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Absa profit down on bad debts

Jul 27 2012 07:45 Reuters

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Johannesburg - Absa Group [JSE:ASA], South Africa's third-largest banking group, on Friday reported an expected 6% drop in first-half earnings, hit by a spike in bad debts in its home loans business.

The South African lender majority held by Britain's Barclays said headline earnings per share fell to 602.3 cents in the six months to end-June, down from a total 638.5 cents a year earlier.

Absa, the first of South Africa's big banks to report earnings this season, flagged last month profit would likely fall as much as 10% due to sour mortgages.

The warning sent its shares into a tailspin and ignited fears that its recent recovery was losing steam. Absa has in the past few years grown earnings by cutting back bad debts rather than expanding earnings from lending.

Other large South African lenders such as Standard Bank Group [JSE:SBK], FirstRand [JSE:FSR] and Nedbank Group [JSE:NED] are unlikely to post profit declines as they have set aside adequate provisions, analysts say.

Absa said net interest income, a measure of earnings from lending, totalled R11.9bn, compared with R11.6bn last year.

Credit impairment charges, or bad debts costs, totalled R4bn, an increase of 40% from a year earlier.

Lenders in Africa's largest economy have been ramping up unsecured lending to counter slow growth in home and vehicle financing.

Absa has been losing market share to competitors such as FirstRand, and investors are also worried about the exit of several top ranking executives including the deputy CEO Louis von Zeuner. 

Absa will likely see a R190m decline in revenue as a result of the latest rate cut by the Reserve Bank, chief financial officer David Hodnett said.

The South African Reserve Bank cut its benchmark rate by 50 basis points this month, citing concerns about weakness in Africa’s top economy.

“If you look at what just happened with the interest rate cut, for example with the 50 basis points, although we hedge, that will still cost us around R190m in revenue,” Hodnett told reporters on a conference call.

Absa is the worst performing share among South Africa's big banks this year. Its shares are down nearly 4% while bigger rival FirstRand is up 29%. Industry leader Standard Bank has gained 13%, while Nedbank, South Africa's No.4 bank, has added 19%.

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