Banking on a solid strategy for turnaround

SHARE   |   Sunday, 06 July 2014   |   By Othusitse Tlhobogang
Ramos Ramos

WHEN it comes to the big four banks, Barclays Africa Group has in the past few years been the one everyone loves to pick on. The third biggest bank by market capitalisation has been through a tough time as management’s focus on aligning itself with the UK Barclays shifted its attention inwards and away from banking fundamentals, while it was rocked by leadership changes in a number of top executive positions.

Barclays UK bought a controlling stake in Absa Group in 2005. Last year, Barclays sold most of its African operations to Absa, now known as Barclays Africa Group, and increased its stake to 62.3%. The deal created Africa’s largest retail bank by branch networks and customers.

This positions the group well for future growth, but the energy taken to get it here has seen management take its eye off the ball in SA. But the group’s 2013 results showed promising signs of a turnaround, including how it dealt with bad debt and the poor performance of its retail banking division. The return on equity had improved to 15.5% from 14.1% in 2012, and it plans to increase this to between 18% and 20% by 2015.

The share price is also on a better footing than last year when it fell 19%. This year it has increased 26%, making it the best performer among its peers: FirstRand, Nedbank and Standard Bank.
CEO Maria Ramos and her team are due to present 2014 interim results on July 30. The market will be watching for signs the retail business in SA is on the right track given that it contributes 44% to group earnings.

Key will be whether Barclays Africa’s South African operations, still branded Absa, have stemmed the loss of customers. The bank went from 12.1-million customers in 2011 to 8.8-million last year.
Kagiso Asset Management investment analyst Jihad Jhaveri says turning around the local retail business is going to be difficult in the tough economic environment.

“One of the reasons Barclays Africa lost primary customers was that their market share in mortgages dropped below desired levels. With them now starting to take a larger market share of new mortgage business, during a period of increased consumer strain, they will need to convince the market that they are not taking undue credit risk,” he says.

He will be watching closely for a “turnaround barometer” in retail, namely “whether they are succeeding on the deposits front, ie gaining market share of lower cost retail deposits”. Patrice Rassou, head of equities at Sanlam Investment Management, says while the bank was hurt by a deteriorating home loan book, this has been stabilised. While the bank “needs to reposition the retail bank to be able to compete against more nimble competitors”, he says new business volumes are rising.

Jhaveri warns that at this point in Barclays Africa’s retail recovery, cost growth should start picking up as it needs to play catch-up to bring investment in line with its peers. “As the income benefits would be delayed, there would be some profit drag. We would like to see evidence of confident investment spend in retail, and at the same time targets for future return on that spend,” Jhaveri says.

Barclays Africa, the largest of the big four banks, now has a profitable retail franchise in the rest of Africa, which offers the potential to build and diversify earnings, albeit slowly. Jhaveri says investors would like to see strategies targeting increased growth in the rest of Africa retail operations. The group is aiming for its operations in the rest of Africa to contribute 20%-25% to it by 2016, whereas that contribution now stands at 19%. This should diversify earnings and offset a slowdown in the South African economy. Barclays Africa’s corporate and investment banking unit’s performance has been disappointing, with earnings flat, off just 0.04% in 2013. The investment banking business across its African operations is “subscale”, says Jhaveri.
“Part of the investment case for the Africa transaction was the opportunity for the investment banking offering across Africa to be significantly strengthened. We will be looking for evidence of some success in this roll-out.”

Rassou believes it is far too soon to tell whether the merger with Barclays Africa operations has been successful. Barclays Africa still has the lower price:earnings multiple at 11.56 compared to its peers. Standard Bank has a PE of 13.10, Nedbank 12.2 and FirstRand 13.12. This suggests Barclays Africa is an attractive offering among its peers, particularly if it can get its investment banking division on track, realise the competitive advantage of its retail operations across Africa, and turn its local retail operations around. But this is going to be tough in light of strong competition, the increasing pressure on consumers as interest rates rise and sluggish economic growth.