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Absa delivers solid results in a challenging economic environment

15 February 2011 Absa

Highlights of the year ended 31 December 2010
· Headline earnings per share increase 2%
· Diluted headline earnings per share increase 4%
· Final dividend rises 5% to 230 cents per share
· Net interest margin on average interest-bearing assets improves to 4,01% from 3,74%
· Credit impairments fall 33%, resulting in a 1,20% credit loss ratio
· Cost-to-income ratio increases to 56,2%
· Return on average equity (RoE) of 15,1%
· Return on risk-weighted assets of 1,99%
· Net asset value (NAV) per share grows 11% to 7 838 cents
· A core tier I capital adequacy ratio of 11,7%, which is well above regulatory requirements

Speaking at the results presentation, Absa Group Chief Executive, Maria Ramos, said: “Last year I set out our One ABSA strategy. Today, I want to report that the first year of execution against the strategy is on track and we are in a position to highlight important successes with respect to each part of our strategy”.

Ms Ramos, who took over as the Group’s chief executive in March 2009, says that in a challenging operating environment, Absa has produced solid results, growing headline earnings 6% to R8 billion for the year ended 31 December 2010 compared with the same period a year earlier.

 

The Group opened the reporting season for the country’s big banks today by announcing that its full-year performance has been mainly driven by its retail and investment banking divisions.

Retail Banking and Absa Capital, the Group’s investment banking division, grew their headline earnings by 85% and 20%, respectively, whilst Absa Business Bank’s headline earnings decreased by 11% and those of Absa Financial Services, the bancassurance business unit, remained stable.

The numbers released by the Group show that net interest income increased 7% despite negative loan growth and 1,97% lower average prime interest rates during the year. Whilst this is largely attributable to Absa’s effective hedging strategy, it also reflects better new business pricing for credit risk and a change in the loan mix towards higher margin products. The Group’s net interest margin on average interest-bearing assets improved to 4,01% from the corresponding period’s 3,74%.

After almost quadrupling between 2007 and 2009, Absa’s credit impairments improved 33%. Retail Banking, where credit impairments fell 36%, was responsible for most of this reduction. The lower interest rates helped consumers to recover and the benefits of effective collections management and sound credit policy became evident. Absa Business Bank’s credit impairments declined by 3%.

The Group’s credit impairment ratio improved to a better-than-expected 1,20% from the 1,74% recorded in 2009 and the 1,50% for the six months ended 30 June 2010. This is well below the peak of 1,86% that was recorded 18 months ago.

Non-performing loans as a percentage of average loans and advances were 7,7% for the year ended 31 December 2010 and remained in line with the 7,6% recorded for the 6 months ended 30 June 2010 and increased slightly from the 7,0% recorded for the year ended 31 December 2009. Absa’s loans which are subject to debt counselling declined to R7,0 billion from R9,6 billion at 30 June 2010, demonstrating the efficacy of the Group’s strong collection efforts.

Non-interest income declined 4%, largely because of a loss of R128 million on the Group’s Visa stake and non-recurrence of gains arising from the sale of the Group’s shareholding in MasterCard and NuPay. Net fee and commission income grew by 1%, because of subdued transaction volumes and the absence of a price increase in Retail Banking for more than 18 months including the entire review period.

Electronic banking fees for the Group and Absa Business Bank’s fee and commission income increased 9% and 7%, respectively.

Absa’s operating expenses grew 15% as the Group continued to invest for future growth. This included the 19% increase in information technology costs from the previous year. Staff costs, the largest component, increased 16%. However, the compound annual growth rate in costs over five years was well controlled at 11%. As expected, given modest revenue growth, the Group’s cost-to-income ratio rose to 56,2%.

Group performance

Loans and advances to customers: Absa’s loans and advances declined by 1% from 31 December 2009, but were flat from 30 June 2010. Retail mortgages, which constituted 49% of the Group’s total gross loans and advances, grew 2% year-on-year. Retail Banking’s loans and advances increased 1% but restrained customer demand saw loans and advances at Absa Business Bank decline by 1%. However, growth in credit cards and instalment credit agreements improved in the second half of 2010 and personal loans grew 23% year-on-year.

Deposits due to customers: Deposits due to customers increased by 6% compared to 31 December 2009, with solid growth in targeted areas. Retail Banking achieved a 4% growth. Absa Business Bank’s deposits grew by 7% and the business unit’s strategy to lengthen its funding saw it increase fixed deposits by 6%. Consequently, Absa’s overall loans-to-deposits ratio declined to 91,9% (2009: 95,9%).

Net asset value: Net asset value (NAV) grew by 11%. Retained earnings of R4,9 billion were generated from net profits after the payment of ordinary dividends. Cash flow hedging increased other reserves by 96%. Absa’s NAV per share rose 11% year-on-year with compound growth of 15% over the past five years.

Capital to risk-weighted assets: Despite a 9% growth in risk-weighted assets, Absa maintained its healthy capital levels, which remain well above regulatory requirements. As at 31 December 2010, the Group’s core tier 1 and tier 1 capital adequacy ratios were 11,7% and 12,8% respectively. The Group’s total capital ratio declined slightly to 15,5%. Absa Bank’s tier 1 ratio improved marginally to 11,9% and its total ratio was 14,8%.

Prospects

Looking ahead, Ms Ramos says the Group will press ahead with the implementation of its strategy. “While we believe that our operating environment will remain challenging, we also believe that we have the right strategy to grow the business and generate the returns that will keep us competitive,” says Ms Ramos.

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