When you asses the forecasts and the budget documents, the 1.6% long-term forecast for GDP growth is embedding in a lot of the reforms that Operation Vulindlela is putting into place, says Peter Attard Montalto, head of capital markets research on Business Day TV.

Zero-based budgeting has been used elsewhere in the world. It’s often used after deep financial crises, such as in eastern Europe or where the IMF and the World Bank comes in for a capacity building operation around fiscal management, says Intelldex’s Peter Attard Montalto on eNCA.

Considering that TymeBank needed about R1bn to break even just a few months ago, it will be left with only R600m to invest in its new initiatives, notes Nolwandle Mthombeni, senior banks analyst at Intellidex. Featured in News24. 

I expect the big four banks to pay out dividends even though it will be less than their historic dividend policies as they will need to be cautious in the face of the lingering Covid-19 uncertainties, says Intellidex’s Stuart Theobald. Featured in CNBC Africa. 

We were expecting to hear more from Minister Mboweni about Operation Vulindlela – the joint venture between National Treasury and the Presidency meant to drive reforms, says Intellidex’s Peter Attard Montalto on SABC News.

Operation Vulindlela is doing the right things on behalf of National Treasury and the Presidency. However, if you do not break through the political blockages then you cannot move the dial, says Intellidex’s Peter Attard Montalto in an interview with Michael Avery on Classic FM.

Kuben Naidoo, the SARB deputy governor and CEO of the Prudential Authority – has cautioned the banking industry to tread carefully as it juggles the positive effects of higher economic growth associated with the vaccine rollout, because another economic downturn is still possible. Intellidex’s Dr Stuart Theobald said that banks will be cautious to signal that there are still a lot of uncertainties so they will likely not declare dividends at the same levels as their historical dividend policies.

Featured in Business Day.

The South African Reserve Bank’s Prudential Authority giving banks the go ahead on dividend payments as they put the finishing touches to their 2020 financial results, but some banks have already warned shareholders not to expect a pay-out. Intellidex chair Stuart Theobald is featured in Daily Maverick saying that bank boards always have to be prudent in deciding to pay dividends, but the SA Reserve Bank is clearly trying to use moral suasion to tell boards to be particularly cautious about the outlook. He also pointed out that SA’s credit environment has been better than some of the worst-case scenarios envisaged when the SARB decided to give banks access to the capital buffers that are built up in good times.

Access the full article here.

Banks are sufficiently capitalised and have shown resilience and therefore are in a better position to pay dividends, and that’s the sense from the market as well, notes Intellidex Nolwandle Mthombeni. Featured in Bloomberg. 

In a report published last week, Intellidex says that the Covid-19 Loan Guarantee Scheme (LGS) is now “moribund”. Featured in Moneyweb. 

National Treasury announced stronger government tax revenue in December 2020 compared to December 2019. This was partly due to an extreme positive revenue shock from mining and corporate tax, says Intellidex’s Peter Attard Montalto. Featured in Business Insider. 

 Correction: Subsequent to publication, the SA Reserve Bank alerted us to a guidance note that had been published on 18 February that changed the Bank’s guidance on the payment of dividends and bonuses by banks. The guidance note no longer “discourages” the payment of dividends but notes the Bank is confident “that the respective boards of directors of banks will act prudently and will duly take into consideration, among other things, the current and anticipated capital levels of their banks, the current and future impact of COVID-19 and the slow pace of economic growth on the safety and soundness of their respective institutions” when approving dividends or bonuses.

This column was first published in Business Day.

Not long ago it made more sense to put your money in the shares of a bank than in the savings accounts it offered. For the last decade banks have on average paid dividends of about 4% of the share price, and shortly before the pandemic big banks were paying as much as 9% — considerably more than most paid in (after-tax) interest even for fixed deposits.

On top of that yield, you could look forward to capital growth as a sweetener (though, of course, take the risk of capital loss). Because of this, bank stocks were popular among those seeking income from their investments, people such as pensioners who live off their savings.

However, that came to an abrupt halt with the Covid-19 pandemic.

In an early move to protect the banking sector from the inevitable credit market fallout, the SA Reserve Bank loosened the capital requirements for banks, the “buffers” of shareholder money that banks accumulate in good times so that they can ride through the bad.

The problem is that when banks are told they don’t need to hold as much capital, they may feel entitled to pay out more as dividends. Banking after all is a game of holding just enough capital to avoid excessive risk, but not too much to damage your return on shareholder money. So, the Reserve Bank also banned the distribution of capital through dividends and bonuses. Well, not “banned” exactly, but “discouraged”, which in central banking language is about the same thing.

That was back in April 2020 when the economic fallout of the pandemic was tough to predict. Bank analysts (including me) believed the global financial crisis was as good a road map as we have, and that didn’t look good for banks. So, the central bank did the prudent thing and declared this was what buffers (invented after the financial crisis) were made for and it was time to let banks eat into them. The corollary, however, was that they had to cease paying dividends.

Almost a year later, though, most banks are coping with the pandemic reasonably well. None of the large banks have lost money. They are now busy tallying up their results for the year to end-December, and the guidance to the market has been that profits are down roughly 60%, but still in positive territory. Credit performance has been bad, but not as bad as predicted, with 5.18% of books impaired at end-December from 3.89% a year earlier, but way off the global financial crisis level of 5.94% reached in 2009.

That means they have been profitable and capital levels have not been under huge pressure. Indeed, the sector’s total capital adequacy ratio of 16.6% is slightly higher than before the crisis hit, and way higher than it was back in the financial crisis (13.01% in December 2008). The big four banks are all far above the minimum capital requirements, on the last Basel 3 capital disclosures made in September 2020.

The problem is that the Reserve Bank’s directive remains in force. So, banks are still discouraged from paying dividends (or capital damaging bonuses) even though the conditions are somewhat better than expected.

Banks, of course, do not like this. Executives have two reasons to gripe — bonuses can’t be paid at the expense of capital (though definitional greyness gives wiggle room). Also, by forcing banks to hold excess capital, banks’ return on equity is weaker simply because there is more equity. It is also bad for wider constituencies: those income-needing shareholders, as well as foundations of banks, that usually have dividend streams as their sole source of funding for the philanthropic work they undertake.

Given market conditions, the Reserve Bank should have shifted language from “discouraged” to something more like “only with the utmost prudence”. It could also have attached discouraging language on the use of capital buffers as a first step to re-establishing them. The buffers are not being used by the big banks (or any others, as far as I am aware) and there really is no reason that shareholders should be starved of cash.

With banks announcing results over the next three weeks, expect much griping about the dividend constraint. While in theory banks could ignore the Reserve Bank and go ahead with dividends, that sort of relationship faux pas is not one bankers do, no matter how much pressure they may be facing from shareholders. While the Reserve Bank is the custodian of the riskiness of the system and has done an admirable job of proactively managing bank capital in the face of the crisis, it should now walk back some of its restrictions.

Theobald is chair at Intellidex. 


Existing SA airlines should be incentivised to expand, have domestic supply chains, hire and train black pilots and even run important routes with support from government, says Intellidex’s Peter Attard Montalto. Featured on News24. 

SA banks aren’t disclosing a lot about ESG that we would like to know. The catalyst for change largely comes from external sources, particularly European shareholders and funders who are putting pressure on banks to improve ESG disclosure, says Intellidex’s Stuart Theobald. Featured in S&P Global’s Market Intelligence article. 

Intellidex has been researching the need for, and then the practicalities of, loan support into the economy since the start of the covid-19 crisis. The loan guarantee scheme designs we published a year ago fed into the debate amongst policy makers before its launch.

In the State of the Nation address last week, the president directed National Treasury to look at invigorating the Loan Guarantee Scheme but did not provide any specifics. Intellidex has released a new report assessing the deployment of the scheme and the aims for reanimating it. Among other things, the report recommends: “there needs to be development of quite different schemes that help companies to reduce their financial risk if we are to deliver financial solutions to stimulate the economy rather than bridge finance businesses through lockdowns, as the LGS was designed to do.”

Download our post-Sona assessment of the LGS here. 
Download our proposed changes in June 2020 here.
Download the original concept paper here, co-designed by Intellidex. 

As digital banking continues to go from strength to strength, big banks inadvertently help the trend along by making branch visits the worst customer experience ever, argues Nolwandle Mthombeni, senior banks analyst at Intellidex. Access her Fin24 column here. 

Intellidex’s esteemed capital markets research team shared robust insights on President Cyril Ramaphosa’s Sona 2021 speech and had a look at our expectations for the year ahead, specifically from an equity perspective. The webinar was hosted by head of capital markets research, Peter Attard Montalto, and the panel included executive chair Dr Stuart Theobald; senior financial analyst Phibion Makuwerere; and equities research analysts Lerato Matibidi and Gershywn Benjamin.

Access the presentation slides here.

Watch the webinar recording below.

This column was first published in Business Day. 

On Thursday evening, closing your eyes and listening to the oratorical event that is the state of the nation address (Sona) — something was different.

President Cyril Ramaphosa was perky, the speech felt self-confident, and he had clearly found some groove with better delivery combining with a stronger rhythm in the structure of the speech.

Given how dull these things can often be (and how many such speeches we find ourselves forced to listen to for titbits of change), it was a refreshing change.

There was a huge problem though — opening one’s eyes to see a gaping hole between the content in some areas and reality outside parliament in the real world.

This is not to say there weren’t long-term positive markers laid down. The almost secretive reform machine that is Operational Vulindlela (a close-knit venture between the Treasury’s excellent economic policy unit and the presidency) had clearly been busy moving the dial on a range of fronts, including water policy and visas.

The issue was more that between these parts of the speech on firmer foundations, it went off into an alternative reality.

The most obvious, though in some sense least important, was the repeating of the R500bn for the coronavirus stimulus, even though this number has no grounding in reality. Indeed, the speech stated that the largest part of the loan guarantee scheme, at a supposed R200bn, was actually only R18bn.

Far more important was the talk about support for early childhood development (ECD) centres. These crucial grassroots organisations, deeply embedded in communities — most often run by social-entrepreneurial women — need support, given that so many have been closed for prolonged periods with little support. The Sona rightly highlighted the support they need and the strengthening they require as an important community institution.

Yet the reality between the department of social development and ECD centres  themselves is very different. There’s a very short window to apply for R486m in support funding for ECD workers, combined with a faulty application process, design flaws, hoops to jump through that probably take out over half of the ECD centres and precious little of this money looks set to be distributed before the money lapses by the end of the fiscal year.

For example, someone in Pretoria should hopefully realise that about half of ECD centres don’t have business bank accounts in the name of the centre, but are run through personal bank accounts — as is so often the case with small, medium and micro enterprises (SMMEs) and in the informal economy. But this is a requirement for the facility.

This is madness for a sector that is a crucial part of the presidential employment stimulus.

When we turn to energy, we see some face-palming. No-one can yet explain to me what an Eskom “in principle” net-zero carbon commitment is. It is like what you say when you have no intention of doing something: “I, in principle, have a great desire to take the rubbish out in the rain.”

This also singularly fails to meet the requirement for SA to unlock energy transition financing for Eskom — which is to make a sovereign-level net-zero commitment into COP26 before November.

Another thing I don’t understand: how can you mention coal as a source of new electricity in a Sona? It conflicts with your discussion of net-zero, is unbankable and also sounds completely nutty. All these things have been communicated to the president by many people on many occasions.

As such, there was no sense of green recovery that could have galvanised the speech.

Eskom enjoyed a good speech overall, with key parts inserted being a success for CEO André de Ruyter’s reform agenda of the monopoly blob.

Yet De Ruyter’s rallying cry, taken up by business, labour and the entirety of the government (even many public servants inside the department of mineral resources & energy), of a 50MW energy regulator licensing threshold for self-generation and distributed generation fell awkwardly flat with only a commitment that details would be forthcoming within a month.

After all, energy liberalisation was a topic that could see credible follow-through straight away — with a new draft Electricity Regulation Act schedule 2 published this coming week, say.

This blockage is because everyone is behind this idea except the ministry sitting on top of the department of mineral resources & energy.

Given the amount of pushback minister Gwede Mantashe has given against even the president on this issue, and against every piece of fact and reality-based evidence given to him by independent experts, there is no reason to believe we will get a sensible announcement and a new schedule 2 within a month. After all, so many of the promises of the Sona a year ago on energy have materialised in partial, incomplete or haphazard ways. As long as there is not a reshuffle, there will be no change at the speed required to solve the energy crisis.

Finally, the story on infrastructure laid out in the speech was at odds with those trying to fund it, bid for it and build it. While positive steps are being taken — such as the secondment of nearly 30 private sector experts into Infrastructure SA — the deeper reforms to the way the government does infrastructure, the way it interfaces with the private sector on it, and even the very conception of a state-implemented pipeline, are not being fixed. The pipeline is still full of the same old projects that were not fundable 10 years ago or that are reliant on wider policy changes that are not yet happening.

Nedbank’s recently published Capital Expenditure Project Listing 2020, which actually lists what is going on, made the point in black and white. The problem is not that there is no infrastructure or no foreign direct investment (FDI) happening — it is that there is not enough of it happening fast enough.

Hence, while the Silverton brownfield FDI expansion by Ford is indeed a great positive in isolation, it fails to move the macroeconomic dial when other companies and the government are cutting investments and infrastructure rollouts at a snail’s pace.

One expanding car plant and a poultry master plan are not going to uplift your average South African when their local early childhood development centre cannot get funding. Nor can commodity price boons like SA has been experiencing in recent months lift potential growth when the basics aren’t right.

As we open our eyes post-Sona, the speech’s eloquence will be long forgotten as reality sets in, whether that is funds for  infrastructure or trying to educate a child in a township.

• Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting house.

The pandemic hasn’t created South Africa’s problems, but it has accelerated them and allowed us to leap several years down the existing path, says Intellidex’s Peter Attard Montalto. Featured in Financial Times. 

The idea of a state bank is the ultimate zombie idea and has been around for some time. It has no good reason to it, argues Dr Stuart Theobald, executive chair at Intellidex. Listen to the 702 interview with Bruce Whitfield business below.