South African banking stocks are trading near their biggest discount to global emerging-market peers in 10 months and investors should buy them, says John Biccard, a Fund Manager at Investec Asset Management. “We think South African banks are safer than most of their peer group as they have not been invested in so-called toxic assets,” John Biccard, who has bought stocks of Standard Bank Group Ltd. and Absa Group Ltd. in the last three months, said in an interview today. “The gap between the local banks and the emerging-market banks isn’t justified.”

Investec Asset Management is a unit of Investec, owner of the fifth-largest bank in South Africa by assets.

Emerging-market banking shares trade at 12.2 times reported earnings, making them 1.4 times more expensive than South African banks, which trade at 8.7 times earnings, according to Bloomberg data. On June 12, emerging-market banking stocks were 1.5575 times more expensive, the biggest valuation gap since August.

Financial stocks in developing nations have rallied this year as the U.S. government’s bailout of its insurers bolstered confidence in the industry and the cost of borrowing in dollars between banks fell. The MSCI Emerging Markets/Banks Index has climbed 30% this year, paring last year’s 53% slide. South Africa’s FTSE/JSE Africa Banks Index has added 3.1% in 2009 after sliding 15% last year.

South African banks had “very little” of their operations tied to subprime-related assets and are well capitalized, according to a South African Reserve Bank report on Oct. 23. South Africa’s banks escaped the worst of the credit crunch because they rely on deposits for funding, as opposed to capital markets, Ben Kruger, Group Deputy Chief Executive Officer at Standard Bank, said in September.

Consumer-loan defaults at South African banks have soared after the South African Reserve Bank raised its benchmark rate six times to 12% in the year through June 2008. Absa Group and FirstRand Ltd. said June 23 that bad loans and investment losses in the six months to June contributed to a cut in earnings by a third. Standard Bank said March 5 that after missing financial targets for 2008, it will not publish objectives for 2009.

While banks’ earnings may “show weakness for another six to 12 months,” the shares have already “priced this in,” Biccard said.

JPMorgan Chase & Co. said in a in a research note dated June 29 that it recommends being “overweight” in Absa, Standard Bank and FirstRand shares, meaning investors should hold more of the stocks than are represented in benchmark indexes. “South African banks’ discount” to emerging-market peers “offers very attractive entry points,” Johannesburg-based strategist Deanne Gordon wrote.

Visit Investec Asset Management’s website

Source(s):
Bloomberg News