The banks have managed to hold their own in terms of profitability.  Photo: IOL
The banks have managed to hold their own in terms of profitability. Photo: IOL

SA's big banks are facing tough competition

By Edward West Time of article published Mar 9, 2020

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CAPE TOWN - The banks have managed to hold their own in terms of profitability through the last few years of virtually no growth in the South African economy, but it seems as if that trend might have reached the end of the road.

Standard Bank, second-largest bank by market capitalisation, reported flat earnings for the year to December - not a good result given its size, the fact that South Africa's banks have a reputation for steady earnings growth, and that the banks are considered by many investors to be defensive havens when markets go awry.

The share closed 1.66percent lower at R150.10 on the JSE on Friday, slightly up on the R148.50 that it closed at the previous Friday. However, the price has been drifting steadily lower from R182.43 a year ago.

Standard Bank has been cutting costs as it battles with revenue growth and cost inflation.

It is also struggling to make money from its joint venture with the London-based Industrial and Commercial Bank of China.

South Africa's big banks, with their equally massive cost structures, also face tough competition for new clients from more nimble online players such as Tymebank and Discovery Bank, and from fintech start-ups chipping away at other traditional big bank businesses, such as mortgages.

The big banks all have successful online operations. But Standard Bank is a big ship to turn around, and its low * :e of around 8.53 indicates that the market knows this. Notwithstanding this, it operates in a well-regulated market.

Given the coronavirus induced turmoil in the markets, locally and abroad, which has raised the spectre of a global recession, and considering the local recession, Standard Bank shares might present value for an investor looking for a defensive investment.

Its operations may not be recession proof, but it certainly has the ability to ride one out.

Nedbank’s annual results, released last week, provided further evidence that all was not well in the banking market. Its profit fell 7.3percent to R12.5 billion, and a big factor was the sharp 66.2percent increase in impairment charges to R6.1bn, from rising defaults in retail, corporate and investment banking.

The share price closed 3.18percent lower at R161.17 on Friday, and over a week it was down almost 10 percent.

Aside from Standard Bank, also offering potential value for investors is retail and commercial property group Attacq, developer of Waterfall City.

The group, which has additional exposure to fast growing Eastern European markets, last week lifted its dividend per share by a solid 11.1percent to 45 cents - double digit growth in a sector that has been delivering only single digit growth, and even negative figures, for some time now.

Attacq’s three-year share price trend line is not a pretty picture, and it slipped 1.3percent to R9.90 on Friday morning, at a * :e of around 8.4. But the share was still up 7percent over a week, undoubtedly due to the solid operating performance.

Also riding well through choppy seas is Murray & Roberts, which spent the six months to December 2019 building muscle in the form of a bigger order book, on to the newly restructured group.

Its order book grew 60percent to R50.8bn, and while its Power & Water platform needs to find more work locally after completing work at the Kusile and Medupi power stations, the Underground Mining and Oil & Gas platforms are performing well.

Its share price closed 2.54 percent lower at R9.60 on Friday, at a * :e of 12.32, which in this volatile global market seems cheap at the price, and in spite of the low oil price.

Another stock that ought to ride out a global recession well is Vivo Energy, which is pouring capital investment into its Shell and Engen fuel and lubricant outlets in 23 African countries. Earnings before interest tax depreciation and amortisation rose 8percent to $431m in the year to end-December, after successfully integrating new Engen branded service stations.

The demand for petrol and diesel is likely to remain strong on the African continent for many years to come, yet when compared with developed markets such as in Europe, where relatively short commutes and distances between cities mean that the movement towards electrical vehicles for environmental reasons, is gathering pace.

Vivo’s share price was flat at R20.50 on Friday and in line with longer-term share price trends for the stock.


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