Absa and Investec have been named the top picks to lead the recovery in bank shares as the local unit of one of the world largest financial institutions, Bank of America (BofA), forecasts a bounce back in the sector with billions of rand in backstop against bad loans.
On Monday, the bank published a report titled “SA Equity Year Ahead” in which it noted that the valuations of the country’s largest banks had been more deeply affected by the pandemic than their emerging-market peers.
According to the report, SA banks’ share prices in US dollars underperformed their emerging-market peers (MSCI emerging-markets bank index) by 17 percentage points over the course of 2020.
But the prospect of being able to recover and ride out the bad debts incurred during 2020, when the country went into lockdown and incurred millions of job losses, has increased on account of local banks’ extremely strong balance sheets and the significant provisions they raised during the course of last year, according to BofA.
This year will also be the first of a multiyear earnings rally that should result in bank earnings almost doubling from 2020’s level to 2023, according to BofA analyst Bankole Ubogu.
Absa, which trades at roughly three-quarters to its book value (or total assets minus liabilities and intangibles such as brand names and intellectual property), is expected to lead the charge because of its relatively large discount and because its operating metrics are starting to move in the right direction after it restructured in 2018.
Investec, which is even cheaper than Absa as it now trades at below half of book value, “is taking the right steps to simplify the business and improve revenue generation”, says Ubogu.
The FTSE/JSE banks index fell precipitously during March and into May last year as the full impact of the pandemic and the accompanying stringent lockdowns were digested by the market. While the index has rallied by 53% from the lows it touched in May, it is still 23% lower than where it started 2020, according to data supplied by Bloomberg.
Besides a “gradual normalisation” of bad debt provisions over the course of this year and next, Ubogu also expects to see growth in loans and advances recovering. An improvement in margins will result from BofA’s macroeconomic forecast that expects interest rate hikes to lift rates by 100 basis points next year.
Further impetus to a recovery in share prices could come from the relaxation on payments of dividends to come from the Reserve Bank by the time banks report interim numbers in August and September. This follows a “strongly worded” directive last year that dissuaded banks from paying either executive bonuses or dividends in the midst of the crisis.
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