Banking group Absa has reported muted profit growth for its half-year to end-June, hit by a 60% surge in credit impairments as South Africans struggled with higher interest rates and elevated inflation.
Headline earnings increased 2% to R10.7 billion to end-June, the group said, although this was off a high base in the prior comparative period, when this profit measure jumped more than a quarter. In its first of 2023, however, it was lifted entirely by its Corporate and Investment Banking (CIB) division as well as its regional operations.
The CIB, which is focused on servicing businesses, saw its headline earnings jump almost a third and accounted for more than half of the group total, while earnings in its Everyday Banking division slumped more than a fifth.
Group credit impairment charges grew 60% to almost R8.3 billion, largely due to higher credit charges in the South African retail lending portfolio, with the group saying its credit-loss ratio increased from 91 basis points to 127, above the upper end of its through-the-cycle range of 100 points. The second half is likely to improve substantially to slightly above this range, it said.
In its Everyday Banking division, focused on day-to-day transaction, its credit loss ratio jumped 54% to 922 basis points, with credit card impairments surging 70%.
Absa is not alone in reporting pressure on SA’s consumer, with Nedbank also saying recently its credit-loss ratio was more than twice the bottom end of its long-term range in its first half.
There is clear evidence that the higher interest rate environment is placing significant pressure on sensitive parts of the economy such as consumer-facing sectors, Absa said, adding “degrading rail and port infrastructure” also present a downside risk.
The bank, however, expects that SA has reached the peak of the current interest rate hiking cycle, and is eyeing “a measured pace of cuts” beginning in the first half of 2024. It is also forecasting 0.7% GDP growth for SA in 2023, higher than the Reserve Bank’s latest guidance of 0.4% growth.
Absa also said the results showed the benefits of its push into a well-diversified franchise as well as its growth strategy.
“The macro environment has been tough, particularly in SA, and we don’t expect it to provide any tailwinds for a while,” Absa CEO Arrie Rautenbach said in a results presentation.
“We have a well-positioned balance sheet to withstand it. We continue to believe in our strategy … and we are seeing the tangible benefits of a consistent execution.”
Customer numbers grew 4% to 11.8 million, while customer deposits increased 11% to R1.2 trillion. New-to-bank retail transactional account sales increased by 23% in South Africa, and the group has been pushing a strategy of youth accounts and small and medium-sized enterprises, which saw growth of 40% and 56% respectively.
Absa also increased its interim dividend by 5% to R6.85 – about a R5.8 billion payout. It increased its payout ratio to 53% of headline earnings from 52%.
Shares in Absa, which is valued at about R153 billion on the JSE, were down just over 2% in morning trade on Monday, and have fallen almost 5% in the past one year.