Global banking giant JPMorgan has become the second US investment bank in as many weeks to express confidence in local banks’ ability to weather the storm and draw attention to the attractive value on offer as the industry recovers from the Covid-19 pandemic.
With echoes of research published last week by Bank of America, two reports recently authored by JPMorgan analysts lay out the individual merits of each of the big local banks, as well as how attractively priced they are in relation to peers.
The bank recommends investors hold overweight positions in the likes of Absa, Nedbank and Standard Bank, while dual-listed specialist bank Investec is JPMorgan’s top pick.
“We think the banks will resume paying dividends this year, but will pay out a lower percentage of earnings than they did before the pandemic. Even after the run they have enjoyed, current valuations are still attractive when compared to peers in the region and the broader emerging markets,” says JPMorgan bank analyst John Storey.
Despite the likely lower payout ratio, Storey estimates Absa and Nedbank are both trading at forward dividend yields of 9%, implying the total value of dividends expected to be declared this year equates to 9% of current share prices.
But the resumption of dividends is likely to require the blessing of the Reserve Bank. In 2020 the Prudential Authority (the bank regulator housed inside the central bank) issued guidance directing banks to withhold paying dividends and executive bonuses while in the midst of the pandemic.
This appeared to be prudent given that bad debt expenses — predominantly in the form of forward-looking provisions — are expected to rise above those experienced during the global financial crisis.
“The banks have done a good job of providing for bad debts. They also have the earnings power and capital reserves to comfortably absorb any future losses,” says Storey.
He estimates that 73% of non-performing loans have been provided for, while the outstanding quantum of non-performing loans account for just 12% of combined shareholders’ equity.
The bank’s top pick, Investec, is in the middle of a rationalisation programme under CEO Fani Titi that has seen its British division announce job cuts as well as incurring heavy costs associated with extreme market volatility experienced in 2020.
Storey says the interventions made by the new leadership team have not been fully appreciated.
“We think Investec is worth R60 a share, so the current price implies investors are getting the 25% stake in its former asset management division, Ninety One, and the UK operations for free. We think the new management team has taken substantial costs out of their UK operations that the market hasn’t quite given it credit for,” says Storey.
In reference to what it calls the Tesla of SA banking stocks, JPMorgan also drew attention to the fact that Capitec could surpass Standard Bank as the continent’s second largest bank by market value after FirstRand, if its share price rises by a quarter this year.
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