Absa walks economic tightrope

2011-02-19 12:20

The financial results of Absa, the country’s biggest retail bank, give an indication of the fragility of ­economic growth in a country that is aiming to create many jobs.

Maria Ramos, Absa’s chief executive, said banks were prepared to lend more to support job creation, but corporates were unwilling to take on more debt while consumers were already heavily indebted – with 85% to 87% of their income going towards repaying debt.

“When you’ve got that high a ­level of personal indebtedness, you will be in trouble if interest rates go up. I don’t think anyone who is in a position of responsibility would continue to lend into that kind of environment.”

Companies’ lack of appetite for credit suggests that they are not embarking on new projects that could create jobs.

Over the course of last year, high personal debt levels and low appetite for credit pushed Absa’s cost-to-income ratio to 56.2% from 49.6% in 2009, an increase that has put pressure on profits. Other major lenders have also experienced an increase in their expenses relative to their ­revenue, with Standard Bank ­responding by retrenching 2 000 employees in a bid to slash costs and boost earnings.

Ramos said Absa was unlikely to go this route in the short term.

“We are invested for growth and we don’t have any plans to do wholesale retrenchments.

“Costs are important to us, but we need to think about productivity in this business,” she said.

In the 12-month period to ­December last year, Absa reported a 6% growth in headline earnings to R8 billion from R7.6 billion in 2009, while total income grew by 1% to R39.2 billion.

In the period under review, loans and advances showed negative growth, declining by 1% to R498.6 million while net interest income increased by 7%. Bad debts fell by 33% as a series of ­interest rates cuts by the Reserve Bank provided relief to cash-strapped borrowers.

The drop in the number of ­customers defaulting on their loans added more than R2 billion to Absa’s pretax profit of R11.85 ­billion.

This trend suggests that more people are able to afford their debt and are in line with the figures ­released by Stats SA.

The data show that civil judgments for bad debt in ­December were 24.8% lower than the same month in the previous year.

Overall, the judgments for last year were 7.3% lower than in 2009.

Absa’s flat earnings have given investors a glimpse of what to ­expect from other banks: a rise in bad debts and continued pressure on earnings as a result of subdued growth in loan books.

Standard Bank, Nedbank and FirstRand, the parent of FNB, are due to release their financial ­results in the next few weeks.

Khaya Gobodo, head of equities at Afena Capital, said banks were faced with another tough year ahead and those that did well going forward would have to manage their costs meticulously.

One of the challenges Absa is ­facing is stiffer competition from other lenders in the lower end of the market, an area that has seen growth over the past year.

Absa deputy chief executive Louis von Zeneur said the lender was in no rush to relax its overall lending policies, but was making inroads into the low-income market.

Von Zeneur said Absa was a ­major player in that market ­segment, with a 17% market share. Capitec has 10% and African Bank Investment Limited 33%.

Ramos said: “Competition is what makes life exciting and keeps everybody ­innovating.”

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