SBG Securities, the stockbroking subsidiary of the Standard Bank Group, has issued a sell recommendation on its parent company.
In an equities research note sent to its professional and institutional clients this week, SBG Securities issued a sell recommendation on Standard Bank at a revised target price of R160 per share, up from R155 per share due to higher than expected full year earnings and a lower dividend cover.
For the financial year ended December 31 2016, the banking group reported a 4% increase in headline earnings and headline per share to R23 billion and R14.140 respectively.
A poor performance by insurance arm Liberty Holding’s, which suffered a 46.2% decrease in headline earnings to R2.21 million, weighed on the group as headline earnings attributable to Liberty fell 61% to R955 million.
Following the results announcement, Moneyweb reported that the banking group had devised a “detailed action plan” to turn Liberty around.
SBG Securities said the “noise around Liberty’s weak earnings performance has masked some troubling trends at Standard Bank”.
It went on to question whether Standard Bank was struggling to understand the needs of retail clients as growth in non-interest revenue (NR) from Personal and Business Banking (PBB) in South Africa increased by 6% relative to an 11% increase in expenses.
Citing a previous report, it said the interest rates offered on savings were kept low despite rising interest rates.
“PBB’s revenue growth has been flattered by endowment and keeping client deposit rates low… Were it not for the mortgage book, Personal Banking’s earnings would not have grown and this weakness is having an impact on the financial results,” the stock brokerage firm said.
The bank’s financial results show that PBB’s mortgage lending headline earnings grew by 20% to R2.97 billion.
SBG Securities also expressed concern around customer satisfaction. The latest South African Consumer Satisfaction Index shows Standard Bank’s score of 71.9 is the worst among the country’s five largest retail banks. It said it was disappointing that the bulk of the group’s capex spend, allocated to enhance PBB’s core banking capabilities, is not translating to better client experiences. “In our view, the South African retail banking environment is going to get tougher and Personal Banking SA seems to be struggling,” it said.
According to the firm, the recovery in commodity prices should help to lift revenue at the bank’s Corporate and Investment Banking division. However, currency headwinds may weigh on earnings.
“We are concerned that revenue growth in FY17e will be muted, particularly on net interest income (NII), due to weak advances growth in FY16. On a constant currency basis, fee income growth was 9% – however, with currency headwinds this is likely to be slower – second half year-on-year growth was only 3%, including impacts of currency,” it said.
It said the group would need to look to Liberty’s earnings as well as “wild card” Industrial and Commercial Bank of China (ICBC) for growth in the 2017 financial year. It expects Liberty’s earnings to recover to R2.3 billion and Standard Bank’s share of the losses from ICBC to amount to $40 million.
SBG Securities declined to comment on the report, saying that it was intended for professional market and institutional clients only.
A disclaimer carried in the report states that securities discussed may “involve a high degree of risk or volatility and maybe intended for sale only to investors with an understanding and capacity to assume the risks involved”.
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