In its Equity Research report analysing the financial services sector, Imara Securities has maintained its HOLD recommendation on buying ABSA shares.
A HOLD recommendation is given when an investment analyst’s recommendation is to hold what you have and hold off buying more of that particular stock.
Having depreciated by 13.75 percent y-t-d and 13.91 percent y-o-y, ABSA’s price of P4.64 puts its Price to Earnings (PER) and at 9.44x and 1.67x, respectively Price to Book Value (PBV) ratios. In comparison to its regional lending peer’s respective averages of 10.18x and 1.44x, the bank trades at a higher PBV while its PER is below the average.
The bank’s premium above the average PBV is somewhat justified, given its outperformance on Return on Equity (ROE) of 17.73 percent vs. the peer average of 9.14 percent.
“Given the above, our relative valuation yields a target price of P4.73, representing an upside potential of 1.94 percent. In general, we are confident in the bank’s ability to maintain its strong fundamentals on the back of its strong brand name, parent company leveraging opportunities and advancements in digital solutions. We therefore maintain our HOLD recommendation,” the firm said.
Despite the prospects of further credit extension to support the economic recovery, intensifying revenue diversification and cost control measures will be crucial to hedge against the low interest rates and increased competition posed by new entrants to the market. Compared to the respective regional peer averages (listed Sub-Saharan Banks), ABSA underperformed on non-funded income to total income, reporting a ratio of 35.40 percent against the average of 37.66 percent. Encouragingly, the bank outperformed the regional peer average cost to income ratio, achieving 58.15 percent against the peer’s 69.27 percent.
IMARA expects the bank’s current digitization efforts to continue to drive digital adoption, translating into higher transactional volumes, thus facilitating growth in non-interest income streams and further improving cost-control. In addition, the bank, being part of the broader ABSA Group, is availed opportunities to leverage on a strong brand name, the group’s digital solutions and diverse product offerings to broaden its revenue streams.
In terms of macroeconomic conditions in 2021, the Bank of Botswana has thus far maintained its accommodative policy, keeping the bank rate and primary reserve requirement (PRR) at 3.75 percent and 2.5 percent, respectively, after the 2020 rate cuts. In addition, the central bank introduced extensive measures to enhance access to liquidity by commercial banks in April 2020. Aided by the measures taken by the Bank of Botswana, ABSA’s loans and advances growth outpaced that of the aggregate commercial bank loans in Botswana during the period under review. ABSA’s loans and advances growth of 6.67 percent superseded the aggregate commercial banking industry’s 3.55 percent increase to P 65.1billion (December 2020: P 62.9billion), with the bank accounting for 22.81 percent of the measure. According to the Business Expectations Survey Report published by the Bank of Botswana, firms expect an increase in the stock of loans across all markets in the twelve-month period to September 2022 as businesses source funding to boost operations as the economy continues to recover. The Bank of Botswana expects inflation to remain elevated in the short term and revert to the target range of 3 percent – 6 percent in Q2 22. This view gives grounds for the central bank maintaining an accommodative policy in the short term with the implication that the current elevated inflation levels are transitory.