Barclays Increases Stake in Absa

In an effort to boost operations across Africa, Barclays PLC ( BCS - Snapshot Report ) is all set to augment its stake in Absa Group – the bank’s South African subsidiary. The British banking giant will also unite the majority of its African divisions with those of the Absa. The agreement is anticipated to be completed in the first half of 2013, subject to the approval of Absa’s minority stockholders as well as regulatory authorities.

As per the terms of the deal, Barclays will receive shares worth $2.1 billion in Absa. This will raise the company’s stake in the latter to 62.3% from the present 55.5%.

Subsequent to the completion of the deal, Absa will be renamed Barclays Africa Group and will include Barclays’ businesses in 10 African nations. However, Barclays will retain the retail banking and card business segments in South Africa under the Absa brand name.

Back in 2005, in an effort to venture into developing markets, Barclays acquired its initial stake in Absa for roughly a sum of $4.4 billion. In 2011, Africa accounted for 21% of Barclays' profit before tax.

The combining of operations in the 10 African countries is anticipated to make Barclays’ African operations more organized and efficient. Further, it will likely be favorable to the cost and risk management of Barclays’ African unit. This will facilitate Barclays to gain from the growth prospects of the region reflecting the strategic expansion of the corporate and retail banking segments in the long-term.

Currently, African operations are facing a number of headwinds mainly owing to tough macroeconomic environment, which resulted in South African banks being exposed to the worsening asset-quality along with weak revenue streams. Further, South African residential mortgages’ high loan impairment charges are a cause of concern.

Our Viewpoint

Majority of the global banks are currently struggling to bolster revenues amidst the gloomy macro-economic factors and Eurozone crisis. Barclays has adopted several strategic initiatives, such as diversifying their footprints in emerging markets, to counter these issues. We believe that such initiatives augur well for the company going forward.

Barclays currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Given the stressed operating environment, we believe that any significant improvement in its earnings in the upcoming quarters would remain elusive. However, prudent business model changes may improve the company’s efficiency and add to its competitive edge. In the same industry, HDFC Bank Ltd. ( HDB - Analyst Report ) retains a Zacks #1 Rank (a short-term Strong Buy rating).