Banks favour improved business and consumer confidence, which usually drive more lending and transactions, therefore benefiting earnings.
The effect of lower risk premiums priced into bond yields leads to lower funding costs and higher net interest margins, which is favourable for protability.
Last week Barclays Africa Group (BGA) shed light on their new growth strategy announced in March, with, among other things, a reshuffle of its executives.
They provided little info about the deputy chief executive taking a sabbatical.
The Barclays Africa name will change back to Absa next month, and there will be four distinct divisions, all focusing on digital services and transformation.
Under Absa’s new group structure, the heads of the four operating arms will report directly to chief executive Maria Ramos (did they not always?).
With Barclays out of the way, reducing their stake from 62.3percent to 23.3percent, Absa can focus on the market they know so well, doing what they used to do right.
Their goals might be a little ambitious, at least for the moment: doubling their market share (in terms of income) in Africa from 6percent to 12percent.
I cannot think that this will be easy, let alone possible, since they were left behind when the other South African Banks set themselves up to win and gain market share.
They will need to make drastic improvements.
Nevertheless, if they can only keep what they have for the moment, not lose more existing clients to their competitors, it will already be a win-win situation.
Structural growth will take time to materialise under new leadership, and cost management will be crucial to maintain.
Hopefully, this can be proven timeously, and the market’s concerns around the competitiveness of the retail side of the business are addressed.
We, however, do not expect this to result in a material shock to the company’s return on equity (ROE), which could impact the valuation of the share.
Given the ROE, Barclays trades at a discount to their peers, which we do not believe is justified. ROE is an essential measure of valuing banking counters, and currently they have a higher ROE than competitors Nedbank and Standard Bank.
Increased confidence in the domestic economy should be positive for banking counters, both for their balance sheets and the transactional side of the business.
Although an acceleration in economic activity could take some time to come to fruition, higher levels of both consumer and business confidence could create more opportunities for lending and a rise in transactions - which could result in more interest- and non-interest income.
In this sector, Barclays Africa Group remains the preferred entry, given that it continues to trade at a discount to its peers.
Barclays offers value trading at a forward price-to-earnings ratio of below 10 times and 1.5 times its net asset value.
A historic dividend yield of 6percent is another attractive characteristic of this stock. The share price dropped from a recent high of R206, at the height of the Ramaphosa euphoria, back to R176.
Some of the negative factors impacting their outlook, leading to the current low valuation, might be out of the way now.
These were the ongoing losses in their retail client base, and the disruption through the separation from Barclays Plc. The wind of change at BGA/Absa might just not justify the current discount to the other banks.
Amelia Morgenrood CFP, BCom (Hons) Financial Planning, Member of the South African Institute of Stockbrokers, Portfolio Manager, Regional Director, Faerie Glen Stockbroking & Financial Planning.
The views expressed here are not necessarily those of Independent Media.
- BUSINESS REPORT