Johannesburg – Absa’s [JSE:ASA] results were certainly weaker, but better than originally expected, and the bank believes it is on the right track with its strategy.
The dividend declared by the bank, despite its lower earnings, will comfort shareholders.
On Friday Absa said headline earnings were 6% down to R4.33bn. This was largely because of the additional R1.15bn provision for bad debt. This decline is less than the 10% anticipated in a trading update at the end of June.
The market was shocked by the announcement, especially because analysts had expected an increase in headline earnings of up to 15%.
The bank’s share price consequently fell – it is the only bank whose share price is down this year.
On Friday the market however reacted positively and Absa’s share price closed 2.95% up at R139.70.
The decline in headline earnings was largely owing to the higher than expected bad debt write-offs in home loans, said the banking group’s chief executive Maria Ramos on Friday when she announced Absa’s results for the six months to end-June.
The bad debt provision increased significantly in the second quarter as it had become evident over the past six months that more people with home loans were unable to meet their payments. A decision had been taken to take proactive steps.
Absa’s net interest income was 2% up to R11.91bn and non-interest income 5% to R11.17bn.
Its total income was 4% higher than in the corresponding period last year, but its bad debt provision had depressed earnings.
Bad debts rose by 39% – from R2.9bn to R4.02bn.
Ramos said the underlying business units were busy gaining momentum despite the uncertainty in the global economy.
“We acted decisively with respect to bad debts. We also successfully reorganised the business for sustainable growth in a changing environment and to meet our clients’ needs optimally,” she said.
Ramos says that for the rest of the year income is expected to remain subdued and costs will therefore remain a focus for the bank.
Absa’s operating expenses increased by 4% to R12.67bn over the six months.
The recent 0.5 percentage point cut in the repo rate will also lose the bank some R190m in interest income, says financial director David Hodnett, but the bank’s hedging strategy has contained this loss. According to Hodnett, Absa will be the least affected of the four big banks – precisely because of this hedging strategy.
In December 2010 Absa restricted its dealings with bond originators, which resulted in it losing market share in the home loan market. But in January this year the bank resumed doing business with them but, says Ramos, these dealings are now “on Absa’s terms”.
She says this step does not mean that the bank has changed its appetite for risk and credit approval remains strict.
Absa’s loans and advances have remained basically the same, increasing 0.5% to R506.7bn.
Hodnett said a bright spot is the fact that deposits rose 13% to R475.9bn.
Absa pushed up its interim dividend by 8% to R3.15/share. Net of dividend tax this is R2.68/share.
In order to determine the interim dividend, the board took into account changes in legislation, strategy and growth plans, short-term business objectives, as well as the group’s strong capital position.
The bank’s core capital, or its capital adequacy, improved from 12.8% to 13.2% and is considerably higher than the minimum required in terms of Basel III.
Hodnett and Ramos reiterated that there had been and was absolutely no pressure from Barclays to pay a dividend.
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