NEWS ANALYSIS: Absa becomes shrinking giant as profit alert hits market cap
ABSA'S precipitous fall on the markets has shown how quickly today's banking giant can become tomorrow's struggling runner-up, no matter how much the bank may claim to be keeping it together.
Yesterday, a little more than R9bn separated Absa's market capitalisation from that of Nedbank, the smallest of the big listed banks.
Absa's share price has been pummelled since a shock profit announcement last week that headline earnings for the six months to June would be lower by as much as 10% compared with R4,6bn reported in the same period last year.
Absa blamed the poor results on soaring impairments on its mortgage book and tepid revenue growth. As much as R8bn was wiped off its market capitalisation after the trading update was released on Tuesday.
The extent of the fall in its market capitalisation since then until the close yesterday was equivalent to that of construction major Aveng, or four times that of media group Avusa. Absa is the largest retail bank by customer numbers in SA, with more than 11-million. Nedbank had less than half that number as of December. Despite Absa's share price rebounding in late Friday trading, it fell again yesterday, and the Barclays-owned group was the only one of the big banks to experience a fall in its stock.
Absa closed 2,81% down at R137,23, giving it a market capitalisation of about R98,7bn compared with Nedbank's R88,61bn. Standard Bank was still the largest by market capitalisation yesterday (R176,8bn), and FirstRand was second (R151,2bn).
Although unrelated to Absa's financial performance, some analysts speculated that the resignation of the chairman of Barclays, Marcus Agius, over an interest rate -fixing scandal, might have also affected investor sentiment towards the group. An analyst said the resignation had come at the worst time for Absa, even though the offence for which Barclays had been fined had no material affect on Absa's results.
"The Barclays issue is not helping the general crisis of confidence," said Patrice Rassou, head of equities at Sanlam Investment Management. Adrian Cloete, an equity analyst at Cadiz Asset Management, said the resignation should have no direct affect on Absa shares. "The (price-fixing) issue is a concern for Barclays shareholders and does not affect Absa or other South African banks in any way."
The CEO of a rival bank had some sympathy: "Spare a thought for (Absa CEO Maria) Ramos, because these things happen. But the fundamentals of the business are strong and Absa is not about to collapse."
Faizal Moolla, banking analyst at Avior Research, said the fall in Absa's shares yesterday might have been worsened by subsequent full-year earnings downgrades by analysts.
Mr Cloete said Absa's trading update was a "big negative surprise" and the continued weak share price reflected selling pressure as the earnings prospects were downgraded.
"Investors wanting to possibly buy Absa shares are probably sitting on the sidelines until they get greater clarity once the actual results get released," he said.
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