JOHANNESBURG - Buying shares at unprecedented value - compared to the past - is not an opportunity often presented in the markets.
This might be the case with the South African financial shares. They are quality stocks, but the financial markets are incredibly negative, not only are the potential effects of the coronavirus at the top of our minds, but the weak South African economic conditions are the biggest concern.
Nedbank is now trading at 0.9times its price to book value; this is more than 20percent below its five-year average and 35percent below its South African peers.
Some of the reasons might be concerns regarding its exposure to state-owned enterprises, as well as the beleaguered property sector.
It is all about the quality of its assets and their coverage levels when compared to the other banks. What one should not forget is that Nedbank has in the past always shown credit losses in line with the sector average; therefore, we can assume they will be able to maintain the same.
On March 3, Nedbank released year-end results for the 2019 financial year. It wasn't a rosy picture; there was a 66percent increase in impairments, mainly due to higher impairments in Corporate Investment Banking (CIB), private equity revaluations, and the Banco Unico option.
The credit loss ratio increased, Zimbabwean operations suffered and non-interest revenue growth was flat due to revaluations and the high base from renewable-energy deals in 2018.
None of the group's divisions realised headline earnings growth for the year; CIB, which represents 49percent of earnings, was down 8percent.
Retail and business banking, 42percent earnings, declined by 2percent. Wealth was 8percent lower, and the Rest of Africa operations dropped by 35percent.
Total operating costs were well contained, increasing by only 1.7percent and the dividend per share remained flat at 1415cents. Diluted headline earnings per share were down 6percent to 2565c.
The jump in impairments of R6.12 billion was primarily driven by increases in stage 3 impairments of R1.49bn. Total stage 3 advances rose by 9.5percent to R27.6bn. Stage 3 is where the financial asset is credit-impaired - effectively the point at which there has been an incurred loss event.
Earnings estimates for the next two years have been consistently revised down since June 2018, with forecasts for both years declining by 15percent over this period. In line with the lower expectations, the share price has dropped by 40percent; the valuation has retraced from a nine times price/earnings multiple to 5.5 times.
For the first time since 2009, they did not increase the total dividends. At current prices, the forward dividend yield is approximately 9.5percent.
Considering that the current market conditions are expected to remain subdued and challenging, especially as South Africa entered a technical recession and management expects the higher impairment levels to stay, it may place further pressure on the earnings.
This may put dividend growth in jeopardy as the dividend cover has been decreasing, placing it closer to the lower limit of the target range.
Any South African bounce-back can be supportive of the bank shares earnings and credit losses outlook. Nedbank is more exposed to the South African economy than the other big four banks, and any turn in the state of the economy will be more amplified for Nedbank.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Nedbank shares are held on behalf of clients.