Banking sector wrap for 2022

You can also listen to this podcast on iono.fm here.

This transcript is a translation from the original interview, which was conducted in Afrikaans and aired on RSG Geldsake, here.

RYK VAN NIEKERK: We continue looking at the performance of South Africa’s most important economic sectors this year.

The country’s financial services, property and business services sector is the biggest economic sector, representing about a quarter of the total gross domestic product. Some of the JSE’s biggest companies fall in the financial services category, and these include the big banks and insurers.

Kokkie Kooyman from Denker Capital is on the line. Kokkie, welcome to the programme. The financial services sector is an absolutely critical sector in our economy but, despite the poor economic showing that we have seen, this sector’s performance was not too bad. The performance of the financial services sector is usually linked directly to the performance of the economy, but that was not entirely the case this year. The sector was actually a standout. What supported it?

KOKKIE KOOYMAN: Ryk, that was a very good summation. If one just considers what operationally took place on the ground, the banking sector actually did not do badly. I would point to Absa with its around 9% loan growth … [and] interest growth was good. And then they managed their rates very strongly. I think that summarises the banking sector globally. In South Africa, loan growth is still reasonably strong everywhere, also because of inflationary pressure.

Remember, as inflation rises companies require more working capital and as a result of the higher interest rates the banks’ interest margins [also rose], as well as cost control.

And following the provisions made during Covid – which they were forced to implement – those provisions were not necessarily used.

So yes, you are quite right, earnings were up. Absa’s earnings were 25% up, and all banks were much the same. Life insurers and short-term insurers of course had a difficult time because of their huge payouts, also as a result of the pandemic and other events. Life insurers, in particular, had to deal with mortality claims as well as contingency claims and did not do as well.

If you look at the price movements, the banking sector did very well. As you said, it was one of the outperforming sectors. Absa and Nedbank and Standard Bank … did less well and Capitec’s performance was much what it had been at the beginning of the year. That was chiefly the result of the valuations.

RYK VAN NIEKERK: Earlier this year when we chatted, you said it could be a good year for the financial services sector because the sector had actually been treading water, not performing well. But the entire sector seemed to lift its head this year.

KOKKIE KOOYMAN: I’m sitting with Absa’s numbers before me. In December 2017 Absa was at R182/share, and at the end of 2020 R120/share. So for three years in the banking sector Absa struggled. Eventually, during 2020 the price came back after Covid and, once the market realised that the banks were the one sector benefiting from higher inflation in the wake of higher interest rates, there was a reassessment.

So at the start of the year Absa and Nedbank – as we said – were just too cheap. Valuation was in your favour and knew that the sector would deliver good operational results, and that is what happened.

RYK VAN NIEKERK: You also referred to the insurers. The massive floods in KwaZulu-Natal seriously hurt the short-term insurers in particular, and it would seem that these natural disasters strike South Africa somewhere; last year there were a couple of events. In the past there have also been huge fires. Is this a theme that the insurance sector expects to persist – that one can anticipate such devastating events leading to big claims?

KOKKIE KOOYMAN: It’s a global phenomenon, probably caused by global warming which seems to be getting worse. You see it everywhere – in Australia, in the US – with massive wildfires and torrential rainfall. Worldwide, claims in the sector have shot up, and these huge claims have put the sector’s capital under pressure, which means weaker players cannot keep up. So among those players that have survived, South Africa’s Santam emerges strongly.

Premiums have shot up, and if listeners check their insurance premiums they will see how much more they have to pay for cover in the short term.

As a result the sector will become much stronger, especially after a year or two without as many claims. As nature takes a step back in terms of disasters, the insurance sector will do fairly well because of the higher premiums; people cannot go without cover and the insurers will not have these claims.

Read: Santam and Old Mutual wading through over 7 000 KZN flood claims

RYK VAN NIEKERK: I am sure the reinsurance [providers] will also change their approach in the light of reduced risk.

I want to come back to banks. Which bank do you consider the strongest in a post-Covid world?

KOKKIE KOOYMAN: Absa is the bank that surprised the most, because you will remember that at the beginning the year it had managerial difficulties with the appointment of Daniel Mminele, who wanted to change policy. The underlying management said it had worked on the strategy for five years and it could not now be altered, and Arrie Rautenbach, who should have had the position at the outset, was appointed.

Arrie performed very well, and the team developed a great culture, working well together. After its poor beginning, Absa was the one to perform strongly and surprise everyone – since discord tends to distract the attention of management. For that reason Absa surprised the most.

Read: Why Arrie Rautenbach is the right choice to lead Absa

Nedbank and Standard Bank as well. Standard Bank had problems with their technology systems, which Sim Tshabalala and his team are resolving.

I think Absa might not be the one to surprise in the year ahead, but it will still do very well. FirstRand did well operationally but started off the year being too expensive relative to the others. And Capitec was just too expensive when the year began.

So, looking forward, I think the entire sector will do well. In terms of earnings Absa probably has the most momentum behind it, and the valuations of Absa and Nedbank remain the cheapest.

If you go with this year’s theme, that valuations could unlock even further in a higher interest-rate environment, then I think Absa will probably perform best, with Standard Bank [following].

RYK VAN NIEKERK: Ten to one we are likely to feature on the Financial Action Task Force’s grey list. Many bank bosses expressed themselves very strongly against this and said it could have the same impact as a downgrade by the big global credit agencies. Does this worry you, and do you think it could affect the financial sector very negatively?

KOKKIE KOOYMAN: I don’t think so, since the banking sector has been given time to prepare. But it will certainly raise the cost of capital in the business sector, and it will definitely be a little more difficult to shift money – I’m think of national companies that are very reliant on imports and exports. Those will become marginally more expensive. But several, or rather all banks are telling us that they are reasonably well prepared for that.

The corresponding offshore banks with whom they work are also aware of the situation. I think it won’t make much difference on the ground, except that international transactions will become a little more expensive… Government is beginning to take action, and we hope to be able to avoid [that threat]. It will have an effect, but less than I think is expected. From all our discussions I expect the effect not to be so dire.

RYK VAN NIEKERK: Kokkie, thank you for your time this evening. Kokkie Kooyman is from Denker Capital.