Absa profits take a massive hit as earnings look set for 92% decline
DURBAN – Absa opened weaker on the JSE on Thursday after the bank flagged that its profits would likely take a massive hit in the six months to end June.
Absa said its earnings were expected to decline between 92 percent and 97 percent with headline earnings per share and earnings per share tumbling compared to last year’s 920 cents and 918.9c respectively.
It said the Covid-19 pandemic, national lockdowns and weak economy during the first half had a material impact on customer loan and transaction volumes while significantly lower policy rates reduced its net interest margin despite protection from its structural hedge.
Absa said its revenue would also slow to single-digit growth but it has managed to reduce operating expenses during the period.
“However, credit impairments were four times higher, resulting in a credit loss ratio of 2.77 percent from 0.79 percent in the comparative period. Half of the increase reflects judgmental macro-economic overlays, which strengthened stage 1 and 2 loan coverage materially,” Absa said.
The bank said based on its current expectations, credit impairments should decrease significantly in the second half of 2020 and said its balance sheet remains resilient, with an 11 percent common equity tier 1 ratio at the end of June, together with strong levels of liquidity and an 85 percent loans-to-deposits and debt securities ratio.
At the same time, FirstRand said it also anticipated that its attributable earnings per share to fall between 296.2c and 350.1c from 538.6c and headline earnings per share to decline between 273.5c and 323.2c for the year to end June, down from 497.2c while normalised earnings per share is expected to be between 273.5c and 323.2c, down from 497.3c compared to a year earlier.
FirstRand said last year’s attributable earnings included R2.3 billion of earnings relating to the sale of the Discovery Card business, the absence of which accounts for a 7.6 percent reduction in 2020.
“The main driver of this decline in earnings is the materially higher than expected credit losses and credit impairment charge, driven by the forward-looking economic assumptions required under IFRS 9,” FirstRand said.
Nolwandle Mthombeni, an investment analyst at Mergence Investment Managers, said the expected decline in earnings by both banks is understandable as lending in an environment of such uncertainty has made managing credit risk of existing and potential clients much more difficult.
“However, SA banks have shown to be resilient in this constrained environment and they remain well capitalised. But profitability will be more heavily impacted than in 2008,” Mthombeni said.