Absa is leading the race in a stellar run for local banking stocks, several of which are defying the financial market volatility seen this year thanks to rising interest rates which are enabling them to increase profit margins on their loan books.
The share price of SA’s fourth-biggest bank by market value is up 27.56% so far this year, putting it on course to probably beat the stock price performance of Investec (21.96%), Standard Bank (21.77%) and Nedbank (18.52%). By contrast, FirstRand, the parent of FNB and WesBank, is up just 0.36% while Capitec is down 8.23% so far this year.
“Absa has been on a turnaround journey since 2018 and the results are starting to show in market share gains and in its higher ROE [return on equity] profile,” said Radebe Sipamla, an analyst at Mergence Investment Managers. “Its share price performance is largely a reflection of the stronger performance in its operations, stability and certainty about its management team than its sensitivity to higher interest rates, but its net interest income does benefit from higher rates as its assets and liabilities reprice.”
SA’s banks have benefited from the 325 basis points in cumulative interest rate increases instituted by the Reserve Bank this year. While higher borrowing costs place consumers under greater financial pressure, it also boosts bank earnings on loans disbursed to customers, a phenomenon known in the industry as the endowment effect.
“It’s largely to do with the endowment effect of rising interest rates and the share price valuations of where each banking share started the year,” said Wayne McCurrie of FNB Wealth and Investments. “In the short-term higher interest rates give banks a margin enhancement, though over the long-term [they] can be bad ... as they put pressure on customers.”
In the past few weeks Absa, Standard Bank and Nedbank have all flagged higher earnings to shareholders in operational updates provided for the first 10 months of 2022, further supporting their strong share price performance this year. Investec recently announced a record interim dividend, and said in a results announcement for the six months to end-September that half-year profit almost doubled. That included news that its share buyback programme would be extended to R7bn.
“The positive endowment effect from higher rates has outweighed the negatives from deteriorating credit quality this year,” said Chris Steward, Ninety One’s sector head for financials. “Given that average rates are likely to be higher in 2023, the positive endowment effect next year could be higher still, though the question is what effect it will have on credit quality.”
While FirstRand declared the highest annual dividend in its history when it released its 2022 results in September, the group’s share price has lagged due partly to it being more than just a bank thanks to stakes in asset manager Ashburton and UK lender Aldermore. As the premier blue-chip financial services stock in the country, it also weathered the storm of the Covid-19 crisis and its aftermath relatively well, a factor underscored by its diversified revenue streams.
“FirstRand is a high-quality name that is a firm favourite of foreign investors along with Capitec. During the Covid-19 crisis its share price held up well relative to peers that experienced significant pressure on their share prices,” said Sipamla.
But while banks have had a very good run in 2022, McCurrie says they’re still cheap considering their p:e multiples. Absa is on a p:e of 8, while Nedbank (7.9) and Investec (7.5) are even lower.
FirstRand is on a p:e of 10.5 while Standard Bank’s is 9.6. By contrast, Capitec is by far the most expensive banking share with a p:e of 23.88.
“Capitec is trailing because it was just so expensive from a valuation point of view,” said McCurrie. Most of the banks still look quite cheap and should have further to run in 2023.”
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