Absa Group CEO Arrie Rautenbech is stepping down after only two-and-a-half years as the lender reports a 5% slide in first half headline earnings to R10.2 billion, despite profit growth in the South African operations and prospects of a better second half overall.
In a surprise announcement with the interim results yesterday, South Africa’s fourth largest lender said Rautenbach had agreed to take early retirement. This appeared to be favourably received by the market, as the share price had advanced by 4.99% to R165.27 by late yesterday afternoon, which is a sharp increase for one of South Africa’s big banks.
Rautenbach would be CEO until October 15, and would serve out his six-months contractual notice period as “garden leave”.
Tasneem Samodien, research analyst at Old mutual Wealth Private Clients, said the executive leadership change, though well received by the market, came as no surprise but this was unlikely to be enough to close the valuation gap between Absa and its peers, considering the number of executive changes the bank has had since 2019.
Radebe Sipamla, senior investment analyst at Mergence Investment Management, said it was unfortunate there were multiple governance violations while Rautenbach was at the helm of Absa that forced the board to request him to take early retirement rather than go through disciplinary proceedings to better understand why the governance breaches occurred. Absa told Business Report it did not release any information about corporate governance failures yesterday.
“I think part of the reason why Absa’s performance was worse than its peers in 2023 and thus far in 2024, has largely been due to a softer performance from its retail business, which Arrie led prior to his appointment as CEO,” said Sipamla.
“After he assumed the CEO position there effectively wasn’t a head of retail as the business was broken up into various units which conceptually allowed greater management focus… But that meant there was no functional head that held the various executives to account and ensured the different units were not operating in silos, but leveraged client data and synergies to drive credit, risk and operational decision-making.”
Sipamla said the second half was likely to see a better performance but worrying trends were the contraction in non-interest revenue, continued elevated albeit negligibly improving impairment trends, and high non-performing loan levels.
Samodien said in recent years, competitors like Standard Bank and Nedbank had successfully communicated and achieved their goals to increase return on equity, whereas Absa’s performance had declined, with rising operating expenses and impairments.
“Overall, the bank has many challenges that contribute to its lower valuation relative to its peers, and we remain cautious about its outlook,” said Samodien.
Commenting on the interim performance, Rautenbach said: “All our underlying businesses in the South African retail portfolio reported headline earnings growth, which is indicative of recovery in business performance.” The interim dividend declaration was flat at 685 cents a share.
Rautenbach became CEO in March, 2022, nearly a year after Daniel Mminele, Absa’s first black CEO stepped down in April, 2021 due to differences with the board over strategy.
Charles Russon, who heads up Absa’s corporate and investment banking (CIB) unit will become interim CEO from October 15, 2024. He will also become an executive director on Absa’s boards.
Last month, there were media reports Rautenbach allegedly “broke down” at a meeting as some executives told him they had lost confidence in him, but the bank said these reports were not true.
Rautenbach’s initial appointment was also criticised by the Public Investment Corporation (PIC) and the Association of Black Securities and Investment Professionals (ABSIP), because they had wanted a black person to head the bank.
Rautenbach said while economic conditions were challenging, the delinquency profile of the bank had stabilised as a result of the decisive action.
“We remain committed to our integrated strategy, a focus on seamless customer experience, and delivering sustainable, balanced growth and value creation,” he said at the release of the interim results yesterday.
In line with many other South African companies operating in other African countries, the Absa regional operations retail and business banking cluster reported a 12% fall in headline earnings as exchange rates negated gains.
In constant currency terms, the regional businesses lifted revenue 11%.
The Everyday Banking cluster (card, personal loans, and transactions in SA) grew its headline earnings contribution to the group by 9%, while relationship banking (SME, commercial and private wealth in SA) reported a 1% rise in headline earnings.
The product solutions cluster (comprising home loans, vehicle asset financing, insurance, advisory and more) in South Africa, reported a 7% increase in headline earnings.
The corporate and investment banking Pan African cluster’s headline earnings were largely unchanged from a high base a year earlier, as higher impairments impacted earnings in the period under view.
Yasmin Masithela will become interim CEO of Absa CIB from October 15, 2024 subject to regulatory approval. Masithela is currently managing executive for corporate transactional banking in the CIB unit.
“We anticipate a stronger performance in the second half of 2024, also as we see further improvement in our credit losses and stronger non-interest revenue generation,” said Absa Group financial director, Deon Raju.
Full-year revenue growth was expected to increase by mid-single digits. “This will support stronger pre-provision profit growth and, together with a lower credit loss ratio than in the first half, should also support better second-half earnings growth off a low base in the second half of 2023,” Raju said.
BUSINESS REPORT