Standard Bank (SBK ZA)

Dec 31, 2021 | Stock Picks

SUMMARY

Position: LONG
Upside target: R154.00
Reward / risk ratio: 2.6
Recommended stop-loss: R127.00

RECOMMENDATION: BUY

Analysts:
Peet Serfontein, Thabiso Mamathuba

 

Standard Bank is a South African-based financial services group with a global presence focused on emerging markets. The group operates in 17 countries in Africa and selected countries on other continents.

The bank is regarded as a core portfolio holding. Following a major IT overhaul a few years ago, the opportunity exists for Standard Bank to improve its jaws ratio (the income growth rate less the expenses growth rate). This, together with a bigger contribution from Africa, could result in an improvement in ROAs and ROEs.

Technically, a price on the brink of an accumulation / markup phase makes the share attractive as in investing option.

The share should continue to set higher highs and higher lows to confirm the validity of the move.

An inclining channel pattern (see the black parallel trendlines) confirms this price action. The expectation is that the price action may progress upwards to the upper range of this channel.

Technical analysis
The price remains above its 200-day simple moving average. Continued price action above the 200-day classifies the long-term trend as bullish.

Fading downside price momentum according to the Moving Average Convergence Divergence (MACD) histogram indicator supports the bullish trend.

According to the RSI, the price is overbought at R185.00. This classifies our profit target of R154.00 as realistic.

Our entry range is between R131.00 and R139.00. Our upside target is set at R154.00 (+14.5% upside potential from current levels). This level is close to the upper range of the inclining channel pattern.

Time to exit is early April 2022. Keep the option open to extend the time exit should the price move sideways, or our profit target be reached in a shorter time.

A price below R127.00 (-5.6% from current levels) is a major concern for downside potential and is recommended as a stop-loss. This level is close to the lower range of the inclining channel pattern.

Expect volatility in the price.

Long-term fundamental view
Standard Bank is one of the largest banks in South Africa and the largest on the African continent.

Its African (ex-SA) exposure is what separates it from its JSE-listed peers. Many markets on the continent are still under-serviced, and banking penetration is low. Its presence in African markets also provides diversification benefit and exposure to faster-growing regions.

While the group’s profitability for FY20 was negatively impacted by increased credit impairment charges due to COVID-19, FY21 could mark a gradual recovery in earnings.

In the first 10 months of its 2021 financial year, group revenue continued to recover, supported by higher average balances, a growing client base, improved sales, and higher activity levels.

For the nine months to 30 September 2021, the credit loss ratio (CLR) remain-ed within the group’s through-the-cycle credit loss ratio range of 70 to 100 basis points.

Credit impairment charges are expected to decline from FY20 levels.

Management expects the recovery of key metrics (i.e. headline earnings and return on equity) to FY19 levels to take some time.

Downside risks to our fundamental view includes macroeconomic conditions in SA that remain severely constrained.