Why Invest in South African Bank Stocks ?

South Africa is the most developed country in the African continent. With a population of about 48.0 million the country is rich in many mineral resources including gold, diamonds and platinum. The economy’s size is about $555.0 billion and mining is the largest industry. Investors looking to gain exposure to Africa are better off starting with South Africa.

The CIA’s World Factbook states the following on the state of South Africa’s economy:

Growth was robust from 2004 to 2007 as South Africa reaped the benefits of macroeconomic stability and a global commodities boom but began to slow in the second half of 2007 due to an electricity crisis and the subsequent global financial crisis’ impact on commodity prices and demand. GDP fell nearly 2% in 2009 but recovered in 2010-11. Unemployment remains high and outdated infrastructure has constrained growth. State power supplier Eskom encountered problems with aging plants and meeting electricity demand necessitating “load-shedding” cuts in 2007 and 2008 to residents and businesses in the major cities. Daunting economic problems remain from the apartheid era – especially poverty, lack of economic empowerment among the disadvantaged groups, and a shortage of public transportation. South Africa’s economic policy is fiscally conservative focusing on controlling inflation and attaining a budget surplus. The current government largely follows these prudent policies but must contend with the impact of the global crisis and is facing growing pressure from special interest groups to use state-owned enterprises to deliver basic services to low-income areas and to increase job growth.

Though mining is the major sector in the country, I am not a big fan of investing in mining stocks simply because investing in commodities involves extremely high risks and they can be highly volatile. Hence commodity stocks are not for the faint-hearted especially those trying to invest their hard-earned money or investors trying to earn income in the form of dividends. For example, after reaching record-high prices recently, silver fell 30% in just 6 days. Investing in commodities such as silver, gold and diamonds makes sense only when one takes the physical delivery.

However banking is one South African sector that is attractive but is often ignored by international investors.The four biggest banks in the country are FirstRand, Absa, Standard Bank and Nedbank accounting for 85% of the total banking assets. Some of the reasons to invest in South African banking stocks include:

Source:  Are South African banks still a safe bet?, The Banker

The easiest way to invest in South African banks is via the iShares MSCI South Africa Index ETF (EZA). The fund was launched in 2003 and has an asset base of 493.0 million and. Financials account for about one-fourth of the portfolio and all the four banks mentioned above are part of the fund.

Three of the biggest banks trading on the OTC markets are listed below:

S.No.BankTickerMarket Capitalization as of Nov 30, 2012Dividend Yield as of Nov 30, 2012Stock Price as of Nov 30, 2012
1Absa Group LtdAGRPY$11.5 B5.50%$32.18
2Nedbank Group LtdNDBKY$9.30 B4.12%$20.30
3Standard Bank Group LtdSGBLY$9.1 B10.45%$11.85

 

FirstRand Ltd. trades under the ticker FANDF.

Disclosure: Long NDBKY

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