Absa puts growth on hold to preserve cash

Absa CEO, Daniel Mminele during the presentation of the bank's results in Sandton.
Absa CEO, Daniel Mminele during the presentation of the bank's results in Sandton.
Londiwe Buthelezi

The coronavirus pandemic has halted Absa's growth ambitions for now. The banking group told shareholders during a virtual annual general meeting on Thursday morning that it will prioritise preservation of cash and liquidity in the near-term.

"As a result of Covid-19, our strategy has moved from a growth strategy to one that prioritises capital preservation and liquidity near-term," said Absa Board chairperson, Wendy Lucas-Bull, during the AGM.

Absa did not set a growth budget per se. But after lagging behind its peers for years and losing market share when it was still under Barclays' control, the group declared a new growth phase in July 2018, when it unveiled its Africanicity brand.

The move seemingly paid off as the bank's retail business began growing customer numbers again for the first time in years.

Absa is not the only company to put a damper on growth ambitions in the interest of preserving capital. For instance, hospital group Mediclinic said of the R1.57 billion originally budgeted for Mediclinic Southern Africa in the 2021 financial year, the current monthly expenditure run rate is approximately 25% of that budget, while the Middle East operations are spending about 40% of what was budgeted.

Lucas-Bull said management has presented the Absa Board with different scenarios on how Covid-19 could affect its operations, as some customers are already showing distress when it comes to servicing their debt.

She said credit impairments are high on the Board's agenda. Last week Absa published a trading update, showing that credit impairments the first four months of 2020 doubled year-on-year and the group's credit loss ratio was well above its target range and similar to 2009 levels, which partly explains the cash preservation focus.

Absa's credit losses were already high in both 2018 and 2019 and analysts warned that it's probably not the ideal time to try to grow market share right now. The group expects GDP growth in countries where Absa Regional Operations have presence to average 0.6% and South Africa’s economy to decline by 9.7%.

"I think all SA banks are probably taking a similar approach to Absa. These are not conditions to gain market share in lending," said Avior Capital Markets analyst, Harry Botha.

But one thing that the group is not skimping on is investing on its digital capabilities which is one of the three focus areas it identified in 2018. Lucas-Bull said the group's new CEO, Daniel Mminele, who took the office of CEO in January ,has made this one of the priorities as he has started the process of assessing and refining Absa's strategy.

"Management is looking at opportunities for more digital innovation, entrenching remote working models, digital servicing and innovative products that address emerging client needs and strategic partnerships," said Lucas Bull during the AGM.

Absa said earlier this year that a significant portion of its planned R10 billion spend over the next three years will go towards technological transformation.

Botha said all banks will continue to focus on IT and digitisation but this is also an area where budgets can be cut back. That means while in normal market conditions, banks are more likely to embark on a large system replacement or upgrade, under current conditions they will probably focus on the essentials.

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