The African National Congress (ANC) won majority support in South Africa’s recent elections, with 57.5% of the vote. The focus has rightfully been on the challenges South Africa's President Cyril Ramaphosa is likely to face, including allegations of corruption in the ANC, reforming state-owned enterprises and tackling the persistently high unemployment. These factors are important for banks, given (a) exposure to Eskom and other SOEs, (b) the possible impact of land and other reforms on various sectors of the economy and (c) the potential effects of any volatility in ZAR.
In this context, it is worth assessing South African bank bond valuations. We acknowledge that there are many more corporate bonds outstanding, and that the corporate bond market continues to grow – Gold Fields recently issued bonds and NEPI Rockcastle is marketing a EUR-denominated security. Focus on MTN has also increased ahead of the listing of its Nigeria operation. Having said this, South African banks have also become more important for international bond investors – FirstRand, Absa Group and Investec Bank Plc all issued foreign currency-denominated eurobonds in 2018, and Standard Bank is currently marketing a USD-denominated subordinated bond issue.
Here are a few thoughts on the South African bank bond valuations:
- We reiterate our Buy recommendations on the two African Bank (AFRIBK) USD-denominated securities. S&P recently affirmed its B+ rating on African Bank, stating that the bank “maintains sufficient liquidity buffers to cater for maturities beyond the next 12 months”. This largely covers the USD-denominated bonds, which mature next year. The spread difference between the African Bank (AFRIBK) 6% Feb 2020 bond and the AFRIBK 8.125% 2020 bond widened going into last week’s elections but this appears to have corrected now. Both bonds are senior, and we do not believe there is any fundamental reason for a significant spread difference.
- Turning to the larger banks and to the USD-denominated subordinated bonds issued by Absa (ABGSJ) and FirstRand (FSRSJ), the spread difference between these two bonds is no longer as wide as was once the case – it is now c55bps to the 2023 call dates, which does not look too far off fair. FirstRand Bank also has a senior USD-denominated bond outstanding. The FSRSJ 4.25% security matures next year and yields c3.6%. We do not expect much change to that, given the short time to maturity and strong fundamentals of the bank. We think there may be another opportunity to invest in FirstRand in the primary market if the lender chooses to replace this bond.
- The GBP-denominated bonds issued by Investec Plc and Investec Bank Plc have largely ignored any election-related market jitters. At the time of writing, these bonds were much tighter than in January. This may well reflect the currency of issue, the domicile of these particular issuers and the diverse nature of the Investec group.
- Standard Bank (SBKSJ, STABAN) is marketing a 10NC5 Tier 2 Reg S only bond. Based on Bloomberg data, there are no USD-denominated bonds under the SBKSJ ticker, and no benchmark-sized USD-denominated bonds under STABAN. However, ICBC Standard Bank Plc (ICBCST), which is 60% owned by ICBC and 40% owned by Standard Bank, has a US$500mn subordinated bond maturing in December this year. South Africa accounts for 77% of Standard Bank Group’s total assets and this issuer derives 68% of total income from that country, where it is the largest bank by total assets. This, the double-B issue ratings and the structure (Basel III Tier 2) probably mean that, although the Group is present in 19 African countries outside South Africa, FirstRand and Absa Group are more likely to be seen as comps than issuers such as Ecobank Transnational. We note that both the FSRSJ 2028 and ABGSJ 2028 bonds yield less than 6% to maturity.