SA bank shares soar to new highs

SA banking shares have soared on the JSE in recent months, as reduced load-shedding, an improved economic outlook, expected interest rate cuts and the favourable election outcome have made investors bullish about the sector.

Last week, three of SA’s five major banks saw their share prices hit record highs, with Capitec and Standard Bank peaking at R2,977.72 and R243.17, respectively, while FirstRand closed at R87.15. The JSE banking index also reached record levels.

The cessation of load-shedding and the outcome of the national election, which led to the formation of a government of national unity (GNU), have both contributed to an improvement in SA’s economic outlook and investor sentiment, which has reflected positively on SA banks. 

“Where there’s investment and a growing economy, banks benefit because people and businesses borrow more money to invest,” Independent Securities portfolio manager Harold de Kock told Business Day. 

Since the GNU was announced after the May elections, the JSE banking index has gained more than 30%. Standard led the charge, with its share price up 36% over the period, followed by Capitec’s 35%, FirstRand’s 33% and Nedbank’s 27%. Absa lagged somewhat behind, gaining 19%.

In recent weeks, the share price growth for SA banks has been particularly accelerated as investors are confident that the Federal Reserve will cut its key rate in September. With SA inflation now at 4.6% — nearly the midpoint of the SA Reserve Bank’s 3%-6% target range — SA is expected to follow suit. 

Rate cuts are likely to be good for banks, as lower borrowing costs will ease the pressure on consumers and businesses, encouraging them to borrow more. 

“The presumption when you’re moving into a lower interest rate environment is that consumers are under less pressure,” De Kock said. “So we expect banking customers to start borrowing more.

“The important point for banks is that their margins remain intact. In other words, when interest rates fall, banks reduce the rate they charge their customers, but their margin is retained. Because banks will be able to lend more money to customers, they will make increased profit.” 

Additionally, “when consumers are under less pressure, the banks can start reducing their provisions for bad debt, because consumers are naturally in a healthier position. The reversal of these provisions goes straight into the [bank’s] income statement as profit”. 

For international investors, SA banks are widely considered to be particularly secure investments in comparison with those in other countries.

“SA’s banking system is globally recognised as one of the top two in the world and, because of that, our banks are incredibly well managed,” De Kock said. As a result, SA bank shares are attractive to international investors looking for secure, quality investments.

“From an investment trading perspective, the dividend yields of our top banks have been substantially higher than their P/E ratios, and that’s a trigger to investors. This is specific to Absa and Standard Bank, but the same could be said for Nedbank and FirstRand to a degree.

“Because our banking system is recognised as being so good, SA banks are an obvious consideration for foreign investors. They are dirt cheap, well managed and have very high dividend yields relative to international banks.”

Denker Capital’s Kokkie Kooyman said SA banking shares’ recent rally also reflected a recovery from earlier this year, when they came down substantially. 

“There was a lot of negativity in the run-up to the election, and fears of a possible negative outcome,” Kooyman told Business Day. “That led to a lot of selling of bank stocks by both foreign and local investors.” 

Kooyman was optimistic about SA’s economic outlook and the banking sector’s prospects. 

“I think our growth rate is going to surprise positively, and that’s obviously very beneficial for banks, because they are most geared to an economic recovery.”

“I would guess that 18 months from now, [the banking index] will be 50% higher, because the valuations are still so attractive.” 

websterj@businesslive.co.za