South African banks are among the world’s best-managed and capitalised. However a lack of economic growth threatens banks in South Africa.
This is the view of Counterpoint Asset Management CEO Paul Stewart, who told CNBC Africa that he was “puzzled as to how investors have become so pessimistic about South African banks”.
They are among the world’s best managed and capitalised and operate within a strong regulatory framework.
Many banks are trading on single-digit price-to-earnings ratios and have nearly double-digit dividend yields.
Kokkie Kooyman, a finance sector expert and portfolio manager at Denker Capital, agrees with Stewart.
Kooyman said South Africa has a very good banking system and bank management with a central bank that is extremely competent in regulating banks and ensuring stability.
South African banks are inherently risk-averse due to the environment in which they operate, making them very good custodians of customer deposits.
They are, therefore, unlikely to engage in the excesses seen in Europe or America where there were zero interest rates and effectively free money.
Kooyman said, in South Africa, money always had a price, so local banks could not afford to engage in risky loans and investments.
The effects of quantitative easing and 0% interest rates are coming home to roost as many American and European banks made “silly decisions when money didn’t cost anything”.
Lack of economic growth presents a risk
South African banks are well-managed and capitalised, but a lack of economic growth will inevitably affect their performance.
According to Kooyman, if the South African economy enters a recession, bad debts will increase, and bank earnings will come under pressure.
It is unclear how badly local bank earnings will be affected as many have large operations outside South Africa.
Stewart is more positive than Kooyman in this regard and anticipates economic growth over the long term on the back of increased commodity demand.
The global energy transition will require large amounts of commodities, such as copper, iron, and platinum group metals.
South Africa is well-positioned to benefit from the uptick in commodity demand as it is well-endowed with natural resources.
According to Stewart, this will have wider benefits with increased tax revenue from mining companies and increased investment in South African mines and industry.