Consumers key to Absa recovery

Johannesburg - Absa [JSE:ASA] had laid a solid foundation to resume its growth over the next two financial years, said analysts commenting on the bank's recent full-year financial results.

On Monday last week, Absa posted a 23.5% decline in full-year headline earnings of R7.6bn and slashed its dividend a quarter. It also raised the prospect of continuing pain in the commercial sector which was bedevilled by bad debt

The R95bn group's recovery, however, was dependant on a recovery in the economy and the resumption of consumer spending, which will raise demand for bank products like loans and instalment finance, analysts said.

When this is likely to happen, however, was still unclear.

Several obstacles could still be encountered this year such as bad debts that in terms of the provision of the National Credit Act still need to be provided for. There are also questions about further write-offs on the commercial side of the business that could harm Absa Capital.

The competition between the four big banks - Absa, First National Bank in the FirstRand stable, Nedbank and Standard Bank - is expected to become more intense over the next two years.

New players in the market like Capitec won't make it any easier for the four big banks, although in terms of market value Capitec is still small.

Capitec's phenomenal growth in recent years shows that there was a gap in the market that the four majors had neglected. This principally involves paperless banking services with a lower cost base and a focus on the needs of lower-income groups.

Absa CEO, Maria Ramos, when announcing the banking group's latest annual results, emphasised that Absa has a focused strategy of growing in three markets.

First there is the entry level market which will use transactional products and microloans. The core middle market remains a strong focus, and the wealthy segment is another important division.

Some analysts are concerned that Absa does not have a clear strategy for each segment.

Vega Securities analyst Francois du Plessis said Absa seemed to have a rather a hit-and-miss approach. He also said Absa's latest results were uninspiring.

It's the sharp decline in earnings at Absa Capital that raises questions, and there is still a lack of clarity on how the group's Africa strategy will pan out, he said.

- Sake24.com

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