South Africa's Absa Group Ltd. hopes to offset a subdued domestic market by expanding its African footprint so that it can double its share of the continent's banking revenues.
Absa is exploring opportunities in Nigeria, Ethiopia, Angola and Egypt, and although its existing Africa-based operations are moving in a positive direction, South Africa's third-largest lender faces challenges both at home and abroad, according to analysts.
Long-serving CEO Maria Ramos, architect of the Africa strategy to double its share of continental banking revenues to 12%, retired earlier in 2019. Ramos restructured Absa's operations in 2018, creating four business units each headed by a dedicated CEO, covering retail and business banking; corporate and investment banking; wealth management; and foreign operations.
Analysts have welcomed the strategic revamp, but there remains much for the incoming group CEO to do, including winning back market share that it has lost in South Africa's competitive retail banking segment. The bank's pan-African credentials, meanwhile, will depend on how it rebrands on the continent following Barclays PLC's decision to trim its ownership stake to around 15% from 62%.
Growth on continent
Yet an S&P Global Market Intelligence analysis of Absa's regional operations shows a consistent uptick in its return on equity from Africa between 2013 and 2018, and its retail and business banking division also posted growth in Africa in 2018 versus the prior year, though investment banking figures were flat.
Absa has a presence in 12 African countries in total and refers to its businesses on the continent as its regional operations, which excludes its home market of South Africa. The likes of Kenya, Tanzania and Zambia are among the countries comprising these operations.
"Broadly speaking, these markets remain underbanked," said Adrian Saville, CEO of Johannesburg's Cannon Asset Managers and director of the Centre for African Management and Markets at GIBS in Pretoria, South Africa's capital. "The service need ranges from retail banking through to substantial infrastructure spending, which points to corporate and investment banking as avenues for expansion."
Barclays' retreat should bolster Absa's risk appetite and its ability to take decisions, said Patrice Rassou, head of equities at Sanlam Investment Management in Cape Town, South Africa.
"It will probably be on the front foot in terms of lending and being able to serve its customers," he said. "The rebranding of Absa in the rest of Africa will remove a well-known brand, so it will have to spend heavily to ensure customers find affinity with the Absa brand — it's currently unknown to many."
Absa's domestic operations generated 81% of its total revenue last year, including 38% from retail, while business banking provided 15% and corporate and investment banking 20%. Absa's foreign corporate and investment banking division generated 14% of its total revenues in 2018, and its foreign retail and business banking operations provided 5%.
Falling behind
In a December 2018 investor presentation, Absa noted that its domestic retail market share had declined in each of the youth, mass and middle income segments by more than 6% from 2012-2017, also losing its leadership position in the home loans market.
As a result Absa has relinquished its position as South Africa's second-largest lender, falling behind FirstRand Ltd. and trailing market leader Standard Bank Group Ltd., according to S&P Global Market Intelligence data.
Absa's shrinking presence was largely due to Barclays' low risk tolerance following the global financial crisis, said Rassou.
"Risk appetite was set in the U.K., so Absa relinquished its leading position in secured lending in South Africa," he said. "This meant the retail business growth stalled and Absa lost a whole lot of primary clients. In a very competitive banking sector, Absa squandered its favorable position as the trusted bank to most customers."
Absa's wariness also caused it to miss a boom in unsecured, short-term lending, which has proved profitable for its rivals.
"Absa didn't price its products competitively, it lost the battle to serve customers quicker through new digital channels, it was late with its loyalty scheme and cross-selling," said Rassou. "Absa has missed out on all these things, while its competitors have upped the ante."
Home truths
The state of the South African economy has also amplified competition and prompted lenders to look toward Africa for growth.
Lackluster domestic economic growth, grim job prospects — around a quarter of South Africa's potential workforce are unemployed as of October 2018 — and rising living costs mean the country's big banks are struggling to expand their domestic profits.
"South Africa is a very demanding environment for banks, with household balance sheets also showing new signs of strain," said Saville. "Taken at face value, the prospects look better in other African markets."
Absa's headline earnings from its foreign operations increased 9% year over year in 2018 and its foreign units have steadily increased their combined ROE, which was 18.5% in 2018 versus 12.6% in 2014.
"We believe this should increase further medium term, as we reduce RBB's high cost-to-income ratio and grow our CIB franchise, where returns are attractive," Jason Quinn, Absa financial director, told an analysts' call to discuss the bank's 2018 results.
"Who Absa chooses as its new CEO will determine the vision and direction of the bank," said Rassou. "No doubt whoever is appointed, Absa will emphasize its African-icity, but there are subtleties — in a highly competitive world, you want a CEO who has clarity of vision and yet can adapt to the local nuances of retail banking."
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