Absa says its balance sheet is robust enough to handle rising impairment charges and support its growth ambitions in Africa even as accelerating inflation and higher interest rates weigh on the disposable income of its customers.
SA’s fourth-biggest lender by market value opted to distribute almost 44% of its retained earnings in its 2022 financial results released on Monday.
However, that came despite a steep jump in impairments as higher borrowing costs hurt consumers and forced Ghana into restructuring a significant portion of its domestic debt.
“We’re well positioned to deal with stress as well as growth,” Absa CEO Arrie Rautenbach said in an interview. “As tough as what it is, our posture is that we have to participate as a systemic bank to ensure that we contribute in every market. Our balance sheet is strong — we have ample capital to support our growth ambitions.”
Absa, like other banks, has benefited from the 350 basis points of cumulative interest rate hikes since the start of 2022, which resulted in higher loan repayments from clients in a phenomenon known as the endowment effect.
That helped the group’s net interest margin on average interest-bearing assets increase to 4.56% in 2022, up from 4.46% the previous year.
Revenue grew 15% in the year to R98.918bn, with net interest income up 13% to R60.498bn and noninterest income rising 18% to R38.42bn. Headline earnings increased 14% to R20.264bn, enabling the group to declare a final dividend of 650c per share. That took Absa’s annual ordinary dividend for the year to end-December 2022 to 1,300c per share, up 65.6% from the previous year. The total shareholder distribution for the year was R9.343bn net of treasury shares, just less than 44% of the group’s 2022 retained earnings of R21.3bn.
But what higher interest rates give with one hand, they take away with the other. Absa’s solid earnings performance was tempered by a 61% rise in impairments, which rose to R13.703bn as accelerating inflation and higher borrowing costs in SA affected the ability of consumers to repay debt.
The breakdown of the credit charges provided by financial director Jason Quinn shows that the lender’s SA retail credit impairments increased across all loan categories with writedowns on personal loans rising the fastest at 49%.
Absa says it expects one more 25 basis point rate hike in SA, which will take the prime rate to 11%, with cuts unlikely until March 2024. “From an SA perspective, higher rates are not something which we’re necessarily not used to,” said Rautenbach. “We’re quite comfortable at rates around 10% or 11% in the SA market.”
Impairments
Absa also had to absorb a R2.7bn impairment related to Ghana’s sovereign debt woes, of which about R2.1bn was on investments in local currency government debt. Nevertheless, Absa ruled out allocating additional capital. “At the moment we don’t see a need to recapitalise our Ghana business,” Quinn said. “That business is exceptionally well capitalised, well above all target and minimum regulatory requirements.”
Nevertheless, Absa’s credit loss ratio, which excludes impairments on investment securities and cash balances, rose to 0.96% in 2022 from 0.77% the previous year. That is near the top end of its targeted range of 75 to 100 basis points.
“This is not unexpected; this is something we’ve planned for,” Rautenbach said. “We believe we’re well positioned to deal with any sort of further distress that may materialise.”
Absa also managed to expand its customer base in 2022. In SA, its largest market, the number of customers increased to 9.7-million from 9.6-million, driven by a 10% rise in digitally active customers.
The group changed its operating model in mid-2022 to boost competitiveness, moving from two main business units — Corporate and Investment Banking (CIB) Pan-Africa and Retail and Business Banking (RBB) Pan-Africa — to five.
The new product solutions cluster, which covers vehicle financing and mortgage provision, as well as insurance, investment and advisory services in SA, reported a 26% rise in headline earnings to R3.5bn driven by strong balance sheet growth and an improvement in insurance sales.
The retail lending unit, now known as Everyday Banking, delivered unchanged headline earnings of R4.1bn as higher credit impairments offset strong preprovision profit growth.
Relationship Banking, which covers business banking, wealth and commercial asset financing in SA, reported an 8% rise in headline earnings to R4bn.
Absa Regional Operations RBB, which covers retail and business banking in the rest of Africa, saw a strong rebound in headline earnings to R1.1bn from R106m the previous year.
Absa’s corporate and investment banking unit, now called CIB Pan-Africa, reported a 9% rise in headline earnings to R9bn as revenue growth across all business areas compensated for challenging market conditions in West Africa.
The group expects SA’s GDP to grow less than 1% in 2023 as electricity supply constraints remain a drag on the economy. It forecast 4.4% GDP-weighted economic growth in 2023 in the markets where it has a presence in the rest of Africa.
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