Absa Group Limited (ABG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Absa Group's 2024 Interim Results Presentation. The agenda for today will start with me providing my thoughts on the current operating environment before spending some time looking at the salient features of our first half performance. I will then hand over to Deon Raju, our Group Financial Director, to unpack our financial performance in detail. The global sub-Saharan and South African economies entered the year on increased uncertainty. The fall in the global inflation slowed and until very recently had restrained expectations on the timing and pace of interest rate normalization. Geopolitical tensions were elevated for the period and have escalated recently, and together with a number of national elections taking place this year, continue to create uncertainty within the global economy. Turning to our African markets and tight financial conditions, a still high cost of living and significant fiscal constraints continued to weigh on economic activity, as did the El Nino weather conditions that saw significant flooding in some parts of the continent and drought in others. Economic performance varied across the markets. Although, once again, East African economies generally faired best, with growth across our presence countries remaining well above growth in South Africa. South Africa's economy shrank marginally in the first quarter with broad-based weakness offset by agriculture. The suspension of load shedding since the end of March and the continued gradual reduction in inflation have been a welcome relief with the economy expected to have grown in the second quarter. Consumers, however, have continued to show financial strain, particularly as the repo rate remained at 15-year highs in the period. Business and consumer confidence levels reflected a wait-and-see approach ahead of the elections in May and have started to improve after the announcement of the formation of the government of National Unity. We are cautiously optimistic about the potential benefits of the GNU, specifically after it reaffirmed its commitment to the structural reforms under operation, [indiscernible]. Turning to the salient features. While our diluted HEPS is at the upper end of our pre-close guidance, it decreased 5% due to lower noninterest income and several substantial items that remained a drag on our earnings. Despite the decline, the 5-year CAGR in our diluted HEPS is 6%. As guided, we declared a flat interim ordinary dividend of ZAR 0.685 a share given a slightly higher payout ratio of 56%. Our ROE reduced to 14% and was below our cost of equity for the period. Positively, our net interest margin widened slightly, largely due to improved loan pricing. Combining our muted 3% revenue growth and 8% higher operating expenses, our cost-to-income ratio increased to 52.7%, although it remains in the low 50s. Our NPLs rose slightly, while our credit loss ratio improved marginally to 123 basis points, reflecting lower retail and relationship banking credit impairments in South Africa. Nonetheless, our charge remains above our through-the-cycle target range and is expected to remain so for the full year. Our NAV per share grew 6% to ZAR 180, taking its 5-year CAGR to 8%. Lastly, although our CET1 capital ratio declined slightly year-on-year to 12.7%, it is above our board target range and up from 12.5% last December. I will now hand you over to Deon.

Thanks, Arrie, and good morning, everyone. Just a reminder that we no longer normalize our results for the financial consequences of separating from Barclays PLC, as it is no longer material nor do we normalize for the impact of our BEE transaction. Unpacking our income statement drivers, headline earnings decreased 5% to ZAR 10.2 billion, a disappointing outcome, notwithstanding the challenging operating environment and the items that we dealt with in these results. A stronger average rand was a slight drag on group earnings during the period. On a constant currency basis, earnings declined 4%. As previously guided, some sizable items have negatively impacted the second half of 2023, and these continued into the first half of 2024, including applying hyperinflation accounting in Ghana, for the losses on the naira and costs related to our broad-based black economic empowerment transaction. These were partially offset by a substantially lower Barclays PLC separation impact in the first half. Excluding the combined earnings impact of the 3 items, our earnings declined 2%. Given the quantum of these items, particularly on the second half of 2023, we provide a slide in the appendix laying out their impact on our results for the past 3 halves. Net interest income increased 7%, reflecting 5% higher average interest-bearing assets and a slightly wider margin. Noninterest income was a drag, decreasing 2% on lower insurance and markets trading revenue. Total revenue grew 3% or 5% in constant currency to almost ZAR 54 billion. Operating expenses increased 8% or 9% in constant currency, as we continue to invest in the business to ensure sustainability of future revenue generation. As a result, our operating JAWS were 5% negative, and pre-provision profit decreased 1%. Our credit impairment charge was flat versus an elevated base. Although it was pleasing that our retail charge in South Africa reduced, even though customers remained under pressure given the higher average prime rate over the period. The increase in Other included the impact of applying hyperinflationary accounting to the results of Absa Bank Ghana. Conversely, our tax expense fell 14%, given a higher proportion of exempt income resulting in an effective tax rate of 23.8% from 25.6%. Our net interest margin widened by 7 basis points to 469 basis points, mainly on a substantial improvement in Africa Regions margin, given higher policy rates. However, our margin narrowed slightly from the second half of 2023, reflecting reduced personal loan production and increased reserve requirements in some ARO countries. Unpacking the moving parts. Lending improved our overall margin by 9 basis points, largely due to the improved pricing in CIB, partially offset by a slight negative composition impact from faster growth in investment banking, relationship banking and corporate ARO. Conversely, customer deposits reduced our margin by 3 basis points, reflecting a negative price impact from the higher ARO cash reserving with a similar impact due to the lower liability endowment impact. These outweighed the positive composition impact from reduced low-margin CIB deposits and wholesale funding in ARO. The impact of endowment on equity in South Africa was flat, as average equity balances decreased, offset by the impact of the higher average prime interest rate. Our structural hedge released a ZAR 923 million charge to the income statement, 4 basis points more than the ZAR 568 million charge in the first half of 2023. The after-tax cash flow hedging reserve relating to the program reflected a debit balance of ZAR 1.1 billion as at 30 June 2024, from a debit of ZAR 3.5 billion at 30 June 2023. The impact of the total endowment after hedging in South Africa was minus 7 basis points year-on-year, as endowment balances grew slower than interest-bearing assets, which was partially offset by a higher rate earned on our hedge. Africa Regions equity endowment contributed 2 basis points to our margin as a result of higher rates and equity balances across most markets. Several factors within Other added a net 3 basis points to our overall margin, offsetting a small drag from the introduction of deposit insurance in South Africa from 1st of April, which we expect to cost between ZAR 250 million and ZAR 300 million a year on an annualized basis or about 2 basis points. Lastly, our interest rate sensitivity is a reduction of around ZAR 370 million in net interest income on an annualized basis for every 1% rate cut in South Africa. ARO sensitivity is ZAR 600 million, since we can't hedge in those markets. Turning to our balance sheet, total loans grew 4% to ZAR 1.3 trillion. Within this, loans to customers rose 7% or 8% in constant currency, while loans to banks fell 24%. Excluding reverse repurchase agreements, total net loans grew 6%, South African customer loans grew 7% to almost ZAR 1.1 trillion, and Africa Regions increased 5% or 12% in constant currency to nearly ZAR 170 billion. Total deposits rose 5% to ZAR 1.4 trillion and accounted for 86% of our funding. Customer deposits grew 5% to ZAR 1.3 trillion and bank deposits increased 10%. Geographically, customer deposits grew 6% in South Africa to over ZAR 1 trillion. Africa regions increased 3% or 12% in constant currency to almost ZAR 250 billion. Delving into deposits, retail and relationship banking in South Africa posted solid growth. However, both had a similar shape with low-margin deposits growing significantly faster than high-margin deposits. Everyday Banking's 8% growth saw 12% growth in fixed deposits with savings and transmission deposits up 11%, while check account deposits declined 6%. Our market share of retail deposits increased slightly to 21%, supported by competitive propositions backed by marketing campaigns. Relationship banking customer deposits rose 11% as savings and transmission deposits grew 14%, fixed deposits increased 25% and check account deposits grew 2%. ARO RBB customer deposits increased 4% or 13% in constant currency with 12% growth in transactional products. Lastly, CIB customer deposit growth was better than it looks. Constant currency growth was 3%. And excluding a substantial drop in low-margin national treasury tax and loan deposits, CIB SA customer deposits grew 6%. CIB ARO customer deposits rose 4% or 14% in constant currency, driven by growth in current and savings accounts. Considering higher policy rates in many markets and selective risk appetite cuts, loan growth remained robust across most of our divisions. Reflecting market trends, Product Solutions cluster loan growth slowed noticeably increasing 4%. Everyday Banking increased 7%, largely driven by growth in cards. Relationship Banking grew 7%, given strong growth in commercial asset finance, particularly in the transport and logistics sector, while overdraft utilization remained muted. ARO RBB loans grew 5% or 12% in constant currency, driven by strong growth in commercial lending. CIB customer loans grew 10% with the largest component, South Africa, up 12%, while ARO increased 4% or 12% in constant currency. Our market share in South Africa remained flat year-to-date at 22%, despite the slowdown in retail loan growth. Our largest retail book, home loans grew 3%, as our market share remained stable just below 24%. However, our market share flow increased, particularly among first-time home buyers. Nonetheless, our production reduced given the subdued property market. New business margins remain under pressure, particularly for low-risk customers. Vehicle and asset finance loans rose 5% despite new car sales declining 8% and slightly lower approval rates. Margins are resilient, although pressure on pricing continued due to the increased competition. Credit card grew 8%, reflecting strong new account sales, limit increases and higher utilization and 7% growth in turnover. Personal loans grew just 1% due to 14% lower loan production, as we reduced our risk appetite given the pressure on consumers. The book remains a small part of our retail lending, and our market share is very low. Turning to credit impairments. Our overall charge was flat at ZAR 8.3 billion for the half. Within this, our retail and relationship banking charges in South Africa all reduced year-on-year from elevated levels in the prior year. While South African consumers remain under pressure, our overall retail charge declined 5% to account for 75% of our group charge. Product Solutions cluster impairments declined 6% due to a 21% fall in home loans, while vehicle finance increased 6% off a relatively high base. Everyday Banking decreased 4% as personal loans dropped 15% and card rose 2%. Relationship Banking fell 10% due to the resolution of legacy cases and favorable post write-off recoveries. ARO RBB credit impairments increased 4% or 10% in constant currency, largely driven by the retail portfolio, partially offset by improved collections and recoveries in Business Banking. CIB credit impairments more than doubled off a low base. CIB South Africa rose 84%, mostly due to higher Stage 3 single name impairments. CIB ARO credit impairments increased from a net reversal in the base, although its charge remains relatively low. Note that our head office credit impairments was a small reversal versus ZAR 161 million in the first half of 2023 including charges of local currency bonds in Ghana. Our credit loss ratio improved slightly to 123 basis points from 127, although the charge remains above our through-the-cycle target range of 75 to 100 basis points over a calendar year. Unpacking the portfolios, we saw the impact from our significant collections efforts and selective risk cutbacks in lower retail credit losses in South Africa. Product Solutions cluster improved to a credit loss ratio of 100 basis points. Within this, home loans improved from 65 to 49 basis points. Vehicle and asset finance improved slightly to 232 basis points, but remains elevated. Early arrears improved across both books and their impairments were driven by their NPL portfolios with inflows into debt review and legal. Everyday Banking improved to 847 basis points due to deliberate risk cutbacks and enhanced collection strategies plus an improved macroeconomic outlook. Early stage delinquencies improved, while late stage remained elevated with increased flows into debt counseling. Credit losses for card improved slightly to 834 basis points, and personal loans improved noticeably to 940 basis points. Relationship banking improved to 57 basis points, which is back to within its through-the-cycle target. ARO RBB's credit loss ratio improved slightly to 161 basis points and remains comfortably below its through-the-cycle range. Finally, CIB increased to 33 basis points, slightly above its 20 to 30 basis points target range from a low of 16 basis points. CIB South Africa's credit loss ratio rose to 37 basis points, while CIB ARO remains low at just 14 basis points. Stage 3 loans or nonperforming loans grew 10% to ZAR 83.4 billion, largely reflecting the pressured late cycle legal and debt counseling books within the retail portfolio in South Africa, particularly home loans. However, the increase in NPLs slowed during the period rising only slightly year-to-date. We remain appropriately provisioned for a tough operating environment. Our NPL coverage rose to 47% mostly due to higher CIB single name charges and increased home loans cover given its aging legal book. Our overall Stage 1 and 2 loan coverage reduced slightly because of favorable macroeconomic outlooks across the retail portfolio in South Africa and higher quality new business origination. Total loan coverage rose slightly to 4.2%, which remains well above pre-COVID levels of 3.3%. The increase was due to a higher proportion of NPLs. Returning to our top line, growing capital-light revenue remains a group priority. However, total noninterest income reduced 2%, down 1% in constant currency to ZAR 18.4 billion and accounted for 34% of our revenue. The largest component, net fee and commission income grew 2% and accounted for over 2/3 of the total. Our gross fee and commission income rose 4%, as transactional fees and commissions increased 6% with broad-based growth across electronic banking, check accounts and service charges. Merchant income grew 2% on 8% turnover growth. However, fee and commission expenses rose 25%, mainly due to higher reward costs and 28% growth in clearing and settlement charges. Net trading, excluding the impact of hedge accounting, dropped 17%. Global Markets income declined 10% as Markets SA fell 25%, largely due to further losses on the naira in the first quarter. This was partially offset by Markets ARO growing 5% or 11% in constant currency. Excluding the naira loss, our group noninterest income was flat year-on-year. Net insurance income dropped 12%, as Life SA declined 15% and ARO insurance fell 35%, while non-Life SA grew 35%. The strong growth in Other was due to gains on the sale of buildings and positive revaluations in our noncore private equity and infrastructure investments. Noninterest income growth was mixed at a divisional level. Product Solutions cluster grew 5%, as 15% higher Advice and Investments, plus 10% growth in Vehicle and Asset Finance outweighed flat Insurance SA noninterest income. The largest component, Everyday Banking, grew 2%, as price reductions and migration to lower fee digital channels dampened the 2% growth in customers and increased transactional activity. Relationship Banking declined 5%, as cash revenues fell 15% due to lower volumes and acquiring revenue decreasing 2% on higher scheme fees and margin compression. Despite 6% growth in active customers, transaction income was low, given faster growth in low-margin products. ARO RBB Banking grew 8% or 15% in constant currency, driven by 19% growth in transactionally active customers. Growth was broad-based across transactional revenue, card revenue and trade fees. ARO insurance revenue dropped 35% due to higher weather-related claims, reinsurance write-offs and a challenging operating environment. Lastly, CIB fell 2%, although it rose 1% in constant currency, largely due to lower global markets revenue, which outweighed 13% higher net fee and commission income and positive revaluations in private equity and infrastructure investments. Excluding the naira loss, CIB's noninterest income would have increased 5%. Moving to costs. Operating expenses grew 8% or 9% in constant currency, increasing our cost-to-income ratio to 52.7% from 50.6%. The largest component, staff costs, rose 10% and accounted for 57% of the total, reflecting salary increases and people investments. Most of our hiring came in the first half of 2023, and our headcount has reduced marginally year-to-date. Share-based payments grew 80% due to eKhaya employee share scheme costs that were not in the base. Nonstaff costs grew 5% or 6% in constant currency. IT costs increased 14%, given continued investment in new digital capabilities and increased cybersecurity spend. Amortization of intangible assets grew 8% due to further investments in digital, automation and data capabilities that increase the goodwill and intangible assets to ZAR 15 billion. Total IT spend, including staff, amortization and depreciation increased 12% to account for 28% of group expenses. Marketing costs rose 17% on brand campaigns and sponsorship spend. Professional fees grew 11%, given spend on strategic projects. Depreciation was flat, reflecting reduced utilization of physical IT infrastructure and further optimization of our corporate and branch property footprint. Within Other, equipment costs fell 27% due to lower power costs, as load shedding reduced in South Africa. We continue to tactically reduce our discretionary spend in response to the pressure on revenue growth. We also see an opportunity to strategically improve our efficiency, extract value from investments made and reduce legacy costs. We have started a group-wide initiative to drive these efforts, which should deliver substantial value over the medium term. I will now make a few comments on our capital. We remain well capitalized to fund the balance sheet growth opportunities we see. Our CET1 ratio improved slightly year-to-date to 12.7% and is above our 11% to 12.5% Board's target range, while comfortably exceeding regulatory requirements. We remain very capital generative with profits adding 0.9% to our CET1 ratio in the first half. Risk-weighted asset consumption reduced our CET1 by 0.2% as our group RWAs increased 2% year-to-date to almost ZAR 1.1 trillion due largely to 3% higher credit risk RWAs. Our final 2023 dividend reduced our ratio by 0.5%. Our strong CET1 ratio allowed us to increase our dividend payout to 56% from 53% resulting in our flat interim ordinary dividend. Thank you. I will now hand back to Arrie.

Thanks, Deon. Unpacking our divisional performances, our business units grew earnings 1%. However, this growth was outweighed by increased losses at the center due to many of the items Deon flagged earlier, including our eKhaya BEE scheme costs, Ghana hyperinflation accounting adjustments, Barclays separation costs and a lower contribution from treasury. CIB earnings were flat off a high base and contributed 51% of our group earnings. Revenue driven pre-provision profit growth of 7%, absorbed significantly higher credit impairments off a low base. Relationship Banking earnings grew 1% on the back of 10% lower credit impairments and 1% higher pre-provision profit despite continuing to invest in frontline staff and digital capabilities. Pleasingly, our South African retail businesses returned to growth after the earnings fell last year. Everyday Banking earnings rose 9%, driven by 4% lower credit impairments, as its pre-provision profit was flat. Product Solutions cluster also benefited from improved credit impairments, as its pre-provision profit declined slightly, given muted revenue growth. Lastly, the 12% decline in ARO RBB earnings was entirely because of the stronger average rand, as its constant currency earnings grew 1% with the banking operations continuing to show strong growth. Despite CIB taking further naira losses in the period, CIB earnings were flat off a high first half of 2023 that grew 31%. We show its earnings by activity and region, although, as you know, it is run on a pan-African basis. Clearly, CIB continues to benefit from its diversification. Corporate performed very well again with earnings up 16% on a combination of 12% higher revenue-driven, pre-provision profit and 38% lower credit impairments. Conversely, Investment Bank earnings fell 8% due to significantly higher credit impairments that offset 4% pre-provision profit growth. Excluding the naira losses, IB's earnings were only slightly lower. Using a geographic lens, CIB SA earnings fell 6%, as 84% higher credit impairments outweighed 1% pre-provision profit growth and lower taxes. CIB ARO earnings rose 7% or 12% in constant currency, reflecting 14% higher pre-provision profit and a small credit impairment charge from a net release in the prior period. CIB's operational priorities include growing its client base and further improving primacy. Client revenues grew 13% and primacy increased slightly during the period. CIB is focusing on low cross-sell, low revenue clients as well as new client acquisitions. Importantly, it has added 325 new-to-bank clients year-on-year. The business continues to make progress in its digital channel usage with South African migrations onto Absa Access increasing by 9% this year, with initiatives in place to accelerate the remaining migrations in the second half. CIB grew capital-light revenues 2%, driven by deposit growth and 14% higher corporate noninterest income, partially offset by lower trading revenue in Markets SA. Pleasingly, corporate's noninterest income has grown 13% on a compound basis since the first half of 2021. The business continues to diversify geographically with CIB ARO constituting 47% of the first half earnings. Moreover, to capture flows into Africa, CIB opened a Beijing office in and aims to establish a Middle East office in the first half of next year. Lastly, CIB has maintained its leading role in renewable energy financing in South Africa and has arranged ZAR 96 billion in sustainable finance deals putting it on track to easily surpass its ZAR 100 billion goal by 2025. Relationship Banking earnings grew 1%, as its credit loss ratio improved to within its through-the-cycle target range. Its revenue grew 6%, thanks to solid 11% higher net interest income. However, noninterest income declined 5% due to continued contraction in cash volumes, compression in its acquiring revenue margin and growth in low-margin products. Cost growth of 10% was driven by investment in digital and hires in frontline staff across wealth and the SME segment. We expect these hires to generate revenue, which we are starting to already see. Turning to relationship banking strategic priorities. Firstly is its focus on diversifying commercial, its largest business beyond its leading agri franchise. It gained some momentum here with strong growth in non-agri sector revenue, including transport and logistics, the public sector and manufacturing. Active commercial customers grew 3% overall. We continue to see SMEs as a key growth opportunity, and our efforts to scale our business have seen active client numbers, growing 7% and transactional accounts up 11%. Euromoney awarded us best bank for SMEs in South Africa. The turnaround in our Private Banking and Wealth segment has lagged our efforts in commercial and SME, but recent changes to our propositions has accelerated growth in these segments with active customers up 7% year-on-year. We also continue to grow Islamic Banking, where deposits grew 30%. Lastly, the investment in digital capabilities saw digitally active customers grow 10%, and we launched several new digital value-added services and products, both on our app and online. Moving to Everyday Banking, where earnings grew 9%, largely due to 4% lower credit impairments off a high base. Transactions and deposits earnings fell 10% on 7% lower pre-provision profit and 4% higher credit impairments. Its noninterest income grew 3% as continued migration to digital channels and targeted price reductions partially offset growth in customers and transactional activity. Card earnings grew significantly, given 10% higher pre-provision profit on the back of 4% revenue growth. Personal loans improved noticeably, albeit still a small loss as our risk mitigation initiatives led to 15% lower credit impairments, while pre-provision profit grew by 2%. While consumers remain under substantial pressure, Everyday Banking continues to deliver on its strategy. Importantly, customer experience scores improved further during the half. Moreover, it launched Ultimate Banking, an account that offers market-leading value for money, which has been well received by the market and is showing positive sales momentum since launch. Our active transactional base grew 5% with pleasing double-digit growth in targeted segments such as young adult and retail affluent. Moreover, after scrapping Absa rewards fees last year, membership grew 15%, which is positive for retention and cross-selling. We continue to enhance our digital capabilities, which is evident in 12% growth in digitally active customers, while customers using our banking app increased 20% to 2.4 million, supported by strong growth in our app downloads, which grew by 43%. In response to this digital migration, we continue to optimize our branch operations with our traditional branches reducing by a further 5% to 452 branches, while we have increased our sales and service outlets by 30% to 99. Lastly, given the difficulties facing South African consumers, we further reduced our risk appetite in personal loans, where we cut production by 14% and consequently, we have seen a reduction in credit loss ratio in the business. Product Solutions cluster grew earnings 7% due to 6% lower credit impairments off a high base, while its pre-provision profit declined slightly, given muted 3% revenue growth. Recovery in home loans earnings drove this division's growth, again driven by improved credit impairments that offset lower pre-provision profit. Conversely, Vehicle and Asset Finance earnings rose significantly as pre-provision profit grew 7% to outweigh still elevated credit impairments. Insurance SA earnings fell 10% off a very high base with life insurance down 23% due to higher insurance service expenses. Non-Life insurance earnings almost doubled, given solid revenue growth and an improved underwriting margin. The increased loss in advice and investments that includes central costs for the division reflects significant investment in people and technology. The underlying business has seen improved adviser productivity and assets under management. We continue to focus on integrating bancassurance across our retail franchise. This was evident in 11% new business growth in life insurance, while digital sales rose 34%, driven by an increase in digital funeral sales. During the period, Vehicle and Asset Finance launched Renault Financial Services, a partnership with the Motus Group, as part of its strategy to become the bank of the automotive industry. With consumers under pressure, we continue to enhance collection strategies including pre-delinquency and operations, and we have seen a reduction in early cycle roll rates, which is starting to positively impact rolls into late-stage and legal books. We also continue to actively manage our front book risk, and we have significantly reduced our vehicle finance origination risk appetite in higher-risk segments and certain dealer groups. Lastly, PSC has strengthened collaboration with the rest of the group, building integrated propositions with Everyday Banking and Private Banking and Wealth in Relationship Banking. For example, our new Ultimate Banking solution contains embedded life cover and the value of new mortgages originated through our internal channels improved over the period. As mentioned, the stronger average rand was a substantial drag on ARO RBB earnings, which grew 1% in constant currency. In fact, banking operation earnings grew 12% in constant currency rather than the 2% decline you see here. Banking pre-provision profits grew 7%, partially offset by 4% higher credit impairments. ARO Insurance earnings fell 78%, as revenue dropped 35% due to higher weather-related claims, reinsurance write-offs and a challenging operating environment. We believe that a bancassurance distribution model with key partners is a more sustainable model for us and ARO going forward, as shown with our recently announced proposed transaction with Hollard. Growth and increasing returns are priorities for ARO RBB with positive momentum across several strategic imperatives. Our focused customer acquisition initiatives, refreshed retail customer value propositions and improved digital onboarding capabilities saw new-to-bank transactional customers grow by 23%, with 27% increase in digitally onboarded customers. This resulted in total active customers increasing by 7% to 2.5 million with 11% compound growth since June 2020. Further enhancing our digital capabilities to improve convenience and accessibility is key, and we continue to see positive take up on our digital services with digitally active customers growing 10% to over 1 million, taking the 5-year compound growth to 17%. Card is a group area of strength that we can leverage in our Africa operations and the recent launch of commercial cards in 3 of our markets and new Infinite and Signature cards for our retail affluent customers resulted in a 31% growth of new credit cards off a low base. Lastly, in driving financial inclusion, our small ticket short-term mobile loan disbursements grew 17% to almost ZAR 4 billion. Looking at our divisional returns, the 2 highest return businesses decreased, CIB of a very high base, whereas we believe that relationship banking can improve noticeably from the current levels medium term, as its investments pay off and it grows capital-light revenue. Pleasingly, Everyday Banking's return on regulatory capital improved slightly to 22%. Although we aim to increase this further through the medium term, when credit impairments normalize and fee income growth picks up. Product Solutions cluster remains well below our cost of equity, and we expect it to improve materially from these levels, particularly given it includes insurance and home loans that generate attractive returns through the cycle. ARO RBB's return on regulatory capital remains well below ARO's cost of equity. We see scope to improve this materially medium term by reducing its cost-to-income ratio from 65% driven by revenue growth and better efficiency. I will now hand you to Deon.

Turning to our guidance for the remainder of the year. For the global economy, the IMF projects real GDP growth of 3.2% in 2024. We also believe softer inflation provides space for central banks to reduce policy rates and the U.S. Fed has signaled that it's likely to start easing rates soon. For South Africa, we expect real GDP growth of 1.1% in 2024. The initial reaction to the government of National Unity has been positive, reflected in somewhat lower government financing costs and a firmer rand. The strained consumer remains a central focus. Helpfully, we expect headline inflation to moderate further, which is likely to open the way for a measured pace of cuts beginning as early as September. We project that the prime rate is likely to fall to 10.75% by mid-2025. We forecast that GDP weighted growth for our ARO presence countries will rise to 4.7% in 2024, led by East Africa. Fiscal and debt sustainability will remain a central focus for countries like Ghana, Kenya and Zambia, while weather conditions are important for all ARO markets. For many ARO presence countries inflation and foreign exchange developments are likely to enable some monetary policy easing. Based on these assumptions and excluding further major unforeseen political, macroeconomic or regulatory developments, our guidance for 2024 is as follows: We continue to expect mid-single-digit revenue growth with broadly similar growth in net interest income and noninterest income. Net interest income is expected to slow in the second half given lower growth in South African retail lending and the impact of higher cash reserving requirements in some ARO countries. Noninterest income growth should improve noticeably in the second half of 2024 in part due to our naira losses in the second half of 2023. We expect mid- to high single-digit customer loan and deposit growth. Our credit loss ratio is expected to improve slightly from 2023's 118 basis points and exceed our through-the-cycle target range of 75 to 100 basis points again. We expect mid-single-digit growth in operating expenses, producing a similar cost-to-income ratio to the 53.2% in 2023 and low- to mid-single digit pre-provision profit growth. Consequently, we expect an ROE of 14% to 15% from 14.4% in 2023. We still expect our group CET1 ratio to end 2024 in the upper half of our Board target range of 11% to 12.5%, despite the fact that Kenya's recent credit rating downgrade will likely be a drag. We expect to maintain a dividend payout ratio of around 55% for 2024. Given material base effects, we expect stronger pre-provision profit growth and a lower credit loss ratio than the first half to support better second half earnings growth off a low base in the second half of 2023. Finally, looking at medium-term guidance. Given the group's first half 2024 results, it is more challenging to achieve an ROE of above 17% by 2026. However, we continue to firmly believe that an ROE of over 17% is an appropriate target for the group over the medium term. Moreover, we still see a clear pathway to achieving this, with the same drivers previously highlighted, including growing capital-light revenue, a normalizing credit loss ratio, improving productivity and faster growth from Africa regions. Nonetheless, we will update the market in the fourth quarter of 2024 on when we expect to achieve our ROE target, after completing our medium-term budgeting process. Thank you. I will now hand back to Arrie.

Thanks, Deon. In concluding, I would like to make the following remarks. While the operating environment in the first half of 2024 was tougher than we predicted, the management team are focused on specific plans to turn around our current performance, which are already gaining traction. In closure, you would have seen the announcement this morning of me taking early retirement from April 2025 after 27 years with this incredible organization. I look back over my career with fond memories and want to thank the Board, the executive committee and every colleague across the organization for helping me to enjoy a wonderful career in Absa. We will now take your questions.

Good morning. And as we said, we will now take your questions. Starting with those via Chorus Call and then those on the web. Are there any calls on Chorus at this point?

Yes. We do have a couple of questions. The first question we have is from Keamogetse Konopi of Citi.

All the best for early retirement, Arrie. A few questions from my side. Firstly, South Africa's earnings were down 7% having been down 17% last year at a similar point as well, I mean that earnings are now down by double digits versus 2 years ago, even after excluding the ZAR 1.3 billion charge at the head office. What needs to change to get the SA earnings at a [ product ] level back to where they were in 2022 and how soon can this be achieved? And secondly, on -- just on NII, the total endowment hedge reduced 7 bps as mentioned, what impact are you expecting in the second half of the year from this? And as a result, how should we be thinking about the run rate of the ZAR 923 million drag to NII for the rest of the year? And lastly, where do you expect improvement of deteriorations in the credit loss ratio across your book in '24 for the rest of 2024? And also when do you expect the credit loss ratio to get back within the through-the-cycle range?

Keamo, thank you for those questions. And I think there's quite a bit in there. And also just thank you for those well wishes, they are hugely appreciated. You talk about the SA earnings, you talk about the endowment and you talk about the CLR and now we see that for the rest of this year and beyond. I just want to remind everybody on the call that we don't guide outside our current outlook that Deon has shared with us. Deon, I'm going to ask you just to touch on SA earnings and endowment. And then I'll make some comments on CLR, you can add to that if you want to.

Yes. Keamo, thanks for that question. So a couple of things on SA. We do in our presentation in the annexure, we put some of the substantial items that are sitting currently in our earnings. You will see there that there's 2 items that sit in the SA base, which is the naira loss as well as the cost of separation. You'll notice we don't normalize results anymore. So those items remain. The other thing I would say about South Africa is retail impairments have been above the top end of there through the cycle. And as this normalized, we expect that to improve South Africa's performance quite materially. We've seen some of that in the first half. However, CIB impairments have come up off a low base back to where the -- at the higher end of their normalized range. So those are the things that impact South Africa. If you think of the endowment, the ZAR 900-odd million we disclosed is actually the hedge release. It has grown. The reason it's grown is average rates in the first half are higher than it was in the first half of last year. As underlying rates come lower, you'd expect that to reduce on a go-forward basis.

Thank you. Do you want to add to that?

No, I'm happy to park it there. Yes.

Just I think Deon partly covered the CLR question as well, Keamo, but let me just say that as you look at our presentation today, you will see that, as Deon indicated, our SA Retail businesses are beginning to show improvements in their CLRs, we expect that to continue, of course, into the second half of this year across all 3 of those clusters because we want them to get to within their target range. What you're also seeing is that our CIB business has had increased impairments in this half off a very low base, and that's linked to very specific single names in the industry. And our expectation is that they will stay elevated as we close out this year. A small improvement in our ARO business, but they're still well below their through-the-cycle range. So Keamo, hopefully, that gives you a sense of where we are with CLRs.

The next question we have is from James Starke of RMB Morgan Stanley.

Just [indiscernible] questions, 3 from my side. Perhaps you can elaborate a little bit on the outlook for NPLs. I mean you've covered some commentary around improving [ earlier ], et cetera. I get the guidance around the credit loss ratio, but how do you see your NPL formation into year-end? The second question just relates to your core equity Tier 1 guidance. You're saying it's coming down into the range. You mentioned the Kenya sovereign downgrade. Is there anything else that's driving the capital consumption to bring your CLR down into the range? And then lastly is the headline earnings adjustment relating to investment properties of ZAR 473 million net. Perhaps some context around that? And particularly, if there's any more to come on a headline earnings basis...

James, thank you for those questions. So I think, again, around 3 areas, NPLs formation. I'll touch on that. Deon, you can add to that. I think there's a specific question on CET1 and our guidance, then specifically how we look at capital consumption. And then there's headline earnings impact of investment properties. James, let me start with the NPL formation. I think what's very important for us is in our SA businesses, we've made a number of risk appetite adjustments over the last 12 months, again, some strong adjustments in the first half of this year as you do this on an ongoing basis. And I think what's very encouraging is that we are seeing the early delinquencies perform within our expectations as a result of those CapEx that we have made. Of course, as you would expect in a cycle like this is that NPLs will be stickier, and they will take time to settle down. As we've seen the early delinquencies perform within our expectations, all the focus across our businesses now is on the NPLs, and how we see that going forward. I think the big focus for us in this half is still our VAF business. We've made a number of additional adjustments in that business, and we're also seeing those early vintages performing within our expectations, so as we look at the second half of this year and the first half of next year, we continue to expect our risk cutbacks to give us the benefits that we need to see and then focus specifically on our NPL positions and improving that going forward. You would have seen further that our coverage against NPLs is very high. So we feel comfortable that we're sufficiently covered from that perspective. Deon, can you cover for us CET1 and the investment property-related conversations?

Yes, James, as guided, consistently, we expect to be in the top half of the range. We are very comfortable with that as a target range. We did print 12.70%, slightly above the range in the half. We do expect headwinds out of ARO regions. We've called out Kenya specifically, given the downgrade. We also have some organic growth as well as our dividend to pay. And that's -- those are the key items that get us -- that keeps us in the top end of our target range.

Thank you, Deon.

And the headline earnings adjustment?

My apologies, James.

James, that is non-headline earnings, it's part of our attributable earnings. That would be our CBD in the main -- where we've continued our property optimization activities. We expect probably a bit more optimization of opportunities over the next 18 months as we continue to consolidate our property portfolio, particularly in the CBD.

Thanks Deon. James, but also expect -- and I know this is not directly related to your question, but as we look at the efforts we've made over the last couple of years, specifically on digitization, specifically across our SA businesses as well as the ARO businesses, we need to think very carefully about our physical channel environment, our broader property environment. And as you will see in the digital engagements, some continuous effort in that space to ensure that we keep on reducing that portfolio as we try and balance the move to migration -- the move to digitization with the physical experience of our customers. So I expect that to be a key feature in our productivity program over the next 3 years.

The next question we have is from Harry Botha of Anchor Stockbrokers.

Arrie, all the best for the future. Thank you for the disclosure on Slide 30. Can you possibly highlight your FY '24, 2H '24 headline earnings expectations for the Ghana hyperinflation, the separation and the BEE deal? And then you also provided useful color on relationship banking in the presentation. Are you willing to share a bit of timeline in terms of the revenue growth starting to pick up to produce pre-provision profit growth and kind of the business case for that over the next couple of years? And then finally, you noted the expectation for lower credit impairment charges to support the product solution cluster returns. Can you share any other strategies that you have in place to improve the profitability of that segment?

Harry, thank you for those questions, and thank you also for the wishes. Deon, I'm just going to talk -- ask you to talk to Ghana, BEE and the others. Harry, there is also a question around how we look at RB and the investment case there. And of course, how we think about profitability in the PSC cluster. So Deon, will you start with -- just with that head office outlook?

Yes, Harry, given the number of substantial items, we thought this annexure will be helpful for us to talk through over the course of this week. If you look at the substantial items on that slide, clearly, we don't expect another naira loss. Hyperinflation accounting, we can't give exact numbers on this, but I'd expect us to still hyperinflation account Ghana for this year. Therefore, you should think about similar for H2. The other item on here is Barclays separation. Those costs are winding down. We expect that to be in a materially lower space in the second half. And as we go into 2025, it stops being an item that we would even call out. The eKhaya BEE deal, this is a buildup over 5 years, given the maturity of that program. So you can think of similar-ish levels for the second half, slightly higher given that we only took 4 months in H2 of '23.

Deon, thank you for that. Let me talk about relationship banking. I think, Harry, what you would recall is that the relationship banking business is a business that we've invested in significantly over the last couple of years, specifically in the first half of last year as we built out our coverage capability in that business, this is a very high returning business, and we expect better returns going forward. So the focus for us in this environment is to make sure that we get our return on those investments, both from a people as well as from a technology and process perspective and start sweating that asset much better going forward. Also within that business, Harry, we've seen a significant focus on diversification. We've got a very strong commercial segment in that business that was traditionally very strong in agri, but they have diversified into other areas like public sector, transport, manufacturing and that is beginning to give us good growth momentum. Apart from that, there is a significant focus on the SME environment in this business as well as private wealth as I've indicated in the presentation a little bit earlier. And we are beginning to see the investments in our coverage part of our business in the new account acquisitions that we are seeing across those 2 segments. Very importantly, if you look at the first half year, the NIR performance, which for us has been very disappointing in this business, but there are reasons for that. Core reasons is that this is where we carry our cash business, and we are a significant -- contributed to cash still in the South African economy. And as we optimize that model, we expect improvements coming from cash. Also, this is where our merchant acquiring business sit, we're a big merchant acquirer to the big retailers in SA. So a lot of actions there to ensure that we look at our margins in that business. And then as we push into areas like SME now, we are seeing products that are very differently priced going into the second half of this year. And again, as you guys engage with us, I think you'll get a lot of that feedback over the next few days as they're implementing some reprice propositions. In fact, from this month, they're taking that to the market. So we expect the cost growth to slow down, given that we've come out of that cycle and the diversification from revenue to start improving as we go forward. There was also a question around the PSC cluster and how we look at profitability in that cluster. Of course, this is secured lending together with insurance. We have seen the secured lending market slow down as a result of the strain on the SA consumer in this cycle. What's encouraging for us, as we said earlier, is that our actions that we've taken on the risk capital side is working exactly to our strategies and our plans. We are beginning to see some better momentum in the mortgage business. We expect the VAF business to still stay slower for a period of time. Our Life business at this stage is dealing with increased claims, mortalities, and also the adjustments that we had to make as a result of IFRS. Deon, and -- I think we can talk to that if we need to. But again, I think the Life business is a key contributor to our broader franchise sales and then a very strong turnaround in both our non-life business as well as our Absa Investment business in that space. So with the efforts on productivity going forward and efficiency, we expect costs to slow down in this business with focus on revenue and some form of revenue momentum and then, of course, the improvement, Harry, that we expect to see in CLR, which is beginning to come through. So from a CLR perspective, both these businesses have bottomed out. What you would have seen from our CLRs currently is that compared to the average in the marketplace, we are very encouraged with the outcomes of the actions that we've taken on the risk management side.

Can I add...

You're welcome to, Deon.

Maybe just a few points. Let's cover insurance. The key driver of the down on insurance was our ARO business, call it about 2/3 of that, higher claims in those businesses, particularly weather related, if we think of Mozambique and Kenya. Kenya's operating environment has been particularly difficult and under IFRS 17, we've got to deal with things like onerous contracts, experience, variations, et cetera. And we're working our way through all of those as IFRS 17 is quite a new statement. But that would be 2/3 of the drag. About 1/3 of the drag relates to Life South Africa. We did see top line growth in gross premiums. However, if you look at the expense line in our booklet, you'll see that's gone up. And once again, that's related to higher claims, as Arrie said. But also, we've invested in that business last year, consistent with that, overall theme of investing in 2023 that you see come through our cost line at a top level and that will be investments in people, technology, et cetera, to drive us for future growth. But those typically now need to -- will be -- form a part of the NIR line as we think about IFRS 17. So direct expenses are much higher. Also, a little bit -- the tough SA operating conditions also impacted in terms of how you have to think about onerous contracts in that business, particularly as customers bought let's call it, lower-cost options. So we've got to think about profitability of some of those offerings that we've got as well in that space.

Thanks, Deon. A lot of detail there.

We have no further questions on the conference call.

Alan, Can we just check on the web? Just give us a second. Okay, so we've got a few questions on the web. Let me just read them out. It's a question from Stephen from the Financial Mail. Why are you happy to increase your credit card exposure which is also unsecured. Stephen, let me cover that question. I think what's important here is that our card business is one of our anchor businesses in our franchise and you heard us refer to that in the presentation as well how we leverage those expertise into our businesses outside South Africa. What you are seeing is that our average lending growth is slowing down in this business off the back of the risk adjustments that we have made, and that is in line with our expectations. What's very important about this product is the largest part of the expansion is to existing low-risk customers that are broader primacy customers of our broader franchise. And it's also a business that we can continue to make risk adjustments if we don't think that our vintages are performing in line with our expectations. Currently, these vintages are performing in line with our expectations and that for us is very good. And as a consequence of that Stephen, we expect that the losses and the average CLR in this business will continue to improve as we go into the second half of this year. But this is an anchor product for us as a franchise that brings value across the broader franchise. There's also a question from Samuel [ Goodacre ]. Deon, how do you plan to manage the capital stack? Are the intentions to call the AT1 due July '26, do you plan to issue more AT1s or other capital?

So Samuel, thank you. Firstly, we're very comfortable with our capital stack as it is. We are very comfortable with the diversification that those dollar bonds that we issued provide for us. At this point in time, we certainly do replace what we call to maintain the stack as it is and expect that to continue in the short term.

Thank you. Thank you, Deon. There's a question from Megameno from MUMI Investments, that speaks to 2 areas. The first one, CIB provisions uptick. Should we see that as a ones-off and will that normalize at the full year? Megameno, I did cover this in my earlier comments around the broader CLR ratio. Our CIB provisions have ticked up from a very low base for a long period of time. Currently, as you see, they're just above the top end of the range. And as we've indicated, we expect that to stay at that level for the rest of 2024 and probably the first half of 2025. Then you also asked around marketing expenses. And could you give color into that for the full year? Will that also normalize? We have made a significant investment in our brand at the beginning of this year, and it was very important for us to reposition our new or our refreshed brand promise to the market. But what we do expect is, as we've indicated around our cost shape for the second half of this year, that a large number of that slows down into the second half of 2024. So certainly, we expect, and we've already started the actions to ensure that we're comfortable with our efficiency ratio by the end of '24. Ross, you asked some questions. Let me just try and capture those. There are 4 questions. Absa's previous update suggested fee cuts in everyday banking would be fully captured in the '23 base, but the H1 '24 commentary refers to strategic pricing investments impacting H1 performance. Just to clarify then, have you had to institute additional fee cuts? And if so, will these impact 2024 and 2025? Deon, do you just want to touch on that first question, and then I'll continue with the other questions?

Yes, that's a correct observation. There has been some higher reward costs as well as certain products in everyday banking with some fee changes needed to be made at the beginning of this year. In the second half, there isn't any plans to do any further adjustments around this. Look, there's an overall long-term trend here. I think that we all have to be very cognizant of. And clearly, client acquisition and other value-added services need to feature as an offset to this longer-term trend, but not anything specific for H2.

Yes. Thank you for that, Deon. I can just say that in our transactional or in our Everyday Banking business, a lot of focus on new propositions. So rewards for us has become an anchor product to drive primacy in that environment. And you would have seen us making our rewards proposition a free proposition last year. And of course, you're also seeing good reward customer growth, which is a very strong indicator of franchise health as we go forward, and that, of course, comes at a cost. Ross, there was also a question around -- with regard to the large contraction in transactional deposits, how has market share changed over the last year on your definition? Is it possible to [ arrest ] the decline or is this reliant on an improving SA economic outlook? Ross, I think we've got to start here by saying that we have got the second biggest retail deposit market share in the market. And in our case, that is strongly skewed towards investment deposits in the market. And of course, in a SA environment where consumers are constrained in the way they are now, you are seeing some consumption of that on personal balance sheets. So we do expect as the outlook improves that, that situation will also equally improve. But we've got a very strong market share. And if you look at across our broader portfolio, our ability as a franchise to continue to attract deposits across all our segments, in fact, remains very strongly, and we expect that to continue. Your third question is you attribute...

We've dealt with this. This is the insurance question.

Okay. We've covered that. And then with regard to OpEx. Deon, I'm going to ask you just to talk to this. Staff costs, excluding IT...

Grew 10%. Yes.

Grew 10%. Sorry, this is just very small.

Okay, I can deal with that.

So between Deon and I, we're trying to read this small print. Compared to the 1% increase in headcount, please elaborate on what drove this large increase? And then just the guidance, and then I'll cover the last question there.

Yes. So Ross, I think the cost -- the headcount growth actually happened last year. In 2023, we grew the whole year about 1,600. In the first half, we grew 1,300 staff. That was an investment in our business, mainly in front line. So half-on-half, you would see a high growth because as we enter 2024, we've got a full annualization of all those costs. As you would correctly see, at the end of June versus December, our headcount is actually flat, if not dropping slightly. The other driver of the growth is the Khaya share-based reserve that we had to build up that grew 80%. That sits in the staff cost line and it's not in the base. If we then look to the second half, we are -- if we look at the trend, we did guide for mid-single digits, that does imply a pullback. Key items there, so let's deal with just the one-offs or the substantial items. eKhaya is broadly in the base in the second half. So you don't have that base effect. We have -- if you look at the slide on separation costs, we're going to have a big positive base effect on separation costs. Thirdly, a lot of the staff costs, the hiring in the first half of last year will be in the second half base. So that is a positive or at least a neutral base effect versus the first half. And finally, we have -- we are now very considerate on discretionary costs. The investment cycle is done and that trend we expect to continue into 2025, where we've done the investments we need to do, it's now about generating the benefits over that and delivering positive jaws as we look forward.

Yes, and sweat those assets, Deon, to the point that we made earlier. I just want to look at the last question. Stephen, thank you, again. It's a question from yourself. Give us more detail about the new venture with Hollard. Stephen, I think what's important here is if you look at our Hollard business model or strategy, we've got an SA-based strategy, which is a manufacturing bancassurance model and then in the ARO environment, our strategic direction going forward is more of a distribution model as we disinvest from our insurance businesses across those markets. And one of the key partners as part of that process is Hollard. So hopefully, that answers that question. I don't see any more questions on the web. Let us just refresh quickly. It looks like those are the final questions, Deon.

Yes.

Can I just, again, thank you all for joining us for this update. Thank Deon for his first results update. Well done, Deon, that was very well done. We look forward to the engagements over the next week. So thank you so much for joining us.

Thank you, everyone.