Episode Transcript
The Finance Ghost: Welcome to episode 286 of Magic Markets. We are talking banking this week. Moe is going to give us a whirlwind tour of the US banks, Europe, maybe a few global names as well.
I will, of course, be digging into what we've seen from South African banks, because we've got two of the biggies reporting in the next couple of weeks. We've already had results from Nedbank, and we'll have First Rand in roughly a month or so from now, so lots to talk about in banking.
Moe, I'll let you kick us off and say hello and give us an overview of what you are seeing on the global stage.
Mohammed Nalla: Indeed, Ghost. This an industry that's close to both of our hearts. We both came out of the banking industry in South Africa. I've got a lot of ground to cover, so I'm going to jump right in. It’s US, Europe, what's happening with the global trends there.
If I were to summarise this in one line, I would say, if you look at US banks, it's really the capital market side of the business that's doing the heavy lifting.
If you look at Europe, they're still benefiting from margins. There's a lot of cost discipline coming through there but, interestingly enough, also some element of capital return. So, European banking – not quite dead yet.
And the one-liner on the credit story in the US is that it's not breaking (I guess globally, as well), but there are pockets of consumer weakness that are worth watching. That kind of summarises the big top-down look for me.
Jumping into the US banks, they've had a strong Q2, but the real point is around where the growth has come from. It’s really come through from financial markets, investment banking, equities, trading, wealth, and really client activity in that space.
If you drill down into some of the bigger names and look at someone like Goldman Sachs, their Q2 net revenue was up around 39% on a year-on-year basis. Those are really solid numbers. If you look at return on equity (ROE), they're 23.5%.
But the investment banking side of the business is doing the heavy lifting, as you would expect at Goldman Sachs – 52% on a year-on-year basis. I would see that as your cleanest look-through, in terms of the bank in the US that's most exposed to that particular cycle.
Then if you look at someone like Morgan Stanley, also more exposed to the investment banking side of things. Slightly more pedestrian growth – I say ‘pedestrian’, that's really tongue in cheek. Their net revenue was up around 27% on a year-on-year basis. Not as strong as Goldman Sachs.
But if you drill through into some of the segments and look at institutional securities, for example, that was up 44% on a year-on-year basis. Investment banking, 58% on a year-on-year basis. So, that's really showing you where the engines of growth have come through.
Then, JPMorgan. This is slightly more of an all-rounder bank. You are getting the investment banking side of things, so when you look at their results you can actually see that flavour quite clearly.
Because on the top line, you've actually seen their net income up around 41% on a year-on-year basis, but their CIB, 27% on a year-on-year basis. Investment banking fees alone, up 30%. But then the rest of the business, obviously dragging that headline number down a little bit.
Digesting all of that, what's happening in the US – lots of concerns. What's happening with commercial real estate, for example. I would say the credit story is not clean, but we're not yet in a crisis.
There are weak spots in the business. If you look at credit cards, some concerns there. Some concerns around auto lending. Certainly, the lower-end consumer, because you've had this K-shaped recovery in the US where wealthy people have done really well, whereas the lower end of the LSM curve, not doing so well.
You see some of those trends come through as you drill down into more of the detail that these companies have released.
Looking at the capital return story – pretty robust. JPMorgan increased their dividend. They've announced another $50 billion share buyback, so JPMorgan’s really on the stronger end of the spectrum. I mean, Jamie Dimon's on record for saying (and I’m really going to misquote him here), “It's absurd, the amounts of capital that they're actually sitting with.” And so, no surprises coming through there.
Morgan Stanley, similar kind of themes. $20 billion buyback which was reauthorised. And then Goldman, also, increasing their dividends there.
Then there's Europe. Slightly different story. Obviously, we know the European banking sector is not as large as the US, so I would say here the story is more around looking for resilience in margins. They've been looking at costs, keeping those controlled.
The big surprise here has been HSBC because they had a better first-half profits. They actually raised their net interest income (NII) targets and they've restarted a buyback plan with a billion-dollar plan. Now, it sounds a lot smaller – that's because it is a lot smaller – but their share price has been the outperformer. If you actually do this all in US dollar terms, it's HSBC who is the one shooting the lights out there.
Deutsche Bank, German bank, pretty respectable. But again, the numbers are just not where you're seeing them in the US. The Q2 profit was up around 10% on a year-on-year basis and only around half a billion euros worth of share buybacks authorised. So, you can see this clear divergence between the US story and the European story.
On European consumers, I would say I'm still a bit concerned around the UK consumer. You've got concerns around UK mortgages, commercial real estate, similar themes that you're picking up in the US in terms of where you should be looking for signs of cracks coming through.
But yeah, in aggregate, Ghost, I think that's the global banking story. It’s really one of wealth management, capital markets and so forth.
I'll leave my comparison in terms of share price performances for the end, once you're done taking us through the South African story. But again, you can see banking has been a reasonably good sector.
It just looks as though it's underperforming, given what you've seen in terms of some of the other sectors in the US (certainly the tech sector) shooting the lights out. That’s made what's been a very strong year-to-date performance from the banking sector look a little less exciting.
The Finance Ghost: I'm going to dig into some of the recent updates we've seen in South Africa, specifically, because I think share price movements might come now in the next few weeks as we see more results coming through. Let's see.
So, Capitec is the odd one out. They have a year-end of February. First Rand is a June year-end and then you've got Standard Bank, Absa, Nedbank – all December year-ends. That means the four legacy banks are reporting every December and every June, albeit a difference between interim and full year. And then Capitec is the outlier, in terms of the calendar.
We've already had interims from Nedbank. We've got Standard Bank coming this week, Absa coming next week, and First Rand coming in September. So, this is going to be a busy time.
I've gone back through some of the recent updates we've seen from Standard Bank, Absa and First Rand in anticipation of their numbers and then compared that to what actually came out at Nedbank to try and see what the interesting trends are.
Let's start with credit losses. The underlying mix of clients and advances in each bank has a significant impact on how the credit loss ratio actually behaves. They might all be big banks that have ATMs and retail banks and online banking and everything else, but they actually attract very different clients, depending on their historical strategy.
At FirstRand, for example, their guide for the financial year is that retail credit (and I quote) “continued to improve”, with the group coming in below the through-the-cycle range.
At Standard Bank, they told us (and this was as of May, based on a five-month update to May) that the credit loss ratio was down, period-on-period. Absa said, “While we had lower impairments in our PPB book,” (which is basically their personal banking). That's all narrative.
The one where we've had real numbers, the kind that are audited and out in the wild, is Nedbank. Their credit loss ratio went up, from 85 basis points to 95 basis points. The big driver here was a 13% increase in impairments in their retail business, which is now running at 205 basis points credit loss ratio despite the through-the-cycle range of 130 to 190 basis points.
So, they are above the top end; way above the midpoint. Home loans and card – that's where they've indicated the pressure points. That is very interesting.
Now this is driven by macro assumptions as much as anything else, not just actual defaults, so we're going to need to see what happens at the other banks as they report.
It has been a very interesting time in the world. We've had a lot to think about, in terms of fuel inflation, interest rates, all of that, and perhaps things have changed at the other banks since they last gave guidance. We'll have to wait and see. Otherwise, if they haven't, then Nedbank seems to be the outlier there, and not in the way that they want to be.
Then a couple of growth engines which I want to touch on. First one is vehicle finance. This is big business in South Africa. It's been boosted massively by the influx of Chinese and Indian cars, of course.
You've got WesBank at FirstRand, you've got MFC at Nedbank as the biggest names. MFC is actually the market leader in advances. This is one of two areas, by the way, where Nedbank, our alma mater, is the market leader (the other one being commercial property finance).
So, vehicle finance, commercial property finance – Nedbank is top of the pops (in terms of market share, at least). Vehicle finance, doing very well. I expect to see more of that coming through.
Then in terms of insurance, the bancassurance model does actually appear to be working. This is the model where banks sell insurance into their retail banking client base, primarily (although, I guess any of their clients).
Standard Bank highlighted strong earnings growth in insurance. Interesting. We'll wait and see what the actual number looks like.
Nedbank gave us an actual number. Insurance income, up 21%, which is obviously really good. It's very important for ROE as well because this is a capital-light source of revenue versus their traditional lending businesses.
Couple of other things just to note. First one would be, as I mentioned, Nedbank has indicated pressure in their home loans from a credit loss ratio perspective. The other thing I'm looking forward to seeing is how growth has potentially disappointed in that space.
Absa has already told us they only had modest growth in home loans. Can't really see it being much better in Standard Bank where they describe their entire retail banking operation as having ‘moderate’ growth. Again, narrative doesn't help much. We want to see actual numbers. Let's wait and see what's happening in home loans and obviously that speaks directly to the property market as well.
And then, as we get numbers from Standard Bank and Absa, there's one big thing that's going to come to the fore that hasn't really featured at Nedbank, and that is Africa. We're going to have to see how earnings are growing in Africa relative to South Africa.
And of course, that will be more relevant to Nedbank going forward because they've now done (or at least they're busy doing, rather) that NCBA deal in Kenya. They got the shareholder approval for it. They've actually finalised how many shareholders in NCBA will tender their shares. Just a few regulatory hurdles to get over now and they will have their hands on that asset. So, very interesting stuff coming through from the local banking sector. Lots to keep an eye on.
Interestingly, I ran a poll in Ghost Mail and it was actually quite favourable in terms of people seeing value in the Nedbank share price at the current level. Almost two-thirds of respondents said, “Hey, I think there's some value here.”
So, always important to remember: whatever you invest in is a function of two things. It's what you're actually buying, and how much you're paying for it. And there's not much growth priced in at Nedbank right now.
Mohammed Nalla: Ghost, I think that's fantastic colour, because you can actually see some of the comparatives to the global story. I think in South Africa, you don't have the benefit of those massive capital markets that you have in the US. That's been the theme in the US.
But that bancassurance model, that's certainly quite interesting. I would say that's almost the proxy in the South African model in terms of where the banks can actually earn some of those outsized returns.
And then, looking outside of South Africa's borders for growth, that Nedbank Kenya deal, that's certainly quite interesting. Let's see what happens there.
I want to wrap on what the performance has been, comparing the South African banks to the global banks. What I've done is I've looked at this all in US dollar terms just so that we have a clear comparison across the US, Europe and South Africa.
I'll start off by saying that South African banks have done reasonably well compared to their global peers.
If you look at Standard Bank in dollar terms, it's up around 15% on a year-to-date. And Nedbank slightly more pedestrian, around 11.5%, there and thereabouts.
The performer in this space has actually been Capitec, but by a very slim margin. 16% versus Standard Bank's 15%. And then First Rand, 12%. Absa, that's been the disappointing one here, –3% on a year-to-date basis. But we know that they really did face some challenges earlier on in the year. Lots of negative sentiment.
Now, how does that actually compare to the international banks? JPMorgan, that's the biggest, baddest bank out there, but it hasn't actually been the stellar performer. That's up around 11% on a year-to-date basis in dollar terms. Morgan Stanley, outperforming them, up 19%. Goldman Sachs, we mentioned them, they're up around 13%. So, not as stellar as you would expect, but again – they're slightly larger.
But if we move across to Europe, there’s a slightly different picture here. You've got Deutsche Bank, the big German bank, down 3%. That’s similar to Absa. We can actually see those pressures of Europe coming through.
I mentioned HSBC as the standout performer, up 28%. So yes, there may be some base effects that have come through there, but I think them reinstating their buybacks and again just showing a slightly more positive outlook, that certainly played through in terms of some optimism.
Ghost, I haven't landed on Canadian banks. I haven't discussed them at all. But that's a sector that I've had a lot of exposure to, certainly over the course of the last two years. For me, I just want to close on this particular point, because Canada is interesting in that it gives you the developed market exposure. They have a lot of exposure going down into the US as well, but it also gives you that oligopolistic industry structure that you're picking up in South Africa. They enjoy that up here in Canada.
And so here, just a couple of headline performances. Bank of Montreal, up 38% – this is in US dollar terms – shooting the lights out, compared to some of the US peers. TD, that's another large bank here, 28%.
And then one of the smaller ones, Bank of Nova Scotia (or Scotiabank), they were coming through at around 19%. And that's the laggard in the Canadian market. So, it's showing you that the poorest performer in Canada is actually in league with the best performers in the US and in South Africa. Something to be said there; some interesting exposures.
There are concerns around the Canadian consumer. Similar pressure points as you're seeing in South Africa. Home loans or mortgages, that's a bit of a soft spot.
We don't quite have the same vehicle-finance craziness that you're picking up down in South Africa – I think that's a very South African thing; South Africans love their cars – but I think this is showing you a nice global wrap in terms of banking, which has been a fairly strong sector over the course of this year so far.
And again, I think these companies are well positioned, all sitting on pretty decent capital buffers, certainly in the US. So, I wouldn't be too concerned around this, given the macro backdrop that we have. I think it's a sector that I'm quite comfortable having exposure to. What about you, Ghost?
The Finance Ghost: Yeah, my exposure is mainly international. It's the JPMorgans and Goldman Sachs of this world. But I’m always open to seeing what's going on in local banking and where the opportunities lie. It is a very good space to try and play in, so always worth keeping an eye on. I'll certainly be digging into those results when they come out.
Mohammed Nalla: That's fantastic, Ghost. I'd love to hear from our listeners as well. What do you think of the sector? What do you think of the stocks we've covered? Let us know.
That's where we’ve got to leave the show. Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X.
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Until next week, same time, same place.
Thanks and cheers.
