It's a change of guard at SA's biggest retail bank as CEO Steve Booysen exits two years ahead of schedule. With bad debts growing, he seems to be getting out at the right time. How strong is the bank he leaves behind? And what has Maria Ramos walked into?
For the past four years, Absa CEO Steve Booysen has heralded his annual results presentation with a song meant to describe the state of the banking environment.
Perhaps Booysen was aiming for something subtle this year by playing pop-dance hit "Poker Face" for his swan-song presentation. Why poker face? Was it the financial results for 2008 (8% gain in pretax profit, 5,3% in headline earnings), which seemed implausible in an environment where the UK's third-largest bank, Royal Bank of Scotland, is set to announce a loss of £28bn for 2008?
Speaking to the FM
in his glass-backed office at the top of Absa Towers in Johannesburg, Booysen admits he was "blessed" by being CEO during a banking boom. "There's never any right time to go," he says. "But I've met all the goals I set myself when I started. Absa is stronger than ever."
When he was appointed CEO to replace the gold-toothed street fighter Nallie Bosman in August 2004, many questioned the choice - not least because deputy CEO Rupert Pardoe, with a blue-blood Anglo American career behind him, had seemed the obvious heir-apparent. The change of mind was ascribed to former Absa chairman Danie Cronje, an important mentor to Booysen.
Young enough to be Bosman's son, the fresh-faced Booysen took over when he was 41, and some were sceptical he was up to the job. But he had the academic qualifications. From humble beginnings in Pretoria, he was educated at Hoërskool Wonderboom and completed his commerce degree by correspondence through Unisa. Having gained a doctorate, he lectured in accounting at Unisa until 1988, when he joined Trust Bank. That became part of Absa in the early 1990s, when Cronje masterminded a merger of UBS, Allied, Volkskas and Finansbank.
Now that Booysen has proved himself, investors seem anxious he should stay.
Cadiz African Harvest's Rob Nagel asks why the rush. "Why couldn't Ramos have served as deputy CEO to Booysen for a year? It's a key position for the SA economy, and there doesn't even seem to be much of a hand-over period." But it's hard to imagine Ramos, having been CEO at Transnet and DG of national treasury, settling for deputy of anything.
What is not widely known is that Ramos wasn't first choice. When asked if the appointment of an outsider meant that Absa didn't exactly have top-notch succession planning, chair Gill Marcus said there were people who could have replaced Booysen from within. "One person we thought could do it was not willing to do it. He was happy to stay in his position but did not want to do the CEO job," she says.
This is believed to be Louis von Zeuner (48), head of Absa's retail bank. Von Zeuner is coy about this, but tells the FM
: "I'm a retail and commercial banker, not an investment banker. That's where I see my future."
The numbers back Booysen's claim that he has met his targets. Absa has outperformed its rivals since he arrived in August 2004. On the measure of total shareholder return - which includes dividends as well as gains in the share price - Absa has made 115,6% for shareholders, or 25,6%/ year.
By comparison, Standard Bank has made 88,7% (19,6%/year), Nedbank's total return figure is 78,7% (17,4%) and FirstRand has made 66,9% (14,8%/year).
Absa's earnings per share gained 18,6%/year on average, while assets have grown 21%/ year to just under R800bn.
Crucially, Absa is no longer a one-trick pony riding on its retail franchise. Though the retail bank made more than 50% of the bank's profits in 2004, it contributed only 35% to 2008's results. Absa Capital, under former US marine John Vitalo, now contributes R1 of every R5 in profit made by the group.
Booysen has been tough on costs, too. The year before he took over in 2004, it cost Absa 57c to make R1; the 2008 results show that it is now costing Absa a record low 49c to make R1.
It has taken some harsh measures to do this. Since May 2007, Absa has slashed 5 000 jobs - 10% of its total workforce, mostly through attrition.
Booysen admits he has had a great run, steering the bank through a lending boom. But he bristles when the FM
asks if he's leaving another clean-up job for Ramos, considering bad debts are likely to increase this year, and nasty surprises like forced single-stock futures "purchases" have emerged from the woodwork.
"Define clean-up job," he says. "It's not a clean-up job. We have solid foundations. The results for this coming year will reflect the hard work that has been put in place already."
But Absa's results could be a lot worse at Ramos's first presentation. Though the 2008 financials were widely hailed, some analysts have raised concerns about how "sustainable" these numbers are, and how much gloss has been applied.
Nagel says were it not for a "one-time boost" from a few factors, headline earnings would have been flat, rather than up 4,6%. "It looks like Absa took everything out of the hat to present a good set of results, including bringing in income they could have left for later."
Patrice Rassou, portfolio manager at Sanlam Investment Management, agrees. "You need to look closely at this to get a sense of how sustainable their profits actually are," he says. "For example, if you take the R580m that came into the income statement this year, and compare it with the R306m negative charge last year, this is a R1bn swing."
That R580m boost came as Absa "released general provisions" - which it had set aside in previous years - into its profits. That money had been set aside partly to comply with possible unexpected consequences of the National Credit Act. Though this reversal may be simply a technical device to "shift" provisions from its "general provisions" to "specific provisions", to the average reader of Absa's accounts, it will look a lot like a one-off gain.
There were other one-off boosts. For example, Absa took out hedges against the interest rate that ultimately made it R304m in profit this year; yet last year, this hedge cost it R393m.
Also, by changing the accounting treatment of its unlisted commercial property fund investments, the valuation of this portfolio increased by R172m. This gain went into its profits.
If you extract the R304m gain due to the hedge and the R580m release of provisions, Absa's R15,2bn pretax profit would drop to R14,3bn. Applying the same reversals to its 2007 numbers, that R14,1bn pretax profit climbs to R14,7bn.
Under this scenario, there would have been a 3,2% fall in pretax profit, rather than the 8% jump reported.
Of course, this doesn't imply Absa's profits weren't justified - it just casts another complexion on whether this picture can be repeated next year. Rassou says this illustrates just how malleable things like provisions can be. "With a balance sheet carrying R800bn worth of assets, even small movements can influence an income statement. Just the release of provisions, for example, would have resulted in a sharp swing."
One of Booysen's final acts was to address a key criticism levelled against Absa in the past: that its provisions for bad debt were too low. Overall, Absa's bad debt ratio (impairments as a percentage of its loans and advances) now sits at 1,19%, up from 0,93% in June.
But in recent times the other banks were taking a bigger hit on bad debts. By June last year, Standard Bank's bad debt ratio was 1,27%, Nedbank's was 0,96% and FirstRand's was 1,19%. When those banks report results to the end of December in the next few weeks, those ratios are likely to have climbed.
Absa has widened its definition of nonperforming loans, to make it comparable with other banks. In the past, Absa would have considered a loan "nonperforming" only if a customer had defaulted for six months; now this has shortened to three months.
The result is a sharp increase in nonperforming loans (NPLs) for 2008. In 2007, NPLs amounted to 1,7% of all loans; now this has shot up to 3,5% of its book. This means customers are behind by more than R18bn on payments. The impairment it took in its profits for bad debts (where Absa believes it "will not be able to collect the amount due") shot up 140% in 2008, to R5,8bn. So why did Absa move the goalposts?
Finance director Jacques Schindehütte says it was a response to public criticism: "People started looked at Absa's impairment levels, and questioned whether the different definition of a non performing loan might be the reason Absa under provided. We've changed that to take that excuse out of the equation."
Schindehütte says Absa's doubtful debts are now "exactly comparable" with the other banks. Whether Absa still looks light on provisions can be properly assessed only when the other banks report results in the next few weeks.
Schindehütte says critics will probably still moan. "There may still be an anomaly between Absa and the other banks, but now it'll be because we're more prudent when it comes to credit cards, and that a large percentage of our home loans have been on our book for more than two years," he says.
But analysts widely expect bad debts to climb during Ramos's first year.
And the real threat lurks in Absa's commercial business, which lends to companies ranging from large, JSE-listed giants to small businesses. Here, the bad debt ratio is a low 0,28%, but it's likely to shoot past the 1% mark.
Booysen says the warning signs for corporate debts are already evident in the cash-flow charts of Absa's clients. "Impairments in that segment of the business will come through this year," he says. "We haven't had a big collapse like LeisureNet or Macmed for many years, so the probability is there."
But if Ramos is likely to battle a wad of bad debts in the next year, isn't this the wrong time for Booysen to leave?
One analyst, who didn't want to be named, says if Booysen's departure backfires, Absa's board should quit. "There will be more bad debts, especially on the corporate side, to come this year. It isn't the smartest thing to change the CEO midway through a credit cycle and put [Ramos] in the middle of that," he says.
But Booysen says: "I know what the performance should be, and what I would like to achieve if I were still CEO. There's no doubt in my mind that those targets can be achieved."
Though Booysen's biggest coup was nailing down the R33bn deal that enabled Barclays to buy control of Absa, he remains disappointed that "phase 2" didn't happen. That would have seen Absa buy the UK bank's operations in nine other African countries, but Barclays wanted too much money, and Absa wasn't about to do a bad deal to appease its owner.
Booysen isn't ruling out the revival of this plan: "It isn't on the table right now, though. I think Absa should just stick to its core business for a while."
When it comes to customer service, Booysen says: "The leadership position in customer service in financial services is still up for grabs. The first bank to really own this space will have a huge competitive advantage." On the low-cost banking side, Booysen says no bank has got it right yet.
For the first time, Booysen lets on that the Barclays deal was surprisingly tricky, sparking much tension between the two sets of bankers, English and South African. "It was tough. If you're king of your own castle and suddenly you have a controlling shareholder, it's a very different proposition. We kept it out of the press, but it took us about 18 months to sort out how to work together."
Simply getting reporting lines right becomes a headache. Risk officer Dave Hodnett, for example, has twin reporting lines, to Barclays and Absa.
Says Booysen: "Often you get Barclays people who want to implement a system or a process that may not be in the best interests of SA clients," he says. "This leads to long negotiations about which elements to keep and which to jettison. That's where a lot of tension comes in."
It's been a long, hard grind. For five years Booysen's routine has been to leave his house in Irene at 5 am, and travel the 35 minutes to Absa Towers in Johannesburg. He rarely gets home before 8 pm, and works Sunday afternoons.
In his four years, Booysen removed much of the stultifying hierarchy.
He relates an anecdote about the R20 000 long-service award he was given last year after working 20 years at the bank. "I asked, if a guy is at a lower level, does he get this? They said no, it's a graded thing', so I said that's rubbish. If you're here 20 years, you're here 20 years, irrespective of who you are."
There are other examples: parking slots aren't allotted based on rank and people can park where they like; paternity leave has changed; and special dining rooms for general managers are gone.
Von Zeuner says Booysen focused on staff more than his predecessors. "In January, for example, Steve gave each junior staff member a R500 handout, as recognition that people struggled over the holiday period."
And Booysen has also been a hit with shareholders and analysts.
"It's a much more balanced bank than three years ago," says Tracy Brodziak, banks analyst at Old Mutual Investment Management, "and Steve has delivered what he set out to do. What struck me in their results was their retail business was down 25%, yet they're still making a 10% increase in profit."
Absa is in the top two picks of most of the analysts, despite the expectation of higher debts next year.
It'll be a tough act for Ramos to follow, not only because bad debts are likely to increase. If banks are specific beasts unlike any other company, shouldn't new CEOs have banking experience? Though Ramos was widely praised at Transnet and at treasury, her experience at Barclays in the 1980s wasn't in an executive position.
Marcus says sometimes it helps to come from the outside. "Is it an advantage to have banking skills? Absolutely. Is it something that disqualifies you? No."
She says Ramos has a strong background when it comes to risk management, but will have to "become familiar" with the issues affecting banks.
Another concern was that SA's largest retail bank has traded in the veldskoene that kept its top brass close to the National Party for a creeping closeness to the African National Congress (ANC).
But Marcus says her and Ramos's party allegiance doesn't affect their work. "I was deputy governor at the Reserve Bank for five years. Was there ever a criticism I acted in the interests of one specific party rather than the interests of the Bank? It would be hard to find because I dealt with my responsibilities in the best interests of the organisation and country."
Booysen gushes about Ramos's credentials. "If you had to pick someone to replace you, and you got a list of top achievers in business, I guarantee you she'd be on that list."