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WRAPUP 2-Absa, FirstRand eye earnings slide as defaults rise

Published 06/23/2009, 08:34 AM
Updated 06/23/2009, 08:48 AM
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* Absa sees H1 headline EPS 15-25 percent lower

* FirstRand expects FY headline EPS down 28-33 percent

* Banks hit by bad debts, drop in investment portfolio value

* Absa shares fall 2 percent; FirstRand slides 4 percent (Adds FirstRand CEO-designate comments)

By Serena Chaudhry

JOHANNESBURG, June 23 (Reuters) - South Africa's Absa Group Ltd and FirstRand Ltd forecast lower earnings on Tuesday as bad debts mount in the bank sector and a tough economic environment shrinks the value of investment portfolios.

South Africa is battling its first recession in 17 years and local banks have been hard hit by impairments at their consumer and retail units, as customers default on loans after a series of interest rate hikes up to June 2008.

FirstRand, the country's No.2 banking group, said it expected headline earnings per share for the year to end-June to fall by between 28 and 33 percent as a rise in non-performing loans hit its FNB banking unit and vehicle financing business Wesbank.

Its shares fell 3.36 percent to 12.95 rand by 1116 GMT, lagging a 2 percent weaker JSE banking index.

"FirstRand is very disappointing. We had anticipated that it would be worse than the guidance they previously gave, but ... whether they are just literally kitchen-sinking everything this year remains to be seen," a Johannesburg-based analyst said.

"A dreadful year, there's no doubt about it."

Analysts said Absa's update was also worse than expected, reflecting the difficult banking environment. Its shares fell 1.03 percent to 99.86 rand.

Absa, which owns the country's largest retail bank, said it sees headline EPS for the six months to end June down by between 15 and 25 percent.

NOT SPECIFIC

"It's worse than we expected, but I think it's more indicative of what's happening in the banking environment overall than an Absa-specific issue," one banking analyst said.

Elsewhere among banks, stricken German real estate bank Hypo Real Estate said late on Monday that profits will take at least a "high three-digit million" hit in the second quarter as real estate loans continue to turn sour.

Yet such problems are not universal; Spain's Santander said last week it was emerging from the global economic crisis in a stronger position and could boost earnings without making acquisitions.

FirstRand said its investment banking business RMB had been hard hit, with losses of 200 million rand ($24.57 million) at its offshore portfolio. Group earnings would also be affected by single-stock future (SSF) losses related to the collapse of brokerage Dealstream, for which RMB was a clearing agent.

Absa was also forced to acquire stakes in four JSE-listed companies in January after client defaults on futures contracts, which it said would results in minor losses in full-year profit.

AFRICA KEY MARKET

FirstRand CEO-designate Sizwe Nxasana said the group's focus would be to expand operations in Africa, where the fallout from the financial crisis has been less severe, and said it planned to set up commercial banks in Angola and Tanzania.

He said the firm would also focus on deals between Africa and India, but said it did not have short-term plans to set up a wide-scale commercial bank in India.

"We've already concluded 10 deals since the 1st of April and there's about 30 deals in the pipeline," Nxasana told Reuters.

"Those are focusing a lot on the corporates, the first tier Indian corporates that are going into Africa, or the African corporates, mainly South African, that are going into India."

South African banks are relatively well capitalised and FirstRand's rival, Standard Bank, has been expanding aggressively in emerging markets. It said earlier this month it was working on about 60 deals on the continent with China's ICBC . (Additional reporting by Alison Raymond, Tiisetso Motsoeneng and Agnieszka Flak; Editing by David Holmes and Rupert Winchester)

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