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A good place

17 September 2004 Angelo Coppola

Firstrand posted a solid set of results with every division just about firing on all cylinders.

Shaun le Roux, at PSG Fund Managers reports that headline earnings were up by 18%, and after a cut in dividend cover, the dividend per share was raised by 31%, a healthy state indeed.

What is impressive is that these results were achieved over a period which included a 4% cut in interest rates, which resulted in a drop in net interest income.

This means that growth in advances and non-interest income more than compensated for this negative endowment effect.

A closer look at the local trading environment for the big banks over the past year indicates that this has been a happy time for all concerned, with the notable exception of Nedcor which has problems of its own doing.

Low interest rates have resulted in robust consumer confidence and demand for credit has been healthy. Both corporates and consumers have healthy balance sheets, and given the solid state of the local economy, bad debt experience has been remarkably benign.

The second and third tier banks have disappeared, so competition has not exactly been cut-throat.

The question to be asked is: Is this as good as it gets?

As far as the bad debt experience and levels of consumer confidence are concerned, I wouldn't be looking for too much more from here. But, barring significant job losses in the event of sustained rand strength or sharp interest rate hikes in the event of a rand blow off, the next year or two should remain highly favourable for the banking community.

The interest rate cuts are in the earnings base. Further momentum in the domestic economy will spill over to the corporate sector, driving real growth in expansion plans and demand for credit.

The threat of a foreign buyer for one of our local banks inspired a recent feeding frenzy on the JSE, and while we are loathe to speculate about the validity of this occurrence, we prefer to look at the long-term implications of a foreigner entering the fray.

Over the long term, a foreign entrant would likely raise the level of competition and possible eat into the cosy arrangement banks currently enjoy.

Another important consideration for investors is the fact that most of the larger financial institutions in South Africa are over-capitalised and shareholders can look forward to reduced dividend covers, special dividends and/or buy backs in the year or two ahead.

Valuations and dividend yields remain attractive and banks remain a key part of any long-term portfolio.

Quick Polls

QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

ANSWER

Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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