Noose tightens on banks

Johannesburg - Earnings downgrades from Absa and FirstRand on Tuesday may represent the thin end of the wedge as analysts warned of more earnings pain to come. Both Standard Bank and Nedbank have been downgraded by Deutsche Securities.

On Tuesday, Absa and FirstRand warned that the tougher-than-expected operating conditions had weighed on their client base, with bad debts continuing to climb.

Rand Merchant Bank (RMB), the trading subsidiary of FirstRand, continued to prove a problem child. RMB has knocked FirstRand earnings over the last 18 months with a number of offshore and derivative trading losses.

The warnings came a day after Deutsche Securities released its updated overview of the banking sector, where it warned of further bad news. In its report, Deutsche downgraded Absa from "hold" to "sell", while changing its recommendation on Standard Bank and Nedbank to "hold" from "buy".

It retained its "buy" recommendation on FirstRand, but warned that earnings would be lower, an expectation that was confirmed by FirstRand on Tuesday. FirstRand said headline earnings would be between 28% to 33% lower than the 191.5c/share recorded for the year to end-June 2008.

Francois du Plessis of Vega Asset Management told Fin24.com he was concerned about the performance of RMB, because it hadn't responded to the rebound in world equity markets which he dated from March.

RMB's response to challenging market

In commentary accompanying the trading update, FirstRand CEO incumbent Sizwe Nxasana gave indications that he would be changing the focus of the business.

Nxasana said: "We plan to focus on client-driven rather than proprietary trading or investment activities and link any secondary market strategies to those client activities, or leverage off our primary market position.

"This should result in improved quality and reduced volatility of earnings," he said.

RMB CEO Alan Pullinger said he expected the company's earnings for the year to end-June 2009 to be about 50% to 55% lower year-on-year.

"It has been a tough second half for RMB," Pullinger said. A combination of poor local markets and continued exposure to offshore markets had dented profitability in the second half of the financial year, he said.

A more conservative and South Africa-focused RMB was on the cards, he said. "We have a revised our game plan."

It's now likely RMB would focus on its primary market activities in South Africa and Africa. It would close most of its offshore lending and investment activities, but would continue with its Australian private equity and RMB Resources businesses.

Another asset manager said banks were being hit from all sides with increasing retail credit losses, declining asset values, and lower revenues from trading.

- Fin24.com