South African banking shares: broker ratings, price targets and trading view

South African Banking shares – Broker ratings and long term price targets

The below table highlights how major South African Banks (ABSA, Capitec, Firstrand, Nedbank and Standard Bank) are currently viewed at an institutional (analyst) level.

The table highlights current analyst ratings and long term price targets (as polled by Refinitiv), relative to current prices, assuming a discount or premium to longer term valuations. The ratings and aggregated snapshots of these views on the respective shares are as of the 24^th of June 2021.

Absa Bank Limited, Nedbank Group Ltd and Standard Bank Group Ltd remain firmly in investor favour, all maintaining an average analyst rating of ‘buy’, while Capitec Bank Holdings Ltd and FirstRand Ltd maintain ‘hold’ ratings in aggregate.

The suggestion from current prices relative to a median of analyst estimates is that ABSA, followed by Standard Bank, currently trade at the largest discounts to the assumed fair value. Capitec is suggested to trade at the highest premium to its median of analyst price targets.

JSE Banks Index

The JSE Ltd shows the long term trend as remaining up for the time being. The 50 day simple moving average (yellow line) trading above the 200 day simple moving average is suggestive of this.

JSE Banks Index vs USD/ZAR

The above chart highlights the inverse correlation between the JSE Banking Index (blue line) and the USD/ZAR (white line).

While the trend for the Index is up, it has been supported by a prolonged period of ZAR strength. The short term pullback we have recently seen within the banking sector correlates once again with a renewed bout of ZAR weakness.

Traders of banking counters will be mindful of movements within the ZAR short term, as weakness therein poses a threat to the uptrend currently in play for the JSE listed banks.

USD/ZAR

The 200 day simple moving average (blue line) on the USD/ZAR chart suggests that the long term trend for the currency pair remains down (dollar weakness / ZAR strength).

However in the short to medium term we have seen a bullish break of the downward trend line. We are also seeing the 20 day simple moving average (red line) moving towards the 50 day simple moving average (green line). This could be early warnings signs of a short to medium term trend reversal.

ABSA Group vs Nedbank

With the ambiguity in the JSE Banking price trend relative to the volatility of the rand, our preferred to approach to trading shares within the sector are through pairs trading, an example of such a setup is exampled below.

The pair considers a Long ABSA Group position against a Short Nedbank position. The net result of these combined trades looks for a 12.6% profit margin. A stop loss is considered of equal proportion to the expected gain.

A successful pair trade can be realized 1 of 3 ways:

1. The long position rises while the short position falls

2. The long position rises faster than the short position rises

3. The short position falls faster than the long position falls.

The blue line on the chart represents the ABSA / Nedbank ratio which recently traded more than 2 standard deviations below the mean (middle line). In turn a successful trade would require the ratio (blue line) to return back to the mean to meet the guided 12.6% profit target.

In summary

• Standard Bank, ABSA and Nedbank carry an average broker rating of buy
• Capitec and Firstrand have an average broker rating of hold
• ABSA and Standard Bank trade at the broadest discount to a consensus of long term broker price targets
• JSE Banking Index remains in a longer term uptrend which has correlated with ZAR strength over the last year
• Rand weakening would pose a risk to the sector
• ABSA Group vs Nedbank provides a pair trade consideration