Bad turn for Absa
A selloff in Absa Group shares may have further to run as the South African lender’s disappointing earnings guidance causes once-bullish analysts to turn cautious on the stock.
Absa shares have fallen about 10% year-to-date, with almost a third of those losses coming this week after Goldman Sachs Group and Avior Capital Markets downgraded the stock.
The decline is in sharp contrast to the broader South African banking shares index, which has rallied about 7%, recouping losses triggered by the start of the war in Iran.
The latest leg of the selloff began June 30 after South Africa’s third-largest lender by assets said first-half 2026 headline earnings and revenue would grow by only the low to mid-single digits year-on-year, falling short of expectations.
Avior’s Adrienne Damant cut her rating to underperform from outperform, becoming the only analyst tracked by Bloomberg to have a sell-equivalent on the stock.
She forecasts Absa’s headline earnings growth to be the lowest of all its peers, including Standard Bank Group Ltd., Nedbank Group Ltd., and FirstRand Ltd.
The biggest driver, according to Damant, is pressure on net interest income as interest rates decline in key African markets, particularly Kenya and Ghana.
Net interest income, Absa’s primary profit engine, contributed 64% of total income in the 12 months through December.
Kenya, which contributes 6% of Absa’s group interest income, cut rates by 425 basis points since August 2024, while Ghana lowered rates 1,500 basis points in this period, she noted.
“We believe the share is unlikely to re-rate over the next year,” Damant said.
Absa didn’t respond to a request for comment.
Meanwhile, Goldman Sachs’ Kazim Andac cut his rating to neutral from buy, saying Absa’s “operating metrics are tracking below expectations.”
He too blamed a larger-than-expected impact from rate cuts across African markets for the pressure on net interest margins.
Echoes of the past
The selloff rekindles memories of a turbulent period between 2019 and 2025, when Absa cycled through six top executives in as many years before appointing Kenny Fihla as chief executive officer.
The upheaval hurt profitability, making Absa one of the worst performers out of Africa’s largest lenders.
“The market interpreted this as a return to a period prior to the arrival of Kenny Fihla as CEO where the market had become accustomed to Absa leadership repetitively over-promising and under-delivering with impunity on their remuneration, despite shareholders not achieving satisfactory returns,” said Radebe Sipamla, co-portfolio manager at Mergence Investment Managers Ltd., who holds Absa shares.
He expects the latest update from Absa to weigh on share valuations as it “forced many on the buy-side and sell-side to acutely relook at their earnings estimates for Absa, and in most cases revise them lower.”
Some analysts also question whether Fihla can fully implement his pan-African expansion strategy, which includes targeting commodity-rich nations, including Tanzania, Uganda and Zambia. It’s also seeking to raise its Kenya unit stake to 85% via a $238.7 million tender.
Absa’s core regulatory capital is only modestly above its board-approved target of 11%-12.5%, implying limited headroom for mergers and acquisitions, according to Bloomberg Intelligence analysts Philip Richards and Uzair Kundi.
Slowing revenue may jeopardise Absa’s goal of achieving 16% return on equity this year, and threaten its target of lifting ROE to as much as 19% by 2028, they add.
“We see limited M&A optionality,” they said, adding Absa needs net interest income growth, higher non-interest revenue, contained costs and balance sheet optimisation to fire together, which “seems ambitious”.
Even so, most analysts appear to be in wait-and-see mode.
Of the 11 analysts tracked by Bloomberg, six still rate the stock a buy. That includes JPMorgan Chase & Co. analyst Baron Nkomo, who highlights the new management team as a positive following years of instability.
“Absa’s resilient operational and financial performance in recent times is under-appreciated,” Nkomo wrote in a note after the June 30 trading update.
“With a more positive outlook in its key markets, including both South Africa and rest of Africa regions, we think improving fundamentals will provide support to the shares.”
Valuation could be a source of support, with shares carrying a near 50% discount to the FTSE/JSE Africa banks index on a forward price-to-book value basis.
They also trade at 6.5 times forward earnings, versus a 9.8 times average for peers.
The next big test for the shares comes on 18 August, when Absa reports first-half earnings that will be scrutinised for clues on the earnings outlook.
“Absa needs to prove it can grow its revenue faster than its operating costs in the next two years,” Avior’s Damant said.
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