2008 will test group's resilience, says Absa
February 19, 2008
By Ray Faure
Johannesburg - Absa on Tuesday lifted diluted headline earnings per share by 17.4 percent from 1,121.3 cents to 1,316.1 cents for the 12 months to the end of December.
The group increased headline earnings by 19.6 percent to R9.413 billion, compared with headline earnings of R7.872 billion the previous year, with strong contributions from commercial and investment banking.
Headline earnings per share increased by 18.6 percent to 1, 401.9 cents per share.
A final dividend of 320 cents per share was declared, bringing the total dividend for the year to 560 cents per ordinary share. This is up 18.4 percent from the 473 cents per share declared in respect of the year ended 31 December 2006 and represents a dividend cover of 2.5 times.
The group recorded a return on average assets of 1.68 percent for the year (2006: 1,74 percent) and a return on equity of 27.2 percent (2006: 27.4 percent).
Key features of the group's performance for 2007 include advances growth of 22.0 percent; top-line income growth of 19.1 percent; an increase in the proportion of earnings from commercial and investment banking; improved operational efficiency; and an increase in retail credit impairment charges.
Absa's asset base grew by 29.4 percent to R640.9 billion as at 31 December 2007. Interest-bearing assets increased by 27.9 percent and comprise 86.4 percent of total assets.
Loans and advances to customers increased by 22 percent to R456 billion, compared with R373.8 billion in 2006. Mortgages (including commercial property finance (CPF)) instalment finance and credit card advances increased by 22.9 percent, 12.2 percent and 23 percent respectively over the year.
"However, advances growth has started to show signs of a slowdown, owing to the impact of higher interest rates and rising oil and food prices on consumer spending. In addition, the subdued growth in new motor vehicle sales and continued price pressure in the used vehicle market resulted in lower instalment finance growth," the banking group said.
Absa Corporate and Business Bank (ACBB) reported growth in advances of 25.3 percent for the year, with particularly strong growth of 31.9 percent in CPF.
Improved profitability for the year enabled the group's net asset value per share (excluding the Absa Bank non-cumulative, non-redeemable preference shares) to grow by 17.4 percent to 5,537 cents per share.
Net interest income increased by 26.9 percent to R18.890 billion due to improved margins and growth in major advances products. The improvement in the net interest margin stems largely from the higher interest rate environment and greater net flows in capital and rate-insensitive retail deposits.
Non-interest income increased by 11.4 percent to R16.728 billion, which growth was achieved on the back of increased transaction volumes in retail banking and ACBB as well as strong growth in Absa Capital. The increase in transaction volumes was supported by a growth of 7.1 percent in the customer base to 9 million and the deployment of additional delivery channels.
"An additional 133 points of presence, 640 ATMs, 155 self-service kiosks and 148 Internet kiosks were installed during 2007. As a result, net fee and commission income, regarded as annuity income and constituting more than two thirds of non-interest income, increased by 14.3 percent to R11 600 million (2006: R10 153 million)," Absa said.
Revenue growth of 19.1 percent exceeded cost growth and drove down the cost-to-income ratio from the 53.8 percent recorded for 2006 to 51.8 percent for 2007.
"The past year has seen a strong focus on efficiency improvement initiatives and revenue growth," the group added.
It said the Absa-Barclays integration programme had delivered a sustainable increase in profit before tax of R1.428 billion.
"The objective of this programme was to improve profit before tax by 1.4 billion rand by implementing best practices applied by Barclays. The Group is pleased to report that this target was achieved by year-end, 18 months ahead of plan.
"Actual sustainable synergies as at 31 December 2007 were R1 428 million, comprising R698 million of revenue-generated synergies and R730 million in cost savings," the group stated.
Absa said global uncertainties would continue to impact on financial markets and the banking environment in 2008.
"South Africa's large and rising current account deficit, in particular, leaves key financial markets exposed to the sentiment of foreign money managers. There are new domestic challenges as well.
"Recent disruptions to electricity supply, and the clear need to manage lower electricity demand, present a major challenge to business, particularly the energy-dependent mining and manufacturing sectors. This is likely to lead economic growth lower, particularly in the first half of 2008," the group cautioned.
It added that inflation, already high, looked likely to face further upward pressure in the near-term before beginning a downward trajectory later in the year. However, interest rates were expected to remain at current levels for much of the year.
Household indebtedness, coupled with the increased cost of credit, would continue to impact on affordability, resulting in a more moderate growth in advances and might lead to a further increase in the impairment charge.
"On the other hand, record high commodity prices, particularly in precious metals, will help offset some of the impact felt in these sectors arising from the electricity supply problems.
"More generally, buoyant public and private investment spending looks likely to continue in 2008, not only helping to improve South Africa's long-term growth potential but also mitigating downside risks to economic growth in the near-term and supporting corporate and commercial lending and investment banking activities," Absa said.
"The resilience of the group will be tested in 2008," it stated, but added: "Strategies and action plans are in place to address these challenges and opportunities going forward."
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