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Absa rivals to escape its debt woes

Jul 06 2012 15:04 Reuters

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Johannesburg - South Africa's big lenders such as Standard Bank are unlikely to be hit by the spike in bad debts that has plagued rival Absa Group, thanks to their more prudent loan provisions.

Absa, South Africa's third-largest bank and a unit of Britain's Barclays, shocked the market last week when it warned first-half earnings would likely drop by as much as 10% on rising bad debts from mortgages.

The news exposed the fragility of Absa's recovery. Like other South African banks, the lender has been on the mend from a bad debt hangover in 2009. Nervous investors have sent the shares into a tailspin since the warning, wiping $1.8bn off its market value.

But rivals Standard Bank, FirstRand and Nedbank are not expected to suffer the same fate, and their shares have changed little compared with a 13% drop in Absa's shares since the warning.

"It seems to be an Absa-specific issue," said Patrice Rassou, head of equities at Sanlam Investment Management.

"The other three will definitely buck the trend and will have very strong growth."

Absa may have been premature in scaling back its provisions for non-performing mortgages. It cut its cover for non-performing mortgages to 17.1% in December from 19.1%, the lowest among its rivals.

That freed up some cash to help pay for a hefty 50% hike of its 2011 dividend, much of that going to majority shareholder Barclays.

"In December, everyone was dropping provisions as the situations looked like improving. There were assumptions about the economy and debtors getting better," Rassou said.

Other banks have been "reasonably conservative" in their provisioning, however, said Ron Klipin, a portfolio manager at SA Stockbrokers.

"If you look at Nedbank numbers, they seem to have cleared most of the cobwebs out of the cupboard, they made major provisions before as did Standard Bank."

Absa has also struggled to post signs of real growth. Its 21% profit growth last year was largely due to a sharp drop in bad debts. Even as its rivals were reporting solid loan expansion, Absa scaled back its loan book.

Top African lender Standard Bank, which is due to report half-year results in August, is expected to grow earnings by about 14% this year, according to a poll of 16 analysts by Thomson Reuters.

Nedbank, the smallest of South Africa's big four banks, is seen posting 18% growth this year, according to a poll of 17 analysts. Nedbank is also due to report half-year results next month.

Absa is the earliest to report its results, on July 27.

For all four banks, a key point will be how much they set aside for bad loans, said Nondas Nicolaides, a senior analyst at rating agency Moody's.

"Whether the bottom line or the profitability will increase significantly for each bank is difficult to tell right now," he said.

"As is the case for Absa, it will very much depend on the extent of impairments they will have to take against their loan books."
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