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Investors not convinced by Absa’s recovery plan

Sceptics can’t see how it will be able to grow faster than the sector.

Absa is having a hard time convincing some investors that it can win back the market share lost while under the control of Barclays.

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 CEO 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, Nedbank and Standard Bank 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.

‘We’ve heard this story before’

“There is a fair amount of scepticism in the market around how they are going to be able to grow faster than the South African banking sector,” says Denker Capital portfolio manager Jan Meintjes. “We’ve heard that story before. The proof is really in the pudding.”

Source: Bloomberg

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% of loans. The stock declined 1.4% on Wednesday as the benchmark FTSE/JSE Africa All Share Index tumbled 1.8% amid concerns of slowing Chinese growth.

Read: Absa: Here’s what’s wrong with its retail bank

The division unveiled its own strategy last month, 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.

Boxing gloves on

“Absa has largely been the sleeping giant,” says Neelash Hansjee, an analyst at Old Mutual Investment. “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.”

Read: Would you rather get Absa’s interest rate, or its dividend?

Absa released targets on December 7 that include bringing its cost-to-income ratio down to the low 50s by 2021 from 56.2% at the end of June 2018. It is also aiming for a normalised return on equity – a measure of profitability – of 18-20% from 16.9% in the first half of 2018.

“The publication of targets was well received by investors,” Absa said in an email, adding that it is making significant progress in key areas of the business, especially at the retail and business banking unit where revenue is gaining better momentum.

It’s the economy

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% 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 vehicle, 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-owned firms are saddled with unsustainable debt.

New entrants

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 Richards, 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 Bank and TymeBank, the latter backed by billionaire Patrice Motsepe. Established players such as FNB and Nedbank are also becoming more aggressive in their tactics to attract consumers and improve their use of digital channels.

The lender has also revamped its other management teams and appointed a new corporate and investment banking head after searching for the right candidate for several months.

However, attracting more of the right talent to run with Absa’s plans will continue to be a challenge, mainly because of the position the lender finds itself in, says Nolwandle Mthombeni, an analyst at Mergence Investment Managers. “There have to be good synergies among the people you put in there.”

Ramos will be celebrating 10 years as CEO in March and is expected to remain in her role at least until all of Absa’s operations have been rebranded. The group has until June 2020 to convert all of its businesses in the rest of Africa from the Barclays brand to Absa.

Mthombeni says Ramos can expect to come under “a lot of scrutiny” because she oversaw Absa during the time its market share was in decline.

Read: Absa bank aims to lift lagging return on equity by 2021

© 2019 Bloomberg L.P

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Business is all about attitude …absa bank managers make certain you understand they are doing you a favour by talking to you …if you have a query you are sent from pillar to post , because they keep on changing their structures …top management with clear plans and well executed implementation is missing …absa is big and that is all that is remaining of a business in decline .

In my opinion just about every bank has this problem these days. I call the majority of bank employees, computer screen translators. The banks’ activities are defined by computer programs, rules and guidelines. Few if any employees can make a decision. All driven by systems. Decision makers hide behind call centres so the “bank manager” of the bygone days will only be visible to humans with mega-wealth. The days of ordinary bank employees are limited. Not too long before AI replaces them. Cynically yours ….

This is what you get when the entity is run by a cadre depolyee.

The ANC comrades that head and run Absa (you thought Absa is not a division of ANC?) should have taught those other ANC comrades that ran VBS a thing or two but if they did and got it right, we’d have big problems in S.A.

As a long-standing ABSA client, it saddens me to see such a massive decline in service levels. Is this what “Africanacity” means ?Dealing with ABSA now is like dealing with home affairs. If this is how they are treating other clients, I fail to see how they can maintain their market share let alone grow it, especially with the new entrants coming to market. I know of several business owners who are moving to other banks, myself included.

I can’t see Absa surviving the new wave of digital banks and the other banks having modernised.

Of the current banks, Capitec and FNB are far ahead. Nedbank is surprisingly not bad for customer service.

Standard and Absa bringing up the rear. Absa far, far behind.

The most astounding thing for me is that Absa’s share price is so high.

I see no justification for that.

Having worked for ABSA a few years ago,i can categorically state that the rot runs very deep in the organisation.Complete dearth of leadership starting from Maria,and literally droves of the more capable mid level bankers moved to other organisations due to complete lack of any meaningful plan and any sense of pride working for the Group.Those more experienced Executives who could have added some much needed backbone to the Group such as Craig Bond who were sidelined early on,instead of building a talent pool of executives able to reignite the Organisation.Sadly given the changing banking landscape,their is no coming back as far as regaining market share in some of the key segments such as Business Banking and Private Banking.and cannto fathom the share price which is certainly not an indication what is happening throughout the Group.

5 years and no share price growth? A tired and out of touch CEO who plays musical chairs with the management team. Employing an ANC cadre simply evidences the incompetence of the organisation. Please Mrs Ramon. ..go to the beach with Trevor and enjoy the fresh air as shareholders have had more than enough of your value destroying leadership. Ps maybe go record struggle songs with the former chief rubbish

Why did they go the Barclays route? What went into Maria’s pocket…….?

Man, I hate that bank for 364 days of the year! But on that one day….that day on which they increase my overdraft on the current account, I love them! I kiss their feet and I am friendly and kind until they OK that higher limit on the overdraft, the next day I resent doing business with them. Doing business with any bank, is a bit like visiting a brothel actually. You realize what you are doing is wrong….but you can’t stop yourself.

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