Absa maintains good earnings momentum

01 August 2007 Absa

Summary of financial performance:

* 26,2% growth in headline earnings to R4 365 million

* 25,1% increase in headline earnings per share to 651,3 cents per share

* 26,8% return on equity

* 240c interim dividend per share

Absa today announced that it has maintained good earnings growth in the six months ended 30 June 2007. Headline earnings grew by 26,2% to R4 365 million compared with headline earnings of R3 460 million for the corresponding period of the previous year.

Commenting on the results, Steve Booysen, Absa Group Chief Executive, says: "Absa has maintained good earnings momentum and delivered another set of strong results, leveraging the benefits of the Barclays-Absa integration and the favourable operating environment. These results clearly demonstrate the sustainable growth momentum across our businesses."

Headline earnings per share increased by 25,1% to 651,3 cents per share. The Group delivered a return of 26,8% on average shareholders' equity for the period under review.

The interim dividend for the six months ended 30 June 2007 is 240 cents per share, 15,4% higher than the interim dividend declared for the corresponding period of the previous year, and representing a dividend cover of 2,7 times. In view of the changing trading environment in the retail market, the Absa Board has adopted a prudent approach to ensure that the growth in dividend can be sustained for the full year. It is the Groups intention to maintain a dividend cover of 2,5 times for the full year.

As expected, the impairment charge continued to evolve from the cyclical low experienced over the last three reporting periods. The Group's impairment ratio for the current period was 0,49% compared with the 0,37% achieved for the six months ended 30 June 2006. The higher loss ratio resulted from increased delinquencies in the retail book and was offset to some degree by low impairments in corporate and business bankings operations. The Group implemented a more conservative approach to its retail banking scorecards and is enhancing collections strategies to counter the risk associated with the current credit cycle.

The Group recorded a cost-to-income ratio of 53,6% which compares favourably to the 57,7% for the six months ended 30 June 2006. Revenue growth exceeded cost growth by 8,7%. The increase in operating expenses can largely be attributed to costs associated with the expansion of the Group's distribution footprint, further costs relating to the realisation of the Absa-Barclays synergies, higher incentive provisions and expenditure relating to compliance. Consequently, staff cost was the major driver of the higher expenditure levels, with staff numbers 4,3% higher compared to the same period of 2006. The Group's objective remains to achieve a cost-to-income ratio of around 50% over the next three years.

The Group has made excellent progress in delivering the sustainable synergy benefits that were envisaged at the time of the Barclays-Absa transaction. In the period under review, sustainable profit before tax benefits of R650 million were realised, putting the synergy delivery programme approximately 18 months ahead of target. One-off integration costs for this period of R300 million were in line with management expectations. Absa is confident that the targets previously communicated to the market will be achieved well within the timeframe.

Cluster performance

Booysen points out that all of the Group's banking businesses delivered strong growth in attributable earnings, contributing to the Groups good performance.

Retail banking has continued to perform strongly, with attributable earnings up by 24,1% to R2 213 million as a result of strong advances growth in most areas. Transaction volumes continued to grow robustly due to the increased activities of both existing and new customers. During the past 12 months, Absa has grown its retail customer base by 8,4% to 8,7 million. Absa has also continued to expand its delivery footprint in line with its strategy to provide extended access to banking services in previously disadvantaged areas. Twelve new branches were opened and an additional 402 ATMs were added to the network.

Corporate and Business Banking benefited from the introduction of a new operating model and the Barclays value-aligned performance measurement approach, both contributing to improved productivity and profitability in the business. The business achieved very strong attributable earnings growth of 46,2% to R740 million. This was driven by strong growth in advances, particularly from commercial property finance, as well as strong growth in deposits and transaction volumes. The quality of the advances book improved further, as evidenced by an impairment loss ratio of 0,17% compared with the 0,58% for the six months ended 30 June 2006.

Absa Capital delivered very strong growth of 33,3% in attributable earnings to R757 million, reflecting the continued expansion of Absa Capitals franchise. Private Equity Investments remain a key pillar of Absa Capital's growth strategy and the first half of 2007 saw continued growth in this portfolio. Secondary Markets recorded solid growth, which was supported by a strong performance in agency trading. Product innovation and continued growth in the use of derivatives were key developments, along with increased customer flow. Primary Markets' strategy of migrating away from an asset accumulation model towards an originate-and-distribute model showed clear results over the period, with the risk profile improving and fee income rising in excess of 150%. Overall, the business recorded moderate growth, having restructured to position for the change of strategy.

Attributable earnings in the Group's African operations declined by 21,2% to R52 million from the R66 million recorded in the prior period. This was due to the sale of the Groups shareholding in Capricorn Investment Holdings (Proprietary) Limited (CIH), the holding company of Bank Windhoek in Namibia, during 2006. The remainder of the portfolio posted solid growth of 44,4% in attributable earnings.

The Bancassurance cluster delivered a very strong operational performance, posting an increase of 33,9% in attributable earnings to R750 million for the period under review. Investment management operations reported excellent growth in assets under management of R27,7 billion since 30 June 2006, to R116,2 billion as at 30 June 2007, demonstrating good progress in the Group's strategy to become a significant player in this market. The Groups short-term insurance operations increased earnings by 37,2%, which can be attributed to investment income and the growth in commercial business.


"The domestic trading environment is expected to remain favourable, but inflationary pressures are expected to continue in the latter part of 2007 with the CPIX inflation rate continuing to test the 6% upper limit of the target range. The South African Reserve Bank is expected to continue its monetary tightening policy to contain inflationary pressures," says Booysen.

The rate of increase in the broader CPI measure of inflation, including mortgage costs, is accelerating as a result of recent interest rate increases, impacting on affordability and real growth in household disposable income. This, combined with the expected ongoing impact of the National Credit Act (NCA), will result in a slowing of advances growth and a further increase in credit impairments. Equity returns are also expected to slow during the remainder of the year. This, in turn, is expected to lead to the rate of headline earnings growth for the full year being lower than the growth experienced for the six months under review.

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