Camissa Asset Management, which oversees R45bn in assets, has broken ranks with some of its larger peers by dismissing the investment case for SA’s big four banks, on the grounds that the cosy market dominance they have enjoyed for years is in the process of being upended by more nimble digital disrupters.
The Cape Town money manager, which announced its rebrand from Kagiso Asset Management in February, outlined downside risks to the likes of FirstRand, Standard Bank, Absa and Nedbank in an investment presentation on Tuesday.
Camissa, which does not own any SA bank in its portfolios, says local banks are too “optimistically viewed”, perhaps a subtle dig at rivals such as Allan Gray, Prudential and Sanlam, which have all named members of the big four banking oligopoly among their favoured picks in the past six to eight months.
SA “banks are probably at best fair valued ... but we think there are downside risks,” said Dirk van Vlaanderen, a portfolio manager at Camissa.
“The biggest one is our view on the low SA growth prospects. Also, there is this nagging tail risk of disrupters coming in and really starting to shake up what has previously been quite a cosy area for the banks.”
While Camissa acknowledges that SA banks are “unusually profitable” in the global context, it says it is precisely these large profit pools that are attracting more agile disrupters to what has long been a rather captive local banking market.
Van Vlaanderen points out that SA banks are among the most profitable in the world based on their return on equity (ROE), a frequently used profitability measure for assessing lenders. According to Camissa, the ROE of SA banks is about 19%, well ahead of emerging Asia (14%) and the Middle East (14%) as well as the developed world (6%). Only Latin American banks are ranked higher, with an average ROE of 21%.
“This is despite the SA banks having quite large, inefficient cost bases,” says Van Vlaanderen. “Implicitly, that means we think they’re overearning on the revenue side.”
The key profit pools that more agile disrupters such as TymeBank, Bank Zero and African Bank are looking to target are high retail and business banking fees as well as what Camissa terms “lazy deposits”. By the latter it is referring to the penchant of SA’s big four banks to pay zero interest on money held in clients’ transactional accounts, compared with 3.5% interest paid by Capitec, 3.75% by Discovery Bank and 4% at African Bank and TymeBank.
“The big four don’t pay you any interest on the cash you hold in your transactional instant access account,” says Van Vlaanderen. “Their cost of funding is very low because they don’t have to reimburse you for the cash you hold with them.”
Camissa says the comparatively high transaction and business banking fees charged by the traditional big four lenders are in the crosshairs of nimbler new entrants, which do not have the high legacy cost structures of market incumbents.
For instance, 21% of SA banks’ profit share from their retail payments business stems from transaction fees, compared with a global average of just 4%. Business banking fees are also a material contributor to banks’ profits, accounting for between 15% and 20% of lenders’ group revenues in the case of Standard Bank, Absa and FirstRand.
“A lot of that sits in the SME space,” says Van Vlaanderen, referring to small and medium enterprises. “The big four are quite high on their monthly fees, charging between R250 and R275 to SMEs. Capitec is below that — below R200 a month, but with a different fee structure.”
While Capitec is making an aggressive push into the SME business banking space after its acquisition of Mercantile Bank in late 2019, competition is set to increase. African Bank recently signalled its intention to disrupt SME banking with its purchase of Grindrod Bank, while Bank Zero and TymeBank could also make a play for banking entrepreneurs. Sasfin Bank is purely focused on business banking and is looking to bring a private banking experience to the segment.
Though Van Vlaanderen acknowledges that rising interest rates will be a fillip to the earnings of the big four banks in the short term — the so-called endowment effect, which sees their earnings rise as higher interest rates inflate loan repayments — he says this will be undermined by SA’s weak economic growth outlook.
“The banks are the most leveraged play on SA Inc and we think that means low revenue and low loan growth and likely higher credit losses as consumers come under pressure.
“All of this translates into very muted earnings growth for the banks. We think they’re probably trading roughly at fair value with risks to the downside so we’d rather use them as a funding trade for better ideas which we think have significantly more upside.”
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