Battle of the banks: How Absa stacks up against the big four

Key topics:Absa offers recovery value vs. FirstRand/Standard Bank's premium quality.ROE gap shows potential upside if Absa hits 17%+ medium-term target.Credit cycle improvement and Africa growth boost Absa’s investment case..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..BizNews Reporter.In South African banking, context is everything. Absa’s voluntary trading update for 2025 tells a story of recovery and resilience. Still, to truly understand its investment case, we must view it through the lens of its peers: the premium-rated FirstRand, the African giant Standard Bank, and the "Green Bank", Nedbank.Investors effectively have a choice between "quality at a price" (FirstRand/Standard Bank) and "value in recovery" (Absa/Nedbank).The table below breaks down the key financial targets and guidance for the "Big Four" for the 2025 financial period.The Tale of the Tape: 2025 Targets & Guidance.*Note: FirstRand has a June year-end. Figures reflect guidance for FY25 (ending June 2025).Analyzing the Field 1. The ROE Gap: The Valuation KeyThe most glaring difference lies in the Return on Equity (ROE). FirstRand and Standard Bank are effectively printing money with ROEs sniffing at the 20% mark. This explains why they trade at significant premiums to book value. Absa’s guidance of 15% (with a medium-term target of 17%+) shows they are moving in the right direction, but they are still the "chasing pack." For value investors, this gap represents the potential upside if management executes perfectly.2. The Efficiency Battle (Cost-to-Income)Banking efficiency is often measured by the Cost-to-Income ratio—how many cents it costs to generate one Rand of income.The Leaders: Standard Bank and FirstRand are comfortably operating near or below the magic 50% mark.The Laggard: Absa is currently sitting above 53%. Their plan to drive this down to 50% by 2028 is ambitious but necessary. Until they do, their profitability will always lag behind the leaders.3. Asset Quality (Credit Loss Ratio)Here, the playing field is levelling out. All four banks are signaling that the worst of the credit cycle is over. FirstRand remains the most conservative (lowest relative credit losses), which is typical of their "quality first" credit appetite. Absa’s guidance to move into the "upper half" of their target range is a massive improvement from the scary 103 bps hit in 2024.4. The Africa FactorStandard Bank remains the undisputed heavyweight in Africa, with the region contributing massively to its earnings. Absa’s update shows its "Africa Regions" earnings are growing faster than SA, proving that their separation from Barclays is finally bearing fruit on the continent. This is a critical battleground for growth as the SA economy trundles along at 1-2% GDP growth.The VerdictIf you want sleep-at-night quality and are willing to pay for it, FirstRand and Standard Bank remain the "blue chips" of the sector.However, Absa offers something different: a recovery story. With a generous 55% dividend payout ratio, you are being paid handsomely to wait for the turnaround. If they hit their medium-term targets (16-19% ROE), the re-rating in the share price could be significant.As always in the markets, you pay your money, and you take your choice. So let’s have a look at the relative valuations.Value Trap or Opportunity?In value investing, you make your money when you buy, not when you sell. The current valuation divergence across the "Big Four" South African banks offers one of the clearest arbitrage opportunities on the JSE today..Read more: .Standard Bank trading update: Revenue growth meets targets despite rate cut headwinds.When we peel back the layers of the trading updates, the market is effectively saying it implicitly trusts FirstRand and Standard Bank, while it is still "wait-and-see" on Absa and Nedbank. But as the gap widens, the risk-reward ratio shifts.The Valuation ScorecardLet’s look at the raw numbers. The table below compares the two critical metrics for bank valuations: Price-to-Earnings (P/E), which tells you how much you are paying for every Rand of profit, and Price-to-Book (P/B), which tells you how much you are paying for the bank’s net asset value (NAV)..The "Premium" Tier: FirstRand & Standard BankFirstRand has long been the "expensive" bank, and for good reason. It consistently delivers the highest Return on Equity (ROE) and has the lowest credit loss ratio. Investors pay 2.0x book value because they believe every Rand of capital FirstRand holds will generate 20–22 cents of profit.Standard Bank has joined this premium club, mainly due to its Africa advantage. With earnings from the continent now a dominant driver, the market is willing to pay a higher multiple (1.6x book) for that diversified growth engine.The "Value" Tier: Absa & NedbankHere is where it gets interesting.Absa is trading roughly at Book Value.This is a critical psychological and financial floor. When you buy a bank at 1.0x book, you are effectively paying exactly what the assets are worth on paper, with zero premium for the franchise, brand, or future growth.If Absa delivers on its guidance of a 15% ROE in 2025, rising to 17%+ by 2027, a 1.0x valuation is mathematically too cheap. Historically, a bank delivering a 17% ROE should trade closer to 1.3x – 1.5x book value.As the diagram illustrates, banks generally lie on a regression line: higher ROE corresponds to higher Price-to-Book. Absa is currently sitting below the line—an anomaly that suggests the share price hasn't yet priced in the improved ROE guidance.The "Free Option"Buying Absa at these levels gives you a "free option" on the turnaround.Scenario A (Stagnation): If the turnaround stalls and ROE stays at 15%, you are buying a solid asset at fair value (1.0x book) and collecting a fat ~7.5% dividend yield while you wait.Scenario B (Success): If they hit their medium-term targets (17% ROE), the stock re-rates to ~1.4x book. That is a 40% capital gain on top of the dividend.Conclusion: The "Goldilocks" TradeFirstRand is priced for perfection; if they slip, the fall is steep. Nedbank is cheap, but its growth engine is sputtering.Absa sits in the "Goldilocks" zone. It is not as expensive as the leaders, but its momentum is significantly stronger than the laggards. With the credit cycle turning and the "Africa Regions" earnings firing, the 1.0x P/B entry point looks like a gift for the patient investor.

Battle of the banks: How Absa stacks up against the big four

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