African Bank Rated Best Buy as Analysts Dispute Its DistressRenee Bonorchis
African Bank Investments Ltd., which plummeted as much as 50 percent as bad loans climbed, has the highest percentage of analyst buy ratings of the country’s seven largest banks, according to data compiled by Bloomberg.
With an average 12 month target price of more than 27 rand, 79 percent of analysts rate African Bank, which closed at 17.51 rand a share today, a buy. That compares with 64 percent of analysts calling its closest competitor, Capitec Bank Holdings Ltd,. a buy and 33 percent recommending Standard Bank Group Ltd., Africa’s largest lender.
“It’s the best buy among the banks in terms of the value it could create,” Harry Botha, a Johannesburg-based analyst at Avior Research with an outperform rating on the shares, said in a phone interview yesterday. “There’s still a bit of uncertainty but at these levels you don’t really need to worry about that. The view is that it’s not going out of business.”
African Bank’s share price plunged as much as 50 percent this year, pushed lower by declining profit, rising bad debt levels and a proposed 300 million rand ($30 million) regulatory fine. The Johannesburg-based lender, which targets low-income consumers with loans not backed by assets, cut its dividend 71 percent and said on May 20 conditions may worsen in the second half of its fiscal year as higher fuel and power prices make it harder for customers to repay debt.
“While African Bank’s results were disappointing, we think the stock is beginning to price in a distressed scenario that we believe is highly unlikely,” Greg Saffy, bank analyst at RMB Morgan Stanley in Johannesburg, said in a client note. Saffy recommends buying the shares.
The Public Investment Corp., Africa’s largest money manager with more than 1 trillion rand under management, increased its stake in Africa Bank to more than 15 percent last month from
14.3 percent in September. The PIC had to apply to the central bank to increase holdings beyond 15 percent, a limit set by South African law for bank shareholders.
The PIC bought the extra shares and gained central bank approval last month, Markus Borner, African Bank’s executive responsible for balance-sheet management. While the stake has gone beyond the 15 percent limit, it doesn’t mean the PIC would be asked to bail out the lender in a default, he said. A PIC spokeswoman, Nomzamo Petje, declined to comment.
Since African Bank said on June 4 that the PIC increased its stake, its share price has risen as much as 10 percent in intraday trade. It would have to gain more than 35 percent on a closing basis to reach the analysts’ price target. It rose 3 percent to 17.51 rand by the 5 p.m. close in Johannesburg.
“We need to see a better set of results out of the company” before the share price will rerate, Botha said. “We’ve forecast that African Bank has still got a bit to write off in the second half. Next year it can improve quite significantly.”