Release Date: March 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Absa Group Ltd (JSE:ABG, Financial) achieved 8% revenue growth, driven by a 12% increase in net interest income.
- The company saw a significant increase in digital transactions, with transactions on the Absa app increasing by over 200% since 2018.
- Customer acquisition improved, with new-to-bank retail transactional accounts increasing by 21% in 2023.
- The CIB business showed strong momentum, with earnings growing 23% and pre-provision profit increasing by 13%.
- Absa Group Ltd (JSE:ABG) maintained a strong capital position, with a CET1 ratio of 12.5%, at the top end of the Board target range.
Negative Points
- Earnings growth was muted at 1%, below the company's expectations due to a deteriorating operating environment.
- The credit loss ratio increased to 118 basis points from 96 basis points, driven by increased consumer strain in the SA Retail Portfolios.
- Operating expenses increased by 10%, largely due to investments in the sustainability of the franchise.
- The return on equity (ROE) decreased to 15.3% from 16.4% in 2022, reflecting low earnings growth.
- The South African economy faced significant challenges, including record levels of load shedding and logistics infrastructure constraints, impacting business confidence.
Q & A Highlights
Q: PSC increased loans and advances in both home loans and VAF, yet these areas had some of the highest credit impairments of 160% and 29% respectively. Similar case with EB cards and personal loans. Can you shed more light on the lending strategies in these areas, given pressure on consumers?
A: (Christopher Snyman, Interim Group Financial Director) We have seen a slowdown in consumer-facing portfolios in PSC and EB, driven by both customer and our own appetite for origination. The base for impairments in home loans was relatively low in the prior year, leading to an elevated increase. The broad theme is the pressure on South African consumers, which we have highlighted. (Arrie Rautenbach, CEO) Our origination strategies are dynamic, focusing on customer onboarding processes, digitizing channels, and expanding margins. Despite increased loss rates, these vintages remain profitable on a risk-adjusted margin basis.
Q: Chris mentioned tactical cost opportunities ahead. Can you give some color around the size and timing of these opportunities?
A: (Christopher Snyman, Interim Group Financial Director) We are looking at discretionary costs over the next 6 to 12 months to protect our investment spend, which is critical for long-term sustainability. We see opportunities to pull back on some costs to make a meaningful impact. Additionally, we are focusing on productivity improvements over the next two to three years, which will be a longer-term opportunity.
Q: You speak about an immaterial difference between normalized and IFRS reporting going forward. Do you expect this to be materially lower in full year 2024? Can you also talk through your drivers of higher CLR in H1 2024 to H1 2023?
A: (Christopher Snyman, Interim Group Financial Director) The impact of separation items reduced our earnings by roughly ZAR900 million in 2023, and we expect this to be about ZAR300 million in 2024. For the first half of 2024, we expect similar loss rates to H1 2023, with elevated retail portfolio losses and increased charges in CIB and RBB ARO. However, we expect a slight reduction in the full-year credit loss ratio.
Q: High single-digit NIR growth in 2024 reflects a large increase in run rate versus underlying level achieved in 2023. What are the main drivers of this? Does your guidance incorporate interest rate cuts in 2024?
A: (Christopher Snyman, Interim Group Financial Director) The underlying NIR growth in 2023 was closer to 6%, considering base effects like the disposal of the investment cluster and fee actions. For 2024, we expect 75 basis points of rate cuts, with a small impact on COR and a larger benefit in 2025. (Arrie Rautenbach, CEO) We are confident in our NIR growth due to net customer growth and improved customer activity levels.
Q: Can you please clarify your ROE outlook for full year 2024?
A: (Christopher Snyman, Interim Group Financial Director) Our guidance is for an ROE of 15% to 16% on an IFRS basis, up from 14.4% in 2023. This includes ZAR300 million in remaining separation costs and ZAR600 million impact from our BEE transaction.
Q: To reach your ROE target of more than 17% on an IFRS basis in 2026, how much of this is just higher endowment and CLR moving into the midpoint of the through-the-cycle range?
A: (Christopher Snyman, Interim Group Financial Director) Endowment is not a driver; we expect it to pull back with lower rates. CLR moving inside the range is a key driver, with a 15-basis point reduction equating to roughly a 1% ROE improvement. Everyday banking and relationship banking are high ROE businesses, and we expect growth from investments in frontline staff and digital platforms.
Q: What is your outlook for collateral values and their potential impact on provisioning, particularly in a product solutions cluster?
A: (Arrie Rautenbach, CEO) Collateral values have held up well, and our loan-to-value ratios are within our appetite. We do not expect a negative impact on provisioning from collateral values in the short term.
Q: Please explain the net monetary position loss of ZAR550 million in Ghana. Why do you expect further hyperinflation accounting in Ghana?
A: (Christopher Snyman, Interim Group Financial Director) Hyperinflationary accounting is applied when cumulative inflation exceeds 100% over three years. We expect to continue this in 2024. The loss on monetary items is a paper loss, with a corresponding adjustment to opening retained earnings, so shareholders are not net worse off.
Q: How do you reconcile your target of productivity focus and outlook statements, mid to high single-digit growth in operating expenses, assuming inflation expectation is about 5%?
A: (Christopher Snyman, Interim Group Financial Director) We expect weighted inflation to be around 6-7%. We are focusing on discretionary costs and see productivity improvements as a longer-term opportunity. The hiring cycle in 2023 will also have a base effect in 2024.
Q: Would you consider share buybacks in capital allocation given the share has been trading below book value?
A: (Christopher Snyman, Interim Group Financial Director) Our capital remains strong to support growth opportunities. We have increased our dividend payout to 55%. We will continue to evaluate capital allocation, including potential share buybacks, if growth opportunities do not materialize.
Q: In which markets do you expect the fastest growth in other African regions, and what drivers will support that? Is there a long-term target for earnings contribution from the rest of Africa regions?
A: (Arrie Rautenbach, CEO) We expect higher growth outside South Africa, with our businesses set up to exploit this growth. We anticipate the ARO regions' contribution to continue increasing over the short, medium, and long term, beyond the current 30%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
