Investors battle to swallow Absa’s road to recovery tale

Bloomberg

Absa Group Ltd is having a hard time convincing some investors it can win back the market share lost while under the control of Barclays Plc.
South Africa’s third-largest lender was once the leading retail bank with over 10 million customers and more mortgages on its books than any of its Johannesburg-based peers. Now, released from the shackles of London-based Barclays, Absa Chief Executive Officer Maria Ramos can take on more risk with a plan to grow revenue faster than her main
rivals from 2019 to 2021.
By its own admission, Absa is lagging FirstRand Ltd, Nedbank Group Ltd and Standard Bank Group Ltd in the average number of products per customer and the loyalty of its clients. It has also lost market share among the youth, mass market, middle income and affluent groups. And, to top it all, Absa was 2018’s worst performer in the six-member South African banking index. “There is a fair amount of skepticism in the market around how they are going to be able to grow faster than the South African banking sector,” said Jan Meintjes, a portfolio manager at Denker Capital in Cape Town. “We’ve heard that story before. The proof is really in the pudding.”
It’s still early in the game since Ramos, 59, in March brought in new management and restructured the retail and business banking unit — which accounts for more than half of earnings and deposits and 60 percent of loans. The stock declined 1.4 percent on Wednesday as the benchmark FTSE/JSE Africa
All Share Index tumbled 1.8 percent amid concerns of slowing Chinese growth.
The division unveiled its own strategy in 2018, which pivots on first fixing the basics like lowering costs, then adding clients and improving retention rates by focusing on customer needs beyond only banking. It also plans to reward long-standing clients with better offers and will cross-sell products between business segments to drive growth.
“Absa has largely been the sleeping giant,” said Neelash Hansjee, an analyst at Old Mutual Investment Group in Cape Town. “They seem to have all their building blocks in place to achieve all of their targets. They are putting on their boxing gloves and they do want to come out, at least, fighting against their peers.”
Absa released targets, which includes bringing its cost-to-income ratio down to the low 50s by 2021 from 56.2 percent at the end of June. It’s also aiming for a normalised return on
equity, a measure of profitability, of 18-20 percent from 16.9 percent in the first half of 2018.
“The publication of targets was well received by investors,” Absa said in an email. “We’re making significant progress in key areas of the business,” especially at the retail and business banking unit, where revenue is gaining better
momentum, it said.
The lender — which can trace its origins to 1933 when a banking group was created to give Afrikaners access to capital in an economy dominated by English-speaking whites — is making some progress. It boosted lending by 8 percent in the first half of 2018, driven by growth in its corporate and investment banking subsidiary and its operations in 11 other African markets, while the retail banking unit also grew auto, personal and home loans.
But, like many other South African companies, Absa is being held back by an economy struggling to grow as the country heads into elections this year. President Cyril Ramaphosa has yet to implement many initiatives to kick start investment
in a country whose state-ow-ned firms are saddled with
unsustainable debt.
While Absa is beginning to show signs of a recovery, it also faces increasing competition in its home market, weighing on margins, according to Bloomberg Intelligence analyst Philip Ric-hards, who predicts Absa will miss its targets. At least two new digital banks targeted at consumers are due to launch in South Africa in 2019, including Discovery Ltd., the country’s largest health-insurance administrator, and TymeBank, backed by local billionaire Patrice Motsepe. Established players, such as FirstRand’s First National Bank, and Nedbank are also becoming more aggressive in their tactics to attract consumers and improve their use of digital channels.