Barclays Plc (BARC)’s Absa Group Ltd. (ASA) has gone from being South Africa’s best-performing bank stock to its worst after an exodus of executives, slowing income and lower profit this year under Chief Executive Officer Maria Ramos.
Absa, based in Johannesburg, posted the lowest returns on the six-member FTSE/JSE Africa Banks Index (JBNKS) between March 2009, when Ramos was appointed, and the end of the second quarter this year, according to Bloomberg data. In the prior five years, Absa ranked top among the four largest banks, returning 78 percent.
While rivals Standard Bank Group Ltd. (SBK) and FirstRand Ltd. (FSR) are boosting lending, Absa’s market share in South Africa fell to 23 percent in the year through May, from 25 percent a year earlier. Net interest income growth, the difference between the revenue generated from assets and expenses, was the lowest among its peers in 2011. Since the appointment of Ramos, a former CEO of state-owned railway and ports operator Transnet SOC Ltd., at least 12 senior executives have resigned, including chairwoman Gill Marcus and deputy CEO Louis von Zeuner.
“On the trend so far, she hasn’t done well,” Kokkie Kooyman, head of Sanlam Investment Management Global, Absa’s sixth-largest shareholder, said in a telephone interview. “It generally is very short-sighted to get rid of experience.”
Absa surprised investors on June 26 after saying first-half earnings before one-time items fell as much as 10 percent in the six months through June because of rising bad loans, causing the stock to post its biggest fall in a decade. The bank also said asset and revenue growth this year would be “muted.”
“No organization is dependent on one or two people and Absa is no different,” Ramos, who is married to former South African finance minister Trevor Manuel, said yesterday in a telephone interview from Johannesburg. “No one focuses on the people who have joined us and who are strong and competent and able and who have been part of the succession planning.”
The bank’s revenue increased 5 percent last year, less than its three largest rivals, to 24.43 billion rand. Absa competes with Standard, FirstRand and Old Mutual Plc (OML)’s Nedbank Group Ltd. (NED)
“Absa’s revenue growth has been non-existent and its lack of any risk appetite is concerning,” Johann Scholtz, head of research at Johannesburg-based Afrifocus Securities, said in an July 16 interview. “I don’t know why Absa hasn’t exploited its primary bank client base.”
Still, when Ramos, 53, took over at Absa in 2009, South Africa was in its first recession in 17 years and the global economy was in a slump. She has been named by Forbes and Fortune magazines as one of the top 100 most powerful women in business and said in February that profit last year increased 19 percent to 9.67 billion rand. She also boosted its final dividend, increasing last year’s total payout 50 percent to 6.84 rand (84 cents) a share.
Ramos needs to experience a full boom and a bust cycle at the bank and until that happens “she should be given the benefit of the doubt,” Faizal Moolla, an analyst at Avior Research in Cape Town, said. “Maria needs to adjust the cost base more rapidly and aggressively which might involve more retrenchments. She also needs to address advances growth which is lagging behind peers and negatively impacting the top line.”
Ramos joined Transnet in 2003 and oversaw a reorganization that included a return to profitability and the disposal of units outside rail, port and pipeline operations. Born in Lisbon, Portugal, Ramos holds a masters degree in economics from the University of London and spent 10 years working for a unit of FirstRand before helping to formulate the ANC’s economic policies in the run up to South Africa’s first all-race elections in 1994.
Barclays, the U.K.’s No. 2 bank, bought 54 percent of Absa in July 2005 for 32.8 billion rand ($4 billion). At the time, Barclays planned to sell its African operations in more than 10 countries to Absa to make the merged entity the continent’s leading bank. Since then, Absa declined to buy Barclays’s African businesses and sold two African assets. Absa now operates only in Mozambique and Tanzania outside South Africa.
Absa’s origins can be traced to 1933 when a banking group was created to give Afrikaners access to capital in an economy dominated by English-speaking whites.
Barclays CEO Robert Diamond, who resigned on July 3 after regulators fined the U.K. bank 290 million pounds for attempting to manipulate the London interbank offered rate, sought to boost the lender’s profitability by combining Absa and Barclays’s products and customer bases across 14 African countries under the bank’s so-called “One Africa” strategy.
“The Africa strategy has again been reiterated and supported by both the Barclays executive committee and the board,” Ramos said. “The ‘One Africa’ strategy remains very much top of the agenda.”
“The closer integration of Absa with Barclays was something Bob Diamond was pushing so now the uncertainty is a concern,” Afrifocus’s Scholtz said. Barclays is unlikely to reconsider its investment in Absa “but the possibility will continue to feed into Absa’s share price,” he said.
Absa is the only South African bank stock to have declined in the year to date. The share price plunged 8.3 percent to 143.50 rand after the June 26 trading statement which had prompted investors to question why the bank had underestimated bad debt levels. It gained 0.4 percent to 139.45 rand as of 2:30 p.m. in Johannesburg trading, having lost more than 12 billion rand of its market value in the past three weeks.
“If management realizes the value of the assets, Absa can rerate substantially,” Scholtz said. “Versus the other banks it’s trading at the widest discount in years.”
Absa, on a historical price earnings basis, is trading at the cheapest in five years relative to South Africa’s banks index. Forecasts show analysts expect it to get cheaper still.
“Management credibility is now at the forefront of most people’s minds,” Greg Saffy, banks analyst at RMB Morgan Stanley in Johannesburg, said in a July 16 interview. “We need to see a clear strategy and an execution of that strategy.”
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