Standard Bank leading the way

Standard Bank is the leading bank in Africa and presents an enticing opportunity for investors. The company is attractively priced relative to its own history and also in comparison to the broader market. 

This is feedback from Tasneem Samodien, a research analyst at Private Clients by Old Mutual Wealth, who outlined the reasons behind the bank’s strong performance in 2023 and why this trend may continue. 

In its recent 2023 full-year results, Standard Bank reported a strong performance, with headline earnings rising by 27% to R43 billion. 

This growth was primarily fuelled by the sustained momentum in the group’s African operations, where headline earnings rose by an impressive 70% in constant currency terms, Samodien explained.  

Notably, while African regions constitute 27% of Standard Bank’s net asset value, they contributed 42% to the group’s headline earnings. 

This is significant given that just a decade ago, African regions accounted for just 12% of headline earnings and were considered relatively immaterial within the broader group. 

Standard Bank’s foray into Africa started in 1988 with the acquisition of a 49% interest in Union Bank in Eswatini. 

The group slowly added to its exposure through acquisitions and organic expansion. 

It currently has a presence in 20 sub-Saharan countries and has amassed a significant share of the banking market across the region, as shown in the graph below. 

Despite its size, Samodien said that Standard Bank still punches above its weight by ensuring its ventures into Africa have been profitable for shareholders. 

In 2023, its return on equity in Africa surpassed its return on equity deployed in South Africa, offsetting the higher cost of capital outside of its home market. 

One advantage of the group’s dominance in Africa is its Global Markets division, which bridges the gap between African businesses and international markets. 

Through this business unit, the group assists clients in trading foreign currencies, commodities, fixed-income securities and equities, providing a valuable source of income diversification. 

Samodien said this value, however, is not reflected in Standard Bank’s share price, which presents an attractive opportunity for investors. 

The negative investment sentiment surrounding banks is attributed to the expectation that interest rates will be cut in the near future. 

Net interest income, the primary driver of a bank’s revenue, is directly linked to interest rates. Therefore, banks benefit from interest rate hikes as their net interest margins expand, while margins contract when rates decline.

The onset of a rate-cutting cycle in SA and selected markets across Africa is expected to be marginally negative for Standard Bank and its peers. 

Consequently, there has been downward pressure on local banks’ share prices as revenue growth expectations align with heightened expectations of rate cuts. 

According to Old Mutual Wealth’s fair value assessments, Standard Bank’s share price offers value, trading at a price-to-book of 1.3x relative to a medium-term average of 1.7x. 

Furthermore, based on historical data of the forward P/E of the JSE All Share Index since 2010, Standard Bank not only appears attractively priced relative to its own history but also in comparison to the broader market.

This is shown in the graph below.