Absa battered by rising bad debts

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Absa Bank says all its business units remain profitable despite the Covid-19 impact on credit impairments.

Absa has reported a sharp decline in first-half earnings after its credit impairments quadruped as a result of Covid-19 and resulting lockdowns in the countries where it has banks. It has also held back on an interim dividend following guidance from the Reserve Bank for banks to conserve capital due to the pandemic.

The banking group said the biggest impact on its results for the six months to end-June was on credit impairments, particularly as accounting rules require banks to make provisions for future potential credit losses. As a result, impairments were increased to R14.7 billion, resulting in a rise in its credit loss ratio to 2.77% from 0.79% last year

The bank’s local Retail and Business Banking operation was worst hit, with headline earnings slumping 91% to R415 million as impairment charges surged in its Home Loan, Vehicle and Asset Finance and Everyday Banking businesses. Headline earnings at Corporate and Investment Banking SA declined 47% to R817 million while Absa Regional Operations reported a 67% deterioration to R569 million.

Despite significantly higher credit impairments and the material impact of the lockdowns on transactional volumes, it said all its business units remained profitable. However, it said it expected a continued difficult environment for consumers and heightened uncertainty to dampen business confidence and investment for the rest of the year.

Group revenue increased by 3% to R40.4 billion for the six months to end-June and operating expenses were steady at R23 billion. Pre-provision profit increased by 7% to R17.3 billion but headline earnings fell 93% to R559 million due to the credit provisions. Diluted headline earnings per share (HEPS) fell 93% to 918.4c and its return on equity, a measure of financial performance, decreased to 1% from 14%.

On a normalised basis, operating expenses declined 2% to R21.6 billion, pre-provision profit rose 9% to R18.5 billion and HEPS fell 82% to 173.4c. The normalised earnings are adjusted to make allowances for the consequences of its managed separation from former parent Barclays Plc.

After slashing interest rates by 300 basis points this year, reducing the repo rate to 3.5% and the prime lending rate to 7%, Absa said there was scope for a further 25 basis point reduction this year, which would put further pressure on its net interest margin. While it expected its credit loss ratio to improve significantly in the second half of the year, it said it would remain well above the through-the-cycle range of 75 to 100 basis points. Given its focus on preserving capital, it said it was unlikely to declare a final dividend either.

In the current economic climate, ensuring continued operational and financial resilience is paramount,” group chief executive Daniel Mminele said. “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”

Main Image: Galleria Mall

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