Investors are showing growing optimism towards Absa, with the bank’s share price up by 15.24% in the past three months under the leadership of interim CEO Charles Russon.
Appointed in October 2024, Russon inherited a bank at a critical juncture, where it needs to focus on restoring confidence and reshaping its strategy in a competitive market.
While investors have been encouraged by the recent performance, including a 25% increase in valuation over the past six months, it remains to be seen whether the gains can be sustained as the bank scrambles to address shortcomings which led to a loss in market share and suboptimal performance.
Absa’s interim results for the first half of 2024 were a mixed bag. While peers Nedbank and Standard Bank reported increases in headline earnings, Absa’s diluted headline earnings per share (HEPS) fell 5% to 1,227.7c compared with 1,289.1c in 2023.
Everyday banking grew 9% and the product solutions cluster saw a 7% increase. However, corporate and investment banking remained flat.
HSBC has attributed Absa’s underperformance to prioritising loan growth over profit, leading to higher credit losses, recommending reduced risk in retail lending.
Last year Absa said it would merge its SA retail banking units: everyday banking, product solutions cluster, and private wealth banking into a single unit, SA Retail, reversing the 2022 restructuring by former CEO Arrie Rautenbach with the aim to simplify operations and enhance competitiveness against rivals.
Despite the challenges, Absa’s future seems optimistic. In a recent report, the Bank of America Securities labelled Absa as undervalued, assigning it a “buy” rating with a price target of R228, suggesting a 17% upside from its current share price.
While it expects similar corporate and investment banking growth rates across major SA banks, Bank of America (BofA) expects Absa’s retail lending growth to lag by about three percentage points compared with its peers in 2025.
In the report, BofA also highlights that SA’s easing interest rates, improving economic growth and increased infrastructure investments will benefit Absa and other banks’ corporate and investment banking units.
For the other banks, BofA is optimistic about FirstRand and Capitec, giving them “buy” recommendations and price objectives of R94 and R3,90, respectively, citing strong revenue growth potential from retail lending, affluent customer bases and momentum in their respective businesses.
Nedbank received a “neutral” rating, with a modest 10% potential price increase, while Standard Bank is expected to “underperform” with only a 0.7% projected growth in its share price. Despite FirstRand’s potential regulatory risks in the UK, it remains a top pick due to its growth prospects in SA, while BofA views easing inflation and interest rates as key drivers of earnings and share price growth across the sector.
Absa faces the same challenges as its Big 4 peers, however — strong competition from the greater banking industry.
— Shaakir Salie, research analyst at Aeon Investment Management
As Absa’s new leadership embarks on its strategic overhaul, the coming months will be significant in determining whether the bank can capitalise on its recent share price surge and position itself for long-term success.
According to Shaakir Salie, research analyst at Aeon Investment Management, Absa’s attractive valuation, high dividend yield and its strong December trading update presented a compelling case for a short-term rebound in its stock.
He said Russon’s appointment was likely to bolster investor confidence given his solid reputation and experience leading Absa’s Corporate & Investment Banking unit since 2018.
Salie said improved macroeconomic conditions and political stability could support retail loan growth in 2025 but cautioned that intensifying competition in the banking sector poses a risk to long-term returns on equity.
“With a market cap of nearly R170bn, Absa has certainly earned its position among ‘The Big 4’. Absa faces the same challenges as its Big 4 peers, however — strong competition from the greater banking industry,” he said.
“Russon is well-known and respected within the market. Stability at the leadership level may help Absa maintain its momentum and execute on its strategic objectives. Only time will reveal whether Russon can successfully guide the bank through its next phase of growth and navigate the challenges ahead.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.