FIFI PETERS: Earlier today, August 16, 2021, Absa reported soaring profits in the six months to June, with the amount of money customers deposited at the bank increasing beyond R1 trillion for the first time ever. Punki Modise, the interim group financial director at Absa, joins the SAfm Market Update to review the numbers.
Punki, thanks so much for your time. Let’s just talk about the profits because I see that headline earnings per share, which is what is commonly used to measure profits, soared over 1400% when we compare it to the six months in the previous period, My calculations could be wrong, and please feel free to correct me there, but this is not normal growth. So just talk to us about exactly what drove your profits up so strongly.
PUNKI MODISE: Thanks Fifi. I think that’s correct. If I look at our earnings, our earnings and returns were better than expected. To your point, they have grown significantly. From a headline earnings point of view, we grew 500% to headline earnings of R8.6 billion. That was largely due to far lower credit impairments.
And then at the same time from a revenue point of view our revenue grew 3%, which I think was reasonable, considering the tough macro backdrop as well as the substantial impact that Covid-19 has had on our life business.
And then I think the other key factor to mention is that operating expenses remained fairly well managed. They grew at a 5%, resulting in a slightly higher cost-to-income ratio of 55%. All of those component parts ultimately ended up producing 1% higher pre-provision profit on a yearly basis.
FIFI PETERS: Are you comfortable with that current equation right now, whereby you have got your expenses growing a little bit higher than your revenue?
PUNKI MODISE: I am comfortable, Fifi. And really from my side the main factor driving that is the provisions that we’ve had to take in our life business. If I exclude the impact of the life business provisions that we’ve taken, we can clearly see that the underlying momentum remains fairly robust. So, within that combination, I’m still quite comfortable that that is the right level of growth that we are seeing.
FIFI PETERS: And Punki, with this phenomenal profit growth that the bank has reported today, how far are profits from before the pandemic hit?
PUNKI MODISE: To your point, I think it’s important to mention the fact that last year we obviously took on significant provisions, just to fortify the balance sheet and ensure that, given the tough macroeconomic environment, we could continue to effectively support our customers, as well as run a franchise that is healthy. So from that perspective the growth that you largely see is a factor of the provisions that are not repeating coming from last year.
FIFI PETERS: Let’s talk about that deposit number now and the fact that a lot more customers are choosing you to safeguard their money in this environment. Are these new customers or existing Absa clients who are depositing a lot more in this period?
PUNKI MODISE: I would say it’s a combination, Fifi. At the same time banks almost like a safe haven in the current context. So we are seeing a significant shift towards banks, which is more like a flight to safety. And that is what’s largely driving a significant proportion of that growth.
At the same time I think, when you look at corporates, to a large degree corporates are a lot more defensive during this time. And I also think business confidence is a bit low. You are finding that there’s a lot of liquidity that’s just lying there unspent, and that’s what’s really driving this strong deposit growth that you see.
FIFI PETERS: But Punki, are you seeing a difference between your large corporates and your smaller businesses, your SME players, because a lot of research out there [indicates] that these are the individuals or the businesses that have been the hardest hit by the pandemic. What kind of activity are you seeing from the SME space versus some of your larger clients?
PUNKI MODISE: You are right. I think the larger clients, as I said, are a lot more defensive at this point in time. I do agree with you that SMEs have been the ones that have been hurt significantly by the pandemic.
The other big sector that is experiencing quite a bit of strain is the entertainment sector. From that point of view you are still continuing to see pressure in that space.
FIFI PETERS: Entertainment, tourism, hospitality. The question then is that for SMEs in the space – some of whom are currently not getting that much money into the business because Covid-19 still remains a big risk – and some research reports that we’re not over the third wave as yet – what kind of assistance has the bank been able to extend to some of these businesses?
PUNKI MODISE: As I said, we’ve got a balance sheet that we fortified, and we are fortifying it for our customers. At the end of the day it doesn’t matter where in the segmentation those customers sit. And we encourage SMEs to come and talk to us before they experience significant strain, because it’s usually a lot better when customers come to us quicker than late and their businesses are under distress. But also, for businesses that are in distress we do look at them to see the future potential of the businesses and assist them appropriately. I think we fully appreciate the fact that this is an ecosystem and without SMEs, to be quite honest, it’s very difficult to grow economies anywhere in the world.
FIFI PETERS: Mm. On the other side of the equation, when we look at your lending book, there has been quite a lot of activity in lending to your retail customers or normal customers wanting to buy new homes, wanting to buy new cars in this environment. Again, are these new Absa customers that are knocking on your door, or existing clients? And can you just describe the shape of this consumer – given what we have seen with unemployment on the rise, with pay cuts on the rise – in this environment around Covid-19?
PUNKI MODISE: I think to your point on customers it’s a combination; and if you look at home loans to a large degree it’s new-to-bank customers who are taking up loans. We are getting them through the relationships that we have built with our mortgage originators.
Then I think at the same time in vehicle and asset finance we are seeing similar trends coming through. So, from a credit-lending point of view, I think we apply a smart growth approach as a bank, which largely talks to responsible lending because while we want to see growth coming through, we want to see sustainable growth coming through. And to a large degree in the current environment, where interest rates are very low, in our affordability criteria we do stress those to ensure that, if interest rates were to increase and increase very quickly, customers will still be able to honour their obligations.
FIFI PETERS: Punki, the low interest-rate environment is great for us who are wanting to take on more credit, but not the best of news for lenders like yourselves that make more money when interest rates are a little bit higher. So then talk to us about what the road ahead looks like for the bank, and how confident you are about growth going forward.
PUNKI MODISE: I think as a bank we are very conscious of the pressures that a low interest-rate environment can put on a bank. As Absa we’ve got our hedging capabilities, which we largely utilise to cushion the impact of that. And then, given the hedge that we currently have in place, we continue to lend comfortably because it’s really pushing us, as a bank, to be able to effectively ride [out] this period when interest rates are significantly low.
So I think as we go forward, yes, the macros remain fairly fickle. However, I do think that we are in a good space to continue supporting our customers.
FIFI PETERS: All right. Good to know, Punki. Thanks so much for your time. That’s Puki Modise, the interim group financial director at Absa – as opposed to the CFO – which today also rewarded its shareholders by paying a dividend. You’ll remember that this time last year the bank opted to preserve the cash in the event of a worst-case scenario. That clearly hasn’t happened this time around.