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Worst year for South African bank stocks offers glimmers of hope

There are signs that sentiment may be turning for the better.
Image: Reuters

It has been a punishing 2020 for South African bank stocks, which are down almost 40%, already more than twice as deep a slump as in 2015, the sector’s previous worst year on record.

Even so, there are signs that sentiment may be turning for the better. While the coronavirus pandemic has ravaged earnings, banks have bolstered their defences by increasing provisions for Covid-19-related losses under revised accounting standards. High capital buffers have also remained intact, strengthening the case for dividends to resume once regulators give the go ahead.

The worst of the storm may be over, according to Old Mutual Investment Group, and the $40 billion money manager has adopted an overweight view on the sector.

“The new accounting standards force bank management to bring forward their bad-debt cycle and concentrate it,” said Peter Brooke, the Cape Town-based head of macro solutions at OMIG. “This means from 2021 onwards, provisions will decrease and profits will increase, which, in our language, means we have an improving theme.”

Banks have set aside R31 billion to cover potential bad loans, OMIG estimates. Although their profit in the first six months of this year dropped by an of average 69%, the lenders still booked a combined R11 billion in earnings, none of which is being paid to shareholders.

That’s not to suggest that South African banks have an easy ride from here. Gross domestic product shrank by an annualised 51% in the three months ended June from the previous quarter as the nation endured a strict lockdown. That extended the recession into a fourth consecutive quarter, the longest since 1992, and the government has said its forecast of a 7.2% economic contraction this year may be too optimistic.

“The issue for banks is that lockdown restrictions and the fear of contracting Covid-19 have created a short-term cash constraint for borrowers, which could result in defaults unless the economy recovers swiftly,” said Warwick Bam, head of research at Avior Capital Markets, in an emailed response to questions.

The selloff in the sector reflects investor expectations that bad-loan provisions will hurt earnings and valuations, said Nolwandle Mthombeni, an analyst at Mergence Investment Managers in Cape Town. The market “is pricing that in, as well as other various exogenous factors, such as weak South African macro fundamentals,” she said.

But investors have started to focus on the potential positives — Johannesburg’s index of bank stocks last week capped a five-day rally, its longest winning streak in more than four months.

© 2020 Bloomberg

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Investing in shares are really very simple. When the so called professionals start running a sector down that is when you as a dummy must start looking at that sector.Pick your favorite stock and start buying here your average purchase price is vital. When this sector is now starting to get attention you would have been buying your shares for a few months
.

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