Investors wonder if Absa has lost the plot

2012-07-28 10:17

Lender takes a R623m hit on its home loans book, while its shares are down nearly 4% so far this year, lagging all its competitors

Investors in South Africa’s biggest retail lender, the Absa Group, are not happy with its performance.

Absa is seriously lagging behind its peers.

On Friday, Absa reported a 6% drop in first-half earnings after its home loans division was hit by a surge in credit defaults.

Analysts have also attributed Absa’s weak performance to its reluctance to lend to customers, resulting in a slow advances growth.

Patrice Rassou, head of equities at Sanlam Investment Management, an institutional investor in Absa, described the earnings as disappointing and poor.

“We have signalled to them we are not happy. We want action.”

Another institutional investor, Afena Capital, has been left wondering whether Absa has lost the plot under Maria Ramos’s leadership.

“This is a shocking result ... It begs the question whether management is up to the task and whether strategically they have made the right choices. At the moment, they are behind the curve,” said Khaya Gobodo, a portfolio manager at Afena Capital.

Rassou said he could not pin the blame on the current leadership, which he feels walked into the crisis.

“The loans going bad were written between 2006 and 2008. The CEO (Maria Ramos) and the CFO (David Hodnett) inherited a business in trouble. You can’t blame them for loans that were written long before they joined the bank,” he said.

Rassou said the management shake-up at the Barclays-controlled lender had not helped and instead might have worsened its woes.

No less than 10 senior executives have left Absa since Ramos joined the bank in 2009, resulting in severe loss of experience and institutional memory.

“There have been a lot of changes in management. Unfortunately, when you have all of these changes, it’s easy to drop the ball. Who do you blame, the old guys or the new guys?

“Firing everyone is not going to make things better. They need to address the problem,” he said.

Rassou revealed that Absa had appointed external consultants to help it review its operations. He said the bank needed to increase its provisions against bad debts.

On Friday the bank said it raised its provisions from 17% to 23% of the loan book, a move that led to the decline in its profits.

Other large lenders, such as Standard Bank, FirstRand and Nedbank, are unlikely to post profit declines as they have set aside adequate provisions, analysts say.

“The need to significantly increase provisions in the mortgage legal book became evident in the second quarter, as more legal accounts moved into write-offs than expected.

“In response, management has thoroughly reviewed our mortgage provisioning and ensured that the assumptions are more weighted to recent experience.

“In addition, we have improved our collections processes and systems. Absa also reduced its loan to values on new mortgage business in 2009, which is evident in the far better quality of business written,” Absa said in a statement.

Credit impairments increased 39% to R4 billion. Absa’s home loans book reflected a R623 million loss due to non-payment of loans by financially distressed customers.

The bank said net interest income, a measure of earnings from lending, increased to R11.9 billion from R11.6 billion last year.

Interest income, however, may come under pressure due to the 50 basis point cut in the repo rate announced by the Reserve Bank last week.

Reuters reported on Friday that Absa had been the worst-performing share among South Africa’s big banks this year.

Its shares are down nearly 4%, while bigger rival FirstRand is up 29%.

Industry leader Standard Bank has gained 13%, while Nedbank, South Africa’s fourth-largest bank, has added 19%.

Given South Africa’s weak economic growth, the lender is not expecting a rosy future.

“Revenue growth is likely to remain subdued this year. Absa’s cost-to-income ratio is expected to remain similar to last year’s. With muted economic growth in South Africa, Absa’s credit loss ratio is expected to be in the region of 1.4% in 2012.

“Absa will continue to work closely with Barclays to capture the opportunities that the combined franchises offer on the rest of the continent,” it said.

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