Woof, woof, woof…

I had a friend with two dogs, not just any two dogs, but the most ferocious feeders known to man.

Their snarled fangs and grunting demeanour created fear for the local Alsatian that erroneously wondered onto their property.

Adrian Clayton from Alphen Asset Management explains the connection to investment understanding.

One day things changed. The Alsatian, after being terrorised consistently for two years, realised that his three inch canines, bestowed upon him by the good Lord existed for reasons greater than simply to devour his Husky.

It was on that day that George, my mate Mickie's male pug, limbed home and harmony returned to Graaff Street as Brutus the Albino Alsatian grew in stature and ruled till his late years.

Such is the state of the banking environment in South Africa.

It feels like yesterday that Nedcor attempted to overthrow the standard in banking in South Africa. It was almost as if a hot coal was lodged under the rear of Standard Bank's board and the Group has not looked back - they found freedom in their fangs.

Whilst a low interest rate environment has certainly helped all the local banks, it has also masked potential weaknesses in some of these rather sturdy institutions.

Nedcor and Absa, in my opinion, were the largest beneficiaries of low rates as their solvency positions are not as robust as Standard Bank and too much capital tends to have a negative endowment affect when rates are low.

When rates rise, on the other hand, although negative from an advances perspective, the excess capital earns a better return, which will be the case for the highly capitalised Standard Bank. As we all know rates have been declining over the past 24 months, masking weaknesses in the less capitalised of the big four.

But Standard Bank continued to flourish notwithstanding its domestic capital which equates to approximately 17% of advances relative to about 7% for Nedcor and 12% for Absa.

Standard Bank continues to accelerate advances and is growing its retail book at the expense of competitors, this is an incredibly positive sign; growth due to industry acceleration makes even the weak look strong, but growth at the expense of competitors without eroding margin leads to ultimate dominance.

Retail lending equates to 56% of total advances for the Group which is useful in an environment of disintermediation in corporate debt and strong growth in the consumer market.

Although margin compression is par for the course in a rapidly reducing interest rate environment, Standard Bank made up for this by accelerating lending as mentioned above.

The strength of advance growth might cause fear for some, with bad debt potential. Currently though, the bank has fantastic experience on the bad debt side of things, with interim numbers reflecting a bad debt charge of merely 0.72% of average advances from 1.17% in the same six months to June 2003.

It should be said, however, that this positive trend has been experienced by the entire industry.

Added to this, with the solvency intact, it allows the bank to grow its lending book and leads to limited capital concerns.

Much more could be mentioned regarding this bank's credentials and valuation issues, but time does not allow for it. We constantly trade between the banks based on gyrating valuations as the tide of the market moves, but Standard Bank does remain the critical core due to its sound fundamentals.

Whilst we observe that financials are no longer a sitting duck, quality will remain a long-term market theme and this stock can hardly be considered expensive. Seems like every dog has its’ day.