Ramos’s plan for Absa 2.0

It’s strangely fitting that Barclays Africa’s big reveal of its new, post-Barclays strategy last week was classic Absa: unconvincing and oddly familiar. There was a tangible sense of déjà vu, as if we’d seen this movie before — and it doesn’t end well.

To be fair to CEO Maria Ramos, the highly rated former director-general of treasury during Nelson Mandela’s administration, the divorce from British parent Barclays hasn’t been without its fair share of tears.

After all, it’s the biggest U-turn on a foreign direct investment transaction in SA corporate history: reversing the 2005 deal when Barclays bought 55% of Absa for R33bn. Barclays has now sold all but 14.9%. From May, the bank’s name will change back to Absa, from Barclays Africa.

But Ramos’s plan to revive the bank was unconvincing not just because it lacked crucial detail, but also because the announcement was bizarrely prerecorded the day before, to coincide with its 2017 results.

That Ramos figured it wise to deliver the most critical strategic shift since Absa was first formed in 1991 — through the merger of Volkskas, Bankorp, United and Allied — in a prerecorded webcast, rather than in person, speaks volumes about Absa’s record of overpromising and underdelivering.

It also underscored how Ramos, who became CEO in 2009, is technically adept, but often comes across as overly guarded.

But then perhaps caution was warranted. After all, sceptics might ask, why would this time be any different?

Consider, for example, the three-year strategy that Ramos unveiled with much fanfare in 2014. The aims were:

• To be in the top three by revenue in its five biggest markets — SA, Kenya, Ghana, Botswana and Zambia;

• A return on equity (ROE) of 18%-20%;

• A cost-to-income ratio in the low 50s; and

• The rest of Africa to account for 20%-25% of total revenue.

At the time, analysts criticised the goals as "too easily achievable". Yet Barclays Africa missed the mark on all but the last one.

Last week’s results showed that for 2017, Barclays Africa’s ROE was 16.4%, while its cost-to-income ratio was 56.8%. Worryingly, the group posted what bankers call "negative jaws", as operating expenses (up by 4%) increased ahead of revenue (up only 1%).

Only the final goal has been reached, with rest-of-Africa revenue of R15.6bn accounting for about 21% of group revenue of R72.9bn.

This is why Ramos’s big reveal has been met with a big dose of scepticism.

None of the analysts has changed their rating: seven still say it’s a "buy", six rate it a "hold" and one a "sell", with a 12-month target price of R197.19 — 4% below its current level of R206. The market reaction has also been muted: Barclays Africa’s stock has risen 3.9% in recent days, marginally ahead of the 3% rise in the JSE’s banks index.

This illustrates the immensity of Ramos’s challenge: to finally convince the market that the new-look Absa can get back to being SA’s premier retail bank, after a dire few years of shedding market share to its rivals.

This scepticism has meant that Barclays Africa’s shares trade at a deep discount to its much higher-rated peers, particularly FirstRand and Standard Bank.

JPMorgan Cazenove analysts warned last week: "Longer term, the exit of Barclays as a controlling shareholder could create some disruption to the broader group, particularly with regard to Absa Capital [its investment bank] and the Rest of Africa franchise."

Growth remains Absa’s biggest problem, and the reason its share — trading on a p:e of just 10.2 — is so much cheaper than the other big banks.

Ramos says this is about to change: "The banking group we are creating will put growth at the heart of all our being."

Her new goal is to double Absa’s share of banking revenue from the continent to 12% — bold certainly, but characteristically, it doesn’t say by when this must happen.

In an interview with the Financial Mail, Ramos, who has obviously felt the pain of failing to deliver on commitments, declines to express this goal in rands and cents.

"There is a ball park, but the minute you put out the number, that’s all everyone talks about," she says.

There are clues elsewhere though. A report last month by consultancy McKinsey puts Africa’s banking revenue at US$86bn, which is projected to grow 8.5%/year to $129bn by 2022. This suggests Absa’s share would need to grow to $15.5bn (R184bn), at least double its 2017 revenue of R72.9bn — which only inched up 1% last year.

That is indisputably a lofty ambition, and Ramos’s speech was suitably grandiose.

"This is nothing short of a complete reset for our organisation, our people and our customers. It is the most important change we have ever embarked on and the opportunity for us to seize our destiny."

But some will remember similar words five years ago, at the bank’s 2013 results. Then Ramos said: "Our group is stronger and has much better growth prospects ... that is why we can have high ambitions."

The fact is, the much-touted deal in 2013, in which Absa bought Barclays’ African banks in nine countries including Kenya, Tanzania and Nigeria for R18.3bn, has not yielded what the price tag suggested.

This week, Ramos spoke of how, with the British parent out of the picture, the bank will be able to unleash its "entrepreneurial zeal", giving licence to the "agile minds, the innovators and free thinkers".

But again, detail was elusive. Asked if Absa plans to motivate employees to be more entrepreneurial and innovative through pay packages or innovation awards, Ramos says only that these were "some of the things we can start thinking about".

Arrie Rautenbach, the bank’s chief risk officer and head of strategy, told the Financial Mail that details will come. "When we come to the market after [the six months to June], we’ll see the next level of detail around what it means and the metrics against which the market can measure us," he says.

To be fair, this is only the beginning.

Shareholders must first approve the name change — from Barclays Africa to Absa – at the May AGM. Then the rebrand begins in earnest, with a new look expected in the coming months. Though the Barclays brand can be used in the rest of Africa until 2020, in SA the term "member of Barclays" must be removed by June.

Rebranding will be pricey, but luckily Absa scored a R12.6bn divorce settlement from Barclays — half of which will be spent on rebranding and IT in the rest of Africa.

So why did it take so long to change the name back to Absa?

Ramos says the choice "wasn’t all that obvious". Barclays Africa interviewed 130,000 staff and customers across the continent, and she says it is clear the name has resonance in countries beyond SA.

For this Absa can partly thank its sponsorship of SA’s premier league, the Absa Premiership, where Ghanaian soccer stars have featured in local teams such as Mamelodi Sundowns and Ajax Cape Town.

In SA, what makes it easy is that it’s not really a name-change at all. No local has ever said: "I bank with Barclays Africa." It has always been, still is and will forever be, Absa.

Ramos insists the rebrand will not simply be a return to the "current understanding" of Absa. "We’ve had the most unbelievably exciting time with colleagues, rethinking who we are and resetting culture," she says, having gathered 600 individuals from across the organisation — "not people with titles" — in October to brainstorm the future.

"I spent most of that with a huge lump in my throat." Of course, the cultural shift needs to grip all 42,000 employees — not just 600.

The fact is, Absa’s rebuilding could only begin once its British parent had flown the coop. Over the past five years, Barclays called the shots on everything — from risk appetite to remuneration structures.

Michael Lafferty, chairman of banking research company Lafferty Group, told the Financial Mail that Barclays Africa had been "smothered" by Barclays Plc.

The problem was, in its quest to create a "universal" African bank, Barclays took Absa’s eyes off its bread-and-butter retail and business-banking core, while throwing investment banking into the mix, he says.

But at the same time, in pursuit of investment banking profits, Barclays Plc, like so many of its peers, misbehaved — which led to the irreconcilable differences now evident between it and Barclays Africa. This recklessness cost global banks $321bn (R3.8trillion) in fines since the global financial crisis began, says the Boston Consulting Group.

Regulators, smarting from the destruction wrought by exotic derivatives in 2008, resolved to tighten the screws.

But the new rules made it far less attractive for global banks such as Barclays to own overseas banks such as Barclays Africa.

It meant that even though Barclays owned just 62.3% of Barclays Africa, it was on the hook for 100% of the risk. So it got less than two-thirds of the profit, but had to hold capital against all the bank’s assets.

This choked Barclays Africa’s balance sheet and, crucially, its ability to make loans.

The biggest casualty of the Barclays era has been Absa’s retail and business bank (RBB). Until 2005, Absa was the largest retail bank, with the largest share of home loans.

Even by 2013, Barclays Africa had 8.8m transactional banking customers in the SA retail bank. But by June last year, customer numbers had fallen off a cliff, to just 5.96m.

It’s still a strength — RBB made more than half the group’s R15.6bn earnings last year. But its profits grew a measly 1%.

Ramos knows this too: "We really do want to regain that market share and we are going to put the leadership and ownership into those businesses."

Analysts agree that reviving the retail bank — once Absa’s strength — should be the focus. "The biggest area of underperformance has been retail banking," says Harry Botha, an analyst at Avior Capital Markets.

"It has underinvested in the business by not spending enough time and money on innovation and IT upgrades."

Botha adds that the poor service at branch level, which made it difficult to deal with Absa, didn’t help, and it was behind the curve in cross-selling products.

It was Barclays Plc’s squeeze on Absa’s credit policies that led to a rapid loss of market share in mortgages and drove high-quality customers away, says Botha.

An example of this, says one Absa insider, is how the bank was a year behind its rivals in implementing the one-time pin for Internet banking, which is sent to a cellphone as an extra layer of security. "The culture has been hamstrung for years by the old Afrikaner legacy of waiting for the boss on even small things. Add in the British bureaucracy, with thousands of forms for everything, and it became a nightmare," he says.

Ramos aims to change that by creating a more federalised structure, with more autonomy for her chosen executives.

She says: "If you’re a subsidiary, it doesn’t matter how much control you have over your strategy or over your capital, you are still a subsidiary."

Allan Gray portfolio manager Simon Raubenheimer says the upshot of the Barclays’ risk aversion was that Absa pulled back far too aggressively on mortgages.

"Fees were out of line with the other banks and the products and standards were not up to scratch." In the process, many clients switched banks.

By November 2016, just 15% of new mortgage business was going to Absa — a low point for the bank.

It’s no surprise that since Barclays left, Absa Home Loans has been the first business unit to approach Ramos’s group credit committee to ratchet up its credit risk.

By December, the mortgage business was winning about 20% of new business.

Jason Quinn, Barclays Africa’s finance director, says it did this by introducing a new scorecard and increasing its loan-to-value for high-quality existing customers.

Last year was the first time in seven years that growth in Barclays Africa’s SA mortgage book, which accounts for 30% of the group’s R750bn loan book, didn’t decline.

"The quality of loans is not the problem — the quantity is," says Raubenheimer. "Absa will need to grow its customer numbers and engagement levels: more transactions, loans, deposits and other services. But the competition is fierce and the separation is an unfortunate distraction."

Absa will now have to play catch-up with rivals such as FNB and Capitec, which have swallowed much of its market share.

The problem, says Raubenheimer, is Absa doesn’t operate in a vacuum.

"The competition is continually improving. Capitec is rapidly moving upmarket and eating away at the share of the traditional big four. FirstRand continues to dominate IT/tech and Standard Bank has a new core banking system. Plus, this year, Absa will have to contend with Discovery Bank," he says.

If rebuilding is tricky, the task is complicated because the divorce is so messy.

Quinn says there are more than 2,000 "touch points" that need to be decoupled from its former British parent — systems, people and policy dependencies.

This is being done through about 300 projects, on which about 360 people are spending more than 70% of their time.

Still, as divorce settlements go, the R12.6bn Absa will get from Barclays will take some of the sting out of this process.

Says Ramos: "It’s a huge sum of money and gives us the capital to do the brand change, the IT changes and to invest in the things we need to invest in."

She says R5.8bn will be spent on rebranding and technology in the rest of Africa, while R6.8bn will be spent in SA on technology and its investment bank.

But as much as the retail franchise was kneecapped, there is a silver lining to its Barclays partnership that is often ignored.

Today, Barclays Africa is a far more diversified regional African bank with a strong investment banking franchise that it did not have before. The investment bank continues to post double-digit earnings growth and now accounts for 34% of group earnings.

Surprisingly, Stephen van Coller, the former head of Barclays Africa’s investment banking arm who now works at mobile firm MTN, believes the future for banks lies in corporate and investment banking, wealth and private banking — not retail banking.

"Now that I’m on the other side of the fence, I don’t think banks can compete in mass-market retail, which was where Absa was very strong," says Van Coller.

"It’s difficult to make money out of retail banking when you’re up against a telecommunications company that is effectively processing millions of small payments on a daily basis and doing it very well. It doesn’t cost [MTN] a lot to service the masses."

Van Coller argues that no bank has a branch network to rival MTN’s 500,000 agents in 22 countries. He believes Absa’s "big opportunity" is not retail — but to fix its business bank, where growth has flat-lined.

Ramos says Barclays Africa is in the process of finding someone to head its business bank, which until now has fallen under deputy CEO for SA, David Hodnett.

Expect many executive changes soon.

Says Rautenbach: "We want to push a lot of empowerment down in the organisation [and] bring the decision making closer to customers, making us more agile ... we’re actually going to manage the business as a group of businesses with an executive structure on top, rather than as a single business."

Rautenbach, with two decades’ experience in Absa Towers in downtown Joburg, will know the limitations of the past few years. He speaks admiringly of the entrepreneurial model used by FirstRand, where standalone executive committees take full responsibility for different business units.

This is a radical departure from a situation where Absa has simply been a "division of a global bank". Even strategy, it seems, was set in London.

Says Rautenbach: "Of course we drove a strategy, but always in the context of what a Barclays Plc strategy allowed us to do. Nowhere in the world could a franchise be exposed to more risk than [Barclays Plc] was comfortable with at the holding company."

For a customer-facing business, where frontline staff must be empowered to take decisions, it was a disaster.

Ramos says she has not visited branches as often as she would have liked, due to the time spent on the separation.

"I do like to go. Even if I go in for my own personal banking needs I walk around and chat to people. If I go to an [Absa] ATM, it’s not unusual for me to make sure the place is tidy and clean," she laughs.

Asked how much longer she plans to stay in the top job, after nearly a decade at the helm, Ramos (59) retorts: "I’m not dying." While there is no timeline on her exit, it is up to the board to handle succession, she says.

Who might succeed her is anyone’s guess. Botha says deputy CEO for the rest of Africa, Peter Matlare, "doesn’t have enough banking experience to give investors confidence".

Matlare’s disaster as CEO of Tiger Brands, which wrote off $200m in Nigeria, could either be seen as evidence of incompetence, or of valuable lessons learnt. But Matlare (58) could be 60 when Ramos steps down, which leaves Hodnett (48) and Rautenbach (52) – but they would not be popular choices in a sector needing transformation.

Nomkhita Nqweni (43), currently head of the wealth, investment management and insurance (WIMI) unit, would be a breath of fresh air in an industry still headed by white men.

Before then, Ramos has to hit a number of targets — including reviving the stock.

Since 2013, Barclays Africa’s stock has risen 41% — against FirstRand (up 148%), Nedbank (up 62%) and Standard Bank (up 94%). The lag in performance is even starker when you go back to 2005.

At that time, Absa’s then CEO, Steve Booysen, trumpeted the fact that the Barclays deal would be about "growth and leadership ... the fit is excellent".

He couldn’t have known that within four years, the global financial crisis would upend banking across the globe.

Ramos says when she joined in 2009, "I had no idea I was walking into a business that had so many [problems] to deal with".

She joined with an impressive track record, having turned the ailing state-owned rail company Transnet around. She is also a member of the Group of 30, a consultative group on economic affairs, which includes former Federal Reserve chairman Ben Bernanke and Mark Carney, governor of the Bank of England.

But her early years were horrid. First, it was a R400m bungle in bad debts in its mortgage business, followed by the fallout from Absa’s decision to back a number of single-stock futures contracts that fell apart.

"In the heat of the global financial crisis we had so many problems in this business. We did the acquisition of the Barclays businesses across the continent. I thought, okay, this is it, this is a once-in-a-lifetime opportunity. It was the biggest deal in financial services that had been done. And then Barclays decided it wanted to leave," she says.

Ramos says, in this context, there just hasn’t been time to grow bored. "The thing that keeps me energised and excited is change. I love change."

Which is just as well. If there’s one thing Absa needs to do as it tries to claw back its former glory, it is to change.

Barclays Africa will rebrand as Absa across the continent, and focus on rebuilding its core strength in home loans

—  What it means: