Absa feels the pinch

Absa expects stronger earnings, but this comes off a notably low base.

In a trading update for the first ten months of 2024, Absa said that the operating environment in South Africa and its Africa regions countries has been largely as expected year-to-date.

That said, conditions in Kenya, Zambia and Mozambique have been more challenging than expected.

The group added that weaker average exchange rates versus the rand remained a drag on group revenue and headline earnings for the period, which are expected to reduce by roughly 3%.

This means that Absa Group revenue and headline earnings will be about 3% lower than they would have been, had it not been for the rand remaining a drag (not relative to FY2023).

Against this backdrop, the group provided shareholders with the following guidance for its financial performance in 2024:

“In line with previous guidance, we expect materially stronger earnings growth in the second half of 2024, off a relatively low base. Our 2024 guidance is unchanged, besides that, we expect a slightly better credit loss ratio now than we did previously.”

“Conversely, the impact of applying hyperinflation accounting in Ghana is slightly more than we expected. We continue to expect mid-single digit revenue growth, with broadly similar growth in net interest income and non-interest income.”

“Hence, we expect net interest income growth to slow in the second half of 2024, due to lower growth in South African retail lending, the introduction of deposit insurance in South Africa in April 2024, and the impact of higher cash reserving requirements in some Africa regions countries.”

The group expects mid-to-high single-digit growth in customer loans and deposits for the year.

Non-interest income is also set to grow and should improve substantially in the second half of 2024, which, in part, reflects the non-recurrence of Nigerian Naira losses in the second half of 2023, as well as better growth in fee and commission income and insurance revenue.

“We expect mid-single-digit growth in operating expenses, down from 8% in the first half of 2024, given cost actions that we took in the first half of 2024 and the base effects of higher Barclays PLC separation costs.”

“As a result, we expect low- to mid-single-digit growth in pre-provision profit and a similar cost-to-income ratio to the 53.2% in 2023.”

Credit

The group added that its credit loss ratio is expected to improve to the midway point between 2023’s 118 basis points and the top end of its through-the-cycle target range of 75 to 100 basis points.

It added that it expects its credit loss ratio in the second half of 2024 to drop noticeably to within the upper half of its through-the-cycle range.

“Trends across our retail books in South Africa are positive, particularly Vehicle and Asset Finance and Personal Loans, reflecting actions taken in collections and new business origination.”

“In line with our first-half performance, Corporate and Investment Bank’s credit loss ratio is expected to slightly exceed its through-the-cycle range of 20 to 30 basis points.”

“Africa regions’ charge is expected to increase off a low 2023 base.”

The group thus expects an RoE of 14% to 15% in 2024, versus 14.4% in 2023.

“We expect our Group CET 1 ratio to end 2024 in the upper half of our Board target range of 11.0%
to 12.5%, and we plan to maintain a dividend payout ratio of 55% for 2024.”

South Africa leading the way

From a geographic perspective, South Africa is expected to drive group earnings growth in 2024, mostly on lower credit impairments in retail lending and relationship banking.

Africa region earnings will likely decrease slightly due to the stronger Rand, increased cash reserve requirements in certain countries, higher credit impairments off a low base, and a challenging operating environment in several markets.

“In addition, we are providing high-level guidance on the expected shape of our results in 2025.
Revenue growth is expected to moderate in 2025, meaning our operating JAWS is likely
to be slightly negative. We expect the stronger Rand to remain a drag on revenue next year.”

“We expect our credit loss ratio to improve further to within the top end of our through-the-cycle target range of 75 to 100 basis points next year, largely reflecting continued improvement in our retail charge in South Africa.”

“The normal seasonality is likely to be evident in our 2025 credit loss ratio again next year, with our credit loss ratio in the first half of 2025 above the second half of 2025. Ghana’s hyperinflation accounting is currently expected to end in the middle of 2025. These factors should improve our RoE in 2025.”

“Given a broadly supportive macroeconomic backdrop in the medium term, we expect our RoE
to improve to 16% in 2026, with several key drivers.”

“Firstly, we expect a further recovery in our credit impairments, particularly in our South African retail books. Secondly, we have launched a productivity programme that should improve our cost-to-income ratio in the medium term.”

The group will release its 2024 financial results on 11 March 2025.

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