June 11 (Bloomberg) -- Barclays Plc Chief Executive Officer John Varley gave an “absolute” commitment to Absa Group Ltd., five years after he led the $4.48 billion acquisition of the South African bank.
“I’m giving you our strategic commitment to the country of South Africa and to our investment in South Africa and that commitment is absolute,” said Varley, 54, in an interview with Bloomberg News yesterday to mark the anniversary of the July 2005 purchase. “You don’t make an investment of this magnitude and take a short-term view.”
The sum paid for 54 percent of Absa was almost three times greater than the U.K. bank spent on its $1.54 billion takeover of Lehman Brothers Holdings Inc.’s North American unit in September 2008. While the bank in 2005 said the South African deal was “key to the creation of long-term shareholder value,” the return on equity at Absa has declined to 15.5 percent in 2009 from 25.6 percent in 2005, according to company filings.
“Everything’s not rosy,” said Absa’s Deputy Chief Executive Officer Louis von Zeuner in a separate interview in Johannesburg on June 7. “There are areas where we thought we would have made more progress,” including credit cards, wealth management and expansion into the rest of Africa, he said.
Varley said it was “a bit unfair” to judge any bank “by its performance in a market with greater abnormality than anything we have seen in the last 100 years.” The market environment had been “brutal” and Absa has shown a “brisk” rate of profit growth.
Many strategic aims had been achieved, including the performance of the credit card unit and that of Absa Capital, its investment banking unit, which was the leader in the South African capital markets, Varley said.
Absa could be disentangled from the British bank relatively easily and may ultimately be deemed non-essential, according to analyst Mike Trippitt of Oriel Securities Ltd. in London.
“They haven’t had the return they envisaged” in 2005, said Trippitt. “There is a question mark over whether it’s worth more to somebody else,” and could potentially be sold to HSBC Holdings Plc, Standard Chartered Plc or a Chinese bank, he said.
Absa shares gained 34 percent between the bank’s purchase and yesterday, compared with a 55 percent rise for the 13-member MSCI South Africa Financials index.
Former Absa CEO Steve Booysen was replaced by Maria Ramos last year. While that change could have been managed more smoothly, said Patrice Rassou, who helps manage $32 billion at Sanlam Investment Management, including Absa stock, he would give Ramos and her executive committee at least another year before deciding whether Barclays acquisition had been a success.
Other investors include state-owned Public Investment Corp., which manages pensions, with 8.57 percent, and black shareholder group Batho Bonke with 5.1 percent, according to Bloomberg data.
“The ownership structure is an impediment to doing restructures,” said Ian Gordon, an analyst at Exane BNP Paribas SA in London who has an “outperform” rating on Barclays. “It’s an obstacle and can be a constraint,” he said.
“Minority shareholders blatantly think that Barclays hasn’t delivered,” said Absa’s von Zeuner. Outside South Africa, Absa hasn’t seen “earth-shattering growth and the profit “contribution from Africa has shrunk since the deal with Barclays” with fewer branches and customers, he said.
In 2005, Barclays said the purchase would allow it to become “the pre-eminent bank of the African continent.”
Since then it has sold Bank Windhoek in Namibia and its Angolan operations. The bank now operates in only two countries outside South Africa, Mozambique and Tanzania, and in 2008 abandoned plans to buy Barclays’s 10 African operations because they were too expensive.
Standard Bank Group Ltd., South Africa’s largest bank, operates in 17 African countries, while U.K.-based Standard Chartered, which has had a presence on the continent for more than 146 years, operates in 14 African countries.
The financial crisis meant that Barclays and Absa concentrate “like hell” on meeting the needs of existing customers, Varley said.
As the financial crisis ebbed, the banks would aim to “create a seamless experience for customers who might naturally want to use both Barclays and Absa in Africa,” he said. “There is a more substantial strategic and therefore financial prize to go for in creating that collaboration.”
Absa, South Africa’s largest consumer bank, has expanded in its home market since Barclays took a stake. It now has 11.4 million customers compared with 7 million in 2005, while lending rose to 539.7 billion rand ($70 billion) from 327.6 billion rand. Branches have increased to 929 from 675 in the period.
Pretax profit at Absa declined to 9.84 billion rand last year, from 15.31 billion rand in 2008, on rising impairments and a decline on investments. It was 9.2 billion rand for the nine-months ending Dec. 31, 2005.
Barclays returned to South Africa after leaving in 1986, following pressure from anti-apartheid protesters.
“I could have lived without them having bought Absa, but we have to concentrate on the core driver of Barclays’s performance,” said Jane Coffey who helps manage $51 billion at Royal London Asset Management, including Barclays stock. “The more significant thing that Barclays did during the crisis was Lehman, which does look like it was a very good deal. Overall they have come out of this crisis as good as any bank.”
In February, Varley said the bank planned to make a third of profits from its Barclays Capital investment banking unit “over time.” The unit contributed about 40 percent of pretax profit last year, excluding a one-time gain on the sale of BGI. That would indicate it will keep Absa, said Exane’s Gordon.
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