Anne Sebastian
The South African banking sector is experiencing a wave of M&A activity, driven by a combination of competitive pressures and a more favourable economic outlook, renewed optimism in South Africa following the formation of the Government of National Unity (GNU). Challenger banks are seeking to expand their market share, while established incumbents aim to diversify and defend their positions.
Capitec: Shooting the lights out
Capitec’s business model is evolving beyond traditional banking. This reporting season, Capitec posted strong results, far-exceeding the big-four banks, printing stellar revenue growth, both from lending and non-lending activities. Net Interest Income (NII) continued to benefit from higher interest rates, while Capitec’s Non-Interest Revenue (NIR), particularly net commission fee income, was up 29% as customers continue to adopt value-added services, reflecting the benefit of Capitec’s 23 million customer base and the cross-sell opportunities.
Business lending continues to be strong and will likely become a meaningful driver of group earnings growth over the medium term. Capitec trades at a premium, with a notably higher price-to-earnings ratio. However, the positive sentiment is due to their compelling growth narrative.
Standard Bank: Africa is the long-term growth strategy
Standard Bank's recent trading update highlighted decent earnings growth that continues to build as the year progresses. Banking earnings were driven by balance sheet growth, higher rates and higher transactional volumes with lower impairment charges and well contained operating expenses also supportive.
However, this was partially offset by lower trading revenues. Standard Bank reaffirms its expectation to achieve a return on equity (ROE) within its target range of 17-20% for financial year 2024. The Pan-African positioning of Standard Bank bodes well for long-term growth as well as continuing to improve the SA business and incremental reform after GNU formation.
FirstRand: MotoNova overhang
FirstRand’s sentiment remains soft given the ongoing UK MotoNovo motor commission claims risk. However, this is a one-off impact rather than a recurring item. FirstRand delivered a solid second half 2024 operational performance, with the quality of the business evident as seen by ROE of 20% within the long-term target range of 18-22%. Capital optionality and a positive ROE profile should be supportive; however, growth is likely to remain a point of contention for investors. The South African business has strong prospects for an improving macro, with robust loan growth, a clean credit book and the possibility of a couple of Private Equity realisations.
Absa: In need of a turnaround strategy
Absa has been a poor relative performer within the banking sector significantly underperforming its peers over the past year. Asset quality lags behind peers and management instability compounds concerns. Absa has chased loan growth and market share gains and has not focused on economic profit. It continues to generate ROEs below cost of equity in all four main retail loan products. Its lending-led approach neglects NIR. Consequently, it has the lowest ratio of capital-light revenue to total revenue in the peer group which means its ROE ceiling is lower than its peers. High-risk activities with limited rewards are being introduced by Absa to increase its balance sheet and revenue.
Anne Sebastian is the co-Portfolio Manager of the PPS Defensive Fund.
BUSINESS REPORT