By Agency Reporter

Thursday, 4 Nov 2010

CAPE TOWN: Investec Asset Management, a unit of Investec Plc that oversees about $70bn, said some of its funds exited Absa Group Limited. and reduced holdings in Standard Bank Group Limited after valuations became ”stretched.”

”By the middle of the year it had become clear to us that the market‘s expectations for bank earnings both this year and next were too high,” Chris Steward, head of financials at the Cape Town-based money manager, wrote in a report e-mailed today. ”The potential for disappointment was significant.”

Standard Bank, Africa‘s largest lender, is retrenching more than 2,000 staff after costs continued to rise and revenue remained muted even after South Africa‘s central bank cut interest rates to boost consumer spending. Absa, the country‘s biggest retail bank, on August 5 said it expects costs to increase by more than inflation and that second-half revenue growth will be ”subdued.”

Standard Bank is valued at about 12.6 times its estimated earnings, while Absa has a ratio of 11.7, near the highest level since 2005, according to Bloomberg data.

”The recent announcement by Standard Bank that they would have to retrench staff brings into stark focus an issue we have been concerned about for some time – South African banks are finding top-line growth very hard to come by,” Steward said.

Investec’s remaining investments in the industry ”are geared towards companies that offer a resilient growth story, even in the event of prolonged tough operating conditions,” he said.

The report cited African Bank Investments Limited., RMB Holdings Limited. for potential benefits from its reorganization, and FirstRand Limited. for its ”superior relative earnings momentum.”

Sanlam Investment Management, with the equivalent of $41bn in assets, and Coronation Fund Managers said they are ”long-term” investors. Coronation is not reacting to ”short- term news flows,” according to Neville Chester, who helps oversee about $22bn at the Cape Town-based firm.

”We are overweight banks and have been adding to our position,” said Patrice Rassou, a portfolio manager at Sanlam. ”We think Standard Bank management is taking the right action in order to right-size the business. Absa has been hit hard by cost increases, but this will be out of the base next year.”

Standard Bank and Absa have been the worst-performing stocks in the five-member FTSE/JSE Africa Banks Index this year.

Source: Punch