Banking group Absa has admitted that strategic “missteps” over the past 18 months resulted in a loss of market share relative to its peers, hurting the share price and its market capitalisation.
Financial director Deon Raju told Business Times this week that Absa was confident it would eventually achieve a 17% return on equity (ROE) target. It achieved a 13.9% ROE in the first half of 2024, the lowest among its peers, blaming this on tough trading conditions and high credit impairments.
“We are at a point in the cycle where our ROE is sub-optimal. We acknowledge that, and we say that to our investors. We have a clear pathway over the next three years about how that will be addressed,” Raju said from New York, where he's on a roadshow to convince investors that Absa is still value for money.
In a damning report, global corporate and investment bank HSBC pointed to four issues that were mainly responsible for Absa's underperformance and lower return on equity when compared to its peers.
It said Absa had chased loan growth and market share gains without placing enough focus on economic profit. “We think it needs to cut its risk appetite in all retail lending so as to lower credit loss ratio and generate economic profit.
“We think Absa needs to rein in its risk appetite, which would require a change in board-approved risk limits.”
There was a “risk-reward” mismatch in the business, and Absa had cut costs aggressively after its separation from Barclays in 2018.
HSBC said negative publicity and the departure of group CEO Arrie Rautenbach showed that Absa had a “culture and ethos problem” that it needed to address.
The banking group is recovering from a leadership crisis that saw Rautenbach exiting early after losing the confidence of his top leadership team. He was accused by some black executives of pushing back transformation. His attempt to remove the head of Africa regional operations, Saviour Chibiya, was thwarted by the board because the division outperformed local operations, helping lift otherwise depressed earnings.
He also faced board scrutiny for putting the bank under regulatory risk with US and South African tax authorities for seeking to pay former CEO of Everday Banking Corwyk Fox for work done for Absa after he relocated to the US.
We are where we are at this moment in time, we have to focus on the future
— Charles Russon, interim group CEO
Charles Russon, head of the corporate and investment bank, who has been named interim group CEO, told Business Times he spent the last two weeks listening to stakeholders, including employees, regulators, and investors, about what needs to be done to improve the image of the group.
He conceded missteps had been made in the past, which hurt the share price and resulted in Absa lagging behind some of its peers, saying this was a clear message from investors unhappy with the underperformance.
“A share price is driven by many different things. At the end of the day, it is not going to lie to you, if you underperform there is a reason. We have to get our returns to a position that is in the right space. That is the key message that comes through. Your returns need to be, as a minimum, above your cost of equity and ultimately substantially above what causes your stock to rerate. That is the crux of where our stock needs to be.”
Russon said he had told other senior leaders that he wanted leadership that is approachable, enables the business, and supports individuals to make their lives easier.
“We are where we are at this moment in time, we have to focus on the future. We have to be very deliberate. We have to be very focused. Let us create a culture that enables the organisation; where people feel they can deliver to their best, where they can be proud and create a winning feeling in the organisation,” Russon added.
Raju said the drag on ROE had come from retail impairments in South Africa, especially as the interest rate cycle peaked, coupled with high inflation and rising living costs.
He said half of Absa’s 11 markets outside South Africa were also in distress.
“Half of them have been under International Monetary Fund (IMF) and World Bank programmes in the last two years. When a country is in distress, the banking sector becomes distressed.”
They now expect a recovery as South Africa and some of the bank’s larger markets have reached the top of the interest rate cycle.
“That caused customers to be in a certain level of distress. You see that in our higher impairment levels. During the five-year period we went through a Covid cycle where it was tough for customers, and we had to offer significant assistance for them at this point in the cycle. We are finding steep increases in the cost of living and the interest rates have been tough for clients in terms of servicing their debt.”
He said Absa had laid out a plan to normalise impairments and grow profits as it sought to achieve a 17% return on equity.
“We have a clear process of how we get back to 17% ROE and that forms part of the strategy execution. That is our firm commitment to investors because a bank of our size, scale and geographic presence should be able to deliver those returns. Where we are now is suboptimal and we have to step through our strategy execution to be able to get back to where we should be”.
Absa's share price has been down 4.6% over the past year and its market cap of R152.8bn values it below major rivals Standard Bank, First Rand, Capitec and Nedbank.
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