Absa slides on bad news forecast

Johannesburg - Share prices in Absa Group [JSE:ASA] fell more than 3% in early trade on Friday, after the bank said it was hit by slack demand for loans and expects lower first-half profit.

The bank, which is majority owned by Britian's Barclays, said after the market closed on Thursday it expects first-half earnings to drop by up to 5% from the previous year.

Shares in South Africa's biggest retail lender were R134.45 at 10:15, down 3.17% compared with a 1.14% decline in the Top-40 index.

"The operating environment for the six months to end-June 2010 was subdued and revenue levels have not grown during the period," the group said in a trading statement released on Thursday. "Consumer appetite for credit remained low and volumes in all businesses have remained under pressure."
 
Mixed views on prospects

I-Net Bridge analyst consensus ratings have Absa rated as a "hold" ahead of next week's results release, while investment banking group JP Morgan has an "overweight" recommendation on the stock.

The expectation is for earnings to grow by as much as 20% for the full year, indicating that analysts expect a more aggressive second half.

An "overweight" recommendation indicates the analyst expects the stock will outperform the other company in the sector.
 
JP Morgan is not the only firm with an upbeat outlook on Absa.
 
Deutsche Securities also has a "buy" rating on the bank, but said it maintains its preference for competitor FirstRand [JSE:FSR].

"Although the earnings recovery in banks is looming, we expect Absa to report relatively unexciting first-half figures with fully diluted headline earnings per share only expected to grow 3% to 565c per share," analyst Voyt Krzychylkiewicz told clients.
 
Krzychylkiewicz added that a sluggish operating environment and "stubborn" bad debts could continue to hurt Absa and may have a negative effect on its "young" private equity portfolio, which is still in the early phase of its life cycle.
 
Much of Absa's outperformance in the last six years has been driven by a stellar showing by investment banking unit Absa Capital, which includes private equity.

However, exposure to about R1bn in defaulted single stock futures positions and a sharp fall-off in valuations in 2009 meant that the business unit did not make a meaningful contribution over the last 12 months.
 
In the year to end-December 2009, Absa Capital contributed just R288m in profit, compared to R2.2bn the previous year.
 
Stockbrokerage Barnard Jacobs Mellet Holdings [JSE:BJM] said it preferred FirstRand and Standard Bank Group [JSE:SBK] over Absa: "These two banks seem to have more conservative and prudent lending practices relative to their peers."  
 
 - Fin24.com