We upgrade ABSA to Equal-weight and reiterate our
Overweight on Standard Bank. With early signs of
stabilization in retail portfolios in recent months, we now
expect 2009 to be the trough in South African banks’
earnings. Short-term headwinds are still likely to weigh
on share prices, but we would use any weakness to
increase exposure. We think winners in this space will
have a combination of a strong, flow-heavy IB franchise
and a well-capitalised balance sheet. Standard Bank
remains our clear favourite, but we also upgrade ABSA
to Equal-weight, as downside risk is now limited, in our
view. We now have no Underweights in the region; our
order of preference is SBK, FSR, ASA and NED.
We increase our FY09 HEPS estimates for Standard
Bank and Nedbank by 15-23%. We believe that we
were too punitive in our prior assumptions on the SA
corporate sector, in particular, which has held up better
than we had expected for both Nedbank and Standard
Bank. Our earnings revisions for FirstRand reflect lower
RMB earnings expectations. ABSA’s earnings revisions
have largely offset one another.
We take a close look at CRE exposure, but conclude
this will shave just 0.3-3.8% off earnings in FY09.
With growing concerns around CRE exposure globally,
we have looked in depth at the South African CRE space
to evaluate the risk and range of possible losses for the
SA banks. Our analysis suggests that, while property
portfolios may come under pressure in the medium term,
SA commercial real estate is likely to prove relatively
resilient. Even in our bear case of impairments trending
those of global CRE markets, banks are able to absorb
losses incurred on CRE portfolios.
South African banks are attractive within the EMEA
space. SA banks have among the highest trough ROEs
(15-17%, matched only by Turkish and Saudi banks)
and return to sustainable ROE levels by 2010, on our
numbers. Better visibility on the retail cycle and
undemanding valuations underpin our preference for
South African banks within the EMEA Banks space.