What, in five years’ time, will shareholders think of Absa? There are two major themes that guide the answer.
First is Absa’s declining market share in key segments in South Africa. Second is its restructuring into the frontispiece of Barclays’s strategy in Africa.
Africa is a far more exciting story to tell, although it depends more on promise than reality.
South Africa, at least in the short term, is more crucial to the bank’s financial performance. Will we be moaning about Absa’s poor South African performance relative to the other major banks? Or will we be celebrating its visionary restructuring into a pan-African banking powerhouse?
Of course, there may be a way for Absa to get it right on both fronts. Perhaps it can turn around its local operations, reversing the declining market shares in most of its retail banking lines. Perhaps, in what could be called a third theme, it will deliver on the promise of improved investment and corporate banking performance helped by the Barclays DNA that was meant to work its way into Absa Capital years ago.
But listening to Absa’s results presentation last week, there was not much emphasis on turning around the South African performance. The focus was on the happier story of the integrated Barclays Africa Group, which became the official name of the business last Friday when its acquisition of most of Barclays’s Africa network became final.
The website is already live. Barclays Africa is a brand that you will be hearing a lot about, but I am stubbornly sticking to Absa in this piece. In fact, in five years, it is quite possible the brand Absa will not exist. The pitch is all about how Barclays Africa is going to become, in a triumph of marketing gobbledygook, the go-to bank in Africa.
The risk, however, is that Absa gets it wrong on both fronts. While the restructuring of the group into an African banking powerhouse has been complex and an achievement in its own right, it still has to prove that it makes for a genuine investment case. It does not help that, according to an appendix in last week’s announcement, headline earnings for Barclays’ Africa businesses (before the Absa transaction) were down 1%, while the rest of Absa managed a still-not-impressive 8% growth. So as important as the deal has been, it will not immediately deliver improved returns for shareholders.
And it is still going to consume a great deal of management focus, which will distract from the South African business.
Competitors are not standing still. FirstRand and Nedbank particularly have been aggressive in pursuing the local retail market. But in five years, we will measure Absa against Standard Bank.
Rumours are circulating that Standard is in negotiations to dispose of its London business to its 20% Chinese shareholder, ICBC, with a potential R5bn price tag. That will leave it even more focused on Africa, with a network about as profitable as Barclays’s African banks have been, both earning about R1,8bn a year.
The two banks are neck-and-neck at the starting line, although with quite different geographies on the continent. (Standard’s biggest earners are Uganda and Nigeria, Barclays’ are Kenya, Botswana and Ghana.) In five years, which will have pulled ahead? Can the global Barclays reach, particularly in Europe and the US, prove a more potent alliance than Standard’s strong Chinese relationship? Standard Bank posted profits of R15bn in South Africa in 2012.
Absa earned R47bn in the last six months, so about R9.4bn on an annualised basis. In the greater scheme of things, Africa is completely overshadowed by what happens in South Africa. And that is why Absa shareholders have been voting with their wallets and putting downward pressure on the Absa share price.
In five years, shareholders will be best off if management, under CEO Maria Ramos, can arrest the decline in South Africa, where the volumes are larger and margins higher.
Naturally, Africa will change the picture dramatically if the promised economic renaissance translates into a highly profitable banking market. Of course it will be more nuanced — some markets will work and others not. Success will be had by those who pick the best markets to operate in.
So while we ponder the five-year vision, shareholders want to be told a story that ensures short-term profitability remains intact.
And that piece of the puzzle is missing. Absa may want to be the go-to bank in Africa, but shareholders are going elsewhere.
STUART THEOBALD is a Graduate of Rhodes University
Article Source: Business Day