South African banks are looking good

South African equities have rallied in recent weeks, but Allan Gray believes that the country’s banking sector still looks particularly attractive.

Following the 2024 election and the formation of the Government of National Unity (GNU), South African stocks experienced a strong rally.

The GNU currently has ten parties: The ANC, DA, IFP, Good, PAC, Rise Mzansi, FF Plus, PA, UDM and Al Jama-ah. Several of these parties are considered “pro-business”, boosting investor confidence that the GNU that emerges will bring about much-needed economic reforms.

The latest Bank of America Fund Manager survey showed that 59% of managers are bullish on equities despite questions about the GNU’s cabinet.

71% of managers in the survey were also optimistic about South African equities for the next three to five years.

82% are also likely to bring back offshore funds if domestic returns look better.

Several banking stocks have seen a substantial increase in value over the last month.

Below reflect how much South Africans would have if they invested R1,000 in South Africa’s major JSE-listed banks:

With the recent rally, Allan Gray told BusinessTech that the banking sector still looks attractive.

“We believe the banking sector as a whole is attractively valued despite the recent rally,” said Duncan Artus, chief investment officer at Allan Gray.

“Standard Bank, Nedbank, and FirstRand are all material positions within our allocation of South African equities.”

Standard Bank comes out tops

Allan Gray has a substantial stake in Standard Bank, and it praised the bank’s recent moves, such as modernising its systems, rolling out in-store kiosks, and buying out the minority shareholders in Liberty, which bears significant capital optimisation benefits.

Earlier this year, Allan Gray’s Ghiete van Zyl also noted that Standard Bank has a much larger presence in Africa than its peers.

“By the end of 2023, it had expanded its footprint to 540 branches spanning 19 sub-Saharan countries, excluding South Africa (ex-SA),” said Van Zyl.

“In the majority of these countries, its local presence and pan-African capabilities have made Standard Bank the partner of choice for regional corporates and global multinationals alike, as evidenced by its spot among the top three banks (by deposit market share) in 10 out of the 19 Africa ex-SA markets in which it operates.”

Many other African countries also experienced faster economic growth than South Africa.

For instance, in the group’s financial results for 2023, its Africa Regions franchise contributed 42% to group headline earnings (49% year-on-year growth to R18.2 billion). The top contributors were Ghana, Kenya, Mauritius, Mozambique, Nigeria, Uganda, Zambia and Zimbabwe.

On the other hand, headline earnings in South Africa grew by just 3% to R16.8 billion.

“Importantly, banks often face greater risk in these faster-growing African economies – recently demonstrated by the devaluation of the Nigerian naira and three African sovereign defaults in as many year,” said Van Zyl.

“This creates a valuable competitive moat for Standard Bank.”

“While the diversity of Standard Bank’s portfolio allows it to absorb such shocks, the volatility of earnings in any one country would make it incredibly expensive for a competitor to try and replicate Standard Bank’s Africa footprint.”

Read: SARS auto-assessments for tax season 2024 – what you need to know