South Africa is a fresh example of how the invisible hand of free enterprise steps in when socialist fantasies collapse. Denker Capital co-founder Kokkie Kooyman uses the latest bank lending data to illustrate the point – SA businesses and, to some extent, citizens have been investing in new infrastructure to replace collapsing infrastructure previously provided by State monopolies. Kooyman also shares expert insights into the investment case for the listed shares of local and European banks – and insurers – offering some specific examples. He spoke to Alec Hogg of BizNews.
Find timestamps for the interview below:
- Kokkie Kooyman on whether the higher interest rates are good or bad for the banks – 01:25
- On the banks benefiting from the private sector taking more initiative with capital investment – 06:30
- On how the Rand is affecting banking profits – 08:10
- On the potential of South Africa being greylisted – 10:35
- On European Bank shares – 12:10
- On a European share Kooyman would be investing in right now – 15:25
- On looking at the rebound potential for an economy in moving from a socialist to free enterprise model – 19:20
Some extracts from the interview:
Kokkie Kooyman on whether the higher interest rates are good or bad for the banks
If you look back at last year, the bank shares on average did make 25;26;27% and Investec was the best. Nikko actually also did quite well and, in fact, not to be forgotten, the insurance shares lagged and if you remember, at the end of last year, in our last interview, it’s interesting that the insurance shares have lagged and they might actually perform better in 2023. In preparation for this meeting, I had a quick look. And so for year to date, I’m actually surprised I didn’t see this until now – Sanlam was up 19%, MMI 15% and Old Mutual 11% whereas the banks are up so far year to date, let’s make 6%. So the insurer’s shares have had a bit of catchup. If you look going forward, it’s interesting, I just saw the bank lending numbers for December come through and it’s quite interesting that loan growth, despite all our negativity about South Africa and what is happening with loadshedding, Eskom, Transnet, harbors, policing – loan growth was still around 12%. Capitec, once again, the strongest year on year 18% and Nedbank, the weakest, 5% growth. You can see when you drill down into the various segments that the Nedbank number is still being held back by, if you recall, they went into the COVID pandemic with a very big weighting in their lending portfolio to commercial real estate. Obviously that section has just been contained and almost, as I say, in India, “de-grew ” negative growth.
So Nedbank is lagging a bit just because of that large part of the portfolio. But it’s interesting that loan growth is still strong and if you look forward towards this year, it is still the story that it seems that the private sector is privatizing the government without the government actually wanting that. If you look at just the Rand value of lithium batteries that were purchased – it’s fascinating how lithium batteries have just shot the lights out as people and businesses are converting to all kinds of alternatives to Eskom and that’s obviously capital that is invested. So it seems the big thing for the banking sector, and we spoke about it last year, is if we continue on this trend, that the private sector starts investing in infrastructure, taking over from the government despite all the problems, there is actually quite a lot of opportunity for lending growth on the commercial side. So I think going forward, in a nutshell, interest rates are close to having peaked, maybe have peaked, US maybe still one or two hikes left. With us it depends on the Rand, but the Rand has also should strengthen, so we are close to the end, if not the end of the interest rate cycle. So banks have a good net interest margin now. If you still get lending growth of, let’s say again 10%, remember inflation is about 6%, so maybe even at 8%, then the banks will have another good year this year.
Read more: World-class Kokkie Kooyman of Denker Capital on ‘greylisting’ and the bank shares to buy now
On how the Rand is affecting banking profits
Two effects – firstly, those banks with operations outside of South Africa, let’s say FirstRand who’ve got their business in the UK, obviously get a direct benefit from the currency translation. The same with Absa, Nedbank and Standard Bank who have African operations. But that’s more difficult to judge because now you’ve got to do the aggregation of all those different African currencies. But the big negative benefit that they get is that a falling Rand means more inflation. It means that interest rates have to go higher to protect the currency and to curtail inflation. That’s really where the benefit has come through in terms of just that higher interest rate. As long as the Rand is weak, the central bank will keep interest rates high. But for the rest, the longer interest rates stay too high, then it becomes a negative for the banking sector because then you start getting bad debts and start retarding loan growth. But that’s why those loan growth numbers were so important to me – you can see, for the moment, the loan growth is still on average 11% year-on-year and expect it to be more or less the same, maybe slightly weaker. Well that depends on the capital spend. Also it’s the non-retail loans that were the strongest. So that’s commercial loans which means either working capital cycle or investment in electricity and infrastructure. But retail was an average 8%, mortgage is still 8%, instalment fund also 8%. But it’s the non-retail loan so the commercial sector that’s lending – which is a good one.
Read more: SA’s top banking analyst on Absa after interim results: Shares still cheap, 50% upside in next two years
On the potential of South Africa being greylisted
No, not really. The same as we said last year, the government actually has made progress and it looks like all the voices that were raised and spoken to various levels of government seem to have worked. A lot of the legislation has been sped up. I’m always more of an optimist. It looks like we could avoid it, but even if we don’t, then it’s for a year. And as the bank CEOs have told us, they have been talking to all the correspondent banking partners and so everybody’s aware of it. But gradually it will increase your cost of capital. But I think if you just look at the size of the problems we have with Eskom, with Transnet, with policing, I think grey-listing is the least of the problems. The impact of Eskom and water would be much bigger on South Africa than grey-listing. Don’t ignore it but I don’t think it will have much of a noticeable effect.
Read more: Magnus Heystek explains why he’s avoiding SA property investments like a modern plague
On European Bank shares
The European Bank shares have shot the lights out in the last three months, and even Sean’s favorite ABN Amro suddenly jumped 12% in one day. There were three sectors that have driven that and it’s very important also for us going forward. Number one, they were very cheap. They were all trading at between points .3, .4,.5. It’s interesting, if you look at their net interest income over the last 12 years, most of the European banks lending – their loan books have grown let say 50% to double over the last ten years but the net interest income is flat. So you can see that increasing every year compression of your net interest margin and suddenly in ’22 that net interest income jumped 30% because of the high interest rates. So the banks are coil springs in Europe. They’ve been cutting costs, improving efficiency the whole time.
Certainly when interest rates started rising, it just came straight through to the bottom line. You first had in ’22, the second half of the year, the ECB starting to hike rates. Remember, they only started hiking later than the Fed. So the effect of those interest rate hikes will still come through in ’23. Also, there are still more hikes to come. The US is almost at the end, the ECB still has more hikes to come. So the interest income growth has been very strong. Certainly it looks like Europe will avoid a recession. The energy prices have come down, current food prices have come down. Also important for us, if the Rand was to stabilise, we’ll see deflationary pressures coming through and that’s quite good in terms of unemployment, which is still very low in Europe. So you’re still looking at a banking sector that is very cheap, but not as cheap as it was and the upside is not as gigantic, if you want to call it that, as it was last year. But still a very good upside. You’re still getting dividend yields of 5 or 6%. I think the most important aspect in Europe and here to a certain extent as well, the returns on capital in Europe, let’s say is 12 or 10%, but loan growth is still only 2%. Here we’ve got a loan growth of, let’s make it 12%. The returns on capital is 18%. So you’ve got free cash flow generation which the banks are paying back to shareholders via dividends. So dividend yields in Europe and here are still very good. So Europe, I think there’s still more to go.
On a European bet Kooyman would be investing in right now
In a global financial fund, our two largest or three largest holdings in Europe, are Swedbank in Sweden, it’s one of the largest and it just came with stunning results. With net interest income rocketing up 30% and more to come , it’s a very safe bank. 70% of its book is mortgages and the loan to value is on those mortgages about 60%. So that means there is a huge buffer for safety and it’s generating a return on capital of about 17% and it’s very mispriced. There is another one that investors missed out on in Europe – BAWAG. It’s an Austrian bank that has been gradually buying fading other operations and then bolting them on. That’s a strategy we generally don’t like. But these guys really know what they do and they’ve been doing it for ten years – also still mispriced. And then also something like Erste Bank – that has done really well.
On looking at the rebound potential for an economy in moving from a socialist to free enterprise model
A lot of the ex-CEOs of banks and insurers are involved with the government and advising the government. I see them as often as I can just to hear the feedback from what they are seeing and also to just give these hints. I said the other day, take them to Greece and to a country like Georgia, take them to Indonesia, a massive infrastructure plan led by the government, but massive involvement from the private sector.
There are so many countries – Mexico is actually with AMLO being a very leftist president, but has actually managed that economy very well. But in those countries, the governments have staked their reputation on growing the economy. And the problem with us is, there are the incentives that just detract from that. But you’re quite right. There’s so many examples that we could go to where countries have moved from socialism to capitalism. Or, like Mexico, have remained socialist, remained very committed to helping and uplifting the poor, but creating jobs and getting the private sector to create the jobs whilst the government is still standing, getting out of the way and directing it.
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