The outlook for South Africa's top 4 banks: ABSA, Nedbank, FirstRand and Standard Bank
Assessing the economic outlook, broker ratings and target prices for these securities, as well as the technical trading view for these shares.
In this article we take a look at major South African banking counters:
Assessing the economic outlook, broker ratings and target prices for these securities, as well as the technical trading view for these shares.
Banking sector fate linked to domestic growth
Local banking counters ABSA, and Standard Bank have seen COVID-19 disruptions instill earnings declines for these counters in excess of 40% year on year.
However, banks whose fates are directly linked to that of the domestic economy, will be encouraged by news of a significantly stronger than expected South African gross domestic product (GDP) figure posted for the third quarter of the year. The data highlights a quicker than expected recovery from a hard lock down induced by government, with the aim of trying to contain the spread of the coronavirus.
Caution to growth should follow the Minister of Health’s declaration that South Africa has now entered into its second wave of the coronavirus pandemic. Should this lead to further economic disruption through another lockdown scenario, this would bode poorly for SA Inc. and be amplified within the banking sector, perhaps most obviously through non performing loans, a trend market participants would want to watch for these counters, regardless of whether there is another lockdown or not.
The rand supporting short term gains in financials
The above chart compares the Financial Index (black line) against the USD/ZAR (blue line). The arrows on the chart highlight how a rising USD/ZAR (dollar strength / rand weakness) aligns with weakness within the financial sector, while more recently we are seeing a declining USD/ZAR (dollar weakness/ rand strength) accompanied by gains within the financial sector.
This highlights how rand strength is a supporting factor for local banks. ZAR strength has been supported by the risk on market environment induced by progress in a COVID-19 vaccine. While in the near term it is possible that the current COVID vaccine euphoria could help push the USD/ZAR back towards R14/$, the very long term trend remains for ZAR depreciation.
Long term broker ratings & price targets
The below table shows South Africa’s top 4 banks (ABSA, FirstRand, Nedbank and Standard Bank) in terms of market capitilaisation. Within the table, a consensus of broker ratings and price estimates of these companies, from Thomson Reuters, as of the 11th of December 2020 are contained.
The share prices referenced within the table are derived as of the time of writing before close of business on the 10th of December 2020.
|
|
Thomson Reuters Analyst Ratings |
Thomson Reuters |
Share Price |
|||
|
Strong buy |
Buy |
Hold |
Sell |
Strong sell |
Target Price (LT) |
10 Dec |
ABSA Group |
2 |
4 |
4 |
0 |
0 |
12680c |
11469c |
Firstrand Ltd |
2 |
5 |
3 |
0 |
1 |
5275c |
4878c |
Nedbank Group |
2 |
4 |
4 |
1 |
0 |
14659c |
12507c |
Standard Bank Group |
1 |
5 |
5 |
0 |
0 |
13609c |
12462c |
The table highlights a long term average rating of ‘Buy’ for the major banks in South Africa.
It is important to note that while all the banking shares listed are trading at discounts to long term target prices, short term market volatility, should it ensue, could widen these discounts further.
Technical trading view on the Banks
ABSA Group Ltd
The red, green and black lines on the chart above represent the 20, 50 and 200 day simple moving averages. The lie of these moving averages suggest that the short medium and long term trends for ABSA remain up. The red trend lines over the current price action highlight a small rising wedge formation. This is suggesting that a short term pullback could be nearing. Should a pullback ensue, traders respecting the long term trend might look for long entry with a longer term upside resistance target considered at 13580. However, should a pullback take the price back below the 9350 level, the long term bullish assumptions would need to be reassessed.
FirstRand Bank Ltd
The red, green and black lines on the chart above represent the 20, 50 and 200 day simple moving averages. The lie of these moving averages suggest that the short medium and long term trends for Firstrand remain up. FirstRand is however trading in overbought territory at present. Traders respecting the long term uptrend might hope for a price pullback towards the 4200 to 4550 levels, looking for long entry targeting a move back towards resistance at 5570.
Nedbank Group
The red, green and black lines on the chart above represent the 20, 50 and 200 day simple moving averages. The lie of these moving averages suggest that the short medium and long term trends for Nedbank remain up. The share price of Nedbank has recently reversed off support at 12100 from oversold territory. 14000 becomes the initial upside resistance target, while a close below 11100 would consider the bullish indications to have failed.
Standard Bank Ltd
The red, green and black lines on the chart above represent the 20, 50 and 200 day simple moving averages. The lie of these moving averages suggest that the short medium and long term trends for Standard Bank remain up. The share price of Standard Bank has recently reversed off support at 12000 from oversold territory. 13450 becomes the initial upside resistance target, while a close below 11640 would consider the bullish indications to have failed.
In summary
- Growth in banking counters will follow the economic outlook with strong influence from the rand
- ABSA, FirstRand, Nedbank and Standard Bank all carry long term average broker ratings of ‘Buy’
- Banking shares currently trade at discounts to consensus of long term price targets
- The long term price trends for all four banks remain up
- ABSA and FirstRand could see a shorter term pullback before renewing longer term gains
- Nedbank and Standard Bank have recently formed bullish price reversals off support
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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