Absa takes a hit in its three largest markets
Absa has lowered its growth expectations for its three largest markets, with the Big Four bank seeing minimal revenue growth.
In a trading update for the first six months of the year, Absa said that the Middle East conflict increased global inflation expectations and dampened GDP growth.
It was thus forced to lower its GDP growth expectations for its largest markets, South Africa, Ghana and Kenya.
“In South Africa, the South African Reserve Bank increased the policy rate in May, whereas we previously expected further rate cuts,” it said.
“Conversely, policy rates in Ghana have reduced materially and are lower than we expected, which is a near-term drag but should stimulate growth.”
Its revenue is expected to grow by low to mid-single digits, with non-interest income growing faster than net interest income.
It said that its net interest income growth was modest, rising in the low single digits, reflecting margin compression largely due to lower policy rates in the Africa regions.
Net customer loans and customer deposits are also expected to grow only in the mid-single digits.
Personal and Private Banking (PPB) net customer loans are expected to grow by mid-single digits as well.
In PPB, stronger Vehicle and Asset Finance growth is expected to offset modest growth in Home Loans and unsecured lending.
Corporate and Investment Banking (CIB) net customer loans, excluding reverse repurchase agreements, and Business Banking (BB) net customer loans are expected to grow by high single digits.
The group sees mid-single digit growth in non-interest income, with growth in fee and Commission income and insurance income in South Africa are expected to be solid.
The group also expects its operating expenses to grow by low to mid-single digits, which should result in a slightly negative JAWS and a slightly higher cost-to-income ratio
Customers under strain
Regarding its customers, Absa said it expects broadly flat credit impairments and an improved credit loss ratio.
It predicts slightly lower PPB credit impairments, driven by an improved delinquency performance, partly offset by an increase in coverage due to the deteriorating macroeconomic forecast.
BB and CIB credit impairments are expected to increase, with the latter off a low base, it said.
The group thus expects headline earnings growth of around mid- to high-single digits for the first half of the year.
The group added that the stronger rand will reduce group revenue, costs and headline earnings slightly during the first six months.
“We expect strong headline earnings growth in South Africa, given solid pre-provision profit growth and a lower credit loss ratio,” it said.
“Conversely, we expect Africa Regions headline earnings to decline due to lower net interest income and higher credit impairments.”
For the year ahead, the group expects its return on equity to be around 15%, mostly due to weaker net interest income than it originally anticipated, amid margin compression in Africa Regions.
“We are confident that our revenue and earnings momentum remains on track medium-term, given healthy growth in our client franchise and net interest margin stabilisation post the rate cutting cycle, particularly in Africa Regions.”
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