Absa’s bad debts rise sharply and retail profits drop

Absa increased headline earnings just 1% in the year to endDecember, with bad debts rising sharply and profits dropping in its retail businesses after a stretch in which it was determined to regain the market share it lost in the Barclays years.

The group’s minimal headline earnings growth, which it said was below its own expectations, comes after Nedbank last week reported an 11% increase in headline earnings for the year to December, while Standard Bank said in a trading update that it expects to report an increase of 25%-30% when it reports on Thursday. First Rand, which has a June year-end, reported earnings up 6% at the halfway stage.

And while Absa’s headline earnings in SA dropped 18%, on revenue that was up just 2%, its Africa Regions came to the rescue with a 124% increase in headline earnings.

The group took a hit as its structural interest rate hedge went the wrong way, cutting R1.6bn from its interest revenue in 2023 after adding R1.6bn in 2022. The hedge, which Absa has had in place since 2006, cushioned the group’s interest margin and earnings when interest rates were low but does the opposite when rates are high. Absa’s interim finance director, Chris Snyman, told Business Day that without the hedge, the group’s headline earnings growth would have been closer to 11% for 2023 — but without the hedge it would also have reported much lower earnings growth for 2021 and 2022.

FirstRand also has an interest rate hedge, and due to the headwind from these hedges in the latest year these banks couldn’t benefit from the so-called endowment effect of higher interest rates on their capital as unhedged banks could to offset higher credit impairments.

While all the banks have had to raise their credit impairments over the past year as consumers and businesses have taken pain from high interest rates, some have been hit harder than others, depending on the mix and quality of their lending books.

Credit impairments in Absa’s SA banking operations jumped 45% for the year to end-December. It was only thanks to a sharp

decline in impairments in its African Regions — which were the brightest spot in the group’s results — that the growth in impairments was held to 13% for the group overall. And it was in the group’s retail banking businesses that it had to increase credit impairments most steeply, causing profits to slide in its daily banking and “product solutions” clusters.

The retail operations are where the group has been most set on regaining what CEO Arrie Rautenbach, who formerly headed up Absa’s retail and business banking operations, calls its “fair market share”.

In the past few years before Barclays sold its controlling stake in Absa in 2017, the UKbased group’s priorities were elsewhere and Absa steadily lost market share. Since 2018 the SA group’s strategy has focused on regaining that.

Snyman said Absa accounted for only 4%-5% of the growth in the SA banking industry’s retail loan books in 2012-17. Since 2018 it has lifted that to 24%-25% of the growth and its market share stood at 22.2% in 2023.

CREDIT RISK

However, the pickup in the pace of its lending growth in recent years has meant the bank has more relatively new loans on the books that are less “seasoned” in the face of higher interest rates.

Snyman said the group was working very deliberately to manage credit risk in the origination of loans as well as in collections and in recovering nonperforming loans. Absa expects credit impairments to improve slightly as interest rates moderate later this year.

The group continues to see strong growth opportunities in its Africa Regions, the economies of which are expected to grow 4.8% this year against 1.1% in SA.

Snyman said that some of the growth could come via acquisitions.

“We’ve always said while we were busy with the separation from Barclays we didn’t have the bandwidth but with the separation complete we have got the appetite to expand,” he said.

The group has a presence in 12 African countries, including SA.

Rautenbach said that despite a challenging climate, Absa “remains resilient and the underlying franchise is strong and growing”.

“We are seeing the benefits of the strategic choices we made in 2018 as is evident from our diversified business, growing customer franchise and engaged workforce,” he said.

The group’s broad-based empowerment transaction, which was concluded last year and placed 7% of its shares in the hands of employees and customers, was anticipated to support its growth, the group said.

Absa’s shares ended the day 5.08% weaker at R158.32.

THE GROUP HAS A PRESENCE IN 12 AFRICAN COUNTRIES, INCLUDING SA