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JIMMY MOYAHA: We’re going to explore the financial sector’s performance in 2024 and maybe discuss prospects for 2025. Joining me is Kokkie Kooyman, director at Denker Capital, to delve into the trends and accomplishments throughout the year.
Good evening, Kokkie. It’s wonderful to catch up with you. This year has been quite significant for financial sector stocks, driven by expectations around interest rates, inflation, and other dynamics. What’s your perspective on the financial sector’s performance this year?
KOKKIE KOOYMAN: Everything came together as we expected, and sometimes we do get it right. We had been advising our clients about this since December of last year. The underlying factor was that global inflation reached its peak and began to decline, indicating that high interest rates would likely decrease as well.
While we may have been a bit early in our predictions, it’s important to remember that decreasing interest rates typically benefit the financial sector.
Interestingly, when analyzing South Africa’s top performers this year, I’m somewhat taken aback. We are fortunate to have both on our radar, though they weren’t my initial picks. The leading performers were OUTsurance and Capitec, with Capitec achieving a 67% year-to-date increase, including dividends, while OUTsurance posted a 69% rise. Both companies are excellently managed and have successfully positioned themselves for growth.
Read: Capitec now has as many clients as Standard Bank, Absa and Discovery Bank combined
Earlier this year, Capitec was considered expensive, with a price-to-net-asset-value ratio of 5.56 compared to Absa’s one-time valuation. In fact, it was five times pricier than Absa, but it has now undergone a re-rating to 7.28.
It is among the most expensive banks worldwide when looking at the price-to-NAV ratio.
Clearly, the market is perceptive—though we’ll see how things unfold—anticipating future potential and recognizing the value embedded in these franchises.
Nedbank and Absa have also performed well, with Nedbank seeing a 44% increase this year (including dividends) and Absa rising by 32%. Both started the year trading near book value, with Nedbank re-rated to 1.4, while Absa remains attractively priced.
As for insurers, we have a favorable view of Momentum, particularly under Jeanette Marais, who has been instrumental in leveraging the platform established by herself, Hillie Meyer, and Risto Ketola over the last three years. Metropolitan also enjoyed a 49% gain, starting from a price-to-book ratio of 1.1.
Looking back, the financial sector was undervalued at the start of the year, which was evident across numerous shares in the index.
As interest rates dropped, the sector benefited immensely.
A pivotal moment for South Africa this year was the election and the establishment of the GNU (Government of National Unity), which has boosted investor confidence.
If a GNU had formed that included the Communist Party—an entity not particularly favorable to market capitalization—interest rates might not have had the same effect. It was certainly a confluence of factors that led to this outcome.
We should not overlook a few other players; asset managers like Quilter and Coronation, along with the JSE, have seen notable gains.
PSG Financial Services and various property firms—including Wilson Bayly, Hyprop, Attacq, and Fairvest—each saw increases of around 50%.
Thus, interest rates have played a significant role in the reassessment of financial services stocks, banks, and insurers.
JIMMY MOYAHA: Kokkie, many of the examples you’ve cited indicate double-digit growth in year-to-date performance. Could this reflect that the South African market is facing more challenges than other markets as we head into 2024? Might this suggest robust momentum as we move into 2025 now that elections are behind us?
With new administrations in place and the potential return of figures like former president Donald Trump in the US, do you see room for sustained positive momentum, or could this momentum start to diminish?
KOKKIE KOOYMAN: I would contend that our current environment isn’t entirely overheating, but it is indeed favorable—Capitec and OUTsurance, among others, are experiencing increases of around 60%. Notably, this trend is not just local; we observe similar developments globally.
The average US bank sector index surged by 44%, and European banks enjoyed an approximate 60% increase as well.
This global reaction to decreasing interest rates suggests that we may continue this trend into 2025. Specifically in South Africa, our inflation rates are dropping markedly, leading to discussions about possible Reserve Bank interest rate cuts, potentially three next year.
Read:
Inflation inches up, leaving rate cut hopes intact
South African inflation expectations decline to three-year low
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The trajectory in the US hinges on incoming president Trump, whose policies some believe might lead to inflation. It’s uncertain whether further cuts will materialize; perhaps one could happen next week, but thereafter, it might remain static.
Therefore, I predict that the financial sector will maintain a positive trajectory, particularly in Europe.
In South Africa, we’ve already seen solid performance; many sectors remain competitively priced. Absa’s price-to-book ratio stands at one, and Momentum is at 1.2, yielding returns on capital between 16%-18%, alongside Absa providing a 7% yield. I believe if interest rates decrease, the sector is poised for another strong year.
JIMMY MOYAHA: Considering the performance of the financial sector in South Africa, do you think our greylisting as a nation would have impacted this performance? Would investor sentiment have shifted under different conditions?
KOKKIE KOOYMAN: Jimmy, that’s an insightful question. It’s essential to recognize that there was considerable negative sentiment at the beginning of the year. Notably, the rand has appreciated by 3% against the dollar and over 7% against the euro since January 1st.
In my opinion, the effect of greylisting was present, although somewhat limited. It raised financing costs and hampered growth to a degree.
Nonetheless, the two key drivers were the formation of the GNU and the decline in interest rates. If greylisting is lifted next year, that could further enhance local sentiment, but those earlier developments held significant weight.
Interestingly, while I noted Capitec’s 66% increase and Absa’s 32% rise, keep in mind that the JSE only experienced an 18% growth this year. So, comparing those numbers, the performance of financial stocks is particularly noteworthy.
JIMMY MOYAHA: Absolutely. Financial sector stocks are outpacing many peers, especially when compared to resource counters that are facing significant declines.
Kokkie, looking ahead to 2025, we are hopeful for more consistent decision-making from global leaders. Are you optimistic about the financial sector?
KOKKIE KOOYMAN: Most definitely! A point often overlooked by investors leading up to this year is the extensive regulatory work that has taken place since 2008. Regulators have aimed to fortify the financial sector, making it nearly resilient, which has curtailed returns by necessitating that firms retain excess capital and reserves while cleaning their lending books.
As a result, the financial sector is in a strong position, and we should not expect traditional levels of bad debt.
As interest rates decline, the demand for credit typically rises. Even though we might see marginal reductions in interest margins, transaction volumes are likely to increase. I anticipate solid earnings growth ahead, whether it’s Capitec, OUTsurance, or FirstRand, continuing their re-rating for further profits. They should still achieve around 15% growth.
It’s also important to highlight that Investec has been one of the underperforming stocks this year, trading at a 20% discount to book value. It remains a strong entity but faces challenges from the UK market, along with broader economic factors that are impacting growth and vehicle leasing.
Similarly, Old Mutual has only seen an 8% increase this year. While fundamentally sound, it struggles with some managerial issues.
Overall, there is significant potential for undervalued investments in the financial sector, and I would assert that about 70% of them are mispriced and present opportunities for re-rating.
JIMMY MOYAHA: Here’s to a promising year for 2024 in the financial sector, with an even brighter outlook for 2025.
Let’s conclude this discussion, Kokkie. Thank you for sharing your insights and valuable contributions once again.
Kokkie Kooyman, director at Denker Capital, provided his insights on the financial sector’s performance for 2024.
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