PSG Wealth is still banking on South Africa’s lenders. This despite the uncertainty whipped up by fragility in large European banks and the collapse of Silicon Valley Bank (SVB) and other regional lenders in the US.
It’s mainly down to local banks’ inherent conservatism. During the pandemic, local lenders took excessive bad debt provisions for the economic fallout of lockdowns. The expected blowout didn’t realise. But the banks have been stubborn to release these provisions back to shareholders.
Now, with the benefit of hindsight, local banks may have been prudent in this course of action. And even as the Reserve Bank is on a crusade — nay, war — to rein in inflation, as seen by last month’s 0.5% interest rate increase, the commercial lenders have plenty of ammunition left in their arsenals.
“It’s not their first rodeo,” says Vaughan Henkel, head of securities at PSG Wealth.
It’s not their first rodeo
— Vaughan Henkel
A striking difference between SVB and South African lenders is the fact that local banks have had to contend with struggling government bonds yields for much longer.
One of the key drivers behind SVB’s demise was the inexorable rise in US government bonds yields, which implies falling bond prices. The price slump is, however, not realised until the bonds are physically sold. But as wealthy retail depositors started pulling their cash from SVB, the lender came under liquidity pressure and had to sell the government debt at steep discounts to what it paid.
“SVB’s clients were mostly high net worth individuals who are very mobile,” says Henkel.
The bank run forced the US government to increase the cap of deposit insurance from $250,000 per person in a bid to calm depositors in other fragile, mostly regional, banks in that country. This points to the composition of depositors at these banks: mostly retail investors.
In South Africa, banks’ depositor profiles look quite different. Most deposits come from large corporates, which tend to act more rationally than retail clients in moments of uncertainty. South African banks also have a large number of retail clients, but the value of their deposits is smaller.
Henkel says the secured nature of South African banks’ loans to customers lowers the risk of a bad debt fallout. “The corporate sector is characterised by low leverage following a period of deleveraging during the pandemic. Also, the majority of loans to retail customers is secured either through mortgages or as vehicle finance.”
Then there’s the fact that South African banks remained profitable, even during Covid. This was not the case with Switzerland’s second-largest lender, Credit Suisse. The Swiss bank was beset by scandals: spying, the collapse of two large investment funds and a revolving door of senior executives. These factors weighed on the market’s trust of Credit Suisse, and depositors pulled about $119bn from the bank in the final quarter of last year.
The horror scenario at Credit Suisse, which resulted in the Swiss authorities engineering a takeover by former rival UBS, is highly unlikely in South Africa. Ever since changes were announced by the Bank for International Settlements to shore up commercial banks’ capital adequacy ratios, local banks have tried to show how conservative they can be with keeping regulatory capital.
Local banks have tried to show how conservative they can be with keeping regulatory capital
For example, Absa’s tier 1 capital ratio was 12.8% on December 31, FirstRand’s 13.9%, Standard Bank’s 13.5% and Nedbank’s 14%. This is well above the required total capital ratio of 9% as set out by the Reserve Bank.
Still, despite their healthy capitalisation, banks haven’t been immune to the global sell-off in banking shares last month. The JSE banks index slumped 7.7% during the month. Absa lost 10.4%, FirstRand 9.7%, Standard Bank 6.9% and Nedbank 5.9%.
“We’re part of the global economy,” says Henkel. “In this environment our banks also sold off.” Amid this sell-off, a “nice recovery is on the cards”, he believes.
“We are very optimistic that they’ll recover very nicely from here.
By April 11, Absa was trading back at R185.54, giving it a p:e of 7.5 and a dividend yield of 7%. FirstRand traded at R62.85 a share for a p:e of 9.9 and a dividend yield of 6%; Standard Bank traded at R170.76 for a p:e of 8.1 and dividend yield of 7.1%; and Nedbank at R223.70 for a p:e of 7.7 and dividend yield of 7.5%.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.