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JIMMY MOYAHA: Moody’s rating agency has been quite gracious in upgrading the deposit ratings of seven of the banks in South Africa. This is something that will serve Standard Bank, Absa, FirstRand, Nedbank, Investec, African Bank and Bidvest rather well in the future.
I’m joined on the line by Denker Capital director Kokkie Kooyman to take a look at this and perhaps try and make sense of this rating upgrade, but also just get an overview of some of the other banking stocks and banking companies.
Good evening, Kokkie. Thanks so much for taking the time. Let’s start with the rating upgrades. It wasn’t just the deposit upgrades, there were a couple of other upgrades. How do we make sense of it? What were the upgrades, and what do they mean?
KOKKIE KOOYMAN: Thanks, Jimmy. The upgrade was specifically deposit-related, and I must say, not surprising because the environment is deteriorating. You could see that in a confidence index that was released.
But Moody’s commented specifically on the individual banks, the capital levels, their funding – in other words, the balance sheet structures, the sufficiency of liquidity, and then the profitability profiles. In other words, they’re saying all seven banks are profitable, have enough liquidity and have enough capital, so there’s no need for concern about the next 12 to 18 months looking at the banks.
Read: Moody’s gives seven SA banks a ratings thumbs-up
They did raise some concerns in each of the banks. Less so in Standard Bank was the high exposure to South African government debt because of obviously low demand for lending in South Africa or for credit.
Banks are parking a lot of their excess capital in government debt because it gives such a high yield, but that does bring a risk to the banks if government debt levels keep increasing and, at some stage, become risky.
And then the other point that was mentioned more as a potential risk is higher inflation, which would mean higher interest rates, which then would mean higher bad debts and disturb the current situation.
But in essence, that’s really it. Maybe on specific banks, interestingly, Standard Bank came out the best largely because it is the least reliant on South Africa. Its very large footprint in the rest of Africa obviously helps it, interestingly enough, because of the low growth rate here.
And then FirstRand is more profitable or has a higher rate of profitability than the other banks.
And obviously Investec [is interesting] because it has a higher-net-worth individual client base. So its client base will obviously protect it versus, let’s say, an African Bank, which is at risk because of its very low-level client [base] in terms of economic strength.
So a deterioration in environment in South Africa would affect African Bank’s client base with higher unemployment more than let’s say, Investec’s.
JIMMY MOYAHA: Now, Kokkie, we’ve definitely seen in the past that the financial services sector has been the more defensive of sectors in difficult times. This sort of reaffirms a bit of the confidence in the quality of our financial services sector, the quality of our banks.
We do have tier-one banking infrastructure that is comparable to some of the bigger banks around the world, but what does that mean for investors potentially looking at the South African picture saying, ‘Look, if the financial companies or the financial sector in South Africa are holding steady, perhaps it’s not all doom and gloom’?
KOKKIE KOOYMAN: Yes, it’s incredibly frustrating for investors in South Africa, especially professional investors like us who are custodians of clients’ investments.
We look at the investments and say, ‘South African banks are just too cheap’. They are very mispriced for the quality of the franchises and the quality of the businesses.
But the reason for them being so mispriced or cheap is because of our high debt levels in government, and because of the high yields. That means, in theory, in the short term, South African debt yielding, let’s say, 10% is more attractive.
So for the South African bank sector to rerate to where it should be, you actually need interest rates in South Africa to come down – which at the same time will kickstart the banks and the economy because it should facilitate stronger loan growth and demand for credit.
But at the moment the environment is very negative. Government’s ideology obviously is also, in terms of the capitalist view, not going to facilitate growth. And until the election is over that’s not going to improve.
Read/listen: Nedbank says the economic environment is worse than expected
But I think for investors what Moody’s really confirms is the quality of the banks – and that’s also very important for the country economically. You cannot have a successful country without a strong banking sector. So we’ve got that in place now. We just need the election to be over, and hopefully we get a more stable environment and a more growth-orientated environment, and other things start kicking in – the Transnet changes, etc.
But I think in summary the bank sector comes up strong and that’s good for the country.
JIMMY MOYAHA: Kokkie, I like that you brought up the strength of a banking sector as it relates to the country, because I want to ask you about New York Community Bancorp [NYCB]. They recently secured a billion dollars from a group of investors, but they were going through some tough times. They had unexpected fourth-quarter losses, and we saw in the past that a lot of mid-tier banks like NYCB, when the mid-tier crisis happened in the US, closed down. The likes of Signature Bank were all under immense pressure and eventually closed down.
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What are your thoughts on the US banking picture at the moment, and do you think this is something that Fed Chair Jerome Powell and his team might be looking at to say they might have averted the crisis a little earlier, but it doesn’t mean it’s completely gone?
KOKKIE KOOYMAN: Jimmy, how do I summarise this in a few minutes? I could go on for an hour because it’s a fascinating topic.
In essence, let me summarise it this way.
Of the banks that were shattered or that failed, two specific ones were caused by deposit losses, a flight of deposits last year.
That was caused by them very injudiciously and recklessly investing a large part of their deposits in government bonds. Government bonds then went from 1% to 5%, causing huge losses. That frightened depositors.
Now in terms of the current NYCB or New York Community Bancorp, a problem is interesting in that it was allowed to merge with a bank of equal size. In other words, New York Community Bancorp doubled its size with the approval of the Fed, the Fed’s banking supervision department.
Read: Why economists are warning of another US banking crisis
And then after that, Signature Bank, which with Silicon Valley Bank fell over, was also sold – or a large part was sold to New York Community Bancorp. Here the Fed’s banking supervision department seemed to have totally lost the plot, because it suddenly – because NYCB was now a much larger capital bank – was expected to grow into that capital, whereas the market had thought it was going to [take] three years.
At the same time, some bad debts on the commercial real estate side – not alarmingly – combined, but it caused a total loss of confidence. And there were a couple of other things that the bank supervision department had missed, so the bank collapsed.
The fear then, again, is – as in March last year – that you have a flight of deposits.
So you had new investors step in and say: ‘Look, we know there’s nothing wrong with this bank; well, our work shows there’s nothing wrong with it. There are a few problems. At this price we are going to put capital in, and we’ll put in a new team with a new CEO.’
So a lot has happened in a few days. What is interesting is that the larger regional banks are actually up on this news, but [for] the smaller regional banks we know that commercial real estate – specifically office blocks or office space – is where the problems are.
And so how that plays out remains a risk, but it should not affect the larger banks. But every time you have something like NYCB, I believe the bank supervision department [should] take the blame for because of the way they handled it.
[Laughing] Here am I sitting in the Cape in South Africa, criticising the mighty Fed. But I think certainly they have blame in the way this played out and the fright they caused.
But you could see yesterday [Wednesday] they were back up with new investors coming in, actually closing higher at the end despite at one stage being down 45%.
It is interesting. But you are right. The smaller banks don’t fall under the same level of supervision as the larger banks, and it seems that a lot of the problems lie there.
And in South Africa we haven’t actually … that, although you could say, yes, the Reserve Bank missed [VBS] for a long time and some of the others.
Listen: African banks shine in global ranking
Because we’ve got a smaller bank sector, our bank regulation and bank supervision department is much more on top of what happens.
JIMMY MOYAHA: Thankfully, we have very little to be concerned about in this regard.
But we’ll leave it at that, Kokkie. Thanks so much for those insights. That was Kokkie Kooyman, director at Denker Capital, joining me to take a look at the Moody’s upgrades to the South African banks, but also developments around some of the US banks.
