Banking

Absa going from zero to hero

Absa has underperformed its banking peers over the past few years as leadership instability and strategic missteps have hampered its efforts to keep up with Standard Bank, Nedbank, and FirstRand. 

However, the bank appears to be on the mend, with it restructuring its business to streamline its operations and enhance capital efficiency. 

The restructuring will reduce the bank’s number of units to four from the current five by combining Absa’s retail-lending unit and combine it with its private wealth operations. 

This is one of the reasons why M&G Investments prefers Absa over other South African banks as an investment, equity analyst Stefan Swanepoel said. 

Absa has been plagued by operational challenges in the past few years. Chief among these has been leadership instability at the top, with it having six interim and permanent CEOs since Maria Ramos left in 2019. 

Ramos led the bank for ten years and oversaw its unbundling from UK-based Barclays, turning Absa into South Africa’s third-largest bank by assets. 

Of the CEOs that followed Ramos, none would last longer than three years. This not only resulted in instability but also a clear lack of strategic direction. 

While South Africa’s other Big Four banks pushed deeper onto the continent and expanded their offerings to corporations and governments, Absa was left behind. 

Absa’s sluggish performance compared to its peers over the past few years has seen competitors capitalise by not only growing their businesses but also luring the bank’s executives to jump ship. 

Daniel Mminele, who served as CEO from January 2020 to April 2021, is now the chairman at Nedbank and is overseeing the bank’s expansion into Africa. 

The former financial director of Absa, Jason Quinn, followed Mminele and became CEO of Nedbank in May 2024. 

Absa’s leadership crisis came to a head in August last year when CEO Arrie Rautenbach announced he would take early retirement and leave the bank in August. 

Rautenbach, an Absa man throughout his working career, had come under increasing pressure from repeated governance lapses, human resource problems, and the slow pace of transformation at the bank. 

After meeting with the bank’s top leadership to try to shore up support for him, Rautenbach was told by some leaders that they had lost all confidence in him and wanted a new CEO. 

“The general view was that he is weak commercially, and the company has performed poorly under his stewardship,” the Sunday Times reported at the time.

Former Absa CEO Arrie Rautenbach

Rautenbach was succeeded by Charles Russon, who is currently still interim CEO of Absa while the bank’s board searches for a replacement. 

While only being an interim CEO, Russon has overseen some significant changes at the bank that position it to unlock growth after years of missteps. 

Chief among these is the restructuring of Absa’s business to reduce its number of units to four, enhancing efficiency and productivity. 

“Bringing our South African retail business together as a single business is quite a fundamental shift for the organisation,” Russon told Bloomberg in December. 

“It’s our core DNA of the firm, and we know that it is such a big driver of our share price.” Absa shares surged as much as 8.7%, the most since June 2020, when the plan was announced.

The shakeup comes two years after Absa undertook a major restructuring that carved its retail and business banking division into four units.

Combined with the corporate and investment-banking entities, these comprised five core focus areas. The revamp, which got underway at the beginning of January, will shrink these to four. 

“For the future, we need something different,” Russon said, noting that the previous goal was to improve focus and growth within individual units.

“Ultimately, you end up with artificial segmentation of your franchise, and you land up with a customer being dealt with across multiple business units, which creates artificial tension.”

The market reacted very positively to this restructuring plan, with Absa’s share price spiking relative to its peers, as shown in the graph below from Swanepoel and M&G Investments.

This restructuring has greatly improved Absa’s investment case, with Swanepoel saying the bank now stands out as a top pick. 

Absa is a universal bank with a diversified, pan-African franchise that should, over time, deliver a return on equity (ROE) in excess of 18%. 

While the present ROE is somewhat off at around 14%, recent management changes have been encouraging, Swanepoel said in a research note.  

The market has responded positively, and since the change in leadership, Absa has outperformed its peers. 

Absa also has an edge over some of its peers thanks to its strategy of hedging against the impact of interest rate fluctuations.

While this limited its upside in the past two years of high interest rates, as the Reserve Bank deepens its cutting cycle, its downside will also be limited. 

This hedging approach protects the bank from fluctuations in interest income due to changing rates, offering margin stability.

Swanepoel also explained that many of Absa’s headwinds are from once-off events, such as losses in Nigeria, hyperinflation in other African markets,  and debt write-downs in Ghana. 

While the hyperinflationary issue will persist into the first half of 2025, the rest are largely accounted for. 

With an improved focus on country risk and treasury management, Absa is unlikely to face these issues going forward. These factors alone could drive substantial earnings growth over the next two years. 

The diversified African franchise should deliver better earnings growth than South Africa and improved ROEs.

Absa has historically focused on market share and revenue growth ahead of return considerations, with the market being critical of the bank’s capital allocation. 

Under its new management team, all these issues are being reviewed with a laser focus on returns and profitability, Swanepoel said. 

 The focus will not only be on the product level but, most importantly, on the client level, with the promise to shut down sub-par offerings. 

This, together with the embedded self-help and a renewed focus on non-interest revenue generation, will help to improve the returns Absa provides to investors. 

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