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The Absa Group Limited announces its interim financial results for the six months ended 30 June 2010

05 August 2010 Absa Group

Salient features:

* Attributable earnings increased by 17% to R3 842 million.
* Headline earnings increased by 1% to R3 862 million.
* Headline earnings per share (HEPS) declined by 4% to 539,3 cents per share.
* A return on average equity (RoE) of 15,0% was recorded by the Group.
* Net asset value (NAV) per share increased by 5% to 7 420 cents per share from December 2009.
* The credit impairment charge declined by 23% to R3 704 million.
* An interim dividend of 225 cents per share has been declared.

Commenting on the interim results, Absa Group CE, Maria Ramos, said:

Subdued asset growth, low transaction volume growth, the continued increase in insurance claims and the weakness of equity markets impacted the revenue performance for the period. Earnings were, however, positively influenced by a decline in the retail credit impairment charge.”

She said, the Group had continued to make investments in people and information technology during the period under review in order to position the Group for future growth.

The Group’s retail banking operations and Absa Capital had experienced positive attributable earnings growth for the period. However, Absa Business Bank and the Group’s bancassurance operations experienced a decline in attributable earnings as a result of the challenging operating environment,” said Ramos.

The Group increased attributable earnings by 17% to R3 842 million, compared to the six months ended 30 June 2009 (June 2009: R3 272 million). Headline earnings for the period increased by 1% to R3 862 million (June 2009: R3 826 million).

Headline earnings per share (HEPS) declined by 4% to 539,3 cents per share, with fully diluted HEPS decreasing by 3% to 535,9 cents per share. This decline was driven by an increase in the weighted average number of shares in issue owing to the successful conclusion, in 2009, of the Group’s broad-based black economic empowerment transaction.

The Group recorded a 15,0% return on average equity (RoE) (June 2009: 16,3%) and a return on average assets of 1,08% (June 2009: 1,02%) for the six months under review.

Business unit performance

Retail banking increased headline earnings by 40% to R1 018 million (June 2009: R728 million). The business grew attributable earnings by 16% to R1 060 million (June 2009: R916 million). The improvement can largely be attributed to the significant decline of 26% in the credit impairment charge.

Absa Business Bank experienced a decline in attributable and headline earnings of 9%. Interest income remained at previous levels in spite of negative advances growth and pressure on deposit margins. However, in line with the continued focus on non-interest income, net fees and commissions increased by 7%, which was underpinned by an increase in electronic and cash transactions of 13% and 24% respectively.

Attributable earnings for Absa Capital increased by 443% to R700 million, with headline earnings declining by 19% to R747 million (June 2009: R917 million). Revenue from the markets business remained strong in spite of the significant reduction in foreign currency client flows. Client activity in respect of investment banking was below previous year levels and revenue declined by 8%.

Absa’s insurance companies delivered strong premium growth with gross premium income for Absa Life and Absa Insurance increasing by 29% and 12% respectively.

However, lower fee income, together with increases in short-term insurance claims, combined to drive attributable earnings down 10% to R606 million.

Group performance:

Statement of financial position

The Group’s total assets, as at 30 June 2010, of R718,2 billion remained relatively unchanged from 31 December 2009 but declined by 4% from 30 June 2009, largely due to a decline in loans and advances to customers.

The Group experienced a decline in gross loans and advances of 4% from June 2009. The mortgage book, comprising 59% of the Group’s gross loans and advances, remained unchanged from 31 December 2009, while instalment finance loans declined significantly by 10% from 30 June 2009 and 6% from 31 December 2009 (annualised).

Strong capital position maintained

The Group improved its healthy capital adequacy position during the period under review. As at 30 June 2010, the capital adequacy ratios of the Group were 11,9% (30 June 2009: 10,3%) at a core tier l level, 13,1% (30 June 2009: 11,5%) at tier l level, while the total capital adequacy ratio was 15,8% (30 June 2009: 13,9%).

Statement of comprehensive income

Net interest income

Net interest income increased by 5% to R11 293 million. The net interest margin on average interest-bearning assets improved by 31 basis points, from 3,58% to 3,89%.

Non-interest income

Continued growth in customer numbers resulted in net fee and commission income increasing by 2%. All business units showed an increase in net fees and commissions, except for investment banking, which reflects the lack of business flow in this area. Strong insurance premium growth was offset by higher insurance claims.

Credit impairments

After almost doubling in 2008, credit impairment charges have started to decline. The Group recorded an impairment charge of R3 704 million for the six months ended 30 June 2010 (June 2009: R4 834 million), a reduction of 23%. In spite of a lower inflow into legal, non-performing advances remain high due to a low cure rate and the impact of debt review.

Operating expenses

Group operating expenses increased by 15%. The Group’s strategic initiatives, however, resulted in additional investment in information technology as a result of the replacement of legacy systems, the enhancement of end-to-end processes and the implementation of systems to adopt the Basel ll advanced internal ratings-based approach. Excluding these investments and incentives aimed at retaining talented employees, costs were contained to an 11% increase.

Prospects and strategic focus

The business environment will remain challenging in spite of our expectation that the economic upturn will continue and household spending will recover slowly.

In excess of one million job losses and high levels of household indebtedness will continue to weigh on the willingness and ability of households to take on new debt.

Investment growth is expected to remain tepid until the slack that was built up during the recession is fully utilised, thus making a quick recovery in corporate credit demand unlikely.

Although overall credit growth is likely to remain weak, signs that the economic recovery is proceeding suggest that interest rates are at or near their low point, but continuing uncertainty around the impact of global events suggests that a cautious approach may be maintained by the South African Reserve Bank.

The Group expects little change in trading conditions in the second half of the year.

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