Absa joins the chorus of interest rate warnings for South Africa

 ·8 Dec 2023

Absa expects revenue growth but joins the list of South African financial service providers flagging a high credit loss ratio.

In a voluntary trading update for the year ending 31 December 2023, Absa said that it expects high-single-digit revenue growth in 2023, primarily driven by net interest income, showing balance sheet growth and higher policy rates.

It also expects high-single-digit growth in customer loans and deposits.

However, revenue growth is expected to slow in H2 2023, partially due to material base effects.

Given significantly higher policy rates, our credit loss ratio is expected to exceed our through-the-cycle target range of 75 to 100 basis points,” the group said.

“Our second-half credit loss ratio is likely to improve noticeably from the elevated first half but remain above our through-the-cycle range.”

Nedbank defines a credit loss ratio as “the impairments charge on loans and advances in the consolidated statement of comprehensive income as a percentage of daily average gross loans and advances.”

Since the South African Reserve Bank (SARB) started its interest rate hiking cycle in late 2021, several banks have highlighted an increase in credit impairments as cash-strapped consumers struggle to pay back their loans.

For the six months ended 30 September 2023, Investec said that its expected credit loss (ECL) impairment charges rose from £29.4 million (R665 million) in 1H23 to £46.3 million (R1.05 billion) in 1H24.

Standard Bank also said that its credit impairment charges remained elevated in the first ten months of 2023 due to balance sheet growth, sovereign risk migrations in African regions, provisions for South African corporates and the strain on consumers due to interest rate increases – even if the credit loss ratio was below the top of the group’s through-the-cycle target range.

Nedbank said that its credit impairments rose by 57% in its interim results for the six months ending 30 June 2023.

Returning to Absa’s trading update, the group added that it expects single-digit growth in operating expenses, resulting in a higher cost-to-income ratio of 51.2% and mid-single-digit growth in pre-provision profit.

“Given its effective date of 1 September 2023, our broad-based black economic empowerment
transaction will be included in our 2023 financial results for four months. We currently expect the
transaction to reduce 2023 earnings by approximately 1%,” it added.

“Combining the above, we expect to generate an RoE somewhat lower than 2022’s 16.4%, but above the Group cost of equity of 14.5%.”

“Geographically, we expect similar full-year earnings trends to the first half performances, with our earnings in South Africa decreasing and Africa Regions earnings increasing noticeably, despite applying hyper-inflationary accounting in Ghana.”

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