The management of Absa Group Ltd. (ASA), the South African bank controlled by Barclays Plc (BARC), lost “credibility” after posting a surprise fall in profit related to bad mortgages, an Old Mutual Plc analyst said.
Absa’s share price plunged 8.3 percent on June 26, the biggest fall in a decade, after the Johannesburg-based lender forecast rising bad loans would lead to a fall of as much as 10 percent in first-half profit before one-time items. The stock fell for a fourth session today. Impairments rose for home loans, while asset and revenue growth was “muted,” Absa said.
“Absa’s management will have to work hard to regain credibility,” Tracy Brodziak, a banking analyst at Old Mutual Investment Group South Africa (OML), Absa’s fourth largest shareholder, said in a telephone interview from Cape Town on June 27. “They’re off their game. Maybe this gives them a wakeup call.”
Absa, South Africa’s second-largest home lender after Standard Bank Group Ltd. (SBK), cut the amount set aside for mortgage loan losses last year even as its three biggest local competitors increased provisions. It reduced the amount to 17 percent of mortgages from 19 percent in the first half of 2011. Rivals FirstRand Ltd. (FSR) and Standard Bank provided 20 percent and Nedbank Group Ltd. (NED) covered more than 28 percent.
“If it’s an Absa specific issue, then they were wrong with their provisioning in December,” Brodziak said. Absa needs to get its loan loss provisions “back up to where everyone else is,” said Brodziak, who estimates that Absa may have a bad debt charge of about 3.5 billion rand ($410 million) in the first half of this year.
Early arrears on most portfolios continue to improve, “our underlying businesses are gaining momentum and we are showing progress,” Absa said in an e-mailed response to questions yesterday. “Economic conditions continue to be difficult and distressed customers remain under pressure.”
Since South Africa emerged from its recession in 2009, bad debts in the mortgage market had fallen until Absa’s warning on June 26. This year South African house prices have dropped with Absa recording a fall of 1.6 percent in May from a year earlier, after dropping 0.6 percent in April.
Absa’s lack of clarity on how its specific provision model would “require such significant revision given a few weak data points in April and May is doing little to add to management’s credibility, which is already under pressure following numerous senior management departures,” Voyt Krzychylkiewicz, the second-highest rated banks analyst in South Africa according to Johannesburg-based Financial Mail’s 2012 rankings, said in a note to SBG Securities clients on June 27.
Since September last year at least eight Absa executives have resigned including Chairman Garth Griffin, Deputy Chief Executive Officer Louis von Zeuner, consumer banking head Gavin Opperman and head of communications John Dludlu. Absa has been reorganizing its business to integrate operations with Barclays both in South Africa and the rest of the continent.
FirstRand, the country’s second-largest financial services group, said it doesn’t expect to show an increase in total bad debts. Nedbank CEO Mike Brown reiterated in an e-mailed statement comments by the bank last month that its credit-loss ratio continued to improve. Standard Bank’s credit impairment charges “reflect some increase as portfolio provisions are created in line with book growth,” Simon Ridley, the lender’s financial director, said in an e-mailed statement.
“It sounds like this was very much Absa specific, although we do expect bad debts to be flat from here for other banks,” said Neville Chester, who helps oversee 296 billion rand at Coronation Fund Managers Ltd. (CML), which is Absa’s fifth largest shareholder according to the lender’s data. “I don’t expect other bank profits to drop.”
Absa, which wiped out more than 12 billion rand of its market value this week, rose the most in a month, jumping 1.6 percent to 141.20 rand at the 5 p.m. close in Johannesburg trading.
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