Ann Crotty
The Absa share price firmed 20 cents to close at R165.10 yesterday, following the release of results that were described as being significantly below analysts’ expectations.
The firmer share price was attributed to management’s generally better-than-expected outlook, a maintained dividend and comments by chief financial officer David Hodnett at the mid-morning results presentation that Absa might use part of its R6 billion “excess capital” to pay a special dividend after the Barclays Africa transaction is finalised. The share had eased in early morning trade but recovered by midday.
Hodnett explained that the total dividend payment had been held at R6.84 a share, despite the drop in earnings, because of the group’s strong capital position, its growth plans and its near-term business objectives.
The most significant factor behind the 9 percent slump in earnings to R12.27 a share for the 12 months to the end of December, apart from the subdued trading conditions, was the substantial increase in cover for non-performing loans, as well as increased credit impairments.
In the group’s retail and business banking division, the credit loss ratio has increased to 1.98 percent from 1.16 percent, with the most significant increase recorded in the group’s mortgage business.
The group’s coverage ratio for non-performing loans was increased significantly to 36.4 percent from 27.2 percent with mortgages again accounting for the biggest hike – to 28.5 percent from 17.1 percent.
Hodnett noted that mortgages that originated in 2007 and 2008 comprised the highest proportion of non-performing loans and of write-offs.
The group’s much more conservative approach to mortgage business is evident in the considerably reduced rate of non-performing loans and write-offs of mortgages written in 2010 and 2011.
However, that conservative approach is also evident in the fact that the group’s mortgage business shrank by 3 percent in financial 2012.
The coverage ratio for non-performing loans in the group’s credit card and personal loans business also increased significantly, all of which contributed to the continued decline in the group’s return on equity to 13.6 percent from 27.2 percent in financial 2007.
The 13.6 percent return is marginally above the group’s internal cost of equity.
Net interest income was down by 1 percent to R24.1 billion from R24.4bn for the 12-month period while non-interest income, which is primarily fees and commissions, increased by 6 percent to R22.7bn from R21bn.
Hodnett described the results as “clearly disappointing” and said that the credit impairments were higher than expected, but he stressed that shareholders should not overlook the “good progress” Absa had made.
Management is expecting return on equity to increase in the current financial year, as the credit loss ratio improves and loans increase.
Group chief executive Maria Ramos said Absa was excited about the proposed Barclays Africa deal and “the opportunity it offers to increase our exposure to higher growth economies in the rest of Africa”.