VIDEO: Big five market share at risk as digital banks look set to bring the onslaught
Nedbank and Absa both lost more than 15 percent in the past six months, Capitec lost 18 percent in less than four months, and Standard Bank and FirstRand lost 15 percent in the past six weeks.
What else can you expect if your economy-sensitive industry is bombarded with bad news? Ramaphoria has turned into Ramadreams, and the recent (once again!) downward revision in economic growth leaves us with more questions than answers. The ongoing low growth poses a risk of structural changes in future economic growth and inflation.
Last week, interest rates were cut by 25 basis points, but the general feeling is that it will not bring real relief to consumers since they are highly indebted. The demand for credit is not there, and this will impact banks’ bottom lines. Property prices are not increasing, there is still no clarity on land expropriation, and jobs are not created. These are all factors leading to tighter credit extension criteria.
Furthermore, foreign investors traditionally favour our banks, but since they keep on being net sellers of JSE listed shares week after week, it is also not helping the banks’ share prices.
With the dawn of digital banking come more onslaughts for traditional banks. Will they be able to grow their profits if the new kids on the block – Thyme Bank, Bank Zero and Discovery Bank – steal market share? The big banks had no choice but to start lowering fees, especially on the entry-level banking products, which will compress margins.
WATCH: Traditional banking vs internet banking
It will be vital for them to keep diversifying their income streams as they do not have the luxury of super-low cost structures. Although it is unlikely that they will lose their current clients with home loans, credit cards, overdraft facilities etcetera; new clients will not be that easy to come by. In the long run, it will impact their profitability.
On Thursday, Standard Bank will be the first to report its results. Trading at a historical price/earnings ratio of 10 and a dividend yield of 5.55 it seems to be reasonably good value, but the share price is certainly not showing this.
Standard Bank has the benefit of one third of its profits being generated in the rest of Africa and is therefore not solely dependent on the lacklustre South African economy. Market players are wary. Who knows what surprises can be expected?
Nedbank spent years turning around its Ecobank investment; we might see another impressive performance since it managed to properly turn it around to profitability in the previous six months. Nedbank’s dividend yield of 6 percent and a price/earnings ratio of 8 times looks extremely attractive.
All eyes will be on FirstRand’s results, with the return on equity currently at around 40 percent, the highest of the banks.
FirstRand boasts a robust and diversified portfolio of businesses; a very high-quality bank with strong momentum, albeit slowing. Its new initiatives are showing uptake, and they have typically displayed resilience in earnings and income during difficult times.
The share seems fairly valued trading on a PE multiple of 12.6 times and a dividend yield of 4.6 percent.
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.