Absa will have a new CEO in June. In a game of banking musical chairs, Kenny Fihla is leaving his role as deputy CEO of Standard Bank Group and CEO of Standard Bank South Africa to take the reins at Absa.
This comes after the early retirement of Arrie Rautenbach, which left a leadership vacuum after Jason Quinn left Absa to take the CEO role at Nedbank after being snubbed for the top job at the red bank. Game of Thrones, anyone?
The thrones are not all created equal. Absa’s investor presentation includes a slide that says “we are in a recovery phase” — and as the bank isn’t usually on the tip of the tongue when analysts and market punters are asked for local stock picks, it feels like this recovery phase has been under way for a long time.
If you’ve held Absa for 10 years, you would have incurred a 9% capital loss. You would’ve received dividends along the way, but not enough of them to fix that problem on a total return basis. And in case you’re wondering, that’s the worst performance among the major banks over that period.
Nedbank is hardly any better, with FirstRand and Standard Bank at least showing some capital growth. Over five years, Nedbank has shot to the top of the legacy banks, showing that being focused mainly on the South African market has been the best play of all. You get no prizes for guessing that Capitec sits at the top of the pile over either period.
Absa has needed more than its fair share of patience from investors. Though recent numbers were better, the second-half performance in 2024 was off a very soft base in 2023. The 27% growth in diluted headline earnings in the second half of 2024 should be taken with more than a pinch of salt. The full-year result of 10% is more reasonable but still flattered by the second-half performance.
The Everyday Banking division did the heavy lifting in financial 2024, though not because of top-line growth. Net interest income was up 3%, and noninterest income increased 4%.
The magic happened on the impairments line, with credit impairments down by 11%. The way that Absa has structured its reporting means that this segment has the highest credit loss ratio in the group. It improved from 8.35% in the prior year to 7.2% in 2024. This large impairments base is why you can see such meaty swings in the earnings in that segment.
An area of concern for investors is operating expenses
At a group level, the impairments story was still relevant but much less volatile. The group ratio improved from 1.18% to 1.03%, just above the through-the-cycle target range of 0.75%-1%. Absa will hope to carry this through into 2025, though the macroeconomic situation has deteriorated rapidly this year.
An area of concern for investors is operating expenses. Absa’s expectation coming into 2025 was for the cost-to-income ratio to be under pressure, increasing from 53.2% in 2024. This doesn’t speak to resilience or efficiency in the model. Technology costs grew by 13% in FY2024, and this will likely be a large source of cost pressure once more in FY2025. If you’ve ever wondered how a model built around simplicity (Capitec) disrupted this sector, look no further than the technology spend by legacy banks as they struggle to keep up.
Local consumers are surely in a worse credit environment thus far in 2025 than in 2024, so the improvement to the credit loss ratio is unlikely to be repeated this year. Cost pressures are also part of this story.
So, where is the upside? At Standard Bank, it’s easy to conclude that Africa is an exciting (albeit risky) story. At Absa, the way it reports its segments isn’t as clear. Absa Regional Operations Retail & Relationship Banking is only one part of the African business, with a poor return on regulatory capital of 12.4%. The Corporate & Investment Banking division generates more than 41% of its headline earnings from Africa and has a return on regulatory capital of 22.5%, so presumably Africa as a whole is accretive to returns. It’s just not obvious from the reporting.
Clearer segments, less bureaucracy and a firm hand on costs. This is where it’s hoped Fihla will make his presence felt when he takes over at Absa. Before the Donald Trump chaos, Absa traded on a price/book of about one and thus an effective return on equity of 14.8%. At anything below one, it’s probably worth giving Absa some benefit of the doubt.
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