Absa Drops on Profit Miss as South African Economy Struggles

(Bloomberg) -- Absa Group Ltd., the South African lender once controlled by Barclays Plc, fell for the ninth straight day to head for its longest streak of losses in six years as full-year profit missed analyst estimates.

Banks in Africa’s most industrialized economy are battling to overcome the challenges of tepid gross domestic product growth and a loss of consumer and business confidence, pressuring their ability to generate revenue. Tax increases, higher fuel and utility prices, and stubborn unemployment of 27 percent is cutting into disposable income, while lingering policy uncertainty over land reform, rising government debt levels and struggling state-owned companies are weighing on investor interest.

Absa’s full-year adjusted earnings per share excluding items related to the Barclays separation rose 4 percent to 19.10 rand ($1.32), missing the average estimate of 13 analysts for an increase to 19.28 rand. Standard Bank Group Ltd. last week posted revenue that missed expectations, while Nedbank Group Ltd. said it is becoming increasingly challenging to reduce its cost-to-income ratio as weaker-than-anticipated South African growth weighs on lending and fee income.

Managing Costs

Absa, South Africa’s third-largest lender, aims to grow faster than its main Johannesburg rivals and expects to lend more into its operations outside of the country this year. The company is one year into executing a turnaround strategy to take back market share lost under the control of Barclays. Along with finalizing its separation from the U.K.-based lender, Absa will continue to restructure its own operations to drive efficiencies and lower costs, said interim Chief Executive Officer Rene van Wyk.

In the restructuring of its retail and business banking unit, Absa had to find efficiencies, Van Wyk said. “Through that process we are seeing a lot of costs coming down by doing things differently and structuring ourselves in a better way.”

The Johannesburg-based lender is also reducing its office space in South Africa and is considering doing the same across the continent, Financial Director Jason Quinn said. "We took some charges in 2018 to restructure -- that came at a cost in 2018, but the benefits of that is ahead of us."

Ethiopian Entry

Van Wyk, who is expected to hand the reins to a permanent chief executive in about one year, will also focus on cementing a bancassurance model to tie together operations in the firm’s retail and business banking unit and its wealth and insurance division by July.

The stock declined as much as 2.7 percent in Johannesburg and was trading 2.6 percent down as of 1:48 p.m. in Johannesburg on Monday. It was the worst performer in the six-member FTSE/JSE Africa Banks Index and is in its longest sequence of declines since March 2013.

The lender will consider its options on entering Ethiopia as it wants to focus on countries where Absa already has a presence, Van Wyk said. Ethiopia is looking to open some of its industries that have been closed to investors since a Marxist junta nationalized banks four decades ago. The nation has 18 commercial banks serving more than 105 million people.

“Ignoring Ethiopia is not necessarily a smart move, especially as it opens up because there’s bound to be cross-country trade opportunities, and financial markets deepening opportunities,” Jeremy Awori, the CEO of Absa’s Nairobi-based unit, Barclays Bank of Kenya, said in an interview. “We’re looking at all the options and included in that might be an acquisition.”

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