Barclays/Absa shake-up to improve costs

2012-12-07 07:58

Johannesburg - A combination of Barclays' African operations with Absa Group [JSE:ASA] could improve efficiency and allow the UK group to expand in the faster-growing region‚ Fitch Ratings said on Thursday.

The reorganisation of these operations confirms Barclays' commitment to its Africa strategy and to its majority-owned South African subsidiary‚ Absa‚ it said.

Africa delivered 21% of Barclays' 2011 profit before tax‚ making it the group's second largest non-UK contributor after the US.

“Moving the operations in eight sub-Saharan countries into Absa should enable the Africa operations to be more cohesive and streamlined‚ benefiting cost and risk management. The regional offices of Absa and Barclays' African operations have already been consolidated. This leaves the group better placed to take advantage of the growth opportunities as the region's economies develop. In the long term the profit contribution from Africa could rise as the group expands its bancassurance strategy and builds on its corporate and retail banking platforms.

“In the short term there are earnings challenges. Barclays' African business suffered in 9M12 from high loan impairment charges on South African residential mortgages. The challenging economic environment leaves South African banks exposed to further asset-quality deterioration and weaker revenue streams‚” Fitch said in a statement.

Until the earnings from the rest of Africa made a greater contribution to Absa's earnings‚ it added‚ they were unlikely to provide much diversification benefit to Absa or be supportive of a pan-African strategy.

According to Barclays‚ the rest of Africa would have accounted for 15% of the group's H112 pro forma earnings‚ including the losses in Tanzania and Mozambique‚ assuming the transaction was completed on 1 January 2012.

Barclays will increase its stake in Absa to 62.3% after the transaction from 55.5% and rename Absa "Barclays Africa Group". It will keep the Absa brand for its retail banking and card businesses in South Africa.

“This confirms our view that there is a very high probability of support for Absa from Barclays‚ and this underpins Absa's 'A-' rating.

Although Barclays has made an agreement to combine the majority of its African operations with Absa‚ the transaction is subject to approval of Absa minority shareholders and regulators‚” the rating agency concluded.