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JIMMY MOYAHA: We will now delve into the performance of the financial sector in 2024 and perhaps briefly consider the prospects for 2025. I’m joined by Kokkie Kooyman, the director at Denker Capital, to highlight the movements and achievements over the year.

Good evening, Kokkie. It’s wonderful to connect with you again. This year has been quite eventful for financial sector stocks, with notable fluctuations largely driven by expectations surrounding interest rates, inflation, and other factors. What’s your insight on this year’s performance within the financial sector?

KOKKIE KOOYMAN: It has unfolded as we anticipated, and sometimes we do get it right. We had been advising our clients about this since December of the previous year. The context was that global inflation had peaked and was starting to decline, which indicated that high interest rates would likely follow suit.

While we may have been slightly early in our predictions, it’s important to note that decreasing interest rates typically favor the financial sector.

Interestingly, assessing South Africa’s top performers this year has left me pleasantly surprised. Fortunately, we have a stake in both, but they were not initially on my radar. The leading two were OUTsurance and Capitec, with Capitec showing a 67% year-to-date increase, including dividends. OUTsurance noted a 69% rise. Both firms boast exceptional management and have adeptly positioned themselves for growth.

Read: Capitec now has as many clients as Standard Bank, Absa, and Discovery Bank combined

Earlier this year, Capitec was perceived as overpriced, boasting a price-to-net-asset-value ratio of 5.56 compared to Absa’s standard of one. In fact, Capitec was five times more expensive than Absa, but has since witnessed a re-rating to 7.28.

I believe it stands among the most expensive banks globally when evaluating the price-to-NAV ratio.

Clearly, the market is perceptive—though we’ll see how that develops—anticipating future prospects and the intrinsic value present within the franchises.

Nedbank and Absa have also performed respectably, with Nedbank improving by 44% for the year (including dividends) and Absa by 32%. Both started the year trading close to book value, with Nedbank re-rated to 1.4, while Absa remains quite accessible.

In the realm of insurers, we have a strong preference for Momentum, particularly under the leadership of Jeanette Marais, who has been instrumental in building upon the foundations laid by herself, Hillie Meyer, and Risto Ketola over the past three years. Metropolitan also saw a gain of 49%, coming from a price-to-book ratio of 1.1.

Reflecting on this, the financial sector appeared undervalued at the beginning of the year, something evident across most shares within the index.

As interest rates fell, the sector greatly benefited.

A pivotal event for South Africa this year was the election and the establishment of the GNU (Government of National Unity), which has instilled confidence in investors.

Had there been a GNU inclusive of the Communist Party—a group not particularly favorable to market capitalization—interest rates might not have yielded similar results. It was certainly a convergence of multiple factors at play.

Let’s not disregard a few other players; asset managers like Quilter and Coronation, as well as the JSE, have recorded significant gains.

PSG Financial Services and numerous property companies—including Wilson Bayly, Hyprop, Attacq, and Fairvest—achieved increases of about 50%.

Thus, interest rates have been pivotal in the re-evaluation of financial services stocks, encompassing banks and insurers.

JIMMY MOYAHA: Kokkie, many of the examples you’ve mentioned exhibit double-digit growth in year-to-date performance. Does this imply that the South African market may face more challenges than its counterparts leading into 2024? Could it indicate strong momentum carrying into 2025 now that the elections are behind us?

With new governments now in place and the potential return of figures like former president Donald Trump in the US, is there still potential for continued positive momentum, or could this surge start to diminish?

KOKKIE KOOYMAN: I would argue that while our current conditions might not be overly heated, they certainly lean towards favorable—Capitec and OUTsurance, alongside others, are showing increases around 60%. Notably, this trend isn’t confined to our shores; we observe similar scenarios globally.

The average US bank sector index rose by 44%, and European banks experienced an uplift of approximately 60% as well.

This global reaction to declining interest rates suggests that for 2025, we may maintain this momentum. Specifically in South Africa, our inflation rates are dropping significantly, with discussions surrounding possible interest rate cuts from the Reserve Bank, perhaps even three next year.

Read:
Inflation inches up, leaving rate cut hopes intact
South African inflation expectations decline to three-year low

The US’s direction will depend on the incoming president Trump, whose policies some perceive as potentially inflationary. It remains uncertain whether we’ll witness further cuts; perhaps one may arrive next week, but thereafter, it might stabilize.

Thus, with this context, I foresee the financial sector continuing its positive trajectory, particularly in Europe.

In South Africa, we’ve already seen impressive performance; many sectors are still fairly priced. Absa’s price-to-book ratio is at one, and Momentum is at 1.2, delivering capital returns in the range of 16%-18%, while Absa offers a 7% yield. I believe if interest rates decline, the sector could enjoy another robust year.

JIMMY MOYAHA: In light of the financial sector’s performance in South Africa, do you believe our greylisting as a country might have impacted this performance? Would investor sentiment vary under different circumstances?

KOKKIE KOOYMAN: Jimmy, that’s a pertinent question. Initially, it’s crucial to note that there was notable negative sentiment at the onset of the year. Interestingly, since January 1st, the rand has appreciated by 3% against the dollar and over 7% against the euro.

I believe the impact of greylisting was present, but it was somewhat muted. It raised financing costs and stunted growth to an extent.

However, the two major driving forces were the formation of the GNU and falling interest rates. Should greylisting be reversed next year, it could contribute positively to local sentiment, but those prior events were significant.

Intriguingly, while I noted that Capitec rose by 66% and Absa by 32%, the JSE only indicated an 18% rise this year. Therefore, when we look at those figures, the performance of financial stocks is highly distinctive.

JIMMY MOYAHA: Certainly. Financial sector stocks are surpassing many counterparts, especially when compared to resource stocks that are facing substantial declines.

Kokkie, as we look ahead to 2025, we hope for more consistent decision-making from global leaders. Do you maintain optimism regarding the financial sector?

KOKKIE KOOYMAN: Absolutely! One point often overlooked by investors leading into this year is the extensive work regulators have performed since 2008. They’ve made substantial efforts to fortify the financial sector, which has negatively impacted returns due to the need for firms to keep excess capital and reserves while rectifying their lending practices.

Consequently, the financial sector is in a solid position, and we shouldn’t expect traditional levels of bad debt.

As interest rates decline, the demand for credit typically surges. While there may be slight reductions in interest margins, transaction volumes are expected to rise. I anticipate strong earnings growth is on the horizon, whether Capitec, OUTsurance, or FirstRand continue their re-rating for additional profits. They should still be able to achieve around 15% growth.

It’s worth mentioning that Investec has encountered challenges this year, trading at a 20% discount to book value. It’s a robust company, but it’s facing difficulties in the UK market, along with broader economic challenges impacting growth and vehicle leasing.

Similarly, Old Mutual has managed only an 8% increase this year. While fundamentally sound, it is grappling with some management issues.

Overall, there exists vast potential for undervalued investments in the financial sector, and I’d assert that around 70% remain mispriced and have room for re-rating.

JIMMY MOYAHA: Here’s to a promising outlook for 2024 in the financial sector and an even brighter prospect for 2025.

Let’s conclude this discussion, Kokkie. Thank you, as always, for your insights and contributions.

Kokkie Kooyman, director at Denker Capital, shared his views on the performance of the financial sector for 2024.

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