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[TOP INTERVIEW] The worst appears over for SA banks

I think that a lack of visibility of growth is probably going to play on the ratings of the banks for a while’: Jan Meintjes, Denker Capital.

SIMON BROWN: I’m chatting with Jan Meintjes, a portfolio manager at Denker Capital. Jan, good morning, I appreciate your time – delving in into banks. The banks have come out of 2020, they’re doing all right. The debts have spiked, but my sense is that very much the worst is behind them. The FirstRand trading update was fairly positive, all things considered. Standard Bank maybe a little less so. But is it fair to say that that 2020 has been a horror year, but that we can expect next year to be better for banks in terms of impairments and ability to generate profits?

JAN MEINTJES: Morning, Simon. Certainly, we do think that from a provisioning point of view the worst is certainty behind the banks at this point in time, and we should see profitability recover into next year. And hopefully, we will be able to see the banks being able to pay dividends again. I think that will be the big catalyst going into next year for people to take a different view – possibly not only on the banks but on the insurers as well.

SIMON BROWN: That was my next question, dividends. It was the prudential authority, the Sarb that basically said, please don’t pay dividends. And the big five – and I throw Capitec into that – responded accordingly and didn’t. Are they free to pay a dividend? I mean, the period end for December, which for most of them is year-end. For FirstRand it’s mid-year. They didn’t generate enough cash. The dividends might be a little down on previous periods. Are they free to pay, will the Sarb let that through? And are they going to be confident enough to pay?

JAN MEINTJES: Yes, I think there is two sorts of pointers to that issue. The one is that we have seen in the UK that the regulator has actually lifted the guidance for banks not to pay dividends, and I think one has to say that the local regulator also took its cue a little bit from what was happening globally. So we can see globally that that pressure is easing. 

Also, Investec managed to pay a dividend lately. That must have been in a conversation with the regulator. So I do think that there will be room for the banks to do that. They’re all generating cash. I think in the case of Absa and Nedbank we would probably not expect a full-year dividend. In fact, they have said that they will not be paying a dividend in March. But I do think Standard Bank and FirstRand – and certainly Capitec – will be paying a dividend mid next year. But from there on I think we should see a normal dividend cycle going forward, and the level is probably going to be around 70 or 80% of what we have seen in the past, to give one an idea of where the levels should settle in the short term.

SIMON BROWN: That’s not a hundred percent of course, but 70, 80% is a real number. And it comes to the point, and this is not a new point, that our South African banks are incredibly well capitalised and very well run. I mean, 2020 has been a wild year and our banks took the hit. But they’ve come out of it perfectly solid. There wasn’t even a hint of there going to be issued internally with our large banks.

JAN MEINTJES: I would absolutely agree with that. I think the issue that we are all seeing is that the outlook for growth is a little bit more gloomy, given the state of the economy. So I think that a lack of visibility of growth is probably going to play on the ratings of the banks for a while because they are large and they play a big role in the economy. And, in a big way, they are dependent on economic activity in South Africa specifically.

SIMON BROWN: Does that mean that perhaps, when looking at the banks, because they’re going to struggle in a low GDP [environment] – and GDP numbers will be big, but that of course is a base effect more than anything – then, looking at their operations beyond the borders, Standard Bank into the rest of Africa, FirstRand into the UK, is that going to be perhaps a differentiator?

JAN MEINTJES: I certainly think so. Absa and Standard Bank, both have got diversified operations in Africa. And for the last two or three years, we’ve seen those operations grow earnings significantly ahead of what SA is doing. So, from that point of view, diversification is important. FirstRand has the Aldermore acquisition, the UK acquisition, so that will give them some diversity and that business has got a very low market share and has certainly got room to grow. 

So I would agree that those operations probably bolster the growth a little bit going forward because they will be growing faster than we are going to see in SA.

SIMON BROWN: We’ll leave that there. Jan Meintjes, portfolio manager at Denker Capital, I really appreciate your early morning.

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