Absa, SA’s fourth-largest bank by market value, is targeting sustainable finance as a significant growth opportunity and says it stands ready to help fund the infrastructure investment needed to spark life into SA’s lacklustre economic recovery.
The group’s corporate and investment banking (CIB) unit provided about R19bn of environmental, social and governance (ESG) related financing in 2021, almost double its target, putting it well on track to meet its goal of funding at least R100bn in such projects by 2025, says Absa’s interim CEO Jason Quinn. The bank could well fund more than R100bn in ESG projects over the next four years if the economic environment is conducive, he adds.
Asked what SA needs to do to boost economic growth beyond Absa’s expected 2.1% expansion for 2022, Quinn says rapid investment in infrastructure is the nation’s best bet. With Absa’s common equity tier-1 ratio having improved to 12.8% in 2021, from 11.2% in 2020, Quinn says Absa has “a lot of capital” to allow it to fund significant infrastructure investments.
“Infrastructure investment is the way to go, and dramatically so,” he said on Monday after Absa reported headline earnings surged 195% to R17.83bn in the year to end-December 2021, up from R6.04bn the previous year.
“If you look back over history, you’ll see any country that recovered well after a crisis, whether it was a world war or something else, was a country that prioritised infrastructure investment dramatically in the years afterwards,” Quinn said.
“We’ve flexibly reserved a lot of capital to be able to participate in significant infrastructure investments.”
Though SA’s GDP expanded 4.9% in 2021, giving hope that the country may finally shake off Covid-19, it still leaves the economy smaller than before the pandemic, mainly because of the 6.4% contraction in 2020.
The improvement in economic growth in 2021 was reflected in Absa’s annual results, which showed headline earnings per share (Heps) jumped more than 193% to R21.47 as credit impairments plummeted 59% to R8.5bn.
While Absa’s retail and business banking (RBB) unit accounted for more than 57% of the group’s R17.83bn in headline earnings during 2021, Quinn sees the group’s CIB unit as the key growth driver. That is not just because of the high margin fees it generates from CIB but also because of the avalanche of infrastructure and ESG-related investment that the unit is likely to benefit from in coming years.
Then there is also the higher return on equity of the CIB unit compared to the group 14.6%. The unit is also perfectly positioned to benefit from infrastructure investment in the rest of Africa, where economic growth typically outpaces that in SA.
“The investment in CIB, and its return on equity is sitting at about 20%, makes it a very attractive part of our business to allocate capital to ... not that RBB is unattractive,” Quinn said.
“We’d like to think that the CIB proportion could grow without shrinking retail.”
But while Quinn describes investment in ESG-related projects and renewable power generation as the “underpin” of much of where Absa expects to derive growth in coming years, he is quick to emphasise that the bank is still focused on its smaller customers. Key to that will be focusing on what he calls “inclusive financing” for the mass retail market by rolling out more affordable mortgages and funding for small to medium-sized enterprises (SMEs).
“We think small businesses and the growth of small businesses is going to be a real driver of economic growth,” he says. “We want to be supportive with our capital ... and would like to ensure that the sector becomes more sustainable and inclusive.”
Absa is expecting at least three 25 basis point interest rate increases in each of 2022 and 2023, and acknowledges that this could be a challenge as higher borrowing costs put consumers under further financial pressure. However, Quinn seems confident that consumers will weather the steady rise in borrowing costs, though he concedes that the inflationary pressures caused by higher oil prices could add further headwinds into the equation.
Of more immediate concern is an expected fifth wave of Covid-19 infections, which Absa’s modelling predicts will begin as early as April. Even so, Quinn says the bank expects its severity to be more or less in line with that of the fourth Omicron-driven wave, which was less severe than the previous three.
Absa’s provisioning suggests the bank is not overly concerned about the financial impact of a fifth wave of infections. After raising short-term provisions to R846m at the end of June in 2021, Absa released more than R700m in the second half to cover claims from the tail end of the third wave as well as the onset of the fourth wave that was being expected.
After analysing SA’s excess death data as well as Absa’s own claims experience at end-December 2021, the bank bulked up its remaining R146m in provisions by a further R330m to cover the effects of the fourth wave and an expected fifth bout. That left it with R476m in provision at the end of 2021, of which R423m is to cover its SA operations and the remaining R54m for the rest of Africa.
“We do have it as less severe ... less severe than the third wave ... quite similar to the fourth Omicron wave,” says Quinn. “We’ve been fairly conservative in our assumptions around that.”
With Andries Mahlangu
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