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How SA banks performed in 2021

Kokkie Kooyman from Denker Capital considers FirstRand, Investec, Absa, Standard Bank, Capitec and Nedbank, together with insurers Sanlam, Santam and Discovery.

SIMON BROWN: I’m chatting now with Kokkie Kooyman from Denker Capital. We’re talking banks. We’ve had a number of commentators talk around our banks in the last couple of days. We’ve also had the Turkey issue; the key point there is that we’ve an independent central bank but Turkey hasn’t, and that’s in their currency collapse.

Kokkie, I appreciate the time today. …our banks are world-renowned. They are strong, they are well financed. We saw that in the ’08 crisis, we saw it again last year. A couple of folks are saying though, returns have perhaps been a little modest, certainly [for] our calendar year. Although, if we go back to the lows in October, we’ve had a really good run in the banks.

KOKKIE KOOYMAN: Yes, Simon, you are totally right. Our banks are strong. They’re actually very well managed. But let’s come back to that later. We’ve just a very negative environment for them.

And, if you look at the last five years, they have underperformed quite dramatically. I think they’re the second-worst performer on the JSE.

What investors forget is that in 2016 the banks were trading at very high multiples. FirstRand was trading at 2.8, Investec at 1.4, Absa at 1.6 – whereas at the end of last year Investec was trading at a 50% discount to its price-to-book, 0.5, and Absa 0.97. So those four years until the beginning of this year saw a big derating. This year we saw a nice rerating and obviously a strong earnings rebound post Covid.

SIMON BROWN: What we have seen as well, as I mentioned upfront, they’re well capitalised, they’re well positioned. You make the point that they’re operating in a tough environment. We we’ve seen GDP data out, we’ve seen unemployment data. It’s difficult for a bank to really do incredibly well when your economy is, frankly, limping.

KOKKIE KOOYMAN: Absolutely. We’ve seen the same in Brazil and in Turkey. Although Turkey, interestingly, is a very dynamic, industrial hub. A lot of the Turkish corporates did well through exports as the currency tanked and the banks there kept track. But here there was very little growth. Our export sector isn’t strong enough.

SIMON BROWN: You mentioned a couple of them there and – I’ve chatted with you and your colleagues before – most people sort of put Standard Bank, FirstRand as the best of the bunch. Investec has had a brilliant year. You mentioned they were trading at half of their book value. Looking into 2022, what is your pick of our local banks?

KOKKIE KOOYMAN: It’s very interesting. If you look at the year gone by. Investec actually gave you a return of 140%. That’s not a mistake, 1‑4‑0, where Standard Bank gained only 11%. The others, by the way, all did about 30%: Capitec, Nedbank, Absa around 30%.

Investec, funnily enough, still looks cheap. It’s still training at only 0.88 price-to-NAV, and we’ve had quite a few engagements with the management team. That new management team has really done well in turning around the bank, cutting costs in the UK. Bear in mind that 50% of their assets are in the UK. The UK economy is in a stronger position, much stronger, than South Africa and will grow at a higher rate, and Investec is well poised [for] that. They’re targeting a much higher return on capital than they’ve done, so in Investec you can still see further rerating.

The problem with Standard Bank – and really why it has actually underperformed in 2021 – is really the merger with Liberty. Well, not the merger, they’re actually taking it out. By the way, you’ve obviously seen that Liberty price jump a lot because Standard Bank is paying for that. The market is saying that after so many years, more than 10, of trying to turn it around, you’re giving up and you’re just taking it out of the limelight and trying to fix it internally – and the market isn’t that sure. Well, I think they’ll get it right, but it’s going to be more difficult. And the same time Africa, like South Africa, has a lot of issues with Covid, with vaccination rates.

A few years ago everybody was very excited about emerging markets and Africa, so Africa might still not fire on all cylinders – also because of debt levels.

So if you simply pick the worst-performers [chuckle] of the banks, you’d go for Standard Bank.

I think Investec, like Nedbank and Absa, will do better than Standard Bank. It’s actually very interesting if you look at the same on the insurance side, where Sanlam and Santam have been the worst performers. Santam is basically flat because of business-interruption claims. Covid has hit it very hard.

Sanlam, like the other insurers a lot, [was hit] with the payout for the higher death rate… as well as the other insurers, but Sanlam went into the pandemic quite expensive (high price-to-earnings ratio).

Santam is something whose earnings I think will surprise very, very positively next year. But it’s not cheap. Relative to its past it is cheap.

Obviously Discovery was a big underperformer. It’s down 8% for the year. But again, like for the other insurers, growth slowed down in South Africa, [there were] high claims, and then what hit it the worst is sentiment towards China: you know, the whole Ping An [Insurance] story*. It was about the Chinese government suddenly clamping down on all kinds of [things] – whether they were abuses, malpractices or just trying to change the way the economy operates. But that had a huge negative effect on Discovery because of so many people putting it on a high multiple because of the potential growth in China.

*Discovery owns a stake in Ping An

SIMON BROWN: Certainly we’ve seen some numbers out that the Discovery Bank is signing up and doing fairly well in that regard.

We’ll leave it there. Kokkie Kooyman from Denker Capital, I always appreciate the time, sir.

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