The big four will battle for profit as newcomers start to threaten their market share
The curtain is about to be raised on the next round of financial results, which starts with Liberty Holdings today and carries on for six weeks.
The backdrop will not be favourable: credit demand is growing at just 4% this year yet bank shares soared after the Ramaphosa victory. Managers including Allan Gray then took profits.
But now, after a correction, it has rebuilt its position in Standard Bank, a core long-term holding, and has a smaller position in Absa. “Absa is undoubtedly cheap on a multiple of nine and a dividend yield of 6%. But it has underperformed for some years,” says Allan Gray portfolio manager Duncan Artus. “We don’t get much confidence from its constant management changes. But it was given a big cheque in the divorce settlement from Barclays, so we have held on to a modest holding.”
Absa is already moving back into more active credit sales, which were constrained by the Barclays rule book. Ironically, the man in charge of turning on the taps is the new head of the retail bank, Arrie Rautenbach, who as chief risk officer was responsible for closing the taps in the first place.
Credit is stagnant not just because the banks are keeping the taps turned off but also because clients are reluctant to borrow with uncertainty about economic growth and employment prospects.
Deposit growth is healthy, at 11%, but it is loans that are the main profit centre for banks. Analysts look primarily at the pre-provision operating profit (PPOP) as it is more difficult to manipulate than EPS.
On a PPOP basis, Absa and Standard Bank are expected to be flat.
But Investec head of financials Chris Steward says Standard Bank has been the share to own over the past two years. It has shown an improved operating performance and, at last, the core banking revamp is finished and systems are now up to the standard of its competitors.
And there is some relief that Standard Bank now has just one CEO, Sim Tshabalala, after years of a compromise two-headed rule with Ben Kruger. And, after years of indecision, Standard Bank is going back into personal loans (the euphemism for unsecured lending) as a mainstream offering.
David Munro and Sim Tshabalala. Picture: Freddy Mavunda & Drew Angerer/Bloomberg
FirstRand (which will report for the full year in September) should show PPOP growth a shade under 7%.
Nedbank’s SA operations will report similar growth for its half-year to June. But it will look much stronger at the EPS level as the R1.2bn loss from the 20% holding in Ecobank reported in the first half of 2017 has turned into a small profit. Neill Young, who runs the Coronation Financial Fund, says Nedbank is getting more aggressive locally, with a year-to-date 10% increase in vehicle finance advances, and 5% in cards — both areas in which it is relatively strong already.
But this looks like the trough in bank profits. Credit growth is expected to grow over the next two years; by the second half of 2019 it could be above trend. Steward is not so sure, as uncertainty around the election will put clients off applying for loans, especially if there is no clear-cut victor at the polls.
On the margin, the newcomer banks, or at least the ones that survive, will start eating the banks’ lunch, or rather their evening biscuits, but the banks, especially Absa — and Standard Bank when it comes to vehicle finance — have proved quite capable of ceding market share even without them.
Johny Lambridis, head of equity at Prudential, says the hardcore Diamond-status Discovery loyalists will probably join the new bank in a few months, but it will take time to convince nonbelievers.
Other newcomers such as TymeDigital, Bank Zero and especially Postbank don’t have cult members to rely on, except perhaps for Bank Zero chair Michael Jordaan.
Steward says Africa can provide the differentiator as most of the economies to the north are growing faster than SA. Yet Standard Bank’s African profits are driven entirely by the corporate and investment bank, not the retail bank. Retail made a token R202m last year. Absa Africa retail does rather better with R670m profit, and the franchise is an important differentiator. But of course it will have to manage the transition from the Barclays to the Absa brand with care.
The market will be looking anxiously for signs of life at Liberty. Until it gets resolved, the rating of its majority shareholder, Standard Bank, will be impaired, down from a potential 14 p:e to its current 12.
Liberty CEO David Munro has had 14 months to stamp his authority. Liberty had a relatively good comparative first half of 2017, but the first half of 2018 should look good compared with the second half of last year, when Munro wrote down everything except the kitchen sink to give a low base. Lambridis believes that its asset manager, Stanlib, will benefit from the closure of unprofitable units in East Africa, but turning its local investment performance around is as important to Liberty as getting its insurance operations back to decent profitability.
There has been plenty of news from Old Mutual as it prepared for its “new” listing on the JSE. But as an emerging markets-only business, most of the analysts who used to cover Old Mutual Plc will stop coverage.
Sadly, in the best tradition of corporate magicians, Old Mutual is sowing confusion by changing its key earnings measure from adjusted operating profit to adjusted headline earnings, a uniquely SA metric.
Warwick Bam, head of research at Avior Capital, says many shareholders are still hoping to get a special dividend.
“The new board can take a fresh approach and might not continue the highly conservative approach to capital; there is far more padding than the group needs.”
Steward says Old Mutual is attractively priced as it is making incremental progress, especially in retiring the debt at the centre, but there is no operational momentum yet.
Young says Old Mutual’s strength is in the mass-market business, where profit will continue to grow, but in the retail affluent sector there are challenges.
“A lot of high-margin endowment policies are maturing and being replaced with low-margin new-generation products or often going outside the group into the large independent unit-trust houses.”
Apart from the mass-market business, which is the biggest contributor to Old Mutual at R3.2bn profit a year (under the old measure), its employee benefits business is substantially larger than its competitors’, even Alexander Forbes, with R1.6bn in profit.
But Lambridis says Old Mutual gets weaker as it goes up the income spectrum. It has a reasonable middle-income business but at the top end Old Mutual Wealth has battled to compete with the specialist investment businesses.
Other than the somewhat misleading 25%-28% increase in Nedbank’s earnings, the large financial firms will battle to show more than 5%-7% profit growth.