South African Bank Stocks Beating Rivals May Find 2017 Tougher

JOHANNESBURG (Capital Markets in Africa) – South Africa was a bright spot for banks on the continent in 2016, with stocks shrugging off the nation’s economic woes to head for the third-best performance in the past decade. Next year the picture may not be as rosy.

The nation’s banks index rose 25 percent this year as rate increases boosted lending income, commodities rose and the rand rebounded. In Nigeria, 15 banks fell 33 percent on average and 11 listed lenders in Kenya slumped 29 percent. The South African banks index’s price to earnings ratio is 11.7, less than half that of the country’s FTSE/JSE All Share Index at 28.7.

“South Africa, despite self-inflicted macro problems, has a very good economic structure with sophisticated financial systems,” said Omotola Abimbola, an analyst at Afrinvest in Lagos. “Nigerian and Kenyan banks have had to deal with asset quality and capital adequacy issues which weakened earnings quality.”

South African banks have withstood recent political, economic and currency instability. During the year fraud charges were laid against Finance Minister Pravin Gordhan, which roiled the rand and were later withdrawn, and President Jacob Zuma was found by the Constitutional Court to have breached his oath of office by not paying for some of the upgrades to his private home. Inflation is above 6 percent, unemployment is at a 13-year high and the economy will grow just 0.1 percent this year, according to IMF forecasts.

For the nation’s lenders, though, “most of the gains have been made” and they’re likely to perform in line with the market in the next year, saidRichard Hasson, portfolio manager at Electus Fund Managers in Cape Town. He sees consumer non-performing loans rising into 2017, with corporate bad debts set to gain if the economy doesn’t improve.

Non-performing loans have hampered lenders in Kenya and Nigeria with the West African nation’s bad debt ratio rising to 13.4 percent, almost three times the regulatory threshold, while the measure climbed to 8.3 percent in Kenya by September. South Africa’s four biggest banks recorded a 15 percent increase in non-performing loans by end June, according to PricewaterhouseCoopers LLP. Profit growth is also slowing, while mergers and acquisition activity has declined.

“Non-performing loan increases are going to start hurting and longer-term regulation and compliance is also going to hurt,” said Simon Brown, Johannesburg-based chief executive officer of trading company JustOneLap. “They’re overdone this year and I’m not bullish for them in 2017.”

South Africa certainly isn’t Nigeria, Kenya, Uganda, Zambia or Mozambique, which have all seen bank failures in the past year. The return on equity of South Africa’s four biggest banks, including Nedbank Group Ltd. and Barclays Africa Group Ltd., averaged almost 18 percent by the end of June, according to the PWC report, and their total capital adequacy ratio was 15.5 percent. 

Still, consumers are under pressure, corporates aren’t spending and loan growth is slowing. South Africa’s four biggest lenders are also fighting off off attempts by some in government to intervene in their private client relationships after they closed the accounts of the Gupta family, which is friends with Zuma. While South Africa avoided a credit rating downgrade this year, it still faces the possibility of being cut to junk next year.

“The banks index has bounced back strongly from the cheap valuation levels reached at the start of the year, but the outlook for 2017 is much more uncertain,” said Jean Pierre Verster, a fund manager at Cape Town-based Fairtree Capital, which has 26 billion rand under management. “Whether 2017 turns out to be ‘normal’ is still to be seen.”