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Absa says coronavirus crisis had substantial impact in April

Bad debts doubled in first four months.
Image: Moneyweb

South African lender Absa said on Tuesday it expected its first-half profits to fall by more than 20%, with the impact of the coronavirus outbreak already causing bad debts to double.

Absa, one of South Africa’s big four banks and previously owned by Barclays, has been on a drive to win back market share lost under its former parent, including by increasing lending.

That strategy was just starting to gain traction when the pandemic hit, dealing a substantial blow to performance in the first four months of the year, mainly in April, Absa said.

Its headline earnings per share – the main profit measure in South Africa – would likely be at least 20% lower in the six months to June 30 than the 920 cents it reported in the same period last year, it said, adding it would give more specific guidance at a later date.

“We are reviewing the group’s medium-term financial targets and will update the market when there is greater certainty in the macroeconomic outlook,” it continued, adding a dividend for 2020 was unlikely.

Credit impairments had doubled during the first four months of the year, the bank said, with its credit loss ratio similar to the 1.7% it saw during the financial crisis in 2009.

Absa forecast its return on equity would decline substantially in 2020 from 15.8% last year.

It added, however, that while its common equity tier one capital ratio – a key measure of financial strength – may fall below its target range of 11-12%, stress testing suggested it would remain well above regulatory requirements.

Absa’s shares, which initially lost earlier gains following the announcement, were back up 2.27% by 1217 GMT.

Read the full Sens announcement here.

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The statement that impairments will be “similar to the financial crisis in 2009” is MASSIVE. It speaks to lower profits, which speaks to the lower CET1 capital/equity levels – even with low, to negative growth in loan books. This speaks to weaker banking system (note, I said weak-er, not WEAK – SA still has a world class & strong banking sector).

ABSA saying CET1 level falling below 11-12% target is note worthy. The main source of CET1 capital is profit generation – it adds to capital levels, with dividends paid out being the main source of CET1 level reducing. In a normal time, you’d also have to worry about loan growth also reducing CET1 ratio level… but new loan generation is down across products (have heard 70% down in unsecured lending from industry colleagues). You have to wonder what actions the SARB is thinking about to support worsening of industry…

After the April interest rate cut, there was a great article by the Jupiter saving guys (ex SA bankers, World bankers, and McK consultants) about the surprisingly bold and pre-emotive actions taken by the SARB – worth a read: https://jupitersave.com/blog/ratecut2

End of comments.

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