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‘Broad-based efforts’ help boost Absa HY earnings

Investments in digital processes; client relationships pay off for the lender in a low-growth environment.

NOMPU SIZIBA: Absa Bank came out with its financial interims today [Tuesday] for the six months ended June 2019. It reported total revenue up 6% to R39.1 billion. Headline earnings per share rose 3% to R8.3 billion, while operating expenses rose by 6% to R22.1 billion. The company’s return on equity declined to 16.4% from 17.1% during the same period last year. Shareholders are set to get an interim dividend of R5.05/share.

To unpack the numbers for us and give us a general feel of what’s been happening at the company, I’m joined on the line by Jason Quinn, the group financial director at Absa. Thanks very much for joining us on the line, Jason. Your top-line growth was in single-digit territory, but still above inflation. What were the drivers of the growth?

JASON QUINN: Thanks, Nompu. A couple of factors. In the first instance, we’ve been able to take some market share in lending, deposit-taking and transactional revenues. So pretty broad-based across our business, including outside South Africa, which, as you can imagine, has pretty much improved growth prospects compared to South Africa.

NOMPU SIZIBA: And in terms of that market share that you’ve managed to encroach upon, what is it about your offering, do you think, that’s been appealing to customers to move to you?

JASON QUINN: Well, it certainly is the variety of assets that we’ve put in, a difference in different asset classes. Let me give you an example of our mortgage business – home loans in South Africa. We were able to increase our production of new billings there up to 16% growth. That was in a pretty tough housing market. The way we were able to do that wasn’t necessarily changes to risk appetite or pricing or anything like that, it was really just around investing in our back-end processes, making sure our turnaround times were better, looking at our relationships with the mortgage originators, and strengthening those. So broad-based efforts across the business to get the growth trajectory better.

NOMPU SIZIBA: What about the business in South Africa vis-à-vis companies? What are you seeing there?

JASON QUINN: Similarly, we had pretty strong growth in lending in corporate South Africa. That’s been a strategy of ours for a number of years – to take some share. As you can imagine, we’ve been underweight corporate for some time as Absa in South Africa, and we’ve been able to improve that profile – not just in lending, but in deposits as well. Deposits at a group level were up 13% and for us that’s a good indicator of customer franchise health.

So – how do we get there? Building relationships with our clients, helping them through some of the challenges they face. We saw good growth in commercial property finance as well. So a nice diversified portfolio, but most of them were starting to fire.

NOMPU SIZIBA: Our economy has been moving sideways for quite some time. In this type of environment, what then is the strategy? How do you try and make gains in an environment that’s highly competitive, and also in a low-growth environment?

JASON QUINN: A great question. Certainly I think the GDP and the like have disappointed this year. I think when we probably spoke in March I was hoping for 1.7% GDP. It’s turning out probably closer to 0.5%. So, this growth isn’t exactly on the back of a buoyant economy. It’s certainly the opposite of that. The growth that’s around the investments we’ve been making in our digital processes, our banking app, our coverage relationships with clients improving, turnaround times, process and all of these things are assisting us to take a little bit of share.

NOMPU SIZIBA: Your costs went up a little. Is that due to the investments that you are referring to?

JASON QUINN: Absolutely. Our cost growth was up 6%, which matched our revenue growth of 6%, so our operating leverage was flat. Within our costs, our underlying cost growth is probably lower than the 6% I just mentioned. Within the half we also had a restructuring charge of about R0.5 billion. And, if you exclude that, you’d see the actual operational underlying cost growth coming through a bit lower.

NOMPU SIZIBA: Jason, what progress and perhaps challenges are you seeing on the rest of the African continent where you have operations? How much do those operations account for you guys in terms of revenue and profit?

JASON QUINN: Thanks, Nompu. About one-fifth of our earnings and revenues come from outside South Africa. So some nice portfolio diversification benefit coming through. If you look at it a different way, it’s certainly true that the GDPs in most of the markets we’re in have also been revised downwards, but they are still a lot stronger than South Africa’s. So the average GDP we expect in our markets outside South Africa is about 5% now, compared to the 0.5% in South Africa. So our prospects there remain good.

We’ve also got a business that is probably 75% corporate and investment banking now, which comes off a very low base 30 years ago.

The other key highlight is that, when we bought those retail banks from Barclays in 2013, their return on equity was about 13% – and we’ve been able to maintain just about 19% now. So the rest of Africa contributes both to our present revenue earnings and also to our returns.

NOMPU SIZIBA: Just on the issue of return on equity, I see that that did tick down somewhat. What’s your expectation and target going forward?

JASON QUINN: Well, we’ve set a medium-term target to improve our return on equity to 18 to 20% by 2021. We printed 16.4% for the half and, as you say, that was slightly down on last year. We revised our outlook for this year – that it should be slightly down on last year’s RoE of 16.8%. That’s really a factor of our earnings growing at, let’s say, 3%, but our equity growing at about 8%. That’s really the sort of leverage of capital that’s causing that at the moment.

NOMPU SIZIBA: What’s Absa’s story around lowering its bricks-and-mortar footprint, as traditional banks move away from that and invest more in tech offerings to their customers? And were there any jobs lost in the period under review, where technology has been able to take over the role of human beings?

Read: The bank branch is dead. Long live the branch

JASON QUINN: Of course. We haven’t got a strategy by definition to close branches. We’ve got a strategy to serve our customers, and of course their needs are changing as we invest in the digital platforms that you mention. So, if you want an absolute number, our branches declined from about 670 at the end of last year to 640 at the end of June. But of course, that’s a fluid number. Within that we’ve opened a lot of branches, because we follow where our customers footprints are and the like. In branches we focus now on where we need to give customers advice, where there needs to be human interaction, and these type of things. So we haven’t per se got a branch-closing strategy; we are just trying to make sure we are present to serve customers in the way they need us to.

NOMPU SIZIBA: I hear you. This might be a tricky one, given your position. But it’s taken a while for Absa to announce a replacement CEO following the stepping down of Maria Ramos. The new permanent CEO doesn’t come in until 2020. Why does there seem to be a secrecy over who is going to be taking over? And, in the meantime, how do you avoid the perception in the market that Absa is running based on a kind of caretaker mechanism?

Read: Why doesn’t Absa have a successor to Ramos?

JASON QUINN: Well, I can’t say much more, other than what our board announced yesterday in terms of the stock exchange announcement we made, which, as you say, indicates that the new CEO starts in January and will be announced in due course. The board certainly clarified that it has completed its processes. So I think we’ll wait and see what happens there.

But what I don’t want you to think is that the leadership team around Absa isn’t very focused on implementing the strategy that we took to market last year. You can see it in the momentum in our numbers, because that’s an important milestone for us to put those out, and demonstrate how the franchise help is improving. We are implementing at base. We are also dealing with the separation. So it’s not like, if I look around the Exco, that anyone is confused or distracted at the CEO level. We certainly are deliberately executing the strategy.

NOMPU SIZIBA: Okay, fair enough, Jason. Thank you very much for your time, sir.

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