BANKING group Absa has been in the headlines for the wrong reasons in recent months - and Tuesday's surprise profit warning was no exception.

It started with the departure of four executive committee members, followed by the announcement that long-serving deputy group CEO Louis von Zeuner would leave the Barclays-owned group at the end of the year.

Mr von Zeuner's departure has raised concern among analysts about the loss of such an experienced banker when Absa is facing an onslaught from rivals on its dominant retail market share.

Then came claims, which Absa strenuously denied, that up to 3000 staff could be retrenched in a major cost-cutting exercise.

Tuesday's early-morning trading update, that its headline earnings would be lower by as much as 10%, took many investors by surprise - particularly after the bank had reported double-digit earnings growth in the year to December.

In that period, the group reported a 21% full-year growth in headline earnings to R9,7bn (2010: R8,04bn), with the first half of last year - the period being compared with the current first half - registering earnings of R4,6bn.

It is against the background of expectations of further improvement in earnings this year that investors on Tuesday punished the bank for its trading update by dumping its stock, which fell by 8,3% to close at R143,50, wiping close to R8bn from its market capitalisation.

Among other reasons for the lower profit, Absa says that credit impairments have increased due to higher cover required on its mortgage legal book as property prices and distressed customers remain under pressure.

But it says, without giving more details, that early arrears on most portfolios continue to improve. "The economic environment remains tough and while our new lending is improving, this growth is only expected to become evident during the second half of 2012," says group CEO Maria Ramos.

Analysts on Tuesday gave mixed responses to the trading update, but the common thread was that Absa appears to have underestimated the problem in its housing mortgage loan book, which on paper now appears to be the worst performing after that of Nedbank.

Absa retreated from the housing mortgage market as a result of high impairments and in the process relinquished more market share to Standard Bank, the largest of the big four banks by market capitalisation. Now Absa is battling to claw back market share and has re-engaged mortgage originators to help it in the process.

"Absa's trading update, where it stated that interim headline earnings for the six months to June 2012 are likely to be 0%-10% below the previous period, was a negative surprise to the market," says Adrian Cloete, an equity analyst at Cadiz Asset Management.

"Market consensus for the full year to December 2012 was for (headline earnings per share) to increase by 15% and analysts would in all likelihood downgrade their full-year forecasts after this trading update," he says.

"It is very disappointing and I am not sure Barclays will be thrilled about this," says Faizal Moolla, banking analyst at Cape Town-based Avior Research. "It seems advances growth has been very slow and net interest income has come under pressure and so have mortgage impairments."

Imara Reid SP senior analyst Steve Meintjes was not impressed either, warning that Absa's prediction of a better second half is not convincing owing to soft credit demand from both companies and individual consumers.

Recent estimates show that companies are sitting on cash deposits of more than R530bn, which are expected to end the year at more than R560bn, according to Mr von Zeuner.

Mr Meintjes believes Absa is struggling to reduce impairments, particularly of mortgages which are now subject to legal action.

"They talk of the legal mortgage book, which implies one way or the other mortgages where they have taken legal action. Either way, it does indicate mortgages as the source of the problem whereas other banks (seem to have) better quality books," says Mr Meintjes.

On a broader scale, analysts say Absa's profit warning reveals the depth of challenges facing all the big banks to grow advances and also to rehabilitate delinquent clients, some of whom are more than six months in arrears.

The spectre of an interest rate hike is raising fears that this could tip indebted customers into bankruptcy and also see a resurgence in bad debts and impairments. Absa must grow advances without compromising its credit book and reducing high impairments.

Mr Moolla and Mr Meintjes say Absa has to accelerate its cost-cutting exercise, while Mr Cloete says it is likely Absa will probably show no growth in headline earnings for the 2012 full year.

"We believe they will continue to attempt to restructure costs even though they expect a better second half," says Mr Moolla.

kamhungas@bdfm.co.za