Financial Mail and Business Day

Absa flags higher revenue growth

Garth Theunissen Investment Writer theunisseng@businesslive.co.za

Absa, SA’s fourth-largest lender by market value, said it expects doubledigit growth in full-year revenue, though it warned that credit impairments were expected to increase as higher interest rates began to negatively affect consumer finances.

Absa, SA’s fourth largest lender by market value, said it expects double-digit growth in full-year revenue, though it warned that credit impairments were expected to increase as higher interest rates began to negatively affect consumer finances.

The group said in a trading update on Wednesday for the 10 months to end-October that revenue growth had been “broad-based” over the period, with the total increase in the “low teens”.

Gross customer loans also grew by “low double digits”, reflecting solid growth across all of the bank’s divisions, while deposits rose by “high single digits” and the increase in noninterest income was also in the “low teens”.

Nevertheless, credit impairments increased in the 10month period, pushing Absa’s credit loss ratio to the upper half of its through-the-cycle target range of 75 to 100 basis points. The group said its life insurance revenue rebounded in line with the waning Covid-19 pandemic and further helped by mid- to high single digit growth in fee and commission income.

“Revenue for the year is likely to increase by low teens year on year, driven by strong noninterest income growth in part due to a recovery in life insurance revenue off a low base,” Absa said in its voluntary trading update.

“We expect low double digit net interest income growth, benefiting from rising interest rates, high single digit growth in gross customer loans and midsingle digit growth in customer deposits.”

SA’s banks have benefitted from the 325 basis points in cumulative interest rate increases instituted by the Reserve Bank in 2022.

While higher borrowing costs place consumers under greater financial pressure it also boosts bank earnings on loans disbursed to customers, a phenomenon known in the industry as the endowment effect.

OPERATING EXPENSES

Absa said its operating expenses for the full year were expected to increase by high single digits year on year, reflecting higher performance costs, the depreciation of the rand and continued technology investment. For the first 10 months of 2022 its costto-income ratio improved to “the low fifties” while its return on equity for the period improved noticeably to 17%.

The group said its capital levels remain strong with its common equity tier 1 (CET1) capital ratio at 12.4% by endSeptember 2022.

Higher interest rates in SA are expected to raise credit impairments for the full year, particularly on its vehicle finance book which it said were likely to rise “materially”. Credit impairments on personal loans are also expected to increase “materially”.

“Our return on equity is likely to improve substantially year on year to about 17%, well above our cost of equity,” Absa said. “Given our strong CET1 capital ratio, we expect to increase our dividend payout ratio to at least 50% for the year.”

Absa is scheduled to release its 2022 financial results on March 13.

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2022-12-08T08:00:00.0000000Z

2022-12-08T08:00:00.0000000Z

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