Absa earnings plunge on impairments as consumers battle to pay debt
DURBAN – Absa on Monday joined the growing list of financial services institutions hard hit by Covid-19, warning its shareholders that it expected the trading environment in the second half of the year to be extremely difficult.
Absa said its profits would decline more than 80 percent during the six months to the end of June on impairment charges as consumers struggled to repay debt.
The group said its earnings fell 82 percent to R1.46 billion, with impairment charges increasing 297 percent to R14.66bn from R3.7bn last year.
It said it took a conscious decision to increase impairment provisions against future potential credit losses.
Absa said diluted normalised headline earnings per share (Heps) tumbled 82 percent to 173.4 cents despite revenue increasing 3 percent to R40.1bn. It said operating expenses fell 2 percent to R21.6bn.
Gross loans and advances to customers rose 7 percent to R975bn.
The group did not declare an interim dividend, following an earlier advice from the SA Reserve Bank that encouraged banks to ensure that capital conservation took priority over any distributions of dividends on ordinary shares.
Absa had provided R8.7bn in relief on loans worth R154bn to 538 000 customers, including 20 000 businesses, in South Africa by end June.
It said its corporate and investment banking division in South Africa assisted clients and granted payment relief on R37bn of loans, 12 percent of their book, while Absa regional operations afforded customers payment relief on loans totalling R25bn.
The group said that all its business units remained profitable during the period, despite experiencing significantly higher credit impairments and the material impact of the lockdowns on transactional volumes.
Chief executive Daniel Mminele said the group forecast a continued difficult environment for the consumer and heightened uncertainty to dampen business confidence and investment in the remainder of 2020.
“In the current economic climate, ensuring continued operational and financial resilience is paramount. We are therefore temporarily holding our growth ambitions in abeyance to focus on cost management and capital and liquidity preservation while continuing to support customers,” Mminele said.
Jordan Weir, a trader at Citadel, said the main reason for the relatively large decline in earnings was the almost three-times rise in credit impairments on bad loans during the lockdown.
“With South Africa having had one of the world’s longest lockdown periods, the widespread impact of job losses and salary cuts negatively affected the financial sector’s ability to collect outstanding loan repayments from cash-strapped clients,” Weir said.
Looking ahead, the group said uncertainty remained high, but its strong capital and liquidity position would allow it to continue to support its customers.
Absa rose 3.13 percent on the JSE on Monday to close at R83.