South Africa’s five largest banking companies are worth more than R1.1 trillion!

It’s safe to say this is one of the most important sectors in the country’s economy.

But how do these five banking stocks compare – and what do the numbers tell investors about them today?

SA’s big Five banks – and what the numbers reveal

I’ve compared the big five banks on the basis of their net asset value, profits (PE ratio), return on equity and dividend yield.

These are some of the most important indicators of value in a company – and they can tell us a lot about these businesses.

Ranking the big 5 banks on P/E ratio

Nedbank has the lowest PE ratio, at 6.80, of these five banks, whilst Capitec’s is the highest at 20.86.

Nedbank has a way lower earnings growth rate than Capitec does. In fact, looking at the earnings growth rate since 2012 Nedbank has the lowest earnings growth rate, while Capitec has the highest earnings growth rate of this group of companies.

That’s what you’d expect. Investors pay more for companies that have a high growth rate vs a lower growth rate.

Since 2012 Nedbank’s earnings per share has only grown 86%, compared to 653% for Capitec in the same period…

If we consider the rate of earnings growth, compared to the PE ratio of these companies, a ratio typically called the PEG ratio (PE ratio divided by earnings growth rate). First Rand has the lowest valuation. Then it is Capitec, followed by Nedbank, Absa and Standard Bank in last place!

In this case First Rand might not have the fastest earnings growth rate, but its PE ratio being fairly low compared to Capitec means it comes out ahead.

Ranking the big five banks on dividend yield

Dividend yield is how much of the money a company makes that it returns back to shareholders, as a percentage of its share price.

The bigger dividends a company pays, the less likely it is to be a fast grower.
As it does not reinvest profits in growth, but returns it to shareholders.

In this case Capitec has the lowest dividend yield by far, but we already know it is the fastest grower.

First Rand also has a fair bit of a lower yield than the remaining banks – supporting its higher growth rate as well.

Absa and Nedbank are the slowest growers and have the highest dividend yields.

South African banking stocks compared by ROE

Capitec has the highest ROE of the banking sector.

In short – it reflects the company’s fast growth. There are many reasons for this. But in the main the company has lower costs than other banks, meaning it makes more profit for every rand it invests. Newer IT infrastructure, and a more frugal corporate culture are probably the biggest reasons behind this.

First Rand and Standard Bank around the 19% mark still have above average ROEs. These companies are the two largest SA banks by turnover. And for the most part they are fairly innovative, and good allocators of shareholder funds.

Absa and Nedbank have the lowest ROEs. Nedbank’s ROE is only 13.22%. That means for every rand invested in Nedbank the company will generate almost half the returns that Capitec would!

So, which bank do I find the most attractive?

Looking at these figures – there are two banks that stand out to me.

Capitec and First Rand.

But First Rand is the winner if you ask me. Firstly, the company has a good dividend yield. Higher than the average JSE listed company. And while it is not top of the sector, it sits in the middle.

Again, in terms of PE ratio it isn’t the cheapest, but not the most expensive either. It is the most attractive when you consider the growth rate of the company since 2012…

In terms of return on equity – only Capitec has a higher return than First Rand.

But here’s the thing – if Capitec has an earnings disappointment its share price could easily take a 30% knock. If not more. The company’s shares trade on a PE ratio of 20 and the share price is more than five times higher than the net asset value of the company.

First Rand on the other hand is on a PE below 10, and only trades at around twice the value of the company’s net asset value. Simply put – there aren’t nearly as high expectations priced into the share price, giving investors a higher margin of safety.

PS. To get my next stock pick, go here.

Not a subscriber to Money Morning?
You can get free daily recommendations like these with Money Morning eletter. Just sign up here.