Banking
BY PHAKAMISA NDZAMELA & MAARTEN MITTNER
Wendy Lucas-Bull The board chair is supportive of Maria Ramos
Maria Ramos has been repeatedly criticised for the underperformance of Barclays Africa, formerly Absa Group. But she has streamlined the business and is now preparing to grow the operations in the rest of Africa. Phakamisa Ndzamela and Maarten Mittner assess her tenure and her plans
In the downtown head office of Absa, now renamed Barclays Africa Group, the bright red has been replaced by a cool blue. Everything, including the ties of the security staff and laser lights along sliding doors, has been rebranded, indicating the link to its British parent.
But the cool blue exterior belies the torrid time the bank has endured recently. In her four-year tenure, group CEO Maria Ramos has become the lightning rod for all that has gone wrong at the bank. But is the criticism justified and can the bank's below-par performance be blamed entirely on her?
Since March 2009, when she moved to Absa from Transnet, Ramos has been under the spotlight: she was the first woman and nonbanker to lead the continent's largest retail bank, which was previously run only by Afrikaner men.
Since Ramos took: over market confidence is lukewarm
While Ramos has been at the helm: Market confidence has been lukewarm. From March 2009 to August 2013, the Barclays Africa share price has under-performed relative to its peers. However, in that period, there has been growth in the stock, creating value for shareholders.
Barclays Africa's share price has risen 65% to about R137 while rival Standard Bank's has grown 85% to about R115, Nedbank's by a whopping 165% to just over R191, and FirstRand leads the pack with its share price rising more than 213% to about R30.
At the beginning of this week, Barclays Africa was down about 16% on the JSE in the year to date, a poor showing as Standard Bank was down about 3% and FirstRand about 2%. Nedbank is the only banking stock in the black so far this year, showing a return of 2%.
After the interim results, the Barclays Africa share price fell to R137 - it had been over R170 at the start of this year. The results showed earnings growth of 8% instead of the more than 20% the market was expecting. Between 2011 and 2012, several senior executives quit and Ramos's leadership style was blamed for their departure.
Non-listed analysts rate Barclays Africa as a 'sell'
Despite the negative market sentiment, of the 16 analysts that have rated Barclays Africa Group on Bloomberg, none has a "sell" recommendation for the stock. Five rate the share a "buy" and 11 a "hold", but some investors have been dropping the shares. Standard Bank has five "sell" recommendations, seven "holds" and five "buys", and continues to outperform Barclays Africa.
Nedbank has 10 "buys", six "holds" and one "sell" and FirstRand six "buys", 11 "holds" and one "sell". Was the bank's underperformance inevitable or should Ramos be blamed? "If I did not do my job properly, Barclays would surely take the appropriate action," Ramos tells the FM.
Indeed, if her performance was seen as wanting, parent Barclays in London could have engineered her departure when former CEO Bob Diamond quit in the global scandal over interest rate fixing. Ramos, who worked closely with Diamond on the additional stake Barclays acquired and the buyout of its eight African assets, survived the purge of some of his appointees.
Ramos serves on the bank's executive committee
She serves on the bank's executive committee. The vitriol Ramos has attracted has also raised the question: are her critics merely chauvinistic or was she and her team inadequate in communicating with the market?
Some say it is a bit of both. When Ramos started in 2009 one of the first things she had to deal with was a single stock futures mess. Absa held shares in financially challenged companies such as Pinnacle Point, Blue Financial Services, ConvergeNet and Sekunjalo. Ramos had to write off R1,3bn and raised a provision of R300m.
Ramos says Barclays Africa is still pursuing legal action in this regard. Soon after came the 2009 financial crisis and the effect of poor loans which had been written between 2006 and 2008. In the 2012 financial year Barclays Africa posted a 9% fall in diluted headline earnings per share as credit impairments increased 63% to R8bn. Chief financial officer David Hodnett said then that the group had written better mortgages since 2009 and that about 93% of the impairments had been confined to those written between 2006 and 2008.
Despite the challenges and market sentiment around Barclays Africa, Ramos appears to enjoy support from the parent company and the Barclays Africa board, chaired by seasoned banker Wendy Lucas-Bull. Though she enjoyed a close working relationship with Diamond, it is apparent that she enjoys the support and confidence of new CEO Antony Jenkins. Barclays increased its holding in Barclays Africa to 62,3% from 55% under her leadership, which is undoubtedly a vote of confidence in her.
It is also allowing Ramos to run the enlarged African operations, including the eight she acquired for R18,3bn, which is more kudos for her. Ramos showed her deal-making mettle when she bedded down the acquisition of the eight Barclays operations in the rest of Africa ahead of the allocated schedule. Some of her rivals have struggled to close a single deal outside SA in the past two years. Over the past year Ramos has managed to spend close to R30bn on the African dealand the acquisition of Edcon's store card book for about R9bn.
How the PIC views Barclays Africa
Elias Masilela, CEO of the Public Investment Corp, which has about a 7% stake in Barclays Africa, says that with all the Barclays Africa operations under one umbrella in Johannesburg, SA stands to benefit from dividend flows from other Barclays operations on the rest of the continent.
The group has said that the newly acquired operations should contribute 19%, or R874m, to first-half earnings. Earnings outside SA will contribute15%-20%. Barclays Africa is the third-largest contributor to Barclays Plc earnings after the UK and the US.It contributed over 10% of Barclays Plc's first-half pretax profits in 2013.
However, some analysts believe Ramos and her team paid too much for the assets and that they will not see returns in the short term. Ramos disagrees, saying such assets are not easy to come by. "We believe we paid a fair price for an established network of eight countries and access to a fantastic brand across Africa. It is important to note that our minority shareholders voted overwhelmingly in favour of the deal and, by extension, the terms and price of the transaction," the company has said.
Stanlib financial research head Lebogang Molebatsi says sub-Saharan African acquisitions need at least five years before a return can be seen. "I think the transaction [acquisition of eight operations] was a good one to do in the long term. I think the price paid was not cheap," he says.
He says the fact that Barclays Africa bought assets from its parent was a comfort as they were known operations. Stanlib owns about 1% of Barclays Africa. Tracy Brodziak, equities portfolio manager at Old Mutual Investment Group, agrees that Barclays Africa's operations on the rest of the continent have a good geographic spread and market position. But she, too, believes there will be a return only in the long term.
Absa Group's last interim results are solid
Absa Group's last interim results could be regarded as solid. But they clearly did not meet some analysts' expectations of earnings growth of above 20%. However, the 8% earnings growth reported was a marked improvement on the 9% drop in 2012.
The retail &business banking division grew earnings a strong 48%, to R2,9bn; financial services was 5% up at R671m; and though the corporate investment banking and wealth division, which was previously Absa Capital, reported 7% lower earnings, market conditions were difficult.
The results were a continuance of the strategy put in place by Ramos and Barclays after 2009 to streamline the group and make it more profitable, enlarge the capital base and to exit some risky product segments.
It was keen to stop being the bank that "lent to all and sundry", Ramos and her former deputy, Louis von Zeuner, emphasised. But the market and analysts have reacted sharply to the recent interim results, with some describing them as weak. Absa's share price fell as much as 7,3% on the day of the results.
Bad debt remains high at the group with impairments at 1,35% of advances, though it has come down from 1,62% in the comparable period last year. And revenue growth was subdued as the group reduced risky lending.
But Barclays Africa paid a special dividend of close to R6bn in first-half 2013, in line with its promise that it would return excess capital to shareholders. Deutsche Bank analyst Stefan Swanepoel says in a research report that though net interest income - which a bank earns on normal lending - was at 5%, noninterest revenue on fees was down 1%. He had predicted an 8% rise . "The difference in earnings at the group came mainly from the higher than expected credit loss ratio."
But progress was made in reducing bad debt in the first half. Total nonperforming loans (NPLs, reflecting nonpayments by customers for three months) had improved 9%, or by R3,1bn to R29,6bn at end-June. Retail banking NPLs, mainly reflecting defunct mortgages, fell 17% to R22,2bn. Though still a substantial number, the group has this covered with total NPL cover improving to 38,9% from 32,5%. Clearly, further reductions in bad debt will benefit the group's bottom line in years to come, lifting earnings to double-digit level. Therefore, smart buyers are already adding Barclays Africa to their portfolios.
Barclays Africa suffering from a lack of revenue
A lack of revenue is Barclays Africa's other big problem. This has been noticeable for some time now. The problem has been worsened by an alarming fall in transactional retail accounts with many customers switching to Capitec Bank.
Brodziak is of the view that Barclays Africa will not rerate until revenue growth improves."Over the past few years its revenue has been under pressure as it has not participated in the personal loan lending boom. It has lost clients and has not taken price increases in retail business. It has controlled costs well over this time but the market would like to see increasing revenue growth," she says.
It is estimated that at least 1m customers were lost to end-June and that market share was shed in many retail segments, excluding credit cards. Stopping the haemorrhage in customers is critical to the bank improving its earnings. Barclays Africa is no longer the largest bank by retail customer numbers. It has been surpassed by Standard Bank.
Molebatsi says Stanlib is concerned about the retail business. "We have always said that the high number of executive changes has resulted in an inconsistent strategy in retail. The bank has become more internally than outwardly focused in a very competitive market," he says.
In 2011 Gavin Opperman, the retail banking CE, quit. After his departure, the retail and business banking divisions were merged, with Bobby Malabie appointed CE of the newly created unit. In 2012 Malabie's responsibilities were changed. He is now executive director responsible for marketing, communications & public affairs since the appointment of Craig Bond as head of retail and business banking.
Ramos says she has had to make tough decisions
Ramos says she had to make tough decisions in the retail & business banking division to ensure that the appropriate skills were in place. She shrugs off the exodus of senior managers over the past few years. "I believe we have the right people now, who are all fresh and motivated."
While Barclays Africa has changed leadership in its retail & business banking division, rivals Standard and Nedbank have had stable leadership. Nedbank's retail & business banking division has been under the watchful eye of Ingrid Johnson for over three years. Standard's personal & business banking unit has been guided by Peter Schlebusch for much longer and it added seasoned banker Funeka Montjane to its team, allowing Schlebusch to focus on repositioning retail operations in the rest of Africa.
Molebatsi says that when Barclays Africa pared back mortgages and personal loans, other players filled the gap and gained customers who moved their accounts when they wanted credit. "They have had to introduce cheaper bundles in retail to compete, which hurt income," he says. Ramos and her team have been criticised for inadequate communications.
When asked if she and the bank were not getting their message through to analysts and the market, Ramos shrugged and pointed to the two major deals the bank had done over the past year, Edcon and the buyout of the Barclays African assets. She took up leadership of the bank during the global financial crisis. "At that time we envisaged a strong capital base, and strong liquidity for the group would be necessary. We now have both."
It was also envisaged that earnings would need to be more diversified. That was also achieved, Ramos, says, citing the financial services division as another success. She defends the drawback in lending as necessary for Barclays Africa to emerge stronger over time. "Though we had a big market share with personal loans, we thought the market would come under strain." On this, the bank was proven right. Most of the bad debt is still concentrated in the home loans division, which Ramos describes as a legacy. "There were a lot of things to clean up when I came here," she says.
Now the focus has fallen on the purchase of the Edcon book. Acquired in November 2012 for R9,4bn and with 3,7m active store card holders, the deal has been criticised by analysts as too expensive as Barclays Africa is still saddled with R400m debt in Edcon as part of the takeover.
Ramos believes in the Edcon transaction
However, the Edcon portfolio recorded headline earnings of R101m to June, which could be seen as a harbinger of future profits. Ramos certainly believes in the merits of the transaction. There were not too many lending books of that quality available at the time, she says. "And we were not the only people bidding."
Because of the deal, Barclays Africa has a strong presence in the retail credit card market, and with a market share of 32,8%, Barclays Africa remains the biggest, pipping Standard's market share of 28%. "But it will take time for the business to get in good shape," she admits. Ramos has the dubious distinction of being the only big bank CEO with a spotlight constantly trained on her. But despite the pressure, she has shown that her replacing Steve Booysen was appropriate.
Critics viewed her appointment as political
With impeccable credentials after stints at national treasury and Transnet, she has proven to be the new broom the group sorely needed. As the board chairman was then Gill Marcus, critics believed that Ramos's appointment was political. But her stewardship is better appreciated now. When she started as CEO, the bank was under serious strain with the Pinnacle Point debacle threatening to escalate into a major crisis. And the huge lending spree in the mortgage market by its former management, while benefiting customers, was vastly mispriced and could have saddled the group with a bad debt hangover far bigger than the one it suffered. Talk at the time was that even the Reserve Bank was unhappy with the state of the bank before Ramos took over.
Though many consumers are sceptical and even hostile towards the Barclays brand, it was a well-known and established local bank until it disinvested in 1987. Ramos emphasises that Barclays - now the world's seventh-largest bank - did not need to buy a stake in Absa, or use Johannesburg as its base for African expansion."The benefits of having a multinational and global shareholder are often overlooked," she says.
Barclays Plc has an option to increase its stake in Barclays Africa to just below 75% without seeking regulatory approval. She is aware of the negativity but describes it simply as "interesting". Barclays' decision to increase its stake in Absa was purely an investment decision, she says. "They did not have to do it." And though there were mutterings of discontent within the bank about the level of control exercised by parent Barclays, that is now seen as only natural - after all it is a 62% shareholder.
The tighter grip Barclays has exercised dates back to the first half of 2012 when Absa had to write down a much larger chunk of bad debt emanating from the mortgage book, after reassuring the market beforehand that everything was under control.Rumours that Barclays intended selling Absa/Barclays Africa were dispelled after the group provided greater clarity on its capital leverage, which has come under pressure due to new regulatory requirements in the UK. The Barclays group will have to up its leverage ratio of equity to assets from 2,5% to 3%, implying a £233bn excess of assets or a £7bn equity deficit.
It was speculated that this could be achieved through an asset sale. But Barclays has opted for a rights issue of £5,8bn, making it clear it has disregarded the asset selling option. This puts the group at an advantage, allowing it to focus on the existing businesses, some analysts say.
Ramos and team: under pressure to see growth in retail sector
Nevertheless Ramos and her team are under pressure to increase earnings growth in the retail sector. She is confident that can happen. "Over time we will win customers back as they experience the greater product choice and competitive pricing that we can offer." Her ideal is for Barclays Africa not to be viewed as just another retail bank. "That is important, but we must also be differentiated by service."
And the focus must not only be on retail. Corporate and business banking customers are as important. "We can do trading for all our clients, focusing on Africa from Johannesburg," she says.Getting there, however, could take some time. Though analysts at Deutsche expect Barclays Africa's impairment ratio to further improve this year and return on equity (RoE) to increase, Deutsche's share price target of R145 for Barclays Africa is relatively modest. Analysts at Nedbank Capital predict earnings growth of 15% for the full year with a price target of R141/share. However, Barclays Africa could surprise on the upside this year.
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