Foreign investors have been snapping up South African banking stocks, enticed by the cheapest valuations relative to emerging-market peers since 2011, even as the country's downgrade to junk deepened a broad equity selloff.
Offshore investors bought a net 1.5 billion rand ($147-million) of bank shares, including those of FirstRand Ltd. and Barclays Africa Group Ltd., in the six days after S&P Global Ratings downgraded the country's foreign currency debt on April 3. Fitch Ratings followed with a similar cut on April 7, described by a banking industry body as "devastating" for lenders. Excluding bank shares, foreigners sold a net two billion rand of other stocks in the same period, bringing equity outflows this year to 43.8 billion rand, according to JSE Ltd. data.
Valuations of the country's banks have plunged to 10 times historical earnings, compared with 19 for the benchmark FTSE/JSE all share index. While facing higher costs of capital, rising bad debts and a slowdown in lending, banks are well capitalized to withstand the storm and cheap enough to be bargains, said Adrian Cloete, an analyst at PSG Wealth in Cape Town.
"Banking shares are looking interesting from a valuation perspective," Mr. Cloete said by e-mail. "The current almost-50-per-cent discount is very large compared to the long term trading history" and the lenders are offering "very attractive dividend yields," he said.
South Africa's four biggest banks were profitable through the global financial crisis of 2008 and the country's recession a year later. With the lenders better capitalized now than they were then, surveys compiled by Bloomberg show analysts expect them to remain profitable despite the downgrades and President Jacob Zuma's firing of finance minister Pravin Gordhan in March.
Banks have been preparing for the downgrades, and even Mr. Gordhan's removal, since Mr. Zuma roiled markets when he fired former finance minister Nhlanhla Nene in December, 2015, said Neelash Hansjee, banks analyst at Old Mutual in Cape Town.
Still, South Africa remains at risk of further downgrades and the political situation is far from stable. Opposition parties marched on Wednesday to call for Mr. Zuma's ouster, and parliament is due to debate a motion of no confidence in the President on April 18.
In the days after S&P's rating downgrade, the rand, which had been the world's best-performing currency in 2017, gave up the year's gains while bond yields spiked, increasing the banks' cost of capital. That means investing in banks right now may be risky, though cheap. Not all investors are convinced. Policy uncertainty will continue to weigh on South African assets, said John Ashbourne, an London-based economist for Africa at Capital Economics Ltd. The ruling African National Congress is holding a policy conference in June after Mr. Zuma promised "radical economic transformation" following Mr. Gordhan's dismissal.
The hardest-hit bank share this year is Barclays Africa, which has to contend not only with strife in its home market, but also its parent company's planned sale of stock. The six-member bank index has slumped 6.3 per cent since the first downgrade, compared with a 3.1-per-cent gain in the 164-member all share index.