19 March 2008
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Johannesburg — IN A bear market, the good often gets dragged down with the bad. South African banks operate in a tight market with solid margins in a growing economy.
But with the collapse of Northern Rock in the UK and Bear Stearns in the US, banks here have been dragged down in a global rout. So obviously the question is whether this is a buying opportunity.
A good example is Standard Bank. A few months ago, Industrial and Commercial Bank of China paid about R121 a share and the price is now under R90. It raised a lump of capital at R121 , which means in today's terms they raised money cheaply. They are more highly rated than their peers, but all are cheap.
If you are tempted, you might bear in mind the famously bearish views of Oppenheimer analyst Meredith Whitney who, says the Financial Times, has issued a fresh batch of "under-perform" forecasts on Citigroup, Merrill Lynch and UBS. But here is the cruncher: she expects "further downside of as much as 50% based upon 1990-91 multiples of tangible book values".
She suggests the next area of value erosion will be goodwill, so investors should focus on tangible book value when looking at multiples for banks.
She may be wrong, but then again it might be an idea to wait a bit before plunging in.
The Bottom Line is Edited By Edward West
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