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Banks v Retail

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Not applicable
Curious about the thoughts out there but I'm weighing up whether to invest more now in the banking sector or the retail sector for the year.
Some points to consider:
- Banks seem to be doing well atm when looking at the price.
- RS analysis on banks shows Banks outperforming ALSH
- RS analysis on retail shows Retail outperforming ALSH by ALOT, since last year July
- This could be an early entry signal for banks, whereby General retail might start slowing down, then again does anyone see MPC slowing down?

By retail I mean General Retail stores I'm looking at MPC or WHL
By banks I'm looking at FSR or ASA

Thoughts/comments would be appreciated.
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17 REPLIES 17
Not applicable
I would look at relative PE's here. The retailers are sitting with PE's of around 22, where as the banking index is around 13. A big move in the sector requires a rerating. I think it is more likely to get a rerating in the banking index than the retail index. Unless, of course, there is suspicion of interest rate hikes.
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Not applicable
I might be wrong on this but dont banks' profit margins increase when interest rates increase?
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Not applicable
I don't think so, their turnover might increase, but their margins decrease.
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THRESHOLD
Super Contributor
Yes. (Although on new debt they will, of course, adhere to their internal "margin" policy.)
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THRESHOLD
Super Contributor
Yes. (Although on new debt they will, of course, adhere to their internal "margin" policy.)
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doomsdayza
Super Contributor
generally banks do position themselves to make money in a rate hiking cycle (treasury / money market desks), as they would look to lock in cheap fixed long term funding at the low rates on offer now.
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olilau
Frequent Contributor
why would their margins increase or decrease ? their turnover will fluctuate with more or less interest earnings, but the margin remains at the difference between repo and whatever they lend to their customers at.
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Not applicable
simplisticly: they loan more money when the repo rate is low (e.g. 5%), currently they borrow it customers at 9% (i.e. 4% profit), but as the rate increases they still have money left over at the 5% repo but now they lend it at 10%-12% (i.e. your costs stay the same but your income increases)
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THRESHOLD
Super Contributor
They will effectively increase their returns on their variable book - while much of this is financed through internal funds, the cost of which does not fluctuate in direct relation to the prime rate - eg your overdraft.
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WES
Super Contributor
The way I understand it, if the prime rate interest for example goes up from say 10% to 11% the banks income goes up 10%, but if at the same time the repo goes up 1 % ,then their cost at which they borrow from the reserve bank goes from 5 % to 6 %, which means their cost goes up 20% when their income goes up 10 % therefore skaaptjop is right as interest rate increases their margins decreases and visa versa. I would not invest in either banks or retail at the moment.
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THRESHOLD
Super Contributor
They can vary their overall rate offered to account for the change in % return. In any case - once again - this applies to new business. As far as existing business - a rise in rate leads to an increase in return on capital raised at a weighted historic cost!
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Rams
Super Contributor
is the PE useful for banks ...since ROE works its way into PE, leverage is a major consideration so banks and PE may be misleading?
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MarkD
Contributor
I have invested in WHL which has performed nicely for me. I think when it comes to retail you need to look at "who" you want to invest in. Clicks for example, I would stay away from. Seems they may have some challenges in the coming period with Musica and keeping that chain relevant and their other results werent stellar. I'm very interested in TFG, who seem to be going from strength to strength and expanding into Africa. Even though i do have a fair bit of exposure to Retail already, I am very tempted to get some TFG stock. Nothing else really excites me. Got in on SHP about 18 months ago and have seen growth of over 100% on that so far. As for banks, for the last 5 years, i've witnessed poor-to-mediocre performance, and I'm not sure why that would change right now. But from an investment perspective, ja, maybe you could find something theer. I just find retail more competitive and with more variety.
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olilau
Frequent Contributor
WES, you have a problem with relativity there. the margin is the DIFFERENCE between revenue and cost, ie 10-5 = 5 and 11-6 is still 5. (profit / revenue = percentege margin) if your costs increase from R 5000 to R 6000, then all you have to cover to remain equal is R 1000, not 20% on top of whatever you earn. what the others are saying is true for different reasons, in that if you either lend "own capital" to customers, this comes at zero cost and therefore their margin is 100%. if they lend money and still have loans from the central bank at the OLD repo rate, then they score until the funding at 5% is depleted and replaced with new capital at 6%.
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Not applicable
I think you are confusing markup and margin.
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Rams
Super Contributor
yes its a muckup!....the percentage margin is the percentage of selling price that is profit(and not the difference between revenue and cost). The difference between revenue and cost is markup ( which as a perecntage of revenue(or sales) will be Gross profit percentage).
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royandroy
Contributor
@MarkD - yep TFG looks solid ... I've recently bought. I think with retail one has to look at who is going into the rest of Africa and where. Woolies, TFG, Truworths are already there.Relying on local growth won't cut it
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