Absa’s fall blamed on mortgage book

Photo by Simphiwe Mbokazi.

Photo by Simphiwe Mbokazi.

Published Jun 27, 2012

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A surprise profit warning resulted in Absa shares sliding 8.3 percent to R143.50, the lowest in more than three years, at the close of trade yesterday.

The shares plunged from the opening bell after Absa issued a voluntary trading update at 7.30am, warning that its headline earnings for the six months to June were going to fall by up to 10 percent from the R4.6 billion achieved in the first half of 2011.

The bank said this was largely as a result of increased credit impairments in the group’s mortgage legal book.

Absa said it had higher impairments on this book due to higher cover required as property prices and distressed customers remained under pressure in the six months to June.

Absa group chief executive Maria Ramos said the bank had to write off more than expected in terms of distressed mortgages in the legal process.

Dimitri Mitropapas, an analyst at PSG Konsult, said although the property market was troubled, the increase in Absa’s bad debt had come as a shock to the stock market.

“I think this is a specific Absa problem because they are the largest mortgage provider in the country. If the market expected it from the rest of the banks, it would have hit them more,” he said.

Mitropapas said banking sector shares would still go up and the decline was just a short-term thing for Absa that had probably caught the bank off guard as well.

He said depending on how the market did and how distressed the customers were, this was indicating that interest rates should remain low until 2014 or 2015.

Jean Pierre Verster, an analyst at 36One Asset Management, said although the muted revenue growth across the Absa group was also cited for the decline in revenue, the retail mortgage book appeared to be the main reason.

He said while the other big banks were yet to release their trading updates, he did not foresee them increasing their provision for bad debt to the extent that Absa had.

“Due to the sluggish economy, continued pressure on property prices and distressed customers taking longer to cure, Absa is forced to increase its bad debt coverage ratio on the mortgage book, which up to now has been lower than the other banks. I don’t think others will have to increase their bad debt provision as much,” he said.

Verster said the announcement showed that Absa was even less optimistic than before about the recovery of the property market because the bank had actually surrendered its leading market share in retail mortgages to Standard Bank, yet it was increasing its bad debt provision significantly.

“I think that shows Absa had underprovided for bad debts in the past because the provision that they are making now is not for new loans but loans that were extended pre-2008.”

Absa is expected to release results for the six months to June on Friday, July 27.

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