This week’s results by banking group Absa emphasise the bank’s attraction to Barclays, and the British bank could make it soar. On Monday, South Africa’s largest retail bank unveiled an increase in headline earnings of 23,3% and an average return on equity of 25,5%, a figure that analysts expect to see increase.
Jacques Schindehütte, financial director for Absa, said the deal will help the bank on two levels. Firstly, he estimates it will save Absa about 0,5% on the cost of borrowing, which will help improve returns on loans.
Secondly, the figures show why Barclays is important for Absa’s expansion. Absa’s wholesale and international banking division gave a return on equity of 14,8%, yet absorbs 26,4% of capital allocation.
Barclays will bring its strong wholesale operation and continental presence, which will be complemented by Absa’s retail strength. The retail division enjoyed return on equity of 40%, having grown its customer base to seven million, 3,2-million of whom are black.
Schindehütte believes that the market has not priced in the advantage that Barclays will bring the bank. “This will only be reflected after the vote on June 13,” he says.
In two weeks shareholders will vote on the proposed R33-billion deal. On offer is R82 a share with 32% of the vote probably secured. Shareholders then have the option of offering a further 28% to seal Barclays’s desired 60%.
Neill Young, an analyst at Coronation Asset Managers, says that Absa will benefit from having a parent with a better rating than the South African government “but markets will wait to see where that cheaper equity is used”.
He notes that an additional benefit will be that Absa can now operate with relatively less capital than some of its peers, which will improve its return on equity.
Schindehütte says the bank’s 22% earnings growth and 25% dividend growth over the past five years is its proudest achievement. Most important, he says, are employment creation and the “opening of branches and ATMs”.