Absa sees massive leap in full-year profit

‘The decisions we made in 2020 to build significant provisions for bad debts proved to be the right ones. So in 2021 our bad-debt provisions were quite modest’: interim CEO Jason Quinn.

FIFI PETERS: Absa has restored dividend payments, rewarding its shareholders with a dividend of R7.85 in the 2021 financial year. This is after it didn’t pay a dividend last year, like most banks, taking the more cautious approach as a result of the Covid-19 pandemic. But this time around Absa has reported that profits more than doubled, with its headline earnings coming in at R18.6 billion in the 2021 financial year. We have Jason Quinn, the interim CEO at Absa, joining the Market Update to take us through the numbers. Jason, once again thank you so much for joining the Market Update; we certainly appreciate your time just reflecting on where things stand currently with your book past the pre-pandemic levels, a trend that we saw happening already in the first half of the year. But, as you reflect on the biggest drivers that boosted profits this time around, can you talk to us about the sustainability of these drivers in keeping the profit momentum growing in the year ahead?

JASON QUINN: Thanks Fifi. Good evening to you and your listeners. Thanks for the opportunity. Fifi, I think that’s a good summary. If you look at our performance you’ll see that headline earnings got to, as you say, R18.6 billion. The decisions we made in 2020 to build significant provisions for bad debts proved to be the right ones. So in 2021 our bad-debt provisions were quite modest and, in fact, at the bottom end of our expectations; they came through at 77 basis points.

The recovery in provisions got us to 2019 levels – more or less – of earnings, but we printed about two-and-a-bit billion more than that, and that was supported by revenues growing faster than cost for those two years, with positive draws, pre-provision profits up quite nicely. In other words, last year up 7%.

A strong contribution across our business, so a nice diversified performance in the retail and business bank. Good to see loan momentum continuing in mortgages and vehicles. A great deposit growth. It’s always a nice customer-franchise health indicator, so deposits up 12% there – a very good story for Absa.

And then in the Corporate and Investment Bank [CIB], a really good performance from corporate in the investment bank. Our global markets team did very well. Revenue is up 14%.

So looking at all of those indicators, Fifi, we confirm today that we expect that strong second-half momentum in our business to continue into 2022, with similar levels of RoE [return on equity], high single-digit revenue growth, positive draws and many other strong factors. So in our hands, but we think we’ll execute well against that.

FIFI PETERS: The RoE or the return on equity reported this time around was quite impressive, jumping from 5.2% to 14.6%, and I think your shareholders could possibly be quite encouraged that you are expecting a similar momentum thereof. But [Jason], how satisfied are you with the performance of your retail business, and do you think there are any areas where you can improve the situation presently?

JASON QUINN: Oh, thanks Fifi. Yes, return on equity, the numbers you quoted are the IFRS [International Financial Reporting Standards] numbers. We look at a normalised reporting, excluding the effects of separation from Barclays, which means we think we’re at 15.8% without that, which is the most comparable one to other banks – nicely ahead of cost of equity of 14.5%. That’s a couple of years ahead of the guidance we gave a year ago. So yes, great to see Absa’s RoE well above cost of equity again, and a very good performance.

Both earlier return on equities in our largest business, our CIB, was in the 20s [and] retail business banking [saw] a strong rebound, as you suggest. I think in retail business banking what we’re looking for more now is pre-provision profits – in other words, a bit more revenue momentum, particularly in non-interest revenue, given the fact that I’ve already said that their loans were great on their deposits. It’s not just a matter of growing transactional revenues a bit better going forward. I think that’ll be one of the key drivers we’re looking for from the retail bank in South Africa going forward.

FIFI PETERS: Just in going forward, we heard recently from the finance minister – I think he was just echoing the words of the president as well – regarding the support that a bank such as yourself would be providing in the form of assistance to smaller enterprises as part of the Covid-19 recovery. I think it’s a bounce-back scheme, as it were. Can you just talk to us about the role that you are playing there?

JASON QUINN: Yeah, absolutely. Fifi, at the depth of Covid, Absa provided significant levels of relief to its customers before that first loan-guarantee scheme was launched. So we had almost a third of our mortgage book, for instance, under relief, which meant that those customers didn’t have to make instalments for six months if they were in good standing. So we put significant support back into the market. We supported the first loan guarantee scheme and [in] this one, this latest one of course, any initiative that supports our cash customers with respect to cash loans in their time of need we would support. So we’re fully engaged in the opportunity around that new scheme.

FIFI PETERS: Just going back to the numbers, your numbers coming as we’ve seen the numbers of your colleagues in the banking sector also come, suggesting the economy being a lot more resilient, being in a better form than was initially expected – so would you say the recovery then is firmly on track and that we can potentially be excited about a growing economy this year, just based on what you are seeing walking through your doors?

JASON QUINN: Thanks, Fifi. If you go back to, let’s call it April 2020, when we were in Level 5 lockdowns and the like, and you’d offered us this economic scenario that we’re in today, I think I’d suggest we’d grab onto that with two hands. We’ve seen significant policy support in the form of interest rates being lowered, we’ve seen the commodity sector do particularly well, and we’ve seen how that supported the fiscus, some sectors like agriculture also coming through very strongly with exports. So yeah, look, it’s a delicately balance, Fifi, right now.

The events in Ukraine are obviously high [on] everyone’s radar, and there’s lots still to be done. But if you look at where we are now, our conviction is that we’re going to be okay. We think that the inflation pressures ought to be watched, particularly with the oil price and where that’s going.

However, on the other side, we see significant commitment from the government around infrastructure and infrastructure spending and investment. I think that that should position our economy well for recovery.

FIFI PETERS: Does your book have any exposure to the Russia-Ukraine crisis?

JASON QUINN: No. Fifi, we’ve got negligible exposure on our balance sheets to anything related to Russia or Ukraine. We’ve got some clients, multinational clients, that may have exposure. We’re watching that carefully, but nothing to report at all on our side.

FIFI PETERS: Jason, in terms of management structure, when can we expect Absa to announce a permanent CEO?

JASON QUINN: That’s a matter for our board. Our board’s fully engaged on that.

FIFI PETERS: All right. Any idea on when an announcement can be expected?

JASON QUINN: No, that’s for the board to engage on.

FIFI PETERS: But talking about the board, it would be remiss of us not to reflect on what is happening in the boardroom, with the former lead executive challenging the process that was followed to appoint the new chair. Is there anything that you can tell us about where things are legally there?

JASON QUINN: No, Fifi, that’s a matter that will be heard by the courts in due course. So it’d be inappropriate for me to comment further at this point. At the time of Mr [Sipho] Pityana’s removal from our board there was communication from our company – and that’s still relevant today.

FIFI PETERS: Has the legal situation presently – which of course follows the departure of the former Absa CEO, Daniel Mminele – made doing business difficult?

JASON QUINN: Fifi, if you look, that was a year ago. I don’t think performance can ever be attributed to one person. We’ve got 35 000 people at Absa that have worked tremendously hard to deliver the results that you see us produce today. Our client franchise is in a good position, as you heard from me earlier. So, no, you’ve got a team here that’s very committed to Absa and to its success.

FIFI PETERS: All right. Jason, thanks so much for taking those questions. One last question [is] on growth in the year ahead, and where it’s likely to come from. Can you just give us that detail?

JASON QUINN: For the markets generally, Fifi, is that what you’re referring to?

FIFI PETERS: For Absa, in terms of the opportunities that you are eyeing, not only here in South Africa, but also in the rest of the continent where you are, I think, still trying to pan now or beef up your presence.

JASON QUINN: Thanks, Fifi. I think from Absa right now you’ll probably see more of the same in terms of where the growth should come from. We’ve been delivering and executing, I think, fairly well against the strategy. If you look at how we responded through Covid, making sure our colleagues were safe, being there for our customers, that stood us in good stead to preserve capital liquidity then, [and that] gives us a good balance sheet that we can grow off, and you’ve seen the growth come through last year. So I think those targeted markets are likely to remain the same, because we see significant headroom still in the markets that we’re in.

FIFI PETERS: All right. Jason, thanks so much for your time. Jason Quinn, the interim CEO at Absa.

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