Kokkie Kooyman, who heads the Denker Global Financial Fund, is barely contained in his excitement about the outlook for certain global banks. Be those banks on the border of Russia or in the sleepy tourist towns of the old Yugoslavia, money is apparently to be made. And the big driver is central bank action.
Higher interest rates, as a cure to tame inflation, have historically led to economic recessions, or downturns at best. These downturns and recessions usually don’t bode well for bank loan performance, with a steady increase in bad debt — similar to what triggered the 2008 financial fallout.
But as central bankers from the US, the UK, Europe and emerging markets pull out all the stops to contain inflation, Kooyman expects the downturn to be better than foreseen.
“During the pandemic many companies laid off people as they tried to contain costs,” he tells the FM. “When the economy rebounded, these companies struggled to rehire employees. Companies are now afraid this will happen again.”
In other words, the relative strength of the labour market — despite rising interest rates — is one major positive that may reduce the pain of central banks’ actions.
Things are also vastly different for banks today than they were in 2008, when the global financial system was paralysed following the sinking of Lehman Brothers. The contagion caused by toxic mortgage loans in the US spread quickly across the world as banks stopped trusting each other and halted loans to each other.
Since then, governments have meticulously carved out banking regulations to prohibit a fallout like the global financial crisis. Driven by the Bank for International Settlements, based in Basel, Switzerland, banks’ loan books and the capital they must hold against it are a far cry from what investors had to face in those gloomy days following the collapse of Lehman.
Why, then, are bank shares so deeply discounted across the globe? Even here in South Africa, the four large full-service banks stubbornly keep trading at attractive multiples. Absa sits on a price-to-NAV (p:NAV) of 1.24, Nedbank on 1, Standard Bank on 1.31 and FirstRand on 2.12. FirstRand has, for a long time, demanded a premium due to investors’ perception of its business as being of better quality.
The markets don’t understand the higher interest rate environment yet. The markets fear a recession
— Kokkie Kooyman
“The markets don’t understand the higher interest rate environment yet,” says Kooyman. “The markets fear a recession.”
But Kooyman’s base case outlook is for the world economy to grow stronger than expected. And taking this view, he suggests there are some jewels across the world that are trading at deeply discounted valuations when considering their p:NAV, the returns they generate on employed capital and the dividend yields they offer.
For instance, US Bancorp has no investment banking exposure, which demands that the lender holds less regulatory capital, Kooyman says. The bank generates a return on equity of 24% while its p:NAV is at an undemanding 1.1. With assets worth just north of $535bn, the bank is one of Kooyman’s key picks.
Another lender with an undemanding valuation is TBC Bank Group, based in the Georgian capital, Tbilisi. In its latest reported financial year to end-December 2021, the bank generated a return on equity of more than 23%. It now trades at a p:NAV of 0.87. It is listed on the London Stock Exchange.
“TBC is a small bank in global terms, but it is big in Georgia,” says Kooyman. Since 2020, the bank has also been building up a nice presence in Uzbekistan. “One of the reasons the stock is so cheap is Georgia’s proximity to Russia. Investors price for a Russian invasion, but that won’t happen.”
Keeping with undervalued banks in smaller economies, Kooyman is also positive about the former state-owned NLB Bank, based in the Slovenian capital, Ljubljana. The lender operates in several former Yugoslavian countries, including Croatia, North Macedonia, Serbia, Kosovo, Montenegro and Bosnia-Herzegovina.
“These are some of the fastest-growing economies in Europe,” says Kooyman. “Add to that the return of tourism to these states, together with the continuous rebuilding of some of these countries.”
NLB, which he describes as a very low-risk lender, delivered a return on equity of 12% in its latest reported period (2021) and demands a p:NAV of 0.5. That means an investor will buy the stock at a price equal to half the bank’s NAV.
It’s not only smaller banks that Kooyman’s fund has targeted to add to its portfolio recently.
Citigroup, the New York-based lender, was one of the hardest-hit banks back in 2008. Yet it remains one of the world’s biggest lenders and is now selling six of its seven non-US units, according to Kooyman. Due to Citi’s sheer size, these sales are taking a while, and Kooyman says the market has been too harsh in its judgment of the bank.
“It takes time to sell these units due to regulatory approvals,” says Kooyman. “We think you only need to be patient.”
Citi trades at a very cheap p:NAV of 0.54 — not too dissimilar to the former Yugoslavian state-owned NLB — while it delivers a return on equity of about 9%.
And then, for those with real patience, the Paris-based multinational lender Societe Generale is also an option. The bank now generates a fairly low return on equity of 3%-4%, but analysts expect it to double by next year, says Kooyman. “In the meantime, you earn a 9% dividend yield while you wait for the price to follow suit.”
That seems to be the story of global banks. With the tailwind of higher interest rates and far better loan books than in 2008, the endurance of those who have waited for the world’s lenders to return after 15 years may just pay off during this interest rate cycle.
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