Ramos positions bank for further growth
Group ready to deploy its cash-flush balance sheet to fund expansion, writes Sure Kamhunga
ABSA CEO Maria Ramos says the banking group is “done with the heavy lifting” and is now focusing on sustained growth, even though earnings and advances for this year will be subdued.
Analysts say Absa will be lucky to achieve double-digit full year earnings, with some analysts predicting just 5%.
Ms Ramos admits conditions will be tough owing to the global economic uncertainty, but says Absa has a “solid foundation” for when boom times return.
She says the banking group has made significant progress to restructure its operations, which includes slashing costs, and is also ready to deploy its cash-flush balance sheet to fund organic and inorganic growth.
The focus in the second half of this year will be on customers and other initiatives to strengthen the core retail franchise, she says, brushing aside the disappointing 6% decline in headline earnings to R4,3bn in the six months to June announced on Friday.
The group’s results contrasted with those of its UK parent Barclays, which on Friday beat market expectations with a profit of £4bn in the same reporting period.
She blames the impairment charges on its mortgage book on legacy loans made during the height of the lending boom of more than six years ago.
A raft of interest rate increases, coupled with rising unemployment and pressure on household income as the global economy sank into its first recession, spawned a spate of bad debts for the big banks.
Absa, then and now having the largest mortgage book, took the heaviest hit and is still battling to deal with the bad and nonperforming loans.
Ms Ramos insists there was no overstatement of earnings for the full year to December and neither had Absa underestimated how much it needed to impair for the bad loans.
“I think we have admitted before that we have got a significant non- performing loan book because Absa has always had a bigger homeloan book (than rivals in its peer group),” she says.
Ms Ramos says a comprehensive review of its mortgage loan book has resulted in the bank adopting a more “prudent” risk strategy to deal with impairments, hence the higher mortgage credit provision of R1,15bn.
Absa will continue to work with defaulters to rehabilitate their impaired loan profiles before foreclosing, which Ms Ramos says can be costly and lengthy.
“Our aim remains to keep people in their houses for as long as it is possible,” she says, adding that Absa is lending, but with reduced loan values at better prices.
Absa is also carrying out a comprehensive operational review which includes separating credit and collections strategy, she says. Ms Ramos says Absa is fundamentally still a strong business despite the fall in earnings, which the group financial director, David Hodnett, described as disappointing.
The corporate, investment banking and wealth units grew earnings 14% to R1,4bn, financial services grew 5% to R678m, and the card business grew 11%, from R811m to R904m.
But the retail markets unit suffered a 24% fall in earnings to R1,4bn, which Absa blames on subdued revenue growth of just 2% and a 37% rise in credit losses, which led to a deterioration in its credit loss ratio to 2,03% from 1,46%.
Absa’s decision to increase its interim dividend by 8% to 315c a share shows the group has enough capital to return to investors and fund and still meet tighter regulatory capital requirements under Basel 3 rules, Mr Hodnett says.
Ms Ramos says Absa expects an earnings uplift from its recent deal to buy the credit book of unlisted clothing retailer Edcon for R10bn, which will expand the bank’s market share in the unsecured credit market to 17% and so closer to its target of 20%.
The group plans to invest R400m over three years to revamp its delivery channels, which includes launching a new generation of ATMs and other digital channels, she says.
Acquisitions remain on the agenda for the group, which on Thursday launches a greenfield life insurance unit in Zambia, becoming the bank’s third insurance business outside SA after its invest- ments in Botswana and Mozambique. Ms Ramos says Absa is considering an acquisition in East Africa which it expects to complete by the first quarter of next year.