Drop in earnings, bad debt hit Absa

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Absas building on Commissioner Street in Johannesburg. Photo: Leon Nicholas.

Absa Group is looking for sub-Saharan acquisitions to boost future profit after reporting a drop in first-half earnings on Friday, hit by souring mortgages at home.

Absa, South Africa’s third-largest bank and its biggest retail lender, has been slow to capitalise on parent Barclays’ wide presence on the continent, trailing behind fast-moving rival Standard Bank.

It is now scouring east Africa for a possible acquisition early next year and is set to start insurance operations in Zambia in August, after launching similar operations in Mozambique and Botswana.

“East Africa is our next focus area and we are evaluating acquisition opportunities in this region with a target date of first quarter 2013,” chief executive Maria Ramos said at the bank’s first-half results presentation on Friday.

In its home market, Absa faces a more sombre outlook. First-half profit fell by 6 percent, hit by ballooning bad debt from mortgages, and earnings are likely to remain under pressure given slow economic growth.

Absa expects that a central bank rate cut earlier this month will trim about R190 million from its top line.

Absa, the first of South Africa’s top four banks to report earnings this season, saw a sharp increase in write-offs in April and May, mainly around souring mortgages.

It has since taken a more conservative lending strategy, said chief financial officer David Hodnett, adding that would affect its earnings from fees in its retail segment.

“The bad debt legacy issues have caught up with them,” said Royce Long of asset manager Obsidian Capital. “They are not as aggressive on lending as other banks and it’s coming through in their numbers.”

South Africa’s large banks had about 60 000 distressed properties between them, Hodnett said.

But analysts say rivals Standard Bank, FirstRand and Nedbank are unlikely to post profit declines as they have set aside adequate provisions.

Absa increased its dividend payout by 8 percent despite the drop in profit, a move that helped cushion the stock in Friday’s trading session.

Headline earnings per share fell to 602.3 cents in the six months to end-June, down from a total 638.5 cents a year earlier.

The bank flagged last month that profit would likely fall as much as 10 percent due to sour mortgages. That warning sent its shares into a tailspin and ignited fears that its recent recovery was losing steam. Absa has in the past few years grown earnings by cutting back bad debts rather than expanding earnings from lending.

Net interest income, a measure of earnings from lending, totalled R11.9 billion, compared with R11.6bn last year.

In another development, Absa identified the employee it suspended amid an investigation into why the lender had to set aside more money to cover rising bad debts. Ramos said the bank had put its head of collections on leave in relation to the probe. She declined to identify the employee by name.

There were no allegations of wrongdoing by the individual, and the bank was changing the way the unit was run, Hodnett said.

In an unrelated action, Absa also suspended the managing director of its Tanzanian unit, Lawrence Mafuru, following allegations by a whistle-blower, Hodnett said, adding that no criminal charges had been filed.

“We are investigating what the whistle-blower said, and we are taking it very seriously,” Hodnett said.

Absa shares ended Friday’s trade up 2.94 percent at R139.70. - Reuters and Bloomberg


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