Investors decide against banking on banks
It’s hard not to notice how well South Africa’s banks are doing. It’s equally hard not to notice how little investors care. Why is that?
Bankers are people that help you with problems you would not have had without them, says the old joke. And for banks around the world, this past year has been more than normally exceptional for its problems, notably with some very high-profile banking failures in the US and elsewhere.
Yet in general, and in SA in particular, banks have emerged doing OK, and in general, the reason is obvious: increasing interest rates around the world have boosted bank returns. What remains to be seen, however, is whether those higher interest rates put more of their customers out of business, encouraging the pendulum to swing in the opposite direction.
Banks are such extraordinary contradictions; what most commercial banks like is how margins open up when interest rates rise quickly, but they don’t want them to open up too quickly either. That’s when you get into that perverse situation where all your loans are outstanding, and not in the sense that they are awesome. Hello Sillycon Valley Bank.
South African banks, taken collectively, are an odd beast: some very ordinary, quite large, and pretty stable, with a few notable outliers. Capitec is an outlier in that its growth has been impressive, so it’s a bit of a market darling. And then there are the pretenders, Tyme and Discovery, which both have interesting investment stories.
But taken together, through all the dismal news over the past year, the one sector that has seemed to take it all in its stride has been the banks.
Standard is, in some ways, a good example.
In its most recent results for the 2022 calendar year, earnings were up an eye-popping 37%, which of course is slightly boosted by the new inclusion of Liberty. But Absa’s earnings for roughly the same period were up 15% and Nedbank’s were up 20%. The other big high street banks were in the same bracket.
But the good news came with some dire warnings. Absa, for example, noted that its impairments increased 61% to R13.7-billion. That is a chunky increase and demonstrates very graphically how ordinary people and corporates alike are struggling.
However, investors have remained steadfastly unimpressed. Most of the banks are trading on price/earnings ratios of under 10; even Capitec is looking close to respectable with a forward p/e ratio of 22.
All the banks are on lower forward ratios than they were before Covid. On the crucial price-to-book value measure, most of the banks are trading below one, which usually signifies a value banking stock.
Interestingly, the SA banks are not out of line with international banks on that measure. British bank Barclays, for example, is trading on a price-to-book of an astounding 0.35, while French bank BNP Paribas is trading at around 0.54. Presumably, the sudden disappearance of Credit Suisse has something to do with that.
I think in general, though, the sluggish investment interest in banks can be summarised in a single word: nerves. And that indicates another meme of our times, uncertainty. We are living in an era where sudden, quick changes have been happening repeatedly. Sudden changes are the very thing banks don’t like. Bread buns roll with the changes – banks don’t. DM