Stock Focus: Barclays Africa Group (BGA)

Barclays Africa Group Limited, formerly Absa Group Limited, is a South African-based financial services organization offering a range of retail, commercial, corporate and investment banking, financial services and wealth management products and services. The company also provides products and services to selected markets in the United Kingdom, Mozambique, Tanzania, Namibia, Nigeria and Botswana.

The company operates through: Retail and Business Banking (RBB), Corporate and Investment Bank (CIB) amd  Wealth Investment Management and Insurance (WIMI).

It offers a suite of retail banking products and services to both individual and commercial asset finance customers. It provides insurance, fiduciary and non-banking-related investment products and services to retail, commercial and corporate clients.

History

The group was formed through the merging of Absa Group Limited and Barclays’ African operations on 31 July 2013. Reflecting the enlarged group’s pan-African focus, its name changed from Absa Group Limited to Barclays Africa Group Limited on 2 August 2013.

Prospects: Where is the growth potential?

1. Expansion into Africa is underway

As with the other South African ‘big’ banks, the race for Africa is on.

If you look at the banks targets, you can clearly see it has its sights set on northern expansion:


Non-financial commitments

  • Roll-out Africa Corporate and Investment Banking.

Financial commitments

  • Top three by revenue in our five largest markets (South Africa, Kenya, Ghana, Botswana and Zambia).
  • RoE 18% to 20%.
  • Cost-to-income ratio in the low 50s.
  • Revenue share of 20% to 25% from outside of South Africa.

Source: Maria Ramos, CEO of Barclays Africa

Maria Ramos - Chief Executive Officer
Maria Ramos – Chief Executive Officer

The tie up between Absa and Barclays Africa has given the company a firm foot hold on the continent. It’s now up to the leadership to make sure the group gains maximum benefit from the integration.

If you look at the legal structure below you can see the synergies that can be exploited in turning the company into a pan-African bank.

Legal_Structure20150427

Territory is expanding:

BGAGeog

2. The turn around has begun…

The group has been steadily losing market share in South Africa but for the first time in a while it’s managed to increase its customer numbers. While costs have been controlled extremely well, the renewed focus on expansion is a breath of fresh air. Let’s hope it pays off. Because while Maria Ramos’ words are comforting, the key indicators below are not.


We are on track in executing our strategy… We have increased profitability and our Return On Equity (ROE) is the highest since 2008 – Maria Ramos, CEO of Barclays Africa


20150426BGAKeyIndicators

Risks: Where is the downside?

Risk #1: Tougher macro/unemployment outlook

The banking sector is inevitably tied to the environment in which it operates. If unemployment rises, the credit quality decreases and provisioning and impairments would likely increase.

If GDP growth remains slow and economic activity is subdued then less businesses apply for loans, less houses change hands, less mortgages are originated, less purchases are made on credit cards, etc. A vibrant economy leads to a vibrant banking sector.

Risk #2: SA sovereign downgrade by major ratings agencies

If South Africa is downgraded further by the major ratings agencies (Moody’s, S&P or Fitch) then there would likely be margin compression for the bank. After the collapse of African Bank, credit agencies are keeping a close eye on South Africa. This would affect funding costs and net interest Income would decrease.

Risk #3: Higher loan losses in credit cards

Rumours are doing the rounds about the Edcon book. If impairments rise dramatically then this is going to impact the company severely. Could another local (and UK) investment bank be looking at buying it out though?

Risk #4: Tough regulations

Its not just about Basel III in the case of Barclays Africa. If tighter regulation enters Africa (where regulations have up until now been far more relaxed) then there could be downward revisions of expectation of ROE as margins are squeezed.

Risk #5: A collapse of the South African property market

About 36% of group loans sit in Barclays Africa’s mortgage book. If the SA property market was to take a sharp downturn, the company would be severely impacted.

At the moment, with an emerging middle class and the huge influx of aspirant home owners, this risk seems low, but with over exuberant property developers building quickly,  at some point the supply could overshoot.

In-depth focus: RBB, CIB and WIMI

For a bit more details lets look at the individual business units:

20150426ProdSplit

Retail and Buisness Banking (RBB)

The bank seems to have plugged up some of the holes from which customers where leaking. From Sep 2014 they’ve managed to grow customer numbers, most importantly in the middle market and retail affluent segments.

In order to prosper (sorry) Barclays Africa has increased its marketing spend, simplified its product range and a enhanced its digital experience (like the home owners app).

There has been an massive focus on revitalising the RBB franchise with customer service at it’s heart. Whether we’ll see continued gains as this segment of the business turns around, might have more to do with other banks dropping the ball than Barclays  discovering a silver bullet, but in the mean time they are making progress.

Corporate and Investment Banking (CIB)

CIB has seen strong growth in Africa. It’s focused on ‘critical’ customer systems (BARX, Front Arena, etc.) They’ve also rolled out intergrated payment platform Barclays.Net in Kenya and Uganda.

The real opportunity is for Barclays Africa to take the experience and best or bread international systems from its major shareholder and roll them out across Africa.

Easy to say, harder to do…

Wealth, Investment Management and Insurance (WIMI)

The Wealth and Investment Management business now has R259 bn in assets under management. That’s not small by any stretch of the imagination.

The bank has seen continued growth in Africa. Its Kenyan business is ready to launch and the bank is just waiting for final licencing.  Again, the opportunities abound with African client base expansion, but  with regulation, infrastructure and the political landscape remaining challenging, high margins are most certainly earned.

Competitor analysis

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Source: Google Finance

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Source: J.P.Morgan Cazenove + Bloomberg + Iress

20150426BankSize

Signal: Buy/Sell/Hold

What are the sell-side analysts saying?

201504028BGAANR

 

Source: Bloomberg

What is the chart saying?

20150428BGA

Source: Saxo Capital Markets

  • Stochastic: Late phase bullish
  • RSI: Trending higher but not yet overbought
  • MACD: Consolidating

Barclays Africa is completing a consolidation phase. Volatility is subsiding. Traders will be looking for a sustained break above R199.90. Downside looks to be limited with strong horizontal support at R183.20, as well as 200DMA and a rising incline support.

What is the quantitative model saying?

If you run our proprietary 18 factor quantitative ranking model, BGA comes out 106 out of almost 400 companies ranked. This is a vast improvement (thanks to a firmer set of full year results) from  position 201 it held previously.

Sources: BGA Intergrated report, SENS, Google Finance, BGA Website