Daily Equity Report

At the beginning of the year we mentioned that as results and announcements from companies start to come through we will gain a clearer indication of the extent to which the economic crisis has been factored into prices. Some 2 years after the start of the credit crisis in the US, it’s the global real economy that is still battling along. Banks are at the forefront of both the consumer and corporate market and a worse than this and we will see a definite slowdown in new advances.

Today 2 banks came out with trading updates.

Absa Bank issued a trading update for the 6 months to end of June. It mentioned that in April at the company’s AGM it had already cautioned shareholders that trading conditions had become challenging and that there would be an increase in impairments, lower interest rate margin and a reduction in the value of its investment portfolios.

Today, now just a weak before closing off its 6 month results it is estimating that its headline EPS for Absa group will be down between 15% and 25%. The core banking component has been harder hit with the estimated headline EPS down between 25% and 35% from the prior year.

This negative news has been largely priced into the market and the share price therefore gained 1,29% on the day.

The current consensus is for EPS to decline by 15,5% for the year to December and so if this is tending towards a decline of 25% for the full year, there is likely to be a further downscaling of forward earnings.

On its historical EPS the price trades at 6,9 times PE and a dividend yield of 5,8%.

Firstrand has a June year end. It also came out with a trading statement, saying that it has also previously announced a deterioration but that in fact the scenario has played out much faster than anticipated. It mentioned declining asset growth, further increase in bad debts and the negative impact of faster than anticipated reducing interest rates on capital having a negative impact on earnings for FNB and Wesbank.

The investment banking division, RMB, has been hard hit by a decline in asset prices, lower earnings from its private equity division, a poor second half from fixed income and currency business. The result is likely to be RMB earnings down 50% - 55%.

Overall, Firstrand is now expecting normalised EPS for the year to June to be down between 30% and 35%.

Again a large dose of this has been factored into the current price and it shed just 11c or 0,8% to 1329c. On an historical basis the PE is 8 and the dividend yield is 5,4%.

Various industries have varying degrees of visibility on future earnings. Prior to this downturn, in an environment that reflects a steady increase in gearing levels, banks as lenders have done well. Now they are finding it difficult to make advances and keep bad debt levels in check in a generally over borrowed environment. Growing earnings is going to prove difficult for the larger players and those not targeting other markets.

Global markets continue to move down. The JSE ended the day off 0,45% with financials down 0,19%.

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966