Absa’s interim results to June 2024 were far from stellar. While the other two big banks that have reported results, Nedbank and Standard Bank, notched up increases in headline earnings, at Absa they fell 5% to R10.2bn.
But media coverage has focused less on the numbers and more on the early retirement of CEO Arrie Rautenbach after just two years in the job. Absa had been roundly criticised for appointing a white CEO.
Coronation portfolio manager Neill Young says Rautenbach’s early retirement is obviously disruptive, “but I’m not sure that it necessarily points to some underlying organisational malaise”.
When Maria Ramos retired in 2019 after 10 years as CEO, René van Wyk was appointed as interim CEO. He stepped down to make way for Daniel Mminele, who held the post for just 15 months. Jason Quinn took over, like Van Wyk in an interim capacity.
The January 2020 appointment of Mminele, a former Reserve Bank deputy governor, seemed inspired at the time.
But it’s common cause that the skill set needed for a central banker is quite different from that needed to run a commercial bank. He is nonetheless proving to be a successful chair of Nedbank.
Group CFO Deon Raju says that until 2017 Absa operated as a division of Barclays, and has over the past seven years been rebuilding its systems and management capacity to fit its status as a standalone bank.
“We weren’t able to do the long-term succession planning which our peers have been able to do. That was done at Barclays level, and they would bring in executives from London or New York when appropriate.” An example was John Vitalo, a former US marine who was parachuted in by Barclays to head the then Absa Capital in 2005.
There had been media speculation that Rautenbach intended to replace the head of Absa’s African regional operations (ARO), Saviour Chibiya, a Zambian who has served as head of Citigroup and Barclays Zambia, with Ravin Dajee, head of Absa Mauritius (previously known as Barclays Mauritius).
The media reports also suggested some were unhappy that Raju and not a black African got the CFO post in April, replacing Quinn, who left to become Nedbank CEO.
“I have been part of the central finance leadership team for some time, reporting to Jason Quinn as head of group treasury and risk,” Raju tells the FM.
Chibiya remains as head of ARO and there has been no announcement to the contrary, Raju says.
In the interim period ARO’s retail and business banking headline earnings fell 12% to R875m, in contrast to the flat R5.89bn corporate & investment banking (CIB) earnings. But within CIB operations Africa accounts for 45% of earnings.
Absa’s retail and business banking is separated into three clusters: everyday banking, which includes transactional banking, cards and personal loans, was the best performer with earnings up 9% at R1.56bn; product solutions, which includes home loans and vehicle finance, which was up 7% at R1.17bn; and relationship banking, which was flat at R2bn.
Sophie-Marie van Garderen, a portfolio manager at Truffle Asset Management, says Absa’s headline earnings were disappointing but had been hit by several large one-off items. Without those, the underlying performance was probably closer to flat earnings, she says.
Noninterest revenue’s 2% decline was below expectations and to make things worse operating costs, at 8%, grew faster than she had thought they would.
“The credit-loss ratio was sticky at elevated levels — ahead of Absa’s long-term through-the-cycle range — and I expect it will remain ahead of the top end of the range for calendar 2024. This led to a fall in return on equity from 15.7% to 14%,” Van Garderen says.
She says the 17% return on equity (ROE) target will now likely take a “bit longer to achieve”. In contrast Standard Bank already has a 19% ROE and at Nedbank it’s 15%.
Van Garderen says the latest set of weak Absa results comes on the back of four reporting periods of meaningfully worse than expected numbers. “These disappointments have been caused by operational missteps as well as sovereign debt issues in some of the African countries they operate in.”
These disappointments have been caused by operational missteps as well as sovereign debt issues in some of the African countries they operate in
— Sophie-Marie van Garderen
This includes sovereign defaults in Ghana, which was the largest single contributor in previous years, as well as Mozambique and Kenya. Raju says results should improve after the debt restructuring by the IMF and World Bank in these and other key markets.
The Absa Regions portfolio is less diversified than Standard Bank’s African portfolio. Absa doesn’t have a subsidiary in Nigeria, for example.
Van Garderen says Absa’s African operations have done well as the retail and business loan books have shown growth momentum and deposit gathering has been good.
There has been criticism of Absa’s structure in South Africa. No other bank has separate “everyday banking” and “product solutions” clusters.
Rautenbach did not replace himself as head of retail and business banking — which at times seemed the most important job at Absa. It was responsible for generating more than 60% of earnings at its peak.
At times the group CEO job at Absa seemed like a ceremonial role, described by some executives as that of a constitutional monarch.
Van Garderen says it makes more sense to have one executive responsible for retail banking, and the new CEO should consider this.
Coronation’s Young says integration and cross-sell are critical in retail banking, so separating these businesses complicates operations.
This job split might come to be seen as one of Rautenbach’s strategic errors.
Van Garderen says Absa’s CIB division lags only Standard Bank in scale and effectiveness, and has a decent interest margin. “This is in contrast to some market views that Absa is very aggressive on corporate loan pricing.”
She adds that the CIB return on equity of about 22% is among the highest in the peer group.
Young says that for what was traditionally a retail bank, Absa has done well to grow its CIB business and has built a decent franchise.
Raju says Absa lost much of its natural market share under Barclays, which imposed conservative lending restrictions, particularly after 2012. “Our share of home loans fell from 30% to 20% in 2018. It has since recovered to 22%.”
He does not expect Absa’s strategy to change significantly whoever is appointed as permanent CEO. “The market has recognised there will be continuity under the interim CEO Charles Russon.”
Ninety One head of financials Chris Steward argues that Russon is more than qualified to be made permanent in the job.
Raju describes Absa as very undervalued on a p:e of about 6.5 and a dividend yield that sometimes hits 10.6%.
This looks priced for further pain, and the yield seems very high for a competently run, well-regulated business with a limited chance of complete failure.
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