*Salient points:
- Revenue increased 3% to R40.1 billion
- Operating costs fell 2% to R21.6 billion
- Cost-to-income ratio improved to 53.9% from 56.7%
- Pre-provision profit increased 9% to R18.5 billion
- Impairments increased four-fold to R14.7 billion
- Headline earnings declined 82% to R1.46 billion
- Return on equity declined to 2.6% from 16.4%
- Group CET 1 ratio of 11%, well above regulatory requirements
- Zero dividend declared
*Note: normalised values (stripping out the effect of the separation from Barclays PLC)
Absa Group Ltd. today reported an 82% decline in normalised interim earnings after impairments increased four-fold to R14.7 billion. Impairment charges rose as customers and clients struggled to repay debt and as the Group took decisive action to increase impairment provisions against future potential credit losses.
Despite significantly higher credit impairments and the material impact of the lockdowns on transactional volumes, the Group, including all business units, remained profitable. The Group expects a continued difficult environment for the consumer and heightened uncertainty is expected to dampen business confidence and investment in the remainder of 2020.
“In the current economic climate, ensuring continued operational and financial resilience is paramount. We are therefore temporarily holding our growth ambitions in abeyance to focus on cost management and capital and liquidity preservation, while continuing to support customers,” said Daniel Mminele, Absa Group Chief Executive.
Absa extended significant support to customers and clients across its operating markets. In South Africa, the Group’s largest market, Absa implemented a comprehensive payment relief plan. Measures included credit payment relief, insurance premium relief, the temporary expansion of the Credit Life product to cover a wider definition of loss of income, the waiving of Saswitch fees, and supporting the distribution of social grants and pension payments.
As at 30 June, Absa had provided R8.7 billion of relief on R154 billion worth of loans to 538 000 customers, including 20 000 businesses in South Africa.
Corporate and Investment Banking South Africa assisted clients on a one-to-one basis and granted payment relief on R37 billion of loans, 12% of their book.
Absa Regional Operations afforded customers payment relief on loans totaling R25 billion.
In line with Absa’s commitment to be a force for good in the communities that we operate in, we mobilised our citizenship programme as COVID-19 quickly evolved into a humanitarian crisis. Absa and its employees contributed over R71 million in support across the continent, contributing towards screening and testing, the provision of personal protective equipment for thousands of health workers and humanitarian support to vulnerable communities in the Southern, East and West African countries.
While the negative impact of the crisis on Absa’s earnings is clear, the interim results also highlight the resilience of the business.
“Our revenue remained resilient and our operating costs were well managed and responded to the crisis, resulting in encouraging pre-provision profit growth of 9%,” said Absa Group Financial Director Jason Quinn. “Our capital and liquidity levels are strong and will allow us to further support our customers as we emerge from the crisis,” he said.
Absa continued to deliver against major business imperatives during the period, achieving substantial separation from Barclays and completing the process of renaming and rebranding its operations in 12 countries. The separation has fundamentally improved Absa’s resilience, systems and capabilities, to the benefit of staff and customers.
Business unit performance
Retail and Business Banking South Africa (RBB SA)
RBB SA, the largest of the Group’s three business units by revenue, started the year in a strong position, building on the momentum from 2019 from the execution of its transformation journey. The benefits of improved momentum and the quality of the client franchise was evident in pre-provision profits which increased by 10% on the prior year. Credit impairments increased significantly as balance sheet resilience was built given the challenging macro backdrop for borrowers.
Despite the macroeconomic challenges presented by COVID-19, RBB’s performance remained resilient compared to the market in a number of areas:
- Home loans registrations were down 31% while the market contracted by 39%
- Vehicle and asset financing decreased 19% in a market that shrunk by 42%
- Retail deposits grew 12%, in line with the market
- Solid net insurance premium growth of 9%
The Absa app has been the highest rated banking app since its launch in 2013. Digitally active customers grew by 12% in the period since December 2019.
Corporate and Investment Banking (CIB)
CIB was the Group’s largest profit generator in the period following strong growth from the global markets business across the continent. Pre-provision profits increased by 24% supported by broad-based revenue growth and cost containment actions. Credit impairments increased seven-fold as the group provided for customers in sectors most exposed to the crisis.
Notable business highlights during the period included the successful separation from Barclays PLC, the successful integration of Absa Investor Services, the Custody and Trustee business acquired from Societe Generale bringing over R100 billion of assets under custody, as well as the operational go-live of the Group’s representative office in New York.
Absa Regional Operations (ARO)
ARO, which comprises the operations in Africa outside of South Africa, continued to show strong top-line growth during the period and now contributes 26% of Group revenue. These operations provide the footprint to support customers across the continent and provides diversification to the Group’s exposure.
Similar to the rest of the business, ARO was adversely affected by the crisis, manifesting as a five-fold increase to impairments. Despite this, the business remained profitable and contributed positively to Group earnings.
ARO highlights during the period included the successful completion of separation, specifically the brand and name change and migration of banking platforms and applications, as well as a notable increase in digital customer activity. The number of digitally active customers in the retail and business banking business grew by 28%, resulting in digital transactional volumes rising 77%.
Outlook
While uncertainty remains high, the Group is well-positioned with a strong capital and liquidity position allowing it to continue to support its customers. With the decisive actions that have been taken in the first half to improve balance sheet resilience, the Group expects the second-half impairment outcome and returns to improve.
Highlights include:
- Gross loans and advances grew by 7% to R530 billion
- Deposits grew by 10% to R373 billion
- Non-interest income grew by 6%
- Cost-to-income ratio improved to 57.7% from 58.4% in 2018
- Customer growth of 1% to 9.7 million
- Market share growth in retail deposits and retail loans and advances, including personal loans, new home loans and vehicle finance.
Corporate and Investment Banking (CIB)
CIB’s earnings growth was driven by strong performance in countries outside South Africa, which partially offset a decline in earnings in South Africa.
Highlights include:
- Continued growth momentum in ARO with total income growing 15% (12% in constant currency) to R7.4 billion
- Solid income growth from Corporate Bank franchise up 9% (8% in constant currency) to R10.6 billion
- Strong growth momentum in the trade finance business in SA, with a CAGR of 19% in the last four years.
Absa Regional Operations (ARO)
ARO, comprising Absa Group’s African operations excluding South Africa, delivered strong financial performance in 2019 with earnings growth of 16% (12% in constant currency), enhancing the overall Group’s position.
Highlights include:
- Revenue grew by 14% (11% in constant currency)
- Pre-provision profits increased by 17% (14% in constant currency)
- Cost-to-income ratio improved to 57.8%
- While separating, ARO has grown its retail primary customer base in 2019 to 1.5 million customers.
Outlook
South Africa’s macro environment has consistently disappointed for the past five years, and the outlook remains muted, compounded by the recent outbreak of coronavirus which will have an impact on the global macro outlook, and which will also have implications for the economic prospects in our other operating regions.
“We will continue to drive the execution of our strategic objectives with agility, and take advantage of emerging opportunities, while managing risks more effectively in response to changes in the operating environment,” said Mminele.
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