As the macro environment soured throughout 2019, UBS adopted a more cautious outlook on the South African banking sector. October’s mid-term budget statement in particular was a sharp reminder of the state of the country’s finances. The possibility of renewed corporate credit growth, leading to an extension in the cycle is unlikely to occur given the current environment, the bank's analysts say.
“Although we are more cautious and have trimmed our earnings forecasts for FY19, the banks remain quite profitable with ROEs ranging from 16% to 27% while they are well capitalised with CET 1 ratios for the big banks of between 11% and 14%,” write Stephan Potgieter, UBS South African Bank Analyst.
The country’s bleak growth outlook is unlikely to be fixed by monetary policy; there is limited chance of rate cuts occurring, which typically supports banking valuations.
“The key concern is therefore the lack of growth with earnings momentum firmly negative as consensus forecasts continue to trend down. We are looking for only 2.5% EPS growth on average for the traditional four banks for FY19E, rising to about 7.5% in FY20E, although risk remains to the downside,” Potgieter notes.
