Absa under fire but denies retrenchments

South African banks are not in a happy place. In the last year costs have climbed from 51.1% to 56.4%, while revenue growth is stalling and significant bad debts are undermining loan growth, according to the latest Reserve Bank report.

Yet large scale job cuts are not expected.

"I am not aware of imminent retrenchments on the horizon," says Errol Kruger, chief bank regulator. "In our interaction with banks, this is not an issue high on the agenda. With natural attrition the cost base gets brought under control."

Absa, South Africa's largest retail lender, is certainly taking this line.

Despite being under fire for its spiralling costs and falling market share, deputy Ceo Louis von Zeuner has insisted that the bank will not resort to retrenchments in order to cut costs. The bank, majority-owned by Barclays, admits that "cost management is critical and particularly so if top-line growth is subdued," but it is hoping to rely on natural attrition rather than cutting staff or freezing jobs.

A new focus on efficiency also means promoting internal mobility and redeploying employees to high-growth areas with additional capacity. Sasbo, the fearsome sector union, has taken Absa to court, arguing that relocations amounted to retrenchments, but lost the case.

"Of total staff numbers in South Africa of 36,770, allowing a hypothetical 10% natural attrition, that is almost 4,000 people that you do not replace unless you really need to," says Rob Nagel, portfolio manager at Cadiz Asset Management. "So in essence you are retrenching, but through non replacement."

Absa's cost-to-income ratio has climbed rapidly: at the end of 2009 it was the lowest in South Africa at 49.6% but a year later it had climbed to 56.2%. Staff costs climbed over 16% last year, in large measure due to an aggressive recruitment drive, which Ceo Maria Ramos has defended saying that it gave the bank the "firepower" needed to take on competitors.

According to some analysts, the ratio will climb to 60% this year and 62% in 2012. Kruger has indicated a cost-to-income ratio of 60% is "when one starts getting concerned".

Because of rising costs, and of Barclays Ceo Bob Diamond's relentless push for cost cuts, some analysts predict that Absa may end up reneging on its promise to avoid cutting staff. Instead of ruling them out, a leaked internal document says retrenchments are a "last resort". "Confidence is very low," says Alison Thom, senior consultant at Anton Apps International Recruitment Specialists in Johannesburg. "In the market there is a lot of talk of retrenchments at Absa."