Banks to cut dividends but look ‘extremely attractive’ on 5 year view

South Africa’s banking stocks are at risk of cutting dividends but remain an attractive investment proposition on a five year view.

This is the view of Patrice Rassou, Chief Investment Officer at Ashburton Investments, who said local banks have been harder hit than during the Global Financial Crisis of 2009 which he described as “extraordinary.”

“Twelve years ago we had a mortgage lending crisis which morphed into a liquidity crunch. Going into the corona crisis, the capital position of banks was clearly much stronger, there have been no liquidity problems and yet the sell off has driven bank valuations lower than the last global crisis.”

He noted that the slashing of interest rates around the world in response to the pandemic would extend a challenging period for banks.

“The profit banks make from the spread between deposit rates and loan rates keeps getting smaller as their margins are squeezed as interest rates fall. And we have been in a declining rate environment for some time now. Now add a huge global contraction in economic activity and we have a toxic mix for banks.”

He added that South African banks will experience sharp rises in bad debt levels and to shore up balance sheets, were likely to cut dividends for at least one to two years.

“Despite these immediate challenges, we think banks are extremely attractive on a five year view and should remain a core holding of income investors and pension funds.”

Rassou’s favoured bank stocks are RMB Holdings and Standard Bank as they are likely to be most resilient to the economic slowdown and remain well capitalised.

ENDS