Absa share price leaps after it forecasts headline earnings more than doubling

Absa Group’s share price rose strongly on Friday after it said it said normalised headline earnings per share for the year to December 31, 2021 was expected to be more than double the 946.5 cents for 2020. Photo: Reuters.

Absa Group’s share price rose strongly on Friday after it said it said normalised headline earnings per share for the year to December 31, 2021 was expected to be more than double the 946.5 cents for 2020. Photo: Reuters.

Published Dec 6, 2021

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Absa Group’s share price rose strongly on Friday after it said it said normalised headline earnings per share for the year to December 31, 2021 was expected to be more than double the 946.5 cents for 2020.

However, risks to its earnings guidance included the possibility of a more severe fourth wave of the Covid-19 than the bank expects, plus any unforeseen political, macroeconomic or regulatory changes.

Absa’s share price increased 4.01 percent to R145.15 Friday afternoon, this after the price had come under pressure in recent weeks after the firing of its lead independent director, who had named the bank a respondent in his court case against the Prudential Authority, which added to existing concerns about the changes at Absa’s board. The share later closed at 4.24 percent to R145.47.

Nevertheless, Friday’s share price represented a more than 25 percent gain in the share price over 12 months - bank earnings in South Africa have in general recovered strongly from 2020 Covid-19 lockdown levels.

Absa said Friday that its revenue grew by mid-single digits year-on-year in the 10 months to October 31, and had improved on its first half revenue.

Net interest income increased by high single digits, with solid deposit growth and an improved net interest margin, which was similar to the first half level and noticeably higher year-on-year.

Non-interest income was broadly flat, an improvement from the first half.

As in the first half, net fee and commission income growth was modest. Total insurance non-interest income was down materially, although by much less than it was in the first half.

Retail and Business Banking’s (RBB) non-interest income declined, largely reflecting Absa Life’s significant first half Covid-19 provisions, as well as targeted fee reductions.

Corporate and Investment Banking’s (CIB) non-interest income rose materially, due to non-recurring negative items in the first half of 2020 and robust performance from Global Markets.

Operating expenses grew by low single digits, slightly less than the first half, reflecting continued cost management partially offset by considerably higher performance costs.

Group pre-provision profits for the 10 months grew by mid-single digits, or low double digits in constant currency, a noticeable improvement from the first half.

Credit impairments improved materially year-on-year, off a high base, resulting in a credit loss ratio in the middle of our through-the-cycle target range of 75 to 100 basis points.

The credit charge in RBB and CIB reduced significantly.

On average the rand was 16 percent stronger year-on-year against currencies in its Absa Regional Operations (ARO), reducing group revenue, operating expenses and earnings, although it was only a slight year-on-year drag from a balance sheet perspective.

Growth in gross customer loans improved from the first half, rising by mid-single digits year-on- year, with stronger growth from RBB than CIB, and from South Africa than ARO.

Within RBB, solid growth in Home Loans and Vehicle and Asset Finance was well above moderate Relationship Banking growth and lower Personal Loans. Customer deposit growth remained robust, increasing by low double digits, with good growth across our businesses and geographies.

From a business unit perspective, RBB’s headline earnings more than doubled year-on-year due to significantly lower credit impairments, while CIB’s increased considerably, given strong pre-provision profit growth and substantially lower credit impairments.

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