Absa Group’s headline earnings increased 27 percent to R11 billion in the first half of the year as revenue increased, demonstrating a continued strong recovery from the global economic downturn in 2020.
Absa reported solid pre-provision profit for first-half of the year, supported by revenue which rose by 14 percent – underpinned by growth across our business units and supported by a rebound in the insurance business in South Africa and increased interest rates across key markets. Net interest income and non-interest income rose 12 percent and 18 percent, respectively.
In June, Absa announced a strengthened and more diverse executive leadership team. Absa refined its operating model – adopting a flatter structure, bringing management closer to customers and allowing the Group to accelerate strategy execution. Effective 1 July, Absa has five business units from two previously.
All business units reported improved earnings and stronger returns during the first half. “All of our key measures are significantly above the pre-Covid levels of first-half 2019,” said Jason Quinn, Absa Group Financial Director. “The strategic decisions we made in the last few years have ensured we remain capital generative and that we are appropriately provisioned as we face a tougher environment,” he said.
The Group balance sheet remains well-positioned, with Common Equity Tier 1 (CET1) having improved. CET1 and liquidity levels remain well ahead of regulatory and Board target ranges.
Costs were well-maintained, even as the Group increased investment in IT for enhanced digital performance and improved customer experience. Total IT spend grew 11 percent to R6billion. Improved stability and enriched functionality saw digitally active customers grow across our businesses including a 10 percent increase to 2.2 million in retail and business banking in South Africa. Digital volumes have grown by 86 percent compared to 2019 levels, while branch and ATM volumes have declined substantially.
Business unit performance during the first half:
Retail and Business Banking (RBB)
RBB South Africa, the Group’s largest revenue generator, continued to execute against its 2018 strategic transformation journey supported by momentum from the economic recovery, specifically in first-quarter of the year. Although the operating environment became increasingly difficult in the second quarter, key performance indicators continued to trend positively and in line with expectations, benefitting from deliberate execution over the past three years. Home loans registrations, vehicle asset financing and personal loans, among other areas, increased.
Absa gained market share in key areas of retail advances including home loans and vehicle asset financing; and our deposit market share continued to be strong at 22 percent. Customer numbers increased 1 percent to 9.6 million. RBB earnings from Absa Regional Operations (ARO) increased strongly following very strong revenue growth, an encouraging performance as Absa repositions the business on a growth trajectory and improves returns.
Corporate and Investment Banking (CIB)
CIB benefitted from portfolio diversity and all business units delivered revenue growth. CIB improved its primacy metrics and client acquisition with notable improvements in its regional franchise. CIB revenue growth of 7 percent reflects solid growth in the client franchise. The performance solidifies CIB’s commitment to delivering its Pan Africa growth strategy.
An active force for good
Absa rallied its resources during the April floods in KwaZulu-Natal to assist with immediate and longer-term needs to the value of R10million. In recognition of the direct impact on many households, Absa also waived excess fees on insurance claims.
During first-half of the year, Absa invested R125million in societal impact initiatives in Africa and reached more than 50,600 individuals through financial education literacy and tools. Absa, the largest funder of renewable energy in South Africa, continued to make progress on its sustainability agenda. While the Group’s fossil fuel exposure is set to decline, Absa is looking to double its renewable energy loans as a percent of total group loans by 2030.
Outlook
The macro backdrop deteriorated noticeably in the past six months, and global growth expectations have reduced materially. There are considerably higher inflationary pressures across most of the markets in which Absa operates, and policy rates are increasing faster than we expected. Absa remains well-positioned for the tougher operating environment, with a strong balance sheet and high levels of capital and provisioning.
Absa expects to achieve low double-digit revenue growth in 2022 compared with 2021. Operating expenses will likely increase by low to mid-single digits with pre-provision profit growth in the teens, resulting in a cost-to-income ratio that is expected to be lower than 2021 levels. Return on equity is also expected to improve to approximately 17 percent.