Mergence Investment Managers is calling Standard Bank a screaming buy on the basis that its share price could rally 30% over the next two years as the integration of Liberty and a reorganisation of its business unlock new growth opportunities.
The Cape Town-based asset manager says while Standard Bank’s share price has not recovered as strongly as other banks from 2020’s pandemic-induced mayhem, that makes it an attractive investment given its long-term growth potential. Nevertheless, Mergence cautions that Standard Bank will need to deliver on its recently announced shake-up of its internal operations, something that may require an inevitable cut in staff numbers.
“For the most part the banking sector has recovered but Standard Bank has lagged quite a lot relative to the other banks,” Radebe Sipamla, an investment analyst at Mergence Investment Managers, told Business Day. “On valuation, we think there’s quite an attractive entry point currently. We see a 30% potential return on the share price. It’s probably about an 18-to-24-month story.”
At about R122.94, Standard Bank’s share price is only down about 1.1% year to date, but it hasn’t managed to recover to its pre-pandemic levels of about R167 seen just before the virus began affecting markets in March 2020. In comparison, its rivals have done far better: Investec’s share price has more than doubled so far in 2021, while both Capitec and Nedbank are up almost 20% year to date.
However, Sipamla says Standard Bank’s R11bn takeover bid for Liberty Holdings, the insurer in which it already owns a majority stake, will help it deliver on its goal of becoming the pre-eminent pan-African financial services provider by expanding Liberty’s offering in other markets like Nigeria. Though Standard Bank’s offer of almost R90 a share to Liberty’s minority shareholders came at a roughly 33% premium to its market price in July when the offer was announced, Sipamla thinks Standard Bank shareholders have more to gain from the deal, which is expected to be finalised in the first quarter of 2022.
“The offer to Liberty minorities is quite a smart move and is probably the most optimal use of capital right now,” he says. “Liberty alone is going to add to their book value without them having to do much work. There’s also a lot of potential for them to plug Liberty into their [other] African operations.”
Sipamla is also backing the ability of Standard Bank’s management to deliver on their much-vaunted plan to grow revenue by as much as 9% a year until 2025 by leveraging digital platforms to offer more solutions to clients and getting its internal units to work together more closely. Nevertheless, he cautions that they will have to be more nimble to fight off increasing competition from newer fintech entrants that have much lower operating costs.
“They’ve got quite a deep bench at Standard Bank, it’s a good management team, but they haven’t been nimble enough,” says Sipamla. “Because they’re so big … they were complacent in not being as aggressive in innovation and trying to keep ahead of the pack. They haven’t been ruthless in cutting costs.”
Central to those costs are Standard Bank’s roughly 50,115 permanent employees. Though that’s down from 54,767 in 2016, Sipamla believes Standard Bank could be a lot more aggressive in reducing headcount by automating many of its processes. While he acknowledges this will be difficult given SA’s 34.4% unemployment rate, he says management has little choice given rising competition in the sector.
While Standard Bank’s group-wide cost-to-income ratio is about 58%, this rises to 63.6% for its consumer and high-net-worth banking unit and 63.4% for its business and commercial banking arm. That compares to Capitec’s cost-to-income ratio of 45% for the six months to end-August.
“You can’t be running a bank on a 64% cost-to-income ratio — in the long run you’re going to run into trouble,” says Sipamla. “If you look at Capitec, it’s below 50% and then you have guys like Bank Zero coming into the market that have such a lean cost structure that you won’t be able to compete. They have to [reduce headcount]. It’s tough given the situation in SA,” but they “have to do it”.
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