Worst year for South African bank stocks offers glimmers of hope
It has been a punishing 2020 for South African bank stocks, which are down almost 40%, already more than twice as deep a slump as in 2015, the sector’s previous worst year on record.
Even so, there are signs that sentiment may be turning for the better. While the coronavirus pandemic has ravaged earnings, banks have bolstered their defences by increasing provisions for Covid-19-related losses under revised accounting standards. High capital buffers have also remained intact, strengthening the case for dividends to resume once regulators give the go-ahead.
The worst of the storm may be over, according to Old Mutual Investment Group, and the $40 billion money manager has adopted an overweight view on the sector.
“The new accounting standards force bank management to bring forward their bad-debt cycle and concentrate it,” said Peter Brooke, the Cape Town-based head of macro solutions at OMIG. “This means from 2021 onwards, provisions will decrease and profits will increase, which, in our language, means we have an improving theme.”
Banks have set aside R31 billion to cover potential bad loans, OMIG estimates. Although their profit in the first six months of this year dropped by an of average 69%, the lenders still booked a combined R11 billion in earnings, none of which is being paid to shareholders.
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