Absa Group Ltd has reported a 51 percent decline in normalised headline earnings to Shs 1.96 trillion (R8 billion) after impairments nearly trebled to Shs 508 trillion (R20.6 billion) amid the economic downturn that was precipitated by the 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% of the group’s earnings. Group headline earnings fell 82% in the first half of 2020 compared with the first half of 2019. Headline earnings in the second half of last year were 19% lower than in the second half of 2019.
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.
“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,” said Daniel Mminele, Absa Group Chief Executive. “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.”
“We believe we offered the most comprehensive relief programme in the South African banking sector, providing approximately shs 2.3 trillion (R9.8 billion) in cash-flow relief to 613 000 retail and business banking customers,” said Mminele. 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 Shs 13.2 trillion (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.
While credit impairments had a substantial negative impact on earnings, Absa Group’s 2020 financial results indicated positive underlying trends, including a 2% 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 5% 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 2%.
Combining resilient revenue growth with lower costs produced positive operating JAWS – a measure of efficiency – of 3%, improving cost-to-income ratio noticeably to 56%.
“I was really pleased with our 7% 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,” said Jason Quinn, Absa Group Financial Director.
Retail and Business Banking South Africa (RBB SA)
While RBB SA’s earnings declined 55%, strong pre-provision profit growth of 6% largely cushioned the business against an increase in impairments.
In a challenging and uncertain period, RBB SA actively supported customers through relief measures including financial advice, proactive customer and community outreach programmes and the provision of comprehensive payment relief.
Many customers signed up for the payment relief programme as a precaution, and by December, the outstanding exposure of loans deferred had reduced significantly as customers resumed payments. A combination of these support programmes, strong equity in mortgages and elevated savings rates, along with a resilient balance sheet, place the business on firm footing as it navigates the next phase of its strategy journey.
At the same time, RBB SA continues to invest, particularly in digital to improve operating efficiencies and the overall customer experience. This is illustrated by a 23% increase in digitally active customers to 1.9 million, largely driven by the mobile app. The app has been consistently the highest-ranking in the market.
CIB’s headline earnings declined by 17% as impairments increased six-fold. Pre-provision profit increased by 22%, supported by income growth of 14%, with all core operating business units delivering solid revenue growth.
CIB’s completion of separation from Barclays, which involved 44 projects, was a significant milestone, freeing up management time and facilitating the introduction of newer systems.
CIB successfully integrated the custody and trustee business (Absa Investor Services) which was acquired from Société Générale. The US office became operational with all regulatory approvals and licenses secured.
Absa Regional Operations (ARO)
ARO earnings declined 56%, or 65% in constant currency. Pre-provision profit grew 3% as ARO continued to benefit from its well-diversified portfolio, both by activity and geography.
Completing its separation from Barclays was a significant event for ARO, most of which Absa acquired from Barclays in 2013. It included the largest single data and systems migration in Africa, as customers in nine countries were switched to a new, enhanced online banking system. It also involved a major rebranding of branches and corporate offices, ATMs, point-of-sale terminals, and over 1.2 million customer cards.
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.
“The review process concluded that, while our strategic choices from the 2018 strategy remain relevant, the world in which we seek to achieve them has changed,” said Mminele. “As a consequence, some shifts and accelerations are required to drive the modernisation our business, not only to maintain relevance but to thrive and advance as a business.”
“The Group has delivered respectable progress over the last two-and-half years against the strategy journey that was adopted in 2018, and we have seen good traction in some parts of the business. Our refreshed strategy enables us to become more precise in expressing how we want to embed customer-centricity at the heart of our business, how we will evolve our digital maturity, and what it means to be purpose-led,” said Mminele.