| The Investment Case – Absa Group Limited |
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| Monday, 08 November 2010 09:35 |
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ORAPA - When Barclays Plc purchased a majority stake in Absa (JSE:ASA) in 2005, there were great expectations or how this would boost the fortunes of South Africa's largest retail bank. However, five years later, the relationship has perhaps provided more questions than answers. Even given the harshness of the operating environment over the last couple of years, Absa's fortunes have probably failed to reach up to Barclays' expectations. At the same time, while Absa has enjoyed improvements to its credit card and investment banking units through Barclays' support, the hoped for boost for its African expansion plans has not yet materialised. Barclays has however indicated that it remains committed to Absa, and is taking a long-term view on its investment. Having a parent of Barclays' standing not only gives Absa additional leverage, but also provides a ready source of strategic support. "Absa enjoys a strong owner in Barclays Plc," notes Sanlam Investment Management Senior Portfolio Manager Patrice Rassou. "It has also revitalised its investment bank, which is managed in conjunction with Barclays capital." History In 1991 the United Building Society, Allied Bank Group and Volkskas Bank Group merged into a single entity named Amalgamated Banks of South Africa. The group's asset base was further enhanced in 1992 by the acquisition of the Bankorp Group, which included Trust Bank and Bankfin, from Sanlam. In 1997 the listed entity was renamed to the Absa Group. The individual banks, which had continued to trade under their own names, all adopted the Absa branding a year later. In 2005, Absa became the target of the largest foreign direct investment into South Africa at the time when Barclays Plc acquired a 56.4% stake. Absa's brands include Absa Capital, Absa Vehicle and Asset Finance, Absa Life, Absa Investment Management Services, Absa Health Care Consultants and Absa Private Bank. It is also a 50% partner with Sanlam in Sanlam Home Loans. Dividends Absa's dividend was curtailed slightly in the 2009 financial year due to the drop in earnings through the recession. From R5.60 per share in 2007 and R5.95 per share in 2008, Absa announced a dividend of R4.45 in 2009. This placed the group's dividend yield around 4%. The interim dividend declared for the first six months of 2010 was R2.25 per share, matching the interim dividend declared last year. Which funds hold this stock? Absa is fairly widely held by South Africa's leading unit trust managers. Of the five best-performing general equity funds over the last three to five years, only one - the Coronation Equity Fund - does not hold the stock. The extent of the exposure amongst the other four does however differ quite considerably. The Allan Gray Equity Fund assigns around 0.15% of the fund to Absa; the Kagiso Equity Alpha Fund gives it 1.5%; the Prudential Equity Fund assigns it a little over 3%; and the Absa Select Equity Fund holds over 4% of the fund in the counter. It also features reasonably strongly in the two top equity financial funds. It is the fourth largest holding of the Coronation Financial Fund, behind Standard Bank (JSE:SBK), First Rand and Metropolitan. It is the eighth largest local holding of the Nedgroup Investments Financials Fund, accounting for just over 4% of the fund. To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool. Why would an individual consider investing in this company? Absa is South Africa's leading retail bank, boasting 11m customers. Its national network of 9 000 ATMs is 55% higher than any of its competitors. It also has 40% more branches than any other local bank, with nearly 950 across the country. This established customer base and distribution network place the group in a strong position to be able to cross-sell its range of products to existing clients. The group's recent performance also highlights Absa's ability to remain profitable, even in a difficult economic environment. "In its June interim results, Absa managed to be the only 'major' bank to report positive net interest margin growth," notes Valugro MD JP Du Plessis. "Furthermore, Absa remained the most profitable of the reporting banks over the period, generating a 14.9% return on equity against the average of 11.7%. In essence, management seemed to have fared better than their peers during the recent bad debt cycle." Over the past few years, the group has also been successful in diversifying its earnings. From relying on its retail operation for about half of its profits in 2006, this figure has dropped to around 30% of profits in the latest interim period. What risks does this company face? The appointment of Maria Ramos as Absa CEO in February last year signalled a changing of the guard at the group. Having lost some experienced heads, Absa's management is perhaps not as tried and tested as that of its primary competitors. "The management team is very green, with a new CEO, new FD, and more recently various new business unit heads," notes SIM's Rassou. "This untested team has to deal with a lack of growth opportunities in Africa and the saturation of the core middle market." Absa has high hopes for African growth, but after abandoning a plan to buy Barclays' ten African operations, it is somewhat behind the curve in this arena. The group will still be able to call on Barclay's substantial experience on the continent, but with competition in many countries already tight, Absa will need to be very astute to find its niche. In addition, as the group looks to lower its dependence on earnings from its retail operation, it is developing its influence in other spheres of financial services. However, as this strategy plays out, it is not only meeting the challenge of established competition, but may find itself stretched. "Given its reliance on its retail banking in the past, management has sought to diversify Absa' earnings by focusing on investment and corporate banking," Du Plessis explains. "It has been noted that management may have tried to grow Absa Capital too aggressively, thus taking on too much risk, which may have a negative impact in the medium term." Where does this company's growth potential lie? Given its dominant position in the retail banking space, Absa is the South African bank most geared towards benefiting from a consumer recovery. As demand for credit increases, Absa will be able to take advantage. "It will also focus on cross-selling and exploiting its footprint to extract more profits from its customer base," Rassou adds. Growing its corporate and investment banking businesses will also be important for the group as it looks to diversify its income streams. The influence of Barclays will play an important role in this endeavour. "We foresee a bright future for Absa as it diversifies into a fully integrated bank as opposed to a mainly focused retail operation," Du Plessis contends. Successful African expansion will also be vital for Absa to keep up with its peers. Being able to work with Barclays on the continent will be of significant benefit, as it seeks to offer products, such as its Bancassurance and Islamic banking through Barclays branches. A clear strategy for Africa however still needs to be presented, although the group has stated its interest to move into Nigeria. |
| Last Updated on Monday, 08 November 2010 09:46 |