Nedbank investors need a bigger boat

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Welcome to the Supernatural Stocks podcast on Moneyweb, with your host The Finance Ghost – your weekly fix of local and international insights for investors and traders.

It’s been a strong year on the JSE.

For more years than anyone wants to remember, the narrative has been one of offshore returns smashing anything you can get locally – but 2025 was a shift in momentum, with the local economy and market emerging as the very happy winner during a huge rally in gold prices.

As global sentiment has shifted away from US dominance and towards emerging market opportunities, South Africa has stuck out as an appealing destination.

Read: JSE winners over the past 12 months

It certainly helps that we were already getting our ducks in a row coming into this year, with the GNU [government of national unity] as the foundation for a period that culminated in the removal of our name from the grey list and even a credit rating upgrade by S&P from BB- to BB.

This is now equivalent to Moody’s rating on our sovereign debt. Hopefully at some point, they both improve our rating further.

If you want to see what a recovering sovereign story looks like, all you have to do is consider our 10-year bond yield, currently at 8.3%. You have to go back to pre-Covid levels to find a similar yield. And if you go back a few years before then, you’ll find that our cost of borrowing was significantly higher in the worst of the lost decade.

The market likes the South African story right now, despite the best efforts of the US government to make us a global pariah.

When the economy is doing well, it’s the rising tide that lifts all boats. Well, almost all boats.

The Financial 15 index: Banking on the banks

One of the best ways to judge the overall performance of a country is to look at the financial services sector. These returns are impacted by numerous macroeconomic factors, ranging from economic growth through to prevailing interest rates and the cost of funding.

The Financial 15 index has managed a return of over 15% year-to-date excluding dividends. It obviously pales in comparison to the 120% dished up by the Resources 10 index and its gold stocks, but it compares favourably to the 14.4% from the Industrial 25 index. Remember, you can use the excellent Moneyweb Daily Indicators page to get these stats.

To get a sense of the index, we can look at an ETF [exchange-traded fund] that tracks it, like the Satrix FINI. A review of the most recent Minimum Disclosure Document reveals that the banks dominate this ETF.

Read:
Kokkie Kooyman’s outlook for SA’s banking sector
Bankers rake in up to R416m in Optasia JSE listing

FirstRand sits at around 19% exposure, Standard Bank and Capitec are each 15%, and then you’ll find Absa at 7%. That’s over half the fund attributable to the four biggest banks, as you would expect. But then we flick across to Sanlam and Discovery, 7% and 5% respectively, before landing at poor Nedbank with a weighting under 5%.

There have been some interesting underlying stories in this sector, like the excellent year in short-term insurance thanks to a lack of major weather events. Premiums were put up in response to loss events in recent years, so a clean year for the insurers has led to a period of strong underwriting margins.

This leaves space for price competition, so don’t be shy to push back on your short-term insurance premium increases heading into a new year!

But from a macroeconomic perspective, the most interesting story lies in banking.

There’s an ugly duckling swimming around in a pond of swans.

Spot the odd one out

Among the five biggest names in banking, there’s a clear outlier. But let’s start with the good news stories before we get to the disappointment.

First up is Capitec, with a share price return of 28% this year.

The best retail banking story in South Africa – in fact, the best business story of our democracy full stop – has continued to deliver.

And they’ve done it based almost entirely on exposure to South Africa, rather than because of macroeconomic improvements in the rest of Africa that have boosted peers. Although the valuation of Capitec is demanding, there’s clearly something to be said for just backing winners and letting them do their thing.

Read:
Standard Bank’s 10-month performance holds firm
SA banks step up Africa drive amid fintech rivalry

In second place, we find Standard Bank, up 24%. That’s a solid outcome that is made even more interesting when viewed in the context of significant selling by various directors at points in time. Standard Bank, like the local telcos, has enjoyed a resurgence in African economies thanks to a weaker dollar.

If you can imagine an impala being squeezed by a python, then Trump’s approach this year and the structural issues in the US economy were the slight release of pressure that allowed the impala to escape. And boy, did it run!

This is why Absa is next in line, with an increase of 14%.

Absa’s South African business is nothing to get too excited about, but they do have exposure in Africa and this has helped them in the past year.

When you compare this performance to their most obvious local competitor, you’ll see just how much the African exposure has helped Absa.

Read:
Top bankers are the most bullish in a generation
Capitec dethrones FirstRand as Africa’s most valuable bank

But we aren’t quite at that stage yet. Before that, we need to deal with FirstRand in fourth place.

The FirstRand share price is up 13% this year, negatively impacted by the overhang of the UK motor finance commission issues. The battle with the regulator has turned ugly, with the proposed redress scheme coming in at levels well above what FirstRand believes is fair or reasonable. This creates uncertainty over both the timing and the amount of the potential payment. The market hates uncertainty.

But at least all of these names are in the green – and solidly so.

The same cannot be said for Nedbank, with the share price down 7% year-to-date.

This is a great example of the danger of investing for a dividend.

Although Nedbank’s dividend yield looked great this year, it was almost completely offset by the decrease in the share price. The Nedbank yield also isn’t unique, as Absa will also pay you a juicy dividend thanks to its modest valuation.

The difference is that Absa delivered share price growth as well this year, so the Absa total return is 24% year-to-date vs. Nedbank at 2%. That is spectacular underperformance by Nedbank!

But what is the reason? Is it really just because of the Transnet settlement, as some may be tempted to argue?

The problems go far deeper

Let’s be clear here: the Transnet settlement of R600 million is less than 0.5% of Nedbank’s current market cap. Yes, it’s painful. Yes, it has created even more questions around the company. But no, it’s not responsible for the drop in the share price this year. For that, we need to look deeper.

Read:
Nedbank set to take a Transnet hit
Nedbank to pay Transnet R600m to settle swap dispute

An update for the 10 months to October reveals that net interest income managed growth of only low-to-mid single digits. Admittedly it grew just 2% in the six months to June, so it’s better that that – but that’s hardly saying much.

Non-interest revenue is grew by less than mid-single digits, a really disappointing outcome in a year where South Africa offered decent opportunities for growth. This is a key driver of return on equity [ROE], a metric on which Nedbank is well behind the sector leaders. Growth like this isn’t going to close the ROE gap.

Now we get to the real concern: expense growth in the mid-to-upper single digits. In other words, margins are going backwards. This is far scarier than a settlement with Transnet.

If you can imagine a shark being sighted in the water and everyone trying to swim to safety, Nedbank is the swimmer at the back with a bleeding leg.

Every shark in town is getting ready for a bite, ranging from fintechs in the payments space through to non-bank lenders targeting SMEs and smaller corporate deals.

There’s much disruption in the banking sector, which means that the weakest players are vulnerable.

And if the sharks aren’t scary enough, there are a couple of killer whales lurking in the deep in the form of Discovery’s banking ambitions and even Old Mutual’s plans. Oh yes, and Pepkor for that matter.

Read:
Discovery’s bank bet starts paying off, handsomely
How upstart Old Mutual Bank plans to take on Capitec
Nedbank sells stake in Ecobank for $100m
Investec’s Titi shoots down talk of Pepkor banking partnership

To respond to the threat, Nedbank has simplified its group by selling Ecobank in Africa – at exactly the time when Africa is finally becoming exciting. They’ve also acquired fintech iKhokha to respond to the threats in that area. But on the whole, the music from Jaws is playing and investors are desperately in need of a bigger boat.

Read: Nedbank to acquire fintech iKhokha for R1.65bn

Those bigger boats are found elsewhere in the sector, as evidenced by the share price performances this year.

Chasing after a dividend and buying the weakest player in the sector is a textbook value trap.

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