Absa Braces for Lower Earnings as South African Economy Stutters
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Published by Everything ZA News
South African banking giant Absa faces a challenging first half of 2024, with expectations of declining profits due to a weak domestic economy and global headwinds. The bank released a trading statement after the Johannesburg Stock Exchange (JSE) closed on June 26th, outlining its anticipated performance for the period.
Economic Pressures:
- South Africa’s sluggish economic activity, including a shrinking GDP in the first quarter, is putting a strain on Absa’s operations.
- Consumers are feeling the pinch of higher interest rates compared to the same period last year, leading to decreased borrowing and spending.
- Business activity remains muted, further dampening loan demand.
Global Factors:
- Weaker exchange rates relative to the South African Rand are impacting Absa’s profitability across various financial metrics.
- Inflation concerns remain elevated globally, prompting central banks across Absa’s Regional Operations (ARO) to maintain restrictive monetary policies, potentially hindering growth.
Profitability Outlook:
- Absa anticipates low single-digit revenue growth in the first half of 2024.
- While net interest income is expected to rise in the high single digits, non-interest income is projected to decline due to lower trading and insurance income.
- Operating expenses are likely to see a high single-digit increase, resulting in a slight decrease in pre-provision profit.
Credit Quality:
- The bank’s credit loss ratio is expected to remain similar to the first half of 2023, despite pockets of higher impairments in specific sectors.
- Absa still anticipates an improvement in the overall credit loss ratio for the full year 2024 compared to 2023.
Other Headwinds:
- Certain one-off costs, including applying hyperinflation accounting in Ghana and ongoing separation costs from Barclays PLC, are projected to negatively impact earnings by around 3%.
Market Reaction:
Investors reacted negatively to the trading statement, with Absa’s share price dropping nearly 9% since the announcement. This reflects concerns about the bank’s ability to navigate the challenging economic climate.
Looking Ahead:
Despite the projected decline in earnings, Absa maintains a strong capital base and intends to declare a flat interim dividend per share. The group’s full financial results for the first half of 2024 will be released on August 19, 2024. Investors will be closely watching how Absa manages through these economic headwinds and its strategies to ensure long-term profitability.
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