You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting with Craig Metherell; he’s from Denker Capital. Craig, I appreciate the time today. Absa results came out and I have to say I’m not sure if it’s Absa or the market – Absa is getting sold down quite aggressively. But frankly with the whole SVB, Silicon Valley Bank in the US (debacle), all the banks are getting sold down. Your reading of the Absa numbers?
Read: Absa CEO Arrie Rautenbach on its financial results
CRAIG METHERELL: Hi, Simon. Thanks for having me on the show. Look, there’s a lot going on in the world, particularly with banks, given what’s happening in the US. I think it’s fair to say that there probably is some contagion. If you look across the sector, the South African banking sector, at this point in time the banks index is down around 4%. But Absa is down just over 6% now, I think, as we speak.
Source: Moneyweb’s Comparison Tool
So there’s an element of the contagion risk, but I think at the same time there is perhaps a little bit of a disappointment coming through in Absa’s results. I thought that, underlying, the franchises showed some good performance, but perhaps they’re overshadowed by rising impairments. That’s both in the South African business and linked to the Ghanaian business as well, where they took a R2.7 billion impairment, and that is quite a material impairment that they’ve had to take there. So, all in all, I thought quite promising results, but we certainly must pay attention to some of the risks on the horizon.
SIMON BROWN: You mentioned impairments there. It was one of the things, and this is more around coming out of the pandemic. Of course we’ve got the base effect, because these are numbers for 2022 versus 2021, FNB being the exception because of course December is their mid-year. The impairments were rising, but generally I thought not horrid.
CRAIG METHERELL: Yes. Look, it has been a tricky period, both for the banks and for us as analysts, just to try and read through the set of numbers that we’ve been receiving.
I would say that impairments are starting to become a worry. They have risen quite sharply off a low base.
If you think of what happened to interest rates, and the pace that we’ve seen in interest-rate hikes from the bottom in Covid, when the Reserve Bank gave relief to customers, I think consumers that took on debt in that particularly low interest-rate period have probably not really thought about what would happen when you get a 300-, 325-basis-point increase in the interest rate. So I would say that that’s caught certain segments of the market off guard. You’ve seen that come through in credit loss ratios to a point.
You made the point around FirstRand. Quite a strong number there in terms of credit-loss ratios, whereas maybe in Absa and Nedbank you’ve seen that start to drift into the upper half of their through-the-cycle target ranges. That’s a bit of a worry. It’s come through in more interest-rate-sensitive segments of the loan book, so particularly in terms of home loans and vehicle and asset finance. That’s something to watch out for, and management in fairness are guiding for that. If you look at their outlook statements, they’re certainly pointing the market in that direction and I would argue that maybe there’s some upside risk to these targets that they’ve provided.
Read: More clients have become financially distressed, Nedbank says
SIMON BROWN: The other thing – I always look at its cost-to-income ratio, and I’m old enough to remember sort of … around 2010 and the like. Prior to the 2008/09 crisis, cost-to-incomes were below 50%. They rose a lot during the crisis. They came back to the mid-fifties. We’ve seen some of them, most notably FirstRand, actually getting those cost-to-incomes sort of lower. Is that a sustainable trend? Are they just doing something better than the other banks?
CRAIG METHERELL: Look, there’s a lot of focus on improving efficiencies across the banks. You’ve gone back as far as pre the global financial crisis. A lot has changed on the digital space there. I think that’s also one of the issues that you’re having over in the US now; a digital bank run is very different from a physical bank run.
But, that aside, there’ve been some very impressive results from all of the banks, not only FirstRand in terms of extracting efficiencies, driving a real kind of digital-growth strategy, and that certainly reduced overhead costs. It has come with the tech spend as well. But the banks have been really good in managing this.
In these recent results I think, in fairness to the banks, top-line growth has also flattened that ratio somewhat. You saw that particularly in FirsRand’s Aldermore business. They didn’t shy away from the fact that the top line revenue growth really boosted them, and that’s again back to the interest rate, the massive hikes we saw in interest rates and the endowment effect and the benefit that gives to the banks. That obviously boosts the top line and obviously improves that ratio. Now, in terms of the trend, I think yes, you will see ongoing improvements in those numbers.
Each bank has set some quite stretched targets if you want to call them that in terms of cost-to-income ratios, and it’s certainly something that we do pay close attention to.
We don’t try and get hung up on it, but it is a good indication of kind of the quality of the franchise, and so on. So FirstRand’s 50.7% cost-to-income ratio certainly did stand out, with Absa not too far behind at 51.5%. So yes, some good strides are being made there.
SIMON BROWN: If we look at the big four which have all reported — of course, as we say, FirstRand is an interim, the others are year-end – which is the best of the four for you and your colleagues?
CRAIG METHERELL: It’s an interesting period. I’ve just been trying to take stock now that all four have reported. I think we’ve seen very good underlying franchise growth, as I mentioned, in Absa. And I think you’ve also got to give credit to Standard Bank this time around. Some good results there, albeit in both cases a relatively low basis, particularly in the insurance businesses, and that’s come through and benefited in this period as you’ve seen lower claims and not as much reserves being built up in the insurance businesses, as well as the fact that you’ve got this lag effect from interest rates. So, if you look at Nedbank for example, they saw an expansion of 24 basis points in their net interest margin just from Q1 to Q4, and you’ve still got another 200 basis points for them to catch up.
So I think all four reported some impressive numbers, but we’ve got to pay close attention to what’s happening in credit losses now. I would say that Absa is still executing well post the Barclays separation and Nedbank should be proud of the market-share gains that they’ve made. They also, as I mentioned, benefit from the net interest income sensitivity that they’re positioned for.
In a nutshell, I think probably FirstRand stands out just in terms of how they’ve managed impairments and how we think about it going forward.
SIMON BROWN: That’s Craig Metherell at Denker Capital. Craig, as always, I appreciate the time.
Listen to the full MoneywebNOW podcast every weekday morning here.
