Absa has continued to lose “primary” customers – those who mainly bank with Absa and have a regular source of income in their accounts.
In the year to end-December 2021, this base declined by around 100 000 customers, or 3% from 2.9 million to 2.8 million. However, the number is down 10% from 2019. It has not been able to replace those primary customers it lost during the worst of the Covid-19 pandemic.
The bank says pandemic-related “lockdown restrictions continue to impact consumer income levels and transactional activity, particularly in the entry level banking segment”. This is where customer numbers are under pressure.
This is likely due to very aggressive competition in this space, with low or no-cost options from rivals providing more compelling alternatives.
Overall customer numbers are up 1% to 9.6 million from 2020, with growth primarily coming from its Middle Market (up 3%) and Retail Affluent (up 2%) segments.
The positive here is that these are more profitable customers than entry-level ones, particularly as they are more likely to hold additional products with the bank (beyond just a transactional account).
The earnings impact will be seen in more than just the segment (a R1 billion improvement in Relationship Banking headline earnings). These customers would tend to have vehicle finance and/or a home loan as well.
But the sheer scale of its “Everyday Banking” business means that any improvement will be material. Earnings were up R1.5 billion in the year to almost R4 billion.
Its strategy of getting clients to ‘do’ more with the bank continues to gain traction with product holding per customer up to 2.39 (from 2.29 in 2018). To move this needle by 10 basis points inside three years is a good result.
Dramatic turnaround in home loans
In retail and business banking (RBB), home loan registrations increased by 49% against 2020 (51% against 2019).
It says “the strategic changes made by the business enabled Home Loans to grow faster than the market”. Its market share of new mortgages registered grew to 23.2% in line with that refreshed strategy.
Consider that in 2017, it only had 18% market share in new home loan flow. In 2008, this was as high as 29%.
This is a dramatic turnaround for its home loan business. Headline earnings grew to R2.5 billion – more than R1 billion higher than the 2019 level. Its overall market share in mortgages is back to the level it was in 2018 of 23.7%.
Vehicle and asset finance
Vehicle and asset finance lending increased by 24% relative to 2020 (in line with TransUnion’s estimate of market growth of 23%).
The bank says personal loan disbursements increased by 40% relative to 2020, but these remain below pre-pandemic levels. Limits granted to credit card customers increased by 3%.
Advances in its Relationship Banking segment were up 3% in what it calls a “subdued market”. Deposits grew by 13%, supported by both Transactional and Investment products.
Credit loss ratio
Impairment charges were less than half the level of Covid-hit 2020, but at R8.5 billion remain elevated versus the R7.8 billion in 2019.
The group’s credit loss ratio declined to 0.77% which is right at the bottom end of its through-the-cycle-range of 75 to 100 basis points. It says while this is “likely to increase” this year, it will remain in the “bottom half” of that through-the-cycle target range.
In RBB, the credit loss ratio dropped from 2.78% in 2020 to 1.21% last year. This is broadly in line with the 2019 figure (1.18%).
Absa says the “economic recovery first experienced in the second half of 2020 continued into 2021 although the momentum was moderated by the impact of the hard lockdowns for the second and third waves as well as the civil unrest in July”.
Notwithstanding the unrest, it saw stronger momentum in the second half – partly due to base effects – with pre-provision profits up 14% in the second six months (versus just 1% in the first six months).
It delivered what it terms a “record result” in 2021, with group revenue of R85.9 billion, 7% ahead of 2019.
Diluted normalised headline earnings per share of 2 193c was 14% higher than 2019 and more than double last year’s 946c, driven primarily by a R6 billion improvement in the profitability of RBB.
Costs remain well-managed, with an increase of 4% on the prior year. Its cost-to-income ratio at 55.2% is the lowest it’s been since 2016, made possible by strong income growth and a low single-digit increase in expenses. It remains confident it will be able to get the cost-to-income ratio down to the “low 50s” by 2024.
It is also well on its way to getting return on equity to above 17% by that time (in 2021, it was 15.8% – the 2019 level).
The bank forecasts SA GDP growth of 2.1% this year, with this figure moderating to 1.7% in the next two years.
It says: “Sectoral differences are likely to remain large, with high commodity prices boosting parts of the mining sector, while households face steep increases in fuel and other commodity prices.”
Absa adds that the “outlook for the global economy in 2022 is particularly uncertain”.
“Geopolitical events in Ukraine are acute, and sharp moves in commodity prices and potential interruptions to supply are likely to trigger significant re-assessment.
“Furthermore, high inflation in many developed markets is expected to result in moves to start normalising accommodative policies, with uncertain consequences for asset prices and flows into emerging markets”.
Listen to Absa interim CEO Jason Quinn being interviewed on SAfm Market Update (or read the transcript here):