Absa provides some insight into Covid-19 carnage for consumers

Absa says that it expects its earnings and profit to take a substantial hit in the first half of the year, as the market chaos caused by the coronavirus pandemic, and subsequent nationwide lockdown begins to bite.

In a trading statement published on Tuesday (26 May), the financial services group warned that headline earnings per share (HEPS) and earnings per share (EPS) for the six months ending June 2020, are expected to be more than 20% below the comparatives for the first half of 2019 of 920.0 cents and 918.9 cents, respectively.

Normalised HEPS are expected to be more than 20% lower than the normalised HEPS of 977.5 cents for first half of 2019, it said.

Looking at the retail banking segment specifically, Absa pointed to a material decline in fee income in April, with ATM volumes, bancassurance sales, card turnover and point of sale volumes decreasing significantly month-on-month.

However, there are signs of some recovery in transactional volumes in May, as parts of the economy gradually re-open, it said.

The bank said that consumers are under extreme pressure with credit impairments for the period doubling year-on-year, and large increases in personal loans and credit cards.

It said its credit loss ratio is similar to 2009 financial year levels of 1.7% – well above its through-the-cycle target range. The substantial increase in credit impairments occurred largely in April, Absa said.

“To assist customers experiencing challenges as a result of Covid-19, (Absa retail South Africa) launched a comprehensive payment relief plan on 30 March 2020. It provides three months of payment relief across all credit products for wealth, business bank, private bank and retail customers.

“Take up has been substantial, and to date we have provided R8 billion of payment relief over three months to 398,000 customers on 584,000 accounts, covering R146 billion of customer loans,” it said.

Outlook

Absa said that is difficult to provide guidance for the remainder of the year, given the significant uncertainty about the impact of Covid-19, national lockdowns and the macroeconomic outlook.

“These have a material impact on customer loan and transaction volumes and credit impairments, in particular,” it said.

However, the group currently projects that South Africa’s real GDP will fall by 10% in 2020. It also expects lower average policy rates for 2020 across the board.

Based on these assumptions, and excluding further major unforeseen political, macroeconomic or regulatory developments, it sees the following guidance for 2020:

  • Limited customer loan growth year-on-year and customer deposits are likely to increase by more than customer loans.
  • The 275 basis points lower interest rates in South Africa is expected to reduce the group’s net interest income by approximately R1.6 billion in 2020, after factoring in the meaningful benefit of its structural hedge.
  • There could be another 50bp rate cut in South Africa this year. The annual sensitivity to further rate cuts in South Africa is a R250 million reduction per 50bp.
  • A significant increase in credit impairments this year, to well above the group’s through-the- cycle target range of 75bp to 100bp.

“Given the substantial uncertainty, we will provide additional disclosure on the judgements we have made and more guidance on the group’s likely credit impairment for the year when we report first half results on 24 August 2020,” it said.


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Absa provides some insight into Covid-19 carnage for consumers