Absa often appears in fund manager presentations as an example of a “cheap” South Africa Inc stock. And, as CEO Arrie Rautenbach is the first to admit, it has been a tough environment for the share.
The increase in normalised headline earnings of just 1% was below even Absa’s expectations, though by no means disastrous, and certainly reflected in the share price.
In the bank’s core South African market there has been disappointing growth. The credit loss ratio, which increased from 96 basis points (bp) to 118bp, was above the through-the-cycle range largely due to South African retail consumer stress.
The stress is particularly marked in everyday banking, where it increased from 645bp to 835bp. Inflation-adjusted gross earnings of employed South Africans, according to the bank, have been falling since the beginning of 2022.
Even the Rolls-Royce clients in the relationship banking unit came under pressure, with loss increasing from 45bp to 56bp, while the credit loss ratio of product solutions — primarily home loans and vehicle finance — rose from 65bp to 99bp.
There was a slowdown in the growth of home loans, with a 3% increase to R302bn, after a 9% increase in the previous year; in contrast, vehicle finance loans were up 6% to R113bn, and credit card loans rose 8% to R47bn.
On the other hand, the corporate book is getting healthier, with the credit loss ratio at the corporate and investment banking (CIB) business falling from 27bp to 17bp.
In contrast with the often chaotic macro picture in Africa, the credit loss ratio is far from disastrous in the rest of Africa, increasing from 164bp to 184bp.
In the African territories where Absa’s subsidiaries operate, sovereign risk remains elevated and there is foreign exchange liquidity pressure — though growth remains attractive relative to South Africa.
Absa is priced as a business in trouble, with a dividend yield of 8.8%, comparable to what it offers its clients on deposit, but Rautenbach says the medium-term target remains relevant (that is, achievable). The bank aims for a return on equity (ROE) sustainably above 17% and a cost-to-income ratio of below 55%.
The corporate book is getting healthier, with the credit loss ratio at the CIB business falling from 27bp to 17bp
ROE is still below target at 15.3% but is at least above the cost of equity, and the cost-to-income ratio is a more than acceptable 52%.
And in spite of the challenging environment, the net interest margin has continued to rise — after a 10bp increase to 4.56% in 2022 it grew a further 10bp to 4.66%, and would have been 25bp higher if it had not been for the bank’s hedging strategy.
Hedging has worked for Absa in recent years. It made a substantial R3.2bn in 2021 and R1.6bn in 2022 but lost R1.6bn in 2023.
Absa is growing customer numbers (marginally) after years of decline while it was controlled by Barclays in the UK. Its South Africa retail customer base has been stable at 9.8-million in spite of the increased competition from insurgents such as Capitec, TymeBank, Discovery Bank and African Bank.
Absa offers all kinds of improved products and services, using grandiose terms in its analysts’ presentations such as “holistic multichannel customer experience remediation”. Its CIB business, which has considerable runway compared with the mature retail banking franchise, is being built up, leveraging more aggressively off the African footprint.
In South Africa, Absa has made strides into the digital world, with 22% of sales now digital and a 109% increase in digitally active customers since 2018.
Rautenbach describes Absa as a very different bank from its pre-Covid days and its architecture of 2018. Back then the South African retail and business bank made up 52% of pre-provision profit in constant currency. This has fallen to 39%. The African regions have increased their contribution from 20% to 29%, and CIB from 28% to 32%.
The diversification couldn’t have come too soon. The bank’s three South African retail business units are all trying to recover from a very disappointing 2023, with headline earnings from product solutions, where most of the secured lending is housed, down 24% and everyday banking down 17%. Even in the elitist red carpet personal service relationship banking client base, headline earnings dropped 1%.
The return on allocated equity in product solutions is a particularly dismal 10.5%.
There is good momentum in the rest of the group. This should continue in the interim numbers to June, which will be released next month.
CIB’s earnings rose 23% and Africa regions 27%. But while the return on allocated equity for CIB is a healthy 23.9%, it is still quite poor in Africa at 11.2%.
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