Daily stock pick – Absa

Perpetua Investment Managers’ head of research Lonwabo Maqubela says Absa has been a winner in the short term and expects the bank’s winning streak to continue.

Absa is one of Africa’s largest financial services groups which offers a full range of banking and finance products.

Its offerings include personal and business banking, credit cards, corporate and investment banking, wealth and investment management, and bank assurance.

Outside of South Africa, Absa is the majority shareholder of 11 banks in Botswana, Ghana, Kenya, Mauritius, Mozambique, Seychelles, South Africa, Tanzania, Uganda and Zambia.

He believes Absa is in a recovery stage and is one of the main reasons Absa’s share price has had such a strong performance year to date relative to the market.

Absa’s share price has had a good performance year to date, increasing by 15% from R156.71 per share to R180.43 per share.

Its unaudited results for the period ended 30 June 2022 also look good, with a 28% increase in basic earnings per share.

Absa finances

In a recent development, Barclays sold its remaining stake in Absa, exiting an investment it made in 2005.

Maqubela welcomed this development, arguing that Barclays’ influence has been a significant detractor to Absa’s performance over the past decade.

He said Absa has been able to grow its market share in areas it previously struggled with since Barclays’ disposal.

The chart below shows Absa’s market share relative to Nedbank over the past five years.

Absa has been able to grow revenue since 2017. In its latest integrated report, Absa recorded a strong net profit margin of 20.1%, a recovery from 2020s 7.6% margin.

Deposits made with Absa increased over the last five years. It has grown from 72% of total liabilities in 2017 to 79% of total liabilities in the latest financial report.

It indicates how Absa’s business has grown as deposits made with banks form an integral part of its operating capital.

Banks employ deposits made to them by lending out portions of these deposits to clients and businesses.

The interest payments received from these loans are then used to pay interest to depositors, while the remainder is revenue to the bank.  

Loans made by banks can therefore be seen as operating assets.

The chart below shows how Absa’s loans have increased and what portion these loans are of total assets.