Absa's profits are better than in 2019 - here's how it achieved a 1 300% jump in earnings

Absa's results were noisy, with some one-off items affecting its revenue, but it all came down to a significant decline in credit impairments.
Absa's results were noisy, with some one-off items affecting its revenue, but it all came down to a significant decline in credit impairments.
  • Absa has presented its financial results for the first half of 2021.
  • The bank's headline earnings grew fivefold, while those of its retail banking business jumped eightfold.
  • The bank's results were noisy, with some one-off items affecting its revenue, but it all came down to the significant decline in credit impairments.

Absa says its 2021 started better than it could ever imagine - with its new business production going up, and its earnings surpassing pre-pandemic levels.

Absa's headline earnings grew fivefold to R8.6 billion, while its biggest business unit, Retail and Business Banking (RBB), grew headline earnings eightfold to R4.2 billion. Absa Corporate and Investment Banking (CIB) more than doubled its headline earnings to R4 billion.

"It's particularly pleasing that our earnings are above pre-Covid-19 levels. Also, our first half normalised headline earnings per share is our highest ever," said Absa interim group CEO Jason Quinn.

A slight improvement in pre-provision profit growth and a massive decline in credit impairments saw Absa earnings jump 1 364.4%, possibly earning the bank the title of having the biggest comeback among its peers, if not the financial services sector at large.

Apart from Nedbank, which grew headline earnings by 148% last week, other banks are yet to present their results. But they've told shareholders to expect anything between a 35% and 150% rise in earnings.

How did Absa's earnings jump by so much?

The bank's results were somewhat noisy, given significant one-off items in its revenue. But Absa CFO Punki Modise said it all came down to "far lower credit impairments".

RBB's impairments were down 68%, and CIB's tanked 82%. Quinn said this was way more than the group expected. At the end of June 2020, Absa's credit impairments provisions almost reached R15 billion.

"This time last year, if you remember, we had just got out of the level 5 lockdown in our largest market in South Africa. We had provided substantial relief to customers. We had very big general provisions or macroeconomic variable provisions," said Quinn.

He said the bank has not touched any of those provisions at all. Absa had also raised provisions for bad debt, thinking delinquencies would rise significantly. But customers' repayment patterns actually improved, and thus the bank didn't have to build further provisions for that this year.

The one-off revenue items that also impacted Absa's results include the structural changes in the bank's balance sheet, Modise said. Absa has reduced its reliance on wholesale funding, which is generally more expensive and has more retail funding in the balance sheet now.

The bank also has a structural hedge to caution itself against low interest rates. That hedge contributed about R1.5 billion to Absa's balance sheet in the current financial year.

Operationally, the bank also recorded a sizeable boost in revenues, helped by better pricing in new loans. The group's non-interest revenue also performed better.

But Quinn said even when one excludes these on-off skewers, the underlying trends in Absa's performance were better than they appear on the surface. Recovery was broad-based, with all business units reporting significant growth because of a low base in the first half of 2020. 

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