Dec 6 - A combination of Barclays' African operations with Absa could
improve efficiency and allow the UK group to expand in the faster-growing
region, Fitch Ratings says. The reorganisation of these operations confirms
Barclays' commitment to its Africa strategy and to its majority-owned South
African subsidiary, Absa. Africa delivered 21% of Barclays' 2011 profit
before tax, making it the group's second largest non-UK contributor after the
Moving the operations in eight sub-Saharan countries into Absa should enable the
Africa operations to be more cohesive and streamlined, benefiting cost and risk
management. The regional offices of Absa and Barclays' African operations have
already been consolidated. This leaves the group better placed to take advantage
of the growth opportunities as the region's economies develop. In the long term
the profit contribution from Africa could rise as the group expands its
bancassurance strategy and builds on its corporate and retail banking platforms.
In the short term there are earnings challenges. Barclays' African business
suffered in 9M12 from high loan impairment charges on South African residential
mortgages. The challenging economic environment leaves South African banks
exposed to further asset-quality deterioration and weaker revenue streams.
Until the earnings from the rest of Africa make a greater contribution to Absa's
earnings, they are unlikely to provide much diversification benefit to Absa or
be supportive of a pan-African strategy. According to Barclays, the rest of
Africa would have accounted for 15% of the group's H112 pro forma earnings,
including the losses in Tanzania and Mozambique, assuming the transaction was
completed on 1 January 2012.
Barclays will increase its stake in Absa to 62.3% after the transaction from
55.5% and rename Absa "Barclays Africa Group". It will keep the Absa brand for
its retail banking and card businesses in South Africa. This confirms our view
that there is a very high probability of support for Absa from Barclays, and
this underpins Absa's 'A-' rating.
Although Barclays has made an agreement to combine the majority of its African
operations with Absa, the transaction is subject to approval of Absa minority
shareholders and regulators.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
South African Banks: Peer Review