Johannesburg - Foreign investors have been snapping up
South African banking stocks, enticed by the cheapest valuations relative to
emerging-market peers since 2011, even as the country’s downgrade to junk
deepened a broad equity selloff.
Offshore investors bought a net R1.5 billion of bank
shares, including those of FirstRand and Barclays Africa Group, in the six days
after S&P Global Ratings downgraded the South Africa’s foreign currency
debt on April 3. Fitch Ratings followed with a similar cut on April 7,
described by a banking industry body as “ devastating” for lenders. Excluding
bank shares, foreigners sold a net R2 billion of other stocks in the same
period, bringing equity outflows this year to R43.8 billion, according to JSE
data.
Valuations of the country’s banks have plunged to 10
times historical earnings, compared with 19 for the benchmark FTSE/JSE All
Share Index. While facing higher costs of capital, rising bad debts and a
slowdown in lending, banks are well capitalized to withstand the storm and
cheap enough to be bargains, said Adrian Cloete, an analyst at PSG Wealth in
Cape Town.
“Banking shares are looking interesting from a valuation
perspective,” Cloete said by email. “The current almost-50 percent discount is
very large compared to the long term trading history” and the lenders are
offering “very attractive dividend yields,” he said.
South Africa’s four biggest banks were profitable through
the global financial crisis of 2008 and the country’s recession a year later.
With the lenders better capitalised now than they were then, surveys compiled
by Bloomberg show analysts expect them to remain profitable despite the
downgrades and President Jacob Zuma’s firing of Finance Minister Pravin Gordhan
in March.
Read also: S&P downgrades SA banks
Banks have been preparing for the downgrades, and even
Gordhan’s removal, since Zuma roiled markets when he fired former Finance
Minister Nhlanhla Nene in December 2015, said Neelash Hansjee, banks analyst at
Old Mutual in Cape Town.
Still at risk
Still, South Africa remains at risk of further downgrades
and the political situation is far from stable. Opposition parties marched on
Wednesday to call for Zuma’s ouster, and Parliament may debate a motion of no
confidence in the president pending the conclusion of an application to
the country’s top court seeking a secret ballot.
In the days after S&P’s rating downgrade the rand,
which had been the world’s best-performing currency in 2017, gave up the year’s
gains while bond yields spiked, increasing the banks’ cost of capital. That
means investing in banks right now may be risky, though cheap.
Not all investors are convinced. Policy uncertainty will
continue to weigh on South African assets, said John Ashbourne, a London-based
economist for Africa at Capital Economics Ltd. The ruling African National
Congress is holding a policy conference in June after Zuma promised “radical
economic transformation” following Gordhan’s dismissal.
“I don’t see any silver lining for the nation’s
banks,” Ashbourne said. “We’re waiting for the policy conference in June for
any signs of changes in the nation’s tax and spending policy. Before that
happens, there’s way too much uncertainty.”
The hardest hit bank share this year is Barclays Africa,
which has to contend not only with strife in its home market, but also its parent
company’s planned sale of stock. The six-member banks index has slumped 6.3
percent since the first downgrade, compared with a 3.1 percent gain in the
164-member All Share Index. The bank gauge is the worst-performing index in
South Africa this year and by the end of March had suffered its poorest first
quarter in eight years.
That shouldn’t deter bargain hunters, PSG’s Cloete said.
“The bottom line is that South African banks’ balance
sheets and capital ratios are very healthy, which should be very comforting to
investors,” he said. “They are very profitable with high returns on equity.”