Analysts Baffled as Unsecured Lender Tops South Africa Banks

Updated on
  • Capitec is outperforming Nedbank by more than 50% this year
  • Nedbank top-line growth slows; analyst sees Nigeria as a risk

It’s a banking riddle that has some analysts baffled.

South Africa’s economy is deteriorating and households are being pummeled by rising inflation and interest rates. Yet investors are favoring the shares of the biggest lender to the nation’s poorest while one of the more risk-averse banks is having its worst year on the market since 2008.

Capitec Bank Holdings Ltd., which makes loans not backed by assets to low-income earners, has soared almost 40 percent this year, and is the best-performer in Johannesburg’s benchmark FTSE/JSE Africa Banks Index, which has dropped 2.5 percent. The laggard stock is Nedbank Group Ltd., unrewarded for cutting unsecured lending, building its corporate business, expanding in Africa and producing a 16 percent gain in first-half profit.

“It’s incredible isn’t it?” Liam Hechter, banks analyst at Johannesburg-based Anchor Capital, said in a Sept. 4 e-mail. “Capitec has outperformed Nedbank by almost 50 percent this year, and whether this is entirely justified is questionable.”

Capitec’s fiscal full-year profit to February rose 26 percent and the bank guided on Sept. 4 that interim earnings will increase by as much as 26 percent again. Its net interest income climbed 14 percent in the 12 months, compared with 3.7 percent for Nedbank in the first half to June. Capitec also stormed into the Top 40 of Johannesburg’s stock exchange, compelling institutional investors to include its shares in their portfolios and helping power the stock rally. Some now think the run may be overdone.

“At current levels, we maintain that the share is expensive considering a muted outlook for unsecured credit growth in South Africa,” Harry Botha, an analyst at Avior Capital Markets in Johannesburg, said in a Sept. 8 note to clients. Botha gave Capitec, which trades at more than 470 rand a share, a 12-month target price of 394 rand and rates it underperform. Of 13 analysts who cover Capitec, eight have sell recommendations on the stock, according to data compiled by Bloomberg.

Capitec's share price has more than doubled since African Bank failed

Capitec’s biggest rival was African Bank Investments Ltd. which collapsed in August last year because of rising bad debts and a lack of funding. While all bank stocks declined in the aftermath amid ratings downgrades, Capitec more than bounced back, its share price doubling to reach a record high in April. In the same period Nedbank completed the purchase of 20 percent of Ecobank Transnational Bank Inc., managed bad debts downwards and grew its return on equity. It has dropped more than 11 percent this year.

“I am surprised that Nedbank’s share price hasn’t done better as it has consistently exceeded market guidance when releasing results the last few years,” Adrian Cloete, banks analyst at PSG Wealth in Cape Town, said on Sept. 4. “Nedbank has an excellent management team, has a solid earnings growth outlook and is well positioned with its high proportion of wholesale banking exposure.”

African Challenges

Nedbank has used its alliance with Ecobank, the continent’s most geographically diverse lender, to test African markets and its only other recent acquisition was the purchase of a 37 percent stake in Mozambique’s Banco Unico. While the Ecobank deal helped Nedbank’s earnings from Africa outside of South Africa excluding one-time items climb more than five-fold in the first half, some see risks in the investment.

“Ecobank is a concern with its exposure in Nigeria,” said Neelash Hansjee, banks analyst at at Old Mutual Plc’s Cape Town-based investment unit. “Nigeria is a very challenging environment. Ecobank has delivered results that appear relatively stable in a challenging environment, but potentially the market is pricing in more negative results to come.”

Nigeria, Africa’s most populous country and biggest oil producer, has been hurt by the 50 percent decline in crude prices over the past year. While Ecobank is based in Lome, Togo, its biggest market is Nigeria. As other lenders have experimented with the vagaries of expanding in Africa, Capitec has diversified its business in South Africa, taking more deposits and ramping up product-offerings to lure more customers.

“We didn’t believe the comparison to African Bank was entirely justified and continue to back the Capitec management team to achieve their objective of becoming a diversified South African retail bank,” Hechter said. “They have also been very conservative and transparent in their provisioning, which has slowly but surely gained the trust” of fund managers, he said.

How bank stocks have fared this year in Johannesburg trading, as of Sept. 10

Gaining Customers

Nedbank’s market value at 108 billion rand ($7.8 billion) is still double that of Capitec, but the unsecured lender is ahead on customer numbers. By June, Nedbank said it had 2.5 million clients who use the lender as their main bank while Capitec said earlier this year it has more than 6 million so-called primary bank customers.

“Capitec continues to remain steady in stormy waters,” Hansjee said. “Capitec has been cautious in lending with credit losses under control while building its transactional franchise, gaining customers and deposits.”

Capitec, based in Stellenbosch, near Cape Town, declined to comment.

Economic Headwinds

While Nedbank’s earnings have grown every year since Chief Executive Officer Mike Brown took over in 2010, the pace is slowing as the lender encounters headwinds in its home market. Nedbank’s operating profit before provisions for bad loans was almost flat in June, rising 1.6 percent. South Africa’s economy contracted by 1.3 percent in the second quarter, while the country and its consumers are battling with a power shortage, rising inflation, a currency that has touched record lows this year and rising interest rates.

Despite this, Nedbank’s “longer-term trend” remains intact, Brown said Sept. 7. Over five years, the stock has risen 59 percent, outstripping the returns of rivals Standard Bank and Barclays Africa Group Ltd. which both grew less than 35 percent.

“With the two sets of Nedbank results that have been published this year, excluding the positive earnings impact of the Ecobank acquisition and the lower impairment ratio, the bank has struggled to grow pre-provision operating profit,” Hechter said. “The market may be waiting for evidence of organic, top-line momentum before we see a positive rerating.”

(Updates share moves in second-last paragraph.)
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