SA banking sector still has value to offer

After an extended period of good performance, with gains of around 24 percent in 2014 alone, it is understandable that some investors may be questioning whether South African banks still have any value to offer their portfolios in the coming months. According to Neelash Hansjee, Banking Sector Analyst for Old Mutual Equities, banking continues to be one of the more attractive sectors in the South African equities market.

“The banking sector was put through the mill through the global financial crisis,” Hansjee explains, “but has nevertheless come out stronger and more resilient, despite its fair share of pain.”

“So, while there are some who argue that banks have now had their moment in the spotlight, the combination of underlying fundamental strength with the potential for continued good value relative to other sectors, makes a compelling investment case for SA banks, at least for the rest of 2015.”

According to Hansjee, the robustness of the SA banking sector is clearly evident. The banks have stable and experienced management teams. They also offer good earnings visibility, which typically sits at around 10 to 15 percent per annum and adding to this appeal is the consistently good dividend yield offered by most SA banks.

Hansjee also highlights the fact that the credit quality of SA banks has been steadily improving recently - despite a relatively uncertain macro environment - as they have made significant strides in reducing their bad debt ratios in the face of increasingly onerous credit and legislation requirements.

The result, he argues, is a sector that, while not particularly exciting, is also not looking particularly high risk.

“It should be able to deliver both the relative value and consistency that most investors demand, but aren’t often able to get from many of the more volatile sectors, notably commodities.”

Asked about his predictions regarding the performance of individual banks going forward, Hansjee says that, while every bank seeks to differentiate itself through subtle positioning nuances, the fact is that the overall performance of SA banks is largely a factor of prevailing macroeconomic conditions.

“The outlook for banks in 2015 remains challenging. While GDP is expected to improve from a soft base, the impending power supply concerns remain a risk. However, the outlook for the consumer has mildly improved with the drop in the oil price supporting lower inflation and a view for a shallow interest rate cycle. This should result in modest improvement in the consumer and retail banking and within this context, the SA banking sector offers a safe pair of hands.

According to Hansjee, there is another easily overlooked contributor to the growth potential of SA banks in the coming months of years. This pertains to the concerted efforts most of the country’s larger financial institutions are making to expand their operations into the rest of Africa.

“The determined northwards expansion efforts by many of SA’s banks not only delivers the opportunity for them to unlock additional earnings growth within fast-growing economies that have historically low banking penetration,” he explains, “it also ensures a far greater level of geographic diversification. This offers investors an additional level of comfort by buffering them against local-only operations and economic risks.”

He contends that this diversification, combined with the fact that most SA banks have built up significant capital provisioning in their balance sheets on the back of the last financial crisis, means that the banking sector has a greater ability to absorb the impact of economic or market challenges that may come along in the near future.