Monday, August 3, 2009

Absa to take R1.1bn loss on stock futures

August 3, 2009 - Business Report - By INGI SALGADO

Absa, the local lender most exposed to single stock futures, would write down nearly R1.1-billion on the value of shares in four JSE-listed firms it was forced to buy last year, the bank revealed on Friday.

The banking group would carry the losses incurred on these deals into its income statement today when it reports results for the six months to June.

Single stock futures give investors the right to buy or sell shares at a fixed price on a given date in the future. If the shares fall below a certain level, the broker will ask investors to provide additional collateral. As investors were unable to comply, the bank had no alternative but to buy the shares.

Absa said in a trading update that the impairment would result in earnings falling even further than previously stated - by 38.9 percent in the case of Absa Group and by 49.9 percent for Absa Bank.

In Absa's case, the impairment value represented the difference between the amounts the clients owed (and that Absa was forced to pay) and the value at which the stocks now trade.

This pushed Absa's earnings performance this year to the bottom of the pile, as analysts expect most local banks to report falls in earnings in the region of 30 percent.

Last week, Standard Bank said interim earnings a share would fall by between 30 percent to 35 percent.

Kokkie Kooyman, the head of Sanlam Investment Management Global, said yesterday that Absa's impairment charge as a result of the single stock futures debacle had come in higher than expected. It was possible that new chief executive Maria Ramos wanted to ensure that "any loss is all cleared out", he said.

"What happened was a disappointment - that controls were so lax as to allow such large positions to build up in very illiquid shares," he said.

Nevertheless, the impairment was expected to be a once-off charge, provided controls were tightened up.

Absa's large exposure to single stock futures resulted in the group being forced to pay R1.44bn at the end of last year to acquire 28 percent of JSE-listed Pinnacle Point, 16 percent of Blue Financial Services, 10 percent of Converge Net and 17 percent of Sekunjalo Investments.

Absa subsequently initiated a detailed review and valuation of the investments, which put the pretax impairment value at R1.1bn, and reduced the carrying value of the investments from R1.54bn to R445 million.

Kooyman said the actual loss or profit on the transactions would be known only when Absa sold its stakes in the four companies.

Absa did not respond to a request for comment.

Absa shares on the JSE fell by 0.4 percent to close at R117.50 on Friday.