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Time to buy banking shares?

Experts cautiously optimistic.

Looking to pick up shares in banks? Experts aren’t entirely convinced that now is a good time to do so.   

The outlook for the industry has improved in line with that of the economy in recent weeks. And while banking stocks are still not expensive, they are no longer as cheap relative to historic valuations. But their performance continues to hinge on improved economic growth and South Africa maintaining its sole remaining investment grade rating….

Banking stocks, regarded as a bellwether for the economy, rallied in December following Cyril Ramaphosa’s election as president of the African National Congress (ANC). The Banks Index closed more than 8% higher in the immediate aftermath of his victory, largely because the deputy president of the country is widely regarded as market-friendly, as the price at which individual stocks trade jumped.

Read: Ramaphosa gives banks flying start

“Cyril Ramaphosa’s win at the ANC elective conference was a massive boost for confidence for South Africa, and in turn the banking sector. It signifies the potential for improved governance, growth and investment in South Africa which translates to an improved lending environment for the banks,” said Neelash Hansjee, a banking analyst at Old Mutual Equities.

Banks Index versus 10-year bond yield

Source: Iress

Adrian Cloete, a portfolio manager at PSG Wealth, explained that banking shares benefited from a downward move in the ten-year bond yield (see chart above) as well as a stronger rand following the ruling party’s elective conference. This, due to a strong inverse correlation between the bond yield and banking stocks and as a stronger rand should lead to an improvement in the inflation outlook and provide room for interest rate cuts, which would lift confidence.

As a result, banking shares have moved from being relatively cheap toward more of a fair value as reflected in current price-to-earnings (P/E) ratios. A P/E ratio is a valuation method used to compare current share prices to earnings per share, with a high P/E pointing to higher earnings growth.

 

P/E

Forward P/E

Dividend yield

Barclays Africa

9.43

9.41

6.11%

Capitec

30.01

27.93

1.25%

First Rand

14.90

13.15

4.04%

Nedbank

10.81

10.31

4.85%

Standard Bank

12.52

11.86

4.43%

Source: Moneyweb

He went on to add that underlying full-year earnings growth prospects amid a challenging macroeconomic environment remain muted – in the low single digits for the majority – but the elective conference outcome has removed some uncertainty. Nedbank’s 2017 earnings, including that of its loss-making pan-African play Ecobank Transnational Inc (ETI), are expected to be flat, with Barclays Africa Group’s forecast at 3% and FirstRand, which has a June year-end, at 5%. Standard Bank’s 2017 earnings are expected to be around 9% higher, as its big investments in IT and Africa deliver and after its ICBC unit turned to breakeven, he said.

Hansjee said there’s reason to be cautiously optimistic regarding the performance of banking shares but warned that there is still a “long road ahead” in terms of politics and that the risk of a sovereign rating downgrade remains.  

Cloete too warned of the risk of South Africa losing its sole remaining investment grade rating from Moody’s, which would trigger an exit from world bond indices and forced selling of domestic assets by some investors. He said the rating agency would look to the February budget for signs of fiscal prudence, an improved debt trajectory, and better management of state-owned enterprises, as well as clarity regarding economic growth and employment growth. Based on this, he said that it is difficult to call whether now is a good time to buy shares in banks.

The Banks Index delivered returns of 23.03% in 2017, outperforming the All Share Index at 16.62% and Top 40 at 18.69%.

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COMMENTS   4

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Buy banking shares at an all time high? No

SA Banking shares are priced at a premium to their peers in the developing world due to our very good ethics, admin and good technological ideas/advances.

Also Mr. Zuma has not left the office.

contradiction…. if Moodiess downgrades us to junk…bank shares will lose value, im waiting for Feb…why buy at a high?

Just look at the graphs, banks are at almost all time high. Pointless article. mis titled should have been “Time NOT to buy banking shares”

Just do the smart thing and invest outside of SA. I recommend North Korea

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