Initiation of Coverage - Standard Bank Group: An African giant in the Banking space

An African giant in the Banking space                                                       

We initiate coverage of Standard Bank Group (SBK) with a BUY recommendation and a target price of R217.00. SBK is currently trading at a 19% discount relative to our target price, which is a combination of three valuation methods. Our Discounted Dividend valuation yielded a target price of R189.14, while our Gordon’s Growth valuation and Residual Income valuation for the bank came in at R224.12 and R196.66 respectively. These valuations were weighted, combined, and rolled forward to arrive at our 12-month price target.

Over the last five years (2017-2021), the bank has grown total assets by a CAGR of 6.1% to over R2.7 trillion as at FY’21 and to over R2.8 trillion as of H1’22. Meanwhile, deposits have grown at a more impressive CAGR of 7.4% in the same period. This strong growth was driven by a expansions in its African regions.               

SBK is the largest bank in Africa by total Assets, valued at R2.7 trillion ($160 billion), while its NPL ratio of 4.8% is impressive given the size of its balance sheet and the pandemic-related setbacks. On the other hand, the bank’s earnings have declined since 2017, dragged by increased competition from digital-only players in its home region and across the continent as well as the pandemic.                                                       

Looking forward, we are positive about the bank’s potential for growth, especially in its African regions. We expect the group to see further growth in its insurance businesses to prop up domestic earnings, while profitability is likely to remain strong and ROE is forecasted to grow to 17.6% by 2026.      

Geopolitical tensions are a threat to global growth, with the Russia-Ukraine crisis already causing high inflation across developed and developing economies. This has led to central banks increasing interest rates to curb spending and tame the price growth. Although this has had the effect of increasing asset yields, it has also negatively affected funding costs. This could pose a downside risk to Net Interest Margins for the bank.               

The looming threat of the emerging digital-only banks is a long-term threat to the traditional banks, especially with regard to retail lending and transactions. SBK will have to continue to improve its digital and retail offerings while simultaneously satisfying commercial and business clients.