Executive sent on leave after profit shock knocks R12,6bn off market value and fall in the bank's market value as the share price plunged 11.2%.
ROB ROSE | BUSINESS LIVE
ABSA has placed an executive on special leave and launched a probe into the mysterious circumstances that led to the banking group making a surprise U-turn on the amount of cash it holds to cover bad debts.
Three weeks ago, Absa shocked the market by revealing that it expected profit for its half-year to June would fall by up to 10% because it had to set aside more money to cover bad debts on its mortgage loan book.
Analysts expected Absa's half-year profit to rise about 15%, rather than fall, but this news sparked a R12.6-billion fall in the bank's market value as the share price plunged 11.2%.
In particular, analysts questioned whether CEO Maria Ramos's management team had proper control of Absa's bad debts, as the need for higher provisions was a dramatic turnaround.
Five months ago, Absa said it would actually lower the amount it put in reserve to cover the R23-billion in non-performing home loans from 19% to 17% - at a time when the other banks were increasing their provisions. Absa then included the difference - about R400-million - in its income for the year to December 2011, which boosted its profit and justified paying a record dividend of R6.84 a share. The main beneficiary was Barclays, Absa's 55% shareholder.
Coronation Asset Management banks analyst Godwill Chahwahwa said that the reversal "does raise questions about the integrity of their systems and processes relating to doubtful debt provisioning ... Hopefully, the full picture will become clear in next week's interim results".
Absa's financial director, David Hodnett, confirmed that an internal probe had been launched, and that an executive had been suspended as a precautionary move.
"We are doing an internal investigation right now, and we have suspended one of our employees in that area. This does not mean we have any suggestion that the individual did anything wrong, but simply because it is easier to investigate without (him) present," he said.
Hodnett said the investigation was not focused on individuals, but rather to see whether Absa's collection processes could be improved.
Kokkie Kooyman, analyst and fund manager at Sanlam Investment Management, said that the internal probe should help to reassure investors.
"The other banks were raising provisions, not lowering them, so I don't know what was going through Absa's mind at the time. And they shot themselves in the foot by not clarifying immediately exactly how this had happened," he said,
Kooyman said it was clear that Barclays was under pressure in the UK when Absa lowered its provisions in February, as the UK bank's liquidity reserves were low.
"Some people are saying that it seems Barclays put some pressure on Absa to do this. It may not be that way, but unfortunately, it almost looks that way," he said.
However, Absa chairman Garth Griffin vehemently rejected suggestions that the bad-debt provisions were manipulated to either allow Absa to post higher profits or ensure Barclays was paid a higher dividend.
While responsibility for the reversal of provisions has yet to be determined, some analysts have asked whether the sudden departure of the head of Absa's retail division, Gavin Opperman, last October, was linked to the reversal.
Opperman, who now heads Standard Chartered's consumer business for Greater China from Shanghai, said: "As I am no longer part of Absa and their leadership I am unable to comment on the numbers.
"The numbers reported during my tenure were correct, and audited as such."
Coronation's Chahwahwa said he believed this was an Absa-specific issue and not an indication of problems with any other bank.
"Absa is actually seeing an improvement in bad debts in its other portfolios, so this seems to be an issue specific to its home loans that were written prior to 2008," he said.
However, Chahwahwa said Absa's problems had not been helped by the bank having lost a lot of senior managers recently.
"It is never a great thing for any business to lose as many senior managers in a very short space of time ... but the franchise is still strong, and can recover from this if they act decisively," he said.
Since Ramos took over as CEO in 2009, at least seven top-level executives have left Absa, including Opperman and former financial director Jacques Schindehutte.
At the end of this year, the highly rated deputy CEO, Louis von Zeuner, will step down.