Absa’s new management team continues to impress SA chief banking analyst Koki Kooyman of Denker Capital. The bank’s interim results for the six months to the end of June position Absa as the “best of the rest” behind market leader FirstRand, about as impressive an accolade as CEO Ari Rautenbach could ask for. Strong profit growth, expanding market share, a strong balance sheet and a favorable cycle position Absa shares for further growth – around 50% growth over the next two years, according to Kooyman. He spoke with BizNews’ Alec Hogg.
Koki Kooyman on Absa shares the results
Absa performed very well today and obviously you can see that the price is not that high today because the market expected that. But we’ll get to that at the end as we go forward. But the loan growth is very good depending on whether you take the net growth or the loan, 10 to 12%. I have been critical of Absa – six years ago when they started the new turnaround plan, you may remember that they actually grew quite aggressively in what we thought was an economic downturn, which was happening. But this loan growth has actually persisted, except for one year, 2020, clearly due to Covid. But otherwise, they are gradually gaining market share. And in terms of that result, as we’ll see with the presence of the other banks, I think their growth has been very good, except for obviously Capitec, which is just a different animal at this stage. But what’s important is the loan growth, which at the same time is supported by a wider net interest margin, which means they can charge more to customers and at the same time not pay the same rate of additional payments on their deposits. And it depends on where we are in the world with higher interest rates. Thus, banks typically raise deposit rates faster than they should at the beginning of a rate hike cycle, leading to margin opening. It is also very important to have good control over expenses and bad debts at the top of their own management. Cost of risk, as we call it, and 91, 90 basis points, 91 basis points. But that’s good.
On Absa’s management rating and how it achieved its first results under Ari Rautenbach and the new team
Big banks are massive, like battleships, they take a long time to turn around. But the current team working now started doing the hard work four or five years ago. And so the results we’re seeing now are what they’ve already started doing. They always go well. And I have to give them a lot of credit because our main concern as shareholders was at the board level where the board almost seemed dysfunctional with what was going on there and not focusing on operations and more on the directors. You know all the shenanigans that have been going on, not the shenanigans, but the lawsuits and the appointment of new CEOs, but that seems to be behind us. And the management team was not affected by it. So I think if the board keeps the team in place and obviously the ethics pledge … that team is still pretty white, which means it’s got a lot of experience and it’s older, but they’re in the second tier. There are enough good BEE candidates who have been trained over the years that are starting to come through. So yes, I think if they can keep the team together and slowly breed with new management from the second tier, then they are in a very good position.
On whether Absa’s new management team could begin to challenge FirstRand and Standard Bank for the top spot in the country
I would rate this team better than Standard Bank. The Standard BAank team seems to be slow and suffers from decision-making inertia. Standard Bank made many mistakes, it seems from the outside, in information or IT infrastructure, projects. Much has been outsourced. You’ve seen the loud guys leave. So I would say Absa is in a better position. In that respect, it’s still strong in home loans, and the corporate bank obviously hasn’t grown as much this year. Much of this was retail banking from a corporate bank – if South Africa catches on, they will be stronger. Historically, this has always been Absa’s weak point. And so, by the way, many years ago they did a deal with Barclays to improve their corporate banking. Clearly, Standard Bank has the advantage of having a very large African network. But it was rather a minus. Absa’s African network has done quite well. In fact, profits grew in Africa, I think, by 32% versus 28% in South Africa. but their operations in Africa are quite focused, where Standard Bank is more diversified. So I would say, based on this performance, I think gradually Absa should start trading above Standard Bank.
On Paul Harris’ attempt to replicate FirstRand by merging Rain with Telkom and if Absa, like FirstRand, can become not just the number one bank in SA, but Africa
Low probability, I would think. I think the three things are different. Number one, remember, South Africa then entered a period of strong growth, so the guys at FirstRand were lucky to have some background. If your scenario is a new government, a private enterprise, a targeted government or a corporation, we might go to a higher growth country. But I think what’s more important is that the guys at FirstRand, Gerrit, Laurence and Paul, were very entrepreneurial and made decisions at board level as well. While Absa obviously got a different board. And look, that’s exactly what they should strive for – to be more enterprising. But it is really difficult. I mean, they were very exceptional people. And getting three of them together in one team was amazing. Paul was obviously a little younger; Gerrit and Lauritz were more statesmen. I’m not surprised he’s still trying to do things like this
On when Harris will be able to turn Telkom into number one in the telecommunications industry.
This is a difficult question. Good. I would say, look, I’m close to Paul’s age, not quite there. And what happens as you get older is that you have a more diverse range of interests. When you’re 35 or 40, you’re focused. And, you know, at his age, it’s not the most important thing in his life now. It’s fun. but he must have other fellows to carry out his punishment. So he is clearly wise and has access to all intelligent people. I think there’s a lot of insight and wisdom, but they’re going to be other guys who have to execute for them, and that’s only possible if he gets the right guys. But I don’t think you have the same energy at 72 as you do at 35, 40. But you have wisdom. So it is possible.
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