Absa Group earnings decline

Absa Group Limited has posted a 51 per cent decline in normalised headline earnings to R8 billion after impairments nearly trebled to R20.6 billion amid the economic downturn that was precipitated by the coronavirus (COVID-19) pandemic.

Earnings and returns improved materially in the second half of the year as lockdown restrictions eased, particularly in South Africa, which accounts for more than 80 per cent of the group’s earnings. The Group’s headline earnings fell 82 per cent in the first half of 2020 compared with the first half of 2019. Headline earnings in the second half of last year were 19 per cent lower than in the second half of 2019.

A press release issued by the financial service provider on March 15 quoted the Group Chief Executive of Absa, Mr Daniel Mminele, of saying that “Absa responded decisively to the COVID-19 pandemic and the resulting economic downturn.

“We supported our staff, customers and communities through a difficult period and produced a resilient financial performance in a very challenging operating environment.

“We also successfully completed our separation from Barclays and reviewed our strategy to ensure that it continues to be relevant in the context of rapid changes in the operating environment.”

As COVID-19 lockdown restrictions were implemented across countries last year, Absa moved swiftly to adopt remote-working, implement payment relief measures for clients, and to launch initiatives to support the communities we serve, while ensuring operational and financial resilience.

COVID-19 pandemic response

Colleague safety and wellbeing was the immediate priority, following which substantial customer and community support initiatives were implemented.

“We believe we offered the most comprehensive relief programme in the South African banking sector, providing approximately R9.8 billion in cash-flow relief to 613 000 retail and business banking customers,” it stated.

In addition, Absa waived various transaction fees and provided insurance premium relief, while temporarily extending credit cover to include a wider definition of ‘loss of income’ events.

Absa subsidiaries in countries outside of South Africa extended COVID-19 payment relief to more than 60,000 retail and business banking customers.

Approximately R54.4 billion in payment relief was extended to corporate and investment banking clients during the year under review. This included interest and/or capital moratoriums, covenant concessions and extensions of maturity dates on expiring facilities.

Absa also mobilised its citizenship programme to support communities across presence markets. Absa and its employees directed R83 million towards COVID-19 response initiatives across the continent.

Financial performance

While credit impairments had a substantial negative impact on earnings, Absa Group’s 2020 financial results indicated positive underlying trends, including a two per cent increase in income and strong growth in pre-prevision profit. (Pre-provision profit is profit before setting aside funds for impairments.)

Net interest income growth of five per cent stands out, considering large policy rate cuts that reduced Absa’s net interest income in South Africa. However, Absa’s structural hedge released R2.6 billion to the profit and loss statement to partially offset this.

Operating expenses remained well-managed, declining two per cent.

Combining resilient revenue growth with lower costs produced positive operating JAWS – a measure of efficiency – of three per cent, improving cost-to-income ratio noticeably to 56 per cent.

“I was really pleased with our seven per cent rise in pre-provision profit as this is an important indicator of positive underlying performance. I believe that we have appropriately prioritised balance sheet strength balanced against selective targeted growth during these uncertain times,” the Absa Group Financial Director, Mr Jason Quinn, said.

Strategy

Absa undertook an in-depth review of the group strategy in 2020, two years after the launch of the 2018 growth strategy, to evaluate execution progress, and to assess relevance given the changes in the operating environment.

Absa’s refreshed strategy addresses the implications of the evolving operating environment, and will accelerate the growth of the business, as the Group continues to execute and consolidate elements of the 2018 strategy that have been showing traction. Absa will refine its go-to-market approach and execute with agility and speed, keeping the customer at the heart of everything we do.

Strategic shifts are required to ensure that Absa delivers deeper shared value to a broad range of stakeholders, strengthening the Group’s position as a purpose-led organisation.

Absa will become even more customer-centric in meeting the specific needs of clients, embrace digital-first distribution channels to match customers’ changing behavioural patterns, and diversify market reach to match customers’ points of presence.

Caption: Mr Daniel Mminele