Jason Quinn, financial director of Absa. Photo: Supplied by Absa
- Absa’s market value took a big hit on Monday as investors digested its results.
- Its impairment charge rose by 61% in 2022, with growing credit losses in its vehicle and asset finance business.
- Absa’s profit growth was slower than its peers.
- For more financial news, go to the News24 Business front page.
Absa shares took a big hit on Monday, with the bank losing around R10 billion – almost 7% – of its market value in a single session.
Other banks ended the day 2% to 3% lower, as the collapse of Silicon Valley Bank in the US shook global financial stocks.
But Absa took an additional hit following a year-end results disappointment. While it paid out a solid final dividend of 650c per share, it only grew its headline earnings by 13%, the lowest growth rate among the “Big Four” banks that have published their financial performance up to 31 December 2022.
A 61% jump in its impairment charge – which ballooned to R13.7 billion – caused more concern.
The banking group said R2.7 billion of this impairment charge related to its operations in Ghana. Like many local banks, Absa had invested in Ghanaian government bonds. But Ghana’s debt-to-GDP ratio has gotten out of control, and the country has approached the International Monetary Fund for intervention. The value of government bonds fell, and banks had to write off some of their investments.
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Still, even without the write-off related to Ghana, Absa’s impairments rose more than 29% – the highest of the big four banks. FirstRand’s impairment charge increased by 24%, followed by Standard Bank (+22%) and Nedbank (+13%).
Absa grew its loans and advances faster than its peers, adding pressure to the impairments.
“We watch that market very carefully, but we did extend our appetite last year. As it turns out, our loan losses went up more than we thought… you won’t see big growth from us in that market with environments like this,” said Absa financial director Jason Quinn.
Worst affected was its vehicle and asset finance business, which suffered a credit loss ratio of 1.76% – higher than Absa’s set limit. The business was hit with problems surrounding the implementation of DebiCheck, an authorisation process to prevent fraudulent debit orders. Absa says it has sorted that out. In addition, there was also an increase in customers who went into in debt review.
Non-performing loans (NPL) reduced across home loans and credit cards. But Absa still raised its provisions for bad debts, with credit impairments up more than R5 billion to R13.7 billion.
“NPLs are down, which is a good thing. Coverage [provisions for bad debt] is up, and that’s the trick. So, although the NPLs came down, we have built coverage. We’ve looked at interest rates; we said we need more coverage at this time because consumers are under some distress,” said Quinn.
Absa now expects that interest rates will stay higher for longer. And because of how quickly the hikes took place, the bank has seen some customers battle to adjust their budgets to the new monthly payments.
“But we’ve got forbearance in place for customers we think will get to the other side, just like we did when Covid-19 happened… we want to keep people in their homes. We want to keep people in their cars,” said Quinn.
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He said the fact that Absa’s credit-loss ratio increased to only 0.96% (0.91%, excluding Ghana) showed that the loan losses are at stable levels. Absa’s credit loss ratio target is 75 to 100 basis points through the cycle, although it’s higher for some businesses, like vehicle and asset loans, whose target limit is 1.5% or 150 basis points.
“So, we are okay. Our average [profit] margin is 4.5%. So, you can grow the lending book as we did, have some impairments and still make a good profit,” said Quinn.