It’s fairly obvious that Daniel Mminele chose the toughest job in South African banking, that of Absa Group CEO.
The 56 days he’s been in the job was always going to be too short a period to decide whether the group would follow a strategy set for him by Maria Ramos before her sudden resignation, or overhaul it completely.
At Wednesday’s results briefing, Mminele said that given questions about the matter, it was appropriate that he comment on it: “An important part of the conversations I had with the board prior to joining Absa involved the future direction of the group, including its strategy. I was taken through the process of how it was developed, and how data- and evidenced-based it was. It is my understanding that it involved a thorough analysis of the operating environment and megatrends, and was co-created involving all levels of the organisation.”
Mminele affirms he is “comfortable with the strategic choices that Absa has made and believe they match our growth ambition”.
“Having said that, in a fast-changing environment we need to ensure that we remain relevant, and we must be prepared to refine our strategy accordingly. It has been almost two years since we began implementing our strategy, and we are now in a position to evaluate whether we are seeing the desired outcomes.
“In this regard, I have a full mandate to review our strategy and its execution and to make changes where necessary.”
The signs so far are encouraging.
Customer numbers in Absa’s Retail and Business Banking (RBB) division in South Africa are up 1% to 9.7 million, while primary customers are “now stable” at 3.1 million.
These disclosures are significant, as the group has for many years declined to publish customer numbers in the face of a shrinking base.
It must be noted that the changes being driven by new RBB CEO Arrie Rautenbach and his executive team have only been in place for, at most, a year. Large organisations take time to turn around and the transition to the new operating model (incidentally very similar to FirstRand’s federated approach) will have been disruptive.
The diagnostic shared with the market in late 2018 by Rautenbach and his newly-assembled team was brutally frank. And it was clear where their priorities would be.
Group FD Jason Quinn says the group is “broadly in line with the commitments made at the RBB investor day in December 2018 and while RBB’s restructuring is complete, it is still in a ‘fixing’ stage until the end of this year”.
“We are seeing the benefits of continuity of management and in the successful execution of plans, integrating bancassurance, fixing its loans and deposits value propositions and improving its sales and collections capabilities.”
The numbers show that headline earnings in RBB SA are down 2% to R9.51 billion. However the bank points out that these were dragged down by an unexpected increase in provisions in the (entry/mass-market) ‘Everyday Banking’ unit. Excluding this unit, where earnings fell R500 million, the rest of the RBB business grew earnings.
R800m impairment hit
It took an R800 million impairment charge on personal loans and cards in the Everyday Banking segment. Quinn says this was because “the usual trend of seasonal improvement did not materialise in the second half”. He points out “similar trends among our peers who reported recently”. This references primarily Standard Bank and Nedbank, as FirstRand’s FNB has for years taken a deliberately cautious approach when extending credit to this segment of the market.
Says Quinn: “On an underlying basis, our impairments for these products grew 17%, which is aligned with the book growth. Overall, we have provided appropriately for these books, which are both performing in line with our risk and return expectations.”
It contends that based on bureau data, it is writing the highest-quality new business in both cards and personal loans across its customer base, when compared with its peers.
Across last year, RBB SA gained market share in retail deposits, retail loans and advances (including personal loans), new home loans and vehicle finance. Assuming its quality scoring is correct, this loan production will filter through to earnings – although more than one executive has quietly noted that this will take time.
Corporate and Investment Banking SA earnings were down 6% year on year, but this, together with the weaker RBB SA result, was more than offset by Absa Regional Operations (the group’s units across Africa), where earnings increased by 16%. Diluted headline earnings per share are up 1%.
The credit loss ratio for the group is up to 0.8, with RBB SA increasing from 0.92 to 1.18.
The group has been clear on the ambitions on which it should be judged:
- “To grow revenue faster, on average, than the South African banking sector from 2019 to 2021, with an improving trend over time and within appropriate risk appetite parameters.
- To consistently reduce our normalised cost-to-income ratio to reach the low 50s by 2021.
- To achieve a normalised group return on equity [RoE] of 18% to 20% by 2021, while maintaining an unchanged dividend policy.”
However well the turnaround seems to be fairing, it has failed on two of these three scores.
Group revenue growth looks to be ahead of its peers. But the bank’s cost-to-income ratio increased to 58 in 2019, and structurally it will remain difficult for it to get this below 55. And return on equity is lower at 15.8% (from 16.8%), further from the 18% to 20% target range.
The last nut may be the hardest to crack.
Says Quinn: “We still believe that an RoE target of 18% to 20% is appropriate for our group, although we do not envisage achieving it until 2022 at the earliest, which is heavily dependent on the state of SA’s economy.”