Absa Group Limited (ABG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Absa's 2021 Interim Results Presentation. I'll cover the tough operating environment we faced during the period, explain why we're quietly confident that we're well positioned as a group and then give my perspectives on our first half performance. Thereafter, Punki will unpack our numbers following which I'll provide our guide for the rest of the year, and then we'll take your questions. At a global level, the IMF expects a strong rebound from last year's historic decline of 3% and with worldwide GDP growing 6% this year. We expect South Africa to grow 4% this year from last year's 7% decline. This is slightly higher than the 3% we expected back in March. We should benefit from strong global growth, higher commodity prices and support of mandatory policy. South Africa's economy has generally recovered faster than expected since the depth of the hard lockdown in the second quarter last year, with the last 3 quarters beating consensus materially. Real output grew 4.6% in the first quarter, although most sectors remained below pre-pandemic levels. particularly construction, transport and hospitality with some exceptions such as agriculture. First quarter GDP was still 3% below the fourth quarter of 2019. And growth momentum softened somewhat in the second quarter. We still only see the economy exceeding fourth quarter 2019 levels in early 2023. Confidence remains fragile While up significantly year-on-year, the Consumer Confidence Index remains negative and weakened in the second quarter, and business confidence recovered to a neutral level in the second quarter, although this could decline in the third. Policy rates remain low, and we only expect them to start rising next March with a total increase of 75 basis points next year. We expect weighted 4.3% growth from our ARO countries this year, slightly less than we forecast in March. Economies that depend on tourism, such as the Seychelles, Mauritius and Botswana are likely to recover more slowly than the more diversified East African countries. Policy rates are likely to rise, albeit gradually in many of our ARO countries. I should highlight that the rand was 20% stronger on average against our ARO currencies during the first half, which was a 4% drag on our group revenues. There are a number of risks to our growth forecasts. Firstly, the impact of COVID-19 remains a significant uncertainty. South Africa's third wave of COVID-19 and the adjusted level 4 lockdown were worse than we expected. The third wave is the worst so far, exceeding the previous waves as new infections topped 26,000 on the 3rd of July. Although infections have peaked, the third wave is lasting far longer than the previous waves, with the epicenter shifting to coastal regions just as Gauteng improves. Our life insurance business had significantly higher mortality and retrenchment claims in the half, and increased its provisions for COVID-19 materially. The socioeconomic impact of the prolonged nature of the pandemic and the associated fatigue is becoming evident. Despite accelerating in the past month, the pace of vaccinations remains too slow to quickly deliver herd immunity. At last count, 10% of adults have been fully vaccinated and 18% partially. South Africa's vaccination rate is significantly behind most other emerging markets. Second, load shedding has been quite prevalent this year, particularly in March, and there was load shedding on 40% of the days in June including stage 4 outages. The graph on the right shows that load shedding in the first half was high and at this rate could exceed last year's elevated levels. While government increasing the cap on embedded power generation to 100 megawatts in June was a very positive move, it will probably take a few years to have much impact. We believe that South Africa's stretched power supply remains a downside risk to growth for the rest of this year. The unrest and looting that erupted in parts of KwaZulu Natal and Gauteng from July 9 to July 17 were deeply concerning. The immediate direct impact on Absa was limited. Our immediate priority was ensuring the safety and security of our colleagues and customers. Thankfully, none of our colleagues were injured. During the unrest, 22 of our branches and 233 ATMs were damaged, and 2,500 point-of-sale devices damaged or stolen. At the peak on the 13th July, we closed 252 branches, mostly in Gauteng and KZN. We are covered by SASRIA, and we've submitted a claim to them. We're making ZAR 13 million available to support relief recovery and rebuilding efforts. We distributed 2,000 food parcels to staff and their families in KZN and provided data and airtime to over 1,000 colleagues in KZN and Gauteng. The unrest poses risk to third quarter GDP growth by reducing economic activity in 2 of the largest provinces. Most estimate it will take 0.5% of this year's GDP. We saw the Absa and Markets' PMIs dropped sharply in July. While our card transactions in July were up on June, what is usually a strong month for purchasing activity was disappointing relative to forecast. Bankserv data shows that transactions going through the SA banking system fell 0.6% month-on-month in July after decreasing 0.4% in June. No doubt, these indicators were impacted by the unrest and Level 4 lockdown for COVID-19. We expect the adverse shocks to produce a 2% decline in quarter-on-quarter third quarter GDP. Of our Corporate and Commercial clients, about 420 were impacted either directly or via supply chain, production and trading interruptions, retailers and commercial property clients were the most affected. Medium term, the unrest will have a substantial negative impact on already fragile consumer and business confidence, which could dampen investment in infrastructure and inventory rebuilding. It also probably increases South Africa's credit risk and deters foreign investors, although it's hard to quantify this. Despite the difficult operating environment, we are quietly confident that we are well positioned for success. As a golfer, an analogy to where I think Absa is, would be that having just made the turn after a tricky first nine representing our journey to the beginning of this year, we've managed to play back into being in contention. Our tee shots on 10 has landed squarely in the middle of the fairway, well positioned against our competitors. Looking ahead to the flag, we can see a strong treacherous swirling breeze, but we're confident that our practicing over the last few years will enable us to commit to a solid swing that will put us on our way to topping the leaderboard on the back nine. We take much confidence from completing our separation from Barclays, the largest ever globally, on time and below budget. That is no longer a distraction, which it was for 3 years for management, especially in CIB and ARO. Our first half performance was better than expected. It's particularly pleasing that our earnings are above pre-COVID-19 levels. Also, our first half normalized HEPS is our highest ever, 4% above the previous record in the first half of 2019. Our results were somewhat noisy, given significant one-offs in our revenue, costs and credit impairments, which Punki will cover in some detail. Excluding these, the underlying trends in our performance were better than they appear on the surface. We remain very well provided for, with last year's large ZAR 5.4 billion macroeconomic overlay still intact to protect us from any future distress and total cover of 4.5%. We take great confidence from our strong balance sheet. Our capital levels are healthy, with our CET1 better than expected, and at the top end of our Board target range, which allows us to resume dividend payments. I should mention our very successful issuance of $500 million of Basel III compliance, additional Tier 1 capital in May, which was heavily oversubscribed in a debut issuance for our region. Strong deposit growth has also further improved our liquidity. We are very clear on our strategic priorities. At a divisional level, RBB is now in the second phase, or horizon 2, of its 2018 strategy, focusing on smart growth. The core to its first horizon was stabilizing the franchise and enhancing end-to-end risk management to enable it to regain market share in secured lending. Restructuring to improve efficiency and bring management closer to customers and colleagues was also crucial. Retail's customer base has stabilized, with continued growth in the middle market and affluent segments and strong deposit growth for the last 3 years and we've successfully taken share in secured lending while improving pricing. RBB's priority now is to improve customer primacy, progress with digitization and grow capital-light revenues. We've provided tangible support to customers during the pandemic, providing the largest payment relief program and being voted South Africa's bank most responsive to the pandemic in a Consulta survey. Importantly, focusing on customer service saw us improve from worst to best in the annual Ombudsmen complaints rankings. RBB has invested heavily in digital and has made considerable progress here, including launching Apple Pay recently. Improved stability and enriched functionality saw digitally active customers grew 16% year-on-year to 2 million. with considerable opportunity and further investments required going forward. Lastly, the decision to integrate bancassurance into RBB has created the opportunity for significant upside potential. RBB has benefited from stability in its leadership team over the last 3 years. CIB has also gone through substantial change. Separation from Barclays was enormously disruptive, considering how integrated it was with Barclays Capital. It lost about 15% of its revenues that came from PLC Connectivity, while at the same time, taking on new incremental run costs to replace capabilities lost and technology platforms. CIB's digital platforms like Absa Access are now in place and competitive. although they will require continued investments and client migrations and activations are ongoing. CIB also strengthened its capital allocation practices. Having completed the lead with balance sheet phase of its strategy, CIB is now prioritizing customer primacy, deposit growth and noninterest revenue growth balancing growth and returns. CIB will conclude the foundation phase of the commitments it made in terms of its strategy reset at its 2019 Investor Day by the end of this year. We are now confident in hindsight and considering the improvements in our financial momentum over the last 3 years and also evident in our numbers today that most of our key strategic calls back in 2018 were good ones, which we have been delivering against and which remain very relevant today. It's also clear that much opportunity still remains, and the management team has a strong sense of urgency around re-anchoring and refreshing our strategy against the latest market context and executing against our priorities, including making further and deliberate progress on our culture journey. For starters, we prioritize investing in digital which has only accelerated post COVID-19, representing a bigger potential opportunity than previously envisaged. As you can see, we're very focused on customer centricity and primacy with a customer and business-led approach to innovation. The significant focus on ESG in recent years makes being an active force for good even more important today. You may have seen the IPCC's sobering climate change report last week, and you'll be aware of the record temperatures, wildfires and floods globally recently. We consider climate change an urgent global challenge. I am pleased by several successes on this front in recent months. In March, we published our first TCFD report. We were also the first South African bank to announce sustainable finance targets, aiming to finance over a range over ZAR 100 billion for ESG-related projects by 2025. In May, we announced Africa's first certified green loan from the IFC, $150 million deal. We were also the lead arranger, senior lender and hedge provider for one of South Africa's largest concentrated solar tower projects with an estimated cost of ZAR 12 billion. And this month, we partnered with African Rainbow Energy & Power to establish South Africa's leading black-owned renewable energy fund with assets of about ZAR 6.5 billion. Lastly, we are establishing an environmental and social management system for our business lending. Our ARO portfolio is a quality asset that remains a core part of our strategy. Following a strategic review of that business over the last few weeks, we changed our operating model for ARO, bringing our processes and decisions closer to our customers to capture the substantial growth opportunity we see from it over the medium term. Both our RBB and CIB businesses will be run as Pan-African franchises going forward, leveraging off our strong foundations and improving collaboration around digital innovation. In particular, we expect to execute against the significant opportunity to improve the efficiency of our RBB ARO business as a result of this change. Lastly, I should update you on the closure of the Absa money market fund, which we completed on the 6th July. Pleasingly, we retained ZAR 54 billion or 68% of the starting balance, which was above our expectations. We retained 90% of RBB funds and 46% of corporate and institutional. About ZAR 43 billion went on to our balance sheet, while ZAR 11 billion was placed in our new money market fund. As you can hear, we've had a very busy past 4 months, and we continue to execute at pace on our priorities in the second half. Turning to the salient features. Pre-provision profits grew 1% and to ZAR 18.6 billion. The increase was up 5% in constant currency and even more on an underlying basis, excluding large one-offs in costs and noninterest income. Our credit loss ratio improved more than expected, falling significantly from last year's high base to the midpoint of our through-the-cycle target range without utilizing our sizable MEV management overlay and while maintaining our strong coverage. This all culminated in our normalized HEPS beating the first half of 2019. Pleasingly, our ROE improved materially to over 15%, exceeding our cost of equity of 14.25%. We achieved this while increasing our CET1 ratio materially. Lastly, our NAV per share grew 6% again. Looking at our divisional contributions. Normalized headline earnings recovered strongly of last year's lows with RBB over 8x higher and CIB 1.5x. They were also comfortably above their second half 2020 earnings up 11% and 19%, respectively. Significantly lower credit impairments drove RBB's earnings growth since its preprovision profits declined 15% or 6% excluding insurance. CIB's pre-provision profits grew 15% or 26% in constant currency, and its credit charge dropped 82%. Our divisional returns both rebounded to above the cost of equity. RBB's return on regulatory capital improved substantially to 15.3%, with RBB South Africa's somewhat higher at 17.7%. And while RBB ARO's was just 3.1%, indicating the scale of opportunity we see in that business. I'll now hand over to Punki to take you through our financial performance in detail in her first results presentation.

Thanks, Jason, and good morning, everybody. I will cover our first half performance and then hand you back to Jason to provide guidance for the rest of the year. Throughout my presentation, I will talk to our normalized results, which better reflects our underlying performance because it adjusts for the consequences of separating from Barclays. We reconciled these with the reported IFRS results in our booklet. Starting with our income statement. It is very evident that significant growth in our earnings was driven by far lower credit impairments. Revenue growth was reasonable against a tough backdrop at 3%, particularly considering the large impact of COVID-19 on our life insurance business that I'll unpack later. Also, our top line grew 7% in constant currency, which better reflects our underlying performance. Net interest income grew 6% or 12% in constant currency, largely due to margin expansion. South Africa's net interest income grew 13%, while Africa regions declined 10%, although it was up 7% in constant currency. While noninterest income decreased 2%, it was up 1% in constant currency and even better on an underlying basis. As you have come to expect of us, operating expenses remained well controlled, growing 5%, almost all due to higher incentives. While operating expenses rose 9% in constant currency, the underlying trajectory was better. These combined to produce 1% higher pre-provision profits or 5% in constant currency. Importantly, our pre-provisioned profits grew 8%, or low double digits in constant currency, excluding insurance. Our credit impairments fell by 2/3 or ZAR 10 billion as our credit loss ratio normalized after last year's substantial charge. Materially higher taxation was the bulk of the large increase in other, while minorities also increased off a very low base. All this combined to increase our normalized headline earnings by almost 500% and to ZAR 8.6 billion. A number of large items impacted the year-on-year comparisons of non-interest income, costs and credit impairments that I will unpack throughout my presentation. Turning to our balance sheet. Average interest-bearing assets growth was 2%, largely due to moderate 3% net loan growth or 5% in constant currency. South African loans grew 5% to ZAR 845 billion, and Africa regions decreased 18% due to the stronger rand as it grew 6% in constant currency. RBB SA, our largest book, grew 7% to ZAR 534 billion, largely due to solid 8% growth in retail loans. Relationship Banking grew 3% as muted demand for overdrafts and commercial property finance dampened continued solid growth in Agri. Although RBB ARO's loans declined 7%, its book was 12% higher in constant currency. CIB's loans rose 2% year-on-year, although this was due to a substantial increase in reverse repurchase agreements. Excluding this, CIB decreased 8%, in line with the market, given reduced demand for short-term funding and lower foreign currency loans. CIB ARO's loans fell 18%, although these were up 1% in constant currency. Our retail market share improved slightly to 22% as we grew our secured books. Home loans grew 8%, reflecting strong new business production for the previous 4 consecutive quarters. New mortgages registered with 110% above 2020 levels, and 47% higher than 2019, reflecting healthy demand, improved turnaround times and enhanced originator relationships. Vehicle and Asset Finance increased 14% as our share of new vehicles rose to 29% from 25% following the embedment of our new application system into dealer and branch channels. Credit card grew 6%, largely due to smaller limit increases and higher utilization with card turnover 17% higher than the first half of 2020 and 6% above 2019 levels. Personal loans declined 9%, given our tighter risk appetite until the second quarter when this was released and production improved. While production was up 18% for the half, this was still 27% below the first half of 2019. Our market share remains low here at just 12%. Growing core deposits remains a priority and is an indicator of the health of our franchise. Strong core deposit growth has produced positive balance sheet draws over the past 3 years, with 12% compound annual growth well ahead of 7% growth in gross customer loans. In the past year, deposits increased by ZAR 90 billion compared to loan growth of ZAR 24 billion. Pleasingly, customer deposits have increased to 82% of our total funding from 74% 2 years ago, reducing the proportion of bank deposits and debt securities. Managing our liquidity has been a priority over the past 15 months, and our sources of liquidity remained strong at ZAR 284 billion. While our liquidity coverage ratio of 124% and net stable funding ratio of 118% are both comfortably above regulatory requirements. Total customer deposits grew 10% or 14% in constant currency. Excluding repurchase agreements, the growth was 8%. South Africa deposits increased 14% to ZAR 849 billion. Within this, Retail rose 9%, resulting in a flat share of 22% in a competitive market. Transactional deposits grew 13%, reflecting strong market liquidity. Relationship Banking grew 13%, a strong performance with 24% growth in cheque deposits, in part due to customers maintaining high liquidity in an uncertain environment. Although RBB ARO's deposits decreased 7%, it was 13% higher in constant currency, given good growth in call and current accounts. Deposits are also a priority for CIB SA, particularly Corporate and rose 35% to ZAR 329 billion. Corporate SA grew 31% or 43% on average, driven by strong growth in cheque deposits due to significant national government balances as well as notice deposits. Excluding the national government deposits, which are likely to decrease, Corporate was 15% up. Investment Bank SA increased 55% on strong market and repos growth. CIB ARO deposits decreased 12% due to the stronger rand. In constant currency, it increased 7% as strong growth in call and cheque outweighed lower fixed deposits. Last year, our net interest margin compressed by 29 basis points in the first half, largely due to material policy rate cuts during the period, which had a negative endowment effect only partly offset by our structural hedge. With flat interest rates in South Africa this year, the large negative prime research did not recur, and our margin widened to 4.41% from 4.23%. Looking at the components, our lending margin continues to improve again, due to improved client pricing in Home Loans, Vehicle and Asset Finance and Investment Banking in South Africa. Mix-wise, faster home loan and VAF growth was offset by reduced CIB loans where margins are lower. Our deposit margin decreased mostly due to the impact of lower rates on laser deposits. partially offset by reduced reliance on wholesale funding. Additionally, the lower interest rates in South Africa and most ARO countries were a 10 basis point drag on our margin, by decreasing in government income and equity. We continue to hedge structural balances of 12% of the South African equity and liabilities. Our structural hedge released ZAR 1.5 billion to the income statement. The net impact of endowment on equity, deposits and the structural hedge was a 5 basis point drag. The cash flow hedging reserve reduced to ZAR 1.8 billion after tax from ZAR 4.3 billion at year-end, although we expect further benefit in the second half. Non-recurrence of prime rate reset losses from the 275 basis points of rate cuts in the prior year improved our margin by 15 basis points. while a wider prime-JIBAR differential and higher yields on our liquid asset portfolio were also positive. Growing non-interest income is a priority. Last year was impacted by the COVID-19 lockdowns and the sharp reduction in economic activity, which dampened our fee income. Insurance was a significant drag this year, offset increasing growth in the banking noninterest income, particularly in global markets. While the total noninterest income declined 2%, this was due to rand strength as it increased 1% in constant currency. Looking at the components, the largest net fee and commission income grew 1% or 4% in constant currency. Within this, transactional income increased 1% with muted growth in RBB South Africa. Merchant income grew 14%. Net trading, excluding hedge ineffectiveness grew a pleasing 20% or 31% in constant currency, given a strong performance from global markets, which I will cover shortly. Other noninterest income halved, reflecting significantly higher life insurance claims and further reserving for the third and fourth waves of COVID-19 in South Africa. At a divisional level, RBB's noninterest income decreased 12%, largely due to reduced insurance income. Excluding this, it was flat in constant currency, reflecting customer-centric pricing actions, the shift to digital from traditional channels and subdued economic activity. CIB's non-interest revenue grew 38% or 50% in constant currency, an excellent performance. the growth was driven by the Investment Bank, given a combination of strong global markets and nonrecurring fair value losses in the pace. Several moving parts mask the underlying momentum in non-interest income. Life Insurance's ZAR 1.4 billion higher mortality claims and additional provisions for COVID-19 is the main item. That alone reduced our group non-interest income by 8%. Other drags this year include our fee actions in RBB South Africa and hedging ineffectiveness in our cash flow hedging. Against these, we added back ZAR 570 million of negative fair value adjustments in investment banking in the base. Based on these adjustments, our underlying non-interest income growth was closer to 6%, or 9% in constant currency. Global Markets revenue grew 21% or 30% in constant currency, a credible performance. Our markets histogram shows a material year-on-year decline in loss days and a shift right to positive days. Markets SA rose 35% with fixed income and credit up 32% due to strong client flows and a couple of large client trades. FX and commodities decreased 25% off a very strong base that benefited from significant volatility, underlying client activity was up year-on-year. Equities and Prime Services rebounded from a low base with improved client flows and tight risk management. Although Markets ARO grew 2%, it was 22% higher in constant currency of a high base, and it continues to diversify by product and geography. Moving to costs. Our operating expenses increased 5% or 9% in constant currency. This largely reflects the significant increase in bonus provisions off a very low base last year, given our improved earnings. Staff costs grew 6% and remain the largest component at 56% of the total. However, salaries decreased 1%, reflecting reduced headcount outweighing staff restructuring costs. Provision for bonuses and deferred cash and share-based payments rose materially in line with group earnings. Non-staff costs increased 3% or 7% in constant currency. Some of the growth came in variable costs such as cash transportation costs, which increased 9%, given the improved economic activity and the hard lockdown in the prior year. Obviously, such growth came with an increase in associated revenue. Property costs declined 3% due to our property optimization strategy, coupled with lower spend on COVID-19 protective equipment in the current year. We continue to invest heavily in digital platforms and our technology costs grew 18%. Our total IT spend, including staff, amortization and depreciation grew 11% to ZAR 5.3 billion, which is 24% of group expenses. Investment in digital, data and automation resulted in a 12% increase in amortization of intangible assets. Depreciation fell 6% on lower physical IT infrastructure. Pro fees grew 2%, reflecting change in technology services spend. Marketing costs decreased 2% as reduced sponsorship spend outweighed significantly higher advertising spend. Communication costs declined 2%, given 13% lower printing and stationery costs, while telephone and postage grew 1% to support remote working. Other costs fell 6%, largely due to reduced administration fees after disposing of the Edcon Store Card portfolio in the prior year, plus significantly lower travel and entertainment costs. These offset higher fraud charges. As we cautioned in our guidance, subdued revenue growth resulted in negative operating jaws for this half and a 55% cost-to-income ratio. We see opportunities to improve our efficiency in the medium term through new ways of working and digitalization. As mentioned, our underlying cost growth was better than it seems. Significantly higher bonus accruals were the main contributing factor, which added 4% to our total cost growth. Excluding this and smaller items such as restructuring costs, particularly in RBB SA, and other one-offs in both this half and the base produces a slight decline in underlying costs year-on-year. In constant currency, that equates to just over 3% growth. On this basis, our operating expenses remain well managed. Turning to credit impairments. Our charge dropped significantly from last year's exceptionally high base of almost ZAR 15 billion, which was 4x the first half of 2019. I will spend some time unpacking the improvement. Both RBB and CIB's credit impairments reduced materially by 64% and 82%, respectively, resulting in a ZAR 10 billion lower group charge. In last year's first half, we raised a sizable ZAR 5.5 billion macro overlay, given the deteriorating forward-looking macroeconomic variables. Despite the improving macro outlook in the first quarter, our judgmental overlay was retained because of the uncertainty created by the COVID-19 third wave and the potential for a protracted lockdown, plus the threat of further load shedding in South Africa. We provide details of the macro scenarios used as a sensitivity analysis in our booklet. We raised ZAR 1.3 billion for single names which constituted 28% of our total credit impairments. This charge was 29% lower year-on-year, given no single name in CIB ARO, although Relationship Banking, Business Banking ARO, and CIB SA all increased year-on-year. Turning to our credit loss ratio. It improved considerably to 88 basis points, the midpoint of our expected through the cycle range of 75 to 100 basis points from last year's high of 277 basis points. The improvement exceeded our expectations. RBB's credit loss ratio fell to 133 basis points from 388 basis points, which included ZAR 4.2 billion of MEV management adjustments. The current period benefited substantially from improved underlying performance, model enhancements and the new definition of default in South Africa retail portfolios as well as enhanced collections effectiveness. RBB SA's models were also enhanced to achieve greater consistency between regulatory and IFRS models and refine certain assumptions, including the mortgage loss given default model to reflect empirical workout behavior. These model changes decreased our first half charge by ZAR 1.1 billion, with substantial reductions in home loans, card and vehicle and asset finance. RBB SA's NPL ratio has been an outlier to the sector due to a more conservative application of the definition of default in determining the staging of advances. Aligning our definition of default to the industry, specifically on curing and the treatment of restructures resulted in lower NPLs, particularly in the secured portfolios. The change reduced our credit charge by ZAR 200 million. Home Loans' credit loss ratio improved to negative 22 basis points from 143 basis points due to strong collections and the model updates that better account for improvements in recoveries. The MEV overlay raised last year was retained. Vehicle and Asset Finance's credit loss ratio fell significantly to 158 basis points again due to improved collections and the model updates. Stage 3 coverage for Home Loans and vehicle and asset finance increased to 29% and 54%, respectively. from 27% and 44% based on the revised definition of default last December. Everyday Banking's credit loss ratio fell significantly to 5.7% from 11.8%. Within this, Card's charge improved due to the model enhancements and revised definition of default, plus reduced early stage delinquencies. Personal loans' credit impairments dropped 48%, given the non-recurrence of last year's MEV as well as improved underlying performance, partly offset by model enhancements that increased the charge. Relationship Banking's credit loss ratio improved to 114 basis points as the MEV raised last year was not repeated. It's single name impairments remain elevated and pressure on the SME portfolio persisted. RBB ARO's credit loss ratio dropped considerably to 1.7% from 4.6% given non-recurrence of the coverage built last year and an improved risk profile across most portfolios. Lastly, CIB credit loss ratio improved to 24 basis points, which was within its through-the-cycle range from 130 basis points in the prior year. CIB SA benefited from improving default rates, although its single name provisions remain elevated. CIB ARO reduced significantly to a small credit, given substantial MEV build and single names in 2020. The impact of the COVID-19 pandemic and resulting economic downturn on our stage 2 and stage 3 loans is very evident. After improving consistently for the previous 2 years, both increased materially in the first half of 2020, Although less pronounced than expected, they rose further in the second half of last year. However, the proportion of Stage 2 loans declined this year, with early arrears reducing across most portfolios, particularly Personal loans and CIB South Africa. While the level of Stage 3 loans improved noticeably half-on-half, this was largely due to RBB SA's new definition of default for the period which reduced its full year '20 Stage 3 loans to 8.5% from 9.7% previously. The revised definition of default, which aligns our definitions with the peer group reduced home loans and vehicle and asset finance stationery loans in particular. On a comparable basis, our Stage 3 ratio was only slightly better than last December, particularly in CIB. Our total loan coverage remains comparatively high at 4.5%, which we believe is appropriate for the operating environment based on our current expectations. Stage 1 coverage was flat at 94 basis points as slightly higher RBB coverage was offset by lower coverage in CIB. Stage 2 coverage decreased to 6.2% from 7.2%, mostly due to mix in RBB SA, where home loan balances rose while VAF and everyday banking decreased even as their coverage all increased. CIB SA's coverage also declined, as single names with higher coverage migrated to Stage 3. Stage 3 coverage increased to 47% from 45%, mostly due to mix changes as a result of new definition of default because loans with lower coverage migrated to stage 2 while higher-risk VAF and home loans accounts were kept in Stage 3 for longer. CIB was flat at 33% as SA increased due to higher coverage on certain distressed names while ARO declined has fully impaired exposures were written off. Moving to our divisional performance. RBB's normalized headline earnings rebounded strongly from last year's low base to contribute over half of our year-on-year growth. RBB's earnings grew eightfold to ZAR 4.2 billion largely due to 64% lower credit impairments. Its preprovision profit decreased 15%, impacted by insurances significantly higher claims and COVID-19 provisions. Excluding insurance and the ZAR 300 million of fee cuts, RBB revenue was flat, and pre-provision profit was 3% down. CIB's earnings grew 146% to ZAR 4 billion due to solid 15% higher pre-provision profits or 26% in constant currency, and 82% lower credit impairments off a high base. CIB's earnings were above 2019 pre-COVID-19 levels. As noted, its non-interest income grew 38% or 50% in constant currency, well above 18% cost growth. The ZAR 1 billion improvement in Head Office, Treasury and other was due to non-recurrence of the large reset losses in the base, higher yields on our liquid asset portfolio and lower funding costs. While our group earnings are evenly split between RBB and CIB, we expect RBB's proportion of earnings to increase from here. Looking at RBB's franchises, all rebounded significantly with the exception of insurance. Our secured lending operations recovered materially from their first half losses last year. Home loans produced an excellent performance with record profits of ZAR 1.4 billion. Strong 12% net interest income growth was well ahead of 3% cost growth generating 15% higher pre-provision profits. As mentioned, its credit impairments were a release of ZAR 300 million, mostly due to model refinements. Hence, this is not a sustainable earnings base for Home Loans. VAF continues to generate strong pre-provision profit growth, up 27% on the back of 20% higher revenue due to strong 14% book growth and improved margins. Its credit impairments also dropped 65%, although its credit loss ratio remains above through the cycle levels. These combined to increase its headline earnings by ZAR 1.2 billion year-on-year from last year's substantial loss. Everyday Banking earnings more than quadrupled, due to significantly lower credit impairments in Card and Personal Loans, which both rebounded from last year’s large first half losses. The business faced several revenue headwinds, including lower production, given our reduced risk appetite which was only released recently, whilst the low interest rate environment compressed margins across the balance sheet. Continued lockdowns in 2021 together with fee reductions to support customers and the shift to digital channels weighed on fee income. These revenue headwinds resulted in a decline in pre-provision profit. Insurance earnings dropped by almost ZAR 1 billion to a ZAR 297 million loss given significantly higher mortality claims and increased provisions in the Life business due to COVID-19. Life Insurance lost ZAR 449 million while short-term insurance earnings decreased 3% to ZAR 153 million. Net insurance premiums grew 6% to ZAR 3.5 billion, with Life up 8% from improved integration into the bank, while short-term grows 3%. Relationship Banking's earnings increased 53% to ZAR 1.5 billion due to 46% lower credit impairments and 4% higher pre-provision profits despite slightly negative operating jaws. Strong deposit growth and 18% higher acquiring volume supported 4% revenue growth, offsetting customer-centric fee reductions and lower cheque income. Relationship ship banking's returns remain very attractive. Lastly, RBB ARO made a small profit compared to last year's loss, thanks to 64% lower credit impairments. The stronger rand was a significant drag. Pre-provision profits decreased 18% or 2% in constant currency. its operating jaws were negative given higher bonus provisions and investment in digital, while higher insurance claims reduced top line growth. Turning to CIB. This slide shows its split by business and geography, although it is run on a pan-African basis. Corporate earnings more than doubled, as credit impairments reduced significantly to negligible levels. Its pre-provision profits declined 4%, although it increased 7% in constant currency. Corporate's revenue grew 2% or 10% in constant currency, with South Africa up 13% and ARO down 11% or up 6% in constant currency. Corporate SA’s robust growth reflects strong growth in deposits and trade finance, partially offset by subdued demand for short-term funding. Costs grew 7% or 12% in constant currency largely due to higher bonus provisions. Investment Bank earnings grew significantly, given the combination of strong 26% pre-provision profit growth and 73% lower credit impairments. Its revenue grew 24%, or 33% in constant currency, with double digit growth in all business units, and non-recurrence of negative fair value losses in the base. As mentioned, Markets revenue rose 21% or 30% in constant currency, while Commercial Property Finance grew 14%. Costs increased 22%, or 27% in constant currency, due to higher bonus provisions and incremental run costs. CIB South Africa produced an excellent performance with earnings trebling. Substantial 31% revenue growth produced 39% higher pre-provision profits, while credit impairments fell 66%. The strong rand dampened CIB's ARO's performance as 13% lower pre-provisions profits were actually 7% higher in constant currency. As mentioned, Market ARO was robust, growing 22% in constant currency. CIB's ARO credit impairments swung from ZAR 1.1 billion to a small release which drove its strong earnings growth. The strong rand was a noticeable headwind for Africa regions’ contribution in the first half. For instance, its revenue grew 8% in constant currency, rather than 10% decline we report in rand. Nonetheless, Africa regions remains a meaningful contributor. It accounts for a sixth of our group earnings and almost a quarter of our revenue. We see considerable scope to grow our existing portfolio over the medium-term. We remain well capitalized. Our group core equity Tier 1 ratio increased to 12.4% and from 11% in the past year, which is better than we expected, given strong capital generation and lower risk-weighted assets. Our CET1 ratio is right at the top end of our board target range of 11% to 12.5% and comfortably above regulatory requirements. Our RWAs decreased 5% to ZAR 892 billion due to 5% lower credit risk RWAs due to the stronger rand and some optimization plus a 17% drop in market risk. This was offset by a ZAR 5.4 billion reduction in our foreign currency translation reserve also due to the stronger rand. We remain capital generative, with profits adding 1.7% to our CET1 ratio over the year. Other includes the phasing of IFRS 9, which was completed in January 2021. Our strong CET1 ratio allows us to resume dividend payments initially at a payout rate of 30%. Post our interim dividend of ZAR 3.10, our CET1 is expected to be 12.1% still above the midpoint of our board target range. Thanks for your attention. I'll hand you back to Jason.

Before we take your questions, I will finish with our guidance for 2021 starting with the macro Prospects. We expect South Africa’s economy to grow 4% this year after last year’s 7% decline. The positive effects of strong global growth, higher commodity prices and supportive domestic monetary and fiscal policies will be dampened by further waves of Covid-19, fragile business and consumer confidence stretched electricity supply and the impact of last month’s civil unrest. We expect policy rates to remain on hold into next year. We forecast GDP-weighted growth of 4.3% for our ARO presence countries following last year’s small Contraction. Based on these assumptions, and excluding further major unforeseen political, macroeconomic or regulatory developments, our guidance for financial year 2021 is updated as follows: We expect mid-single digit growth in net interest income, given an improved net interest margin. Non-interest income is likely to decline slightly due to elevated Insurance claims and reserving for mortality and disability liabilities, with positive growth expected excluding these items. We will continue to manage operating expenses carefully, while maintaining investment in systems and digitization. Despite increased variable and performance costs on the back of higher earnings, we expect low single digit cost growth. As a result, we expect stable operating jaws in 2021. Our cost-to-income ratio is likely to be in line with last year’s 56% which will result in low to mid-single digit growth in pre-provision profits. After last year’s significant build in coverage, our credit impairments are expected to decrease substantially, resulting in a credit loss ratio around the mid-point of our through-the-cycle range of 75 to 100 basis points. Consequently, we expect our ROE to improve materially this year to be broadly in line with our cost of equity, although second half returns are likely to be lower than the first half. Finally, our group CET1 ratio is likely to remain above the midpoint of our 11% to 12.5% board target range. We currently expect a dividend payout ratio of 30% for 2021 and increasing to 50% over the medium term. Well, thanks very much for your attention. We'll now take your questions on slido.

Just pulling slide up here. We've got 2 questions, both from anonymous. First 1 is how was investment banking revenue growth in south Africa so strong. Punki may I ask you to deal with that and then I'll support you. So please, do you want to answer that one?

Yes. Thanks, Jason. So I think in South Africa, investment banking revenue was up 43% to almost ZAR 5 billion or ZAR 4.9 billion to be exact. There were 2 main reasons for the substantial growth that we saw. Firstly, Market SA revenue grew 35% to about ZAR 2.4 billion. Within that, the fixed income and credit increased 32% to ZAR 1.5 billion. This was largely due to increased client flows and more clients hedging with rates low. Plus, we had some large trades also coming through. And then the Equities and Prime Services revenue improved significantly to around ZAR 400 million from a slow -- from a very small loss as our derivatives business stabilized.

Thanks, Punki. That's great. Yes. Now we are very pleased with our performance in Investment Banking in the half, and we believe we're carrying some good momentum in that franchise into the second half. The next question say, how did COVID-19 have such a huge impact on your first half earnings in insurance? Punki, once again, if you could cover that one for us?

Thanks, Jas. So South African Life Insurance swung from a profit of ZAR 486 million to a loss of ZAR 449 million. I would say that COVID has had our Life business as well as the earnings in 2 ways -- firstly, our mortality claims grew 85% to almost ZAR 1.1 billion, as the second wave was more severe than expected with higher infection rates as well as higher average claims coming through. We also reassessed our COVID-19 provisions for the expected impact of a third as well as the fourth wave and increased our provisions by ZAR 836 million to be exact -- I think most of the is just a result of the third wave where the infections picked at double the second wave level. We also have more exposure to Gauteng where the inflections peaked at 220% of the second wave. And then our fourth wave provision largely assumes lower severity based on continued progress of the vaccine rollout as well as a lower materiality rate, largely based on what we've seen in countries that have accelerated their vaccination rate experience as we go forward. Thanks, Jas.