FIFI PETERS: Standard Bank seems to have found itself on the wrong side of the law in Mozambique, where that country’s central bank has fined it R66 million for fraudulent activities.
For more on this fine and the pressure that has been experienced on the Standard Bank shares, as well as on its peers in the sector, I am joined by Kokkie Kooyman, portfolio manager at Denker Capital. Kokkie, thanks so much for joining the show.
KOKKIE KOOYMAN: I must say we are having very bad reception here, and I hope you can hear me. The Standard Bank fine was actually very surprising, all the more because of, I think, the strong focus on ethics that Standard Bank always has. The issue seems to involve two individuals.
But it does raise a concern about the controls in their Mozambique operation and the culture that allowed this to happen – possibly also in other African countries.
FIFI PETERS: It sounds like you’re saying that the risk here is that investors are asking if this happened in Mozambique, where else is it happening, potentially – although one needs to be careful not to jump to such conclusions. The Standard Bank share price was under pressure today, but along with its peers in the banking sector. I just wondered how much of the pressure was owing to the fine in your view, Kokkie.
KOKKIE KOOYMAN: The fine is about 0.0004% of our forecast for 2021 earnings. Also, to look at the share-price movement in Standard Bank today, it is down 5% versus FirstRand on 5.2%, Nedbank down 5.1%, Absa 4.8% and Shoprite down 4.1%.
So I think the whole banking sector got really knocked down very harshly because of what’s happening in the country and the lack of confidence this will put in foreign investors.
FIFI PETERS: That 0.0004% sounds very immaterial. Is that correct? Also I was just reading a couple of reports and it doesn’t seem like Standard Bank has commented a lot on this fine.
KOKKIE KOOYMAN: It’s immaterial. It’s 0.0004%, so it’s a very, very small fine, although in Mozambique maybe large; but Mozambique is a very small part of Standard Bank’s earnings. As I said, I think it’s more worrying in terms of the allegations that this did happen, and how it happened. So there seems to be a problem with the culture if two individuals are doing this type of thing that’s been reported. We don’t know the truth of both sides of the story yet, but what’s more important is how it happened. Is there something wrong with the culture in Mozambique, or is it just these two individuals that were working on their own?
FIFI PETERS: It sounds highly unlikely – but let’s not speculate. Let’s talk about something perhaps that we have a bit more clarity on. That is the big losses that we’ve seen in the banking complex right now. Kokkie, just how are you playing this market, given the risk of the uncertainty in the environment presently?
KOKKIE KOOYMAN: Remember this is also global, although we have been affected the worst. But maybe just to put into perspective, the rand is down 1.5% today, month to date 2.5%. Now, month to date the Brazilian real is down 3%, the Mexican peso down 1%, the Canadian dollar down 1%. So it’s also dollar strength. Obviously what’s happening in the country isn’t helping, but the rand weaknesses is also due to global effects.
And then, again, our banks are down a lot, but month to date they’re actually not that far down if you compare that to what’s happening in the world. But yes, we think what’s happened this week should be temporary. One cannot imagine that society can continue in this way. The government will act strongly, as it has started doing – maybe too slowly – but it has started. And in six months’ time the market will have forgotten about this and will look forward.
But the key thing here is the knocks that it most probably has on in foreign investors’ confidence in South Africa. We ourselves are thinking that the price moves have been strong, and the earnings that are going to be reported will be quite good. This is fairly small in terms of their earnings if it stops. If it continues, then obviously one is very worried.
I think most investors like ourselves will stand back a day or two to see how bad it gets. But the market and the banks will bounce back strongly if you can see the government’s getting it under control.
FIFI PETERS: So, if you want to take advantage of a potential opportunity here from the declines in some of these banks – FirstRand down 5%, Standard Bank down almost 5% and Capitec also lower – which bank would you suggest our listeners perhaps pick up at the slightly cheaper levels?
KOKKIE KOOYMAN: Both Absa and Nedbank are still very, very cheap, very mispriced for various reasons. We ourselves have gradually started investing in Nedbank and Absa, and we think this 5% downturn actually gives one another opportunity. They are trading below book value and, as I said, in a year’s time a lot of what’s happening now will be forgotten and we’ll look forward to stronger economic growth and a 15% return on capital, with a good dividend – and they are trading below book value. So I would add to Absa or Nedbank.
FIFI PETERS: Kokkie, thanks so much for that play. That’s Kokkie Kooyman, portfolio manager at Denker Capital.