Absa Group Limited (ABG) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us for our pre-close call. Deon will start with a couple of remarks, and then we'll take your questions. Deon, go ahead.

Yes. Good morning, everyone. Thank you for joining us on our pre-close call first half of 2025. Many of you would have seen our trading update already. For me, the key messages for our first half are: firstly, our first half earnings growth is strong. We expect our earnings to grow by mid-teens year-on-year, improving our RoE to around 14.8%. These benefited somewhat from ceasing to apply hyperinflationary accounting to Absa Bank Ghana for the first half. Second, our net interest income growth is muted due to softer loan growth and some margin compression, particularly in South Africa. However, we continue to expect better second half loan growth given lower policy rates and our wholesale pipelines improving. Thirdly, driven by strong trading revenue and mid-single-digit growth in fee and commission income, noninterest income growth improved to high single digits. We expect this to moderate in the second half given base effects. Fourth, our cost growth continues to be well managed, which is important given the low economic growth in South Africa. Lastly, our credit loss ratio improved noticeably to around the top end of our target range of 75 to 100 basis points. In terms of outlook for the full year, we reiterate our guidance. Before fielding your questions, I'll give you a quick update on the focus areas we mentioned in March. Importantly, we have completed the reorganization of our retail business in South Africa, which will accelerate its turnaround. We combined Everyday Banking and Product Solutions cluster as well as our Private Bank and Wealth business from Business Banking. We will report this division as Personal and Private Banking going forward. We are making good progress in reducing the loss in our group head office. We have reallocated our staff share scheme and depositor insurance costs to our division, and we will provide restated financials for them in August. Group Treasury is also seeing the benefits from ALM optimization. And earlier this month, shareholders approved us buying back our preference shares. Lastly, our productivity program is a key driver in containing cost growth to inflationary levels while creating savings for ongoing investment. We aim to achieve cumulative gross savings of ZAR 5 billion by the end of 2027. This program remains on track with broad-based savings across the group. We expect the biggest benefit in 2025 with much of it coming in the second half. Thank you for your attention. I'm happy to take your questions.

Baron, go ahead with your question.

Just on your credit loss management, I mean, with the credit loss ratio expected to improve, what measures are being taken to sustain this improvement? And I mean, how do you plan to manage credit risk in the face of the potential economic uncertainties? And maybe if you can talk to both your SA and Rest of Africa regions, that would be great.

Perfect. We can take another one. Harry, you want to go ahead?

Harry, go ahead.

Can you possibly provide any comments or guidance on the noninterest revenue growth in Everyday Banking, possibly the customer growth trends as well? And can you give us possibly more color on the headwinds on wholesale or CIB loan growth in the first half.

Baron. We talk a little bit around impairments. Yes, as you would see, we reported our CLR around the top end of our through-the-cycle range. What we see there is the similar trends to what we saw at the end of 2024 with our VAF business, our personal loan products, CIB materially lower. Home loans has still been fairly sticky, particularly in the late-stage NPLs. However, we see the inflows into NPL moderating noticeably. We're seeing business bank dealing with some single names. And our ARO RBB business is higher, but it's still off a low base, and it's at comfortable levels. So in terms of how we see this playing out, as per our previous guidance, we expect to be within the top end. Clearly, there's lots of macro and geopolitical uncertainty out there, including sovereign risk, for example, in Mozambique. We also expect asset growth in the second half to improve from the first half, and we would expect some coverage build. Generally, in South Africa, Baron, in retail, the consumer environment is actually from an impairments perspective, improving. And we're seeing that in wholesale as well. In fact, there's a lot of excess cash out there, particularly amongst corporate clients. I think it talks a little bit to a lack of confidence and surplus cash. And that's certainly a trend in South Africa. Rest of Africa, with inflation moderating in general, interest rates coming down, it's still -- like I said, while it's up off a low base, it's still at fairly comfortable levels. Then Harry, I think you started to talk about NIR. Look, I think we would have seen kind of the retail type of environment and our NIR there at the end of last year, having moderate growth. I think that has been maintained for the first half. In terms of CIB and wholesale loan growth, I would say, if I look at the market trends, we did grow a bit slower than market. What we did see is a lot of vanilla corporate lending in large size hit the market in the first half. As we assess those transactions, they were done -- they pretty much closed at very thin margins. And we didn't necessarily have the full franchise benefit to justify taking those loans on -- at those type of pricing levels. But Harry, what we do see now is a strong pipeline for the second half. In fact, as I look at June, I mean, we're basically at the end of June, June has been a strong month for that business. So there is pipeline out there. I would say it's a bit delayed from a CIB perspective in terms of loan growth, given what we've seen in the half.

Thanks, Deon, go ahead.

Yes. So 3 from me. Just on Ghana, if you can talk about the dynamics there. Obviously, the currency has moved a lot. Maybe just if you can talk about the situation on the ground there. Presumably, obviously, translation if the currency move is to sustain should be helpful, but also interested to hear how activity is picking up there. Secondly, on OpEx, the productivity program you mentioned coming through strongly in H2. Just wondering about the shape of OpEx growth in H2 versus H1, whether anything has changed versus when you spoke to the market in March. And then on Business Banking, that looks, I guess, a bit softer than probably expected when you updated us in March. Just wondering how that's evolving in, I guess, Q2 versus Q1 and how you're thinking about that into H2?

Okay. Yes, Ross, Ghana has been tough for us over the last few years. We're pleased to see that market turn around. They've completed now the debt restructure and a lot of their bilaterals. Their foreign -- reserves and foreign currency are looking a lot better. And I think that's based on a lot of the sectors. Gold production has been fairly strong. The gold price is high. So they're able to get out gold, all boosting foreign reserves, cocoa market as well, fairly supportive. So I think a lot of that kind of risk that we saw in Ghana is now starting to turn. Many of you would have seen that reflected in the currency. A lot of comments about it being best kind of performing currency in the world. Ross, you asked about what that means for us. Clearly, we translate that back. those earnings back. So we called out in March that we expected a drag -- a slight drag in currency for this year from our regional operations. I think we said that now we don't expect a slight drag. And I think a large part of that is Ghana and our ability to translate them at stronger currency. I think also the strong currency has meant inflation in the teens now. And therefore, as we look at the hyperinflation accounting rules, we believe -- we don't believe Ghana is hyperinflationary by the end of June, and we will cease reporting that. So Ghana is certainly -- it's a welcome shift for us, Ross, and very pleased. On the ground, customer growth has been strong. NIR growth has been strong. Revenue growth has been strong. So all of that franchise type of indicators is looking really good in Ghana as we speak. But look, it's not like there's no risks there. But certainly, given where we're coming from, it certainly feels like it's turned the corner. I think you had some comments on OpEx. So look, nothing's changed, I think, in terms of our shape. As you know, the productivity program does help us manage the kind of investments we need to make, but also the fact that we've got amortization coming in from our intangibles. So it allows us to broadly keep costs at inflationary levels. Clearly, we have an eye on the economic environment in South Africa. So we're going to be very disciplined, not just on structural costs, but also tactically on how we spend. But I wouldn't say anything has changed in terms of the shape. And you're right to call out Business Banking is softer than we expected in March. A couple of things there that's probably worth calling out. We have a fairly large market share in agri. And now agri lending actually is negative as we speak. And the traditional harvest season is coming a lot later given the rainfall patterns. So while the half is -- they've taken strain on the revenue line, we do expect some of that lending. And in fact, we're already starting to see some of that lending now coming in as the harvest seasons approach. I would say that's one. The second thing is that the trend we saw at the end of last year around cash volumes as well as scheme fees in acquiring, those still remain a drag on things like NIR. And the last item I'd call out there is they're dealing with 1 or 2 single names for the half. So I think those are the key factors around Business Banking. But Ross, it is right to say softer than we previously expected.

Charles, go ahead with your question.

Just 2 questions from my side. The first one is sort of following up a little bit on -- from Baron's question. If the first half credit loss ratio is at the top end of the range and second half is normally seasonally stronger, would you be cautiously optimistic at this point of potentially upgrading your full year guidance to better than top end of the range? That's first question. And then second one is, Deon, if you could just clarify your position on share buybacks. Is that something that you consider when trading below book? And I mean, there's been some pretty attractive entry points in your own share over the last couple of months. Is this something that you would consider?

Yes, Charles, thank you. So around your question on first half, we expect our credit loss ratio to be around the top end. And for the full year, we say within the top end. And obviously, there's ranges there, Charles. We have an eye to a couple of things. First of all, the macro environment, geopolitical environment, there's clearly risks out there. The second thing I would say is that we do factor in fairly strong asset growth into the second half that we think will require coverage build. And so at this stage, we're not signaling anything different around our guidance around credit loss ratio. Clearly, within the top end operates in a range. And I think a fair amount will depend on asset growth and how that starts to fall into the second half. So we're comfortable with our guidance as it is. We've guided our CET1 ratio to be around the top end. I think for the moment, we need to close the half to give any further detail around where our CET1 ratio is. But around the top end, we still expect we're very comfortable at that level. We have an eye to the increase in the countercyclical buffer minimum requirements. We also have an eye to peers. But as a general comment, we're not averse to share buybacks. That is certainly a tool in our armory. And in the right circumstances, it's not something that we discount.

James, go ahead with your question.

So 2 questions from me. Deon, if you could perhaps just expand on your comments around an improved asset growth outlook into 2H, maybe fold in some commentary around your risk appetite and your stance there. I mean you have been quite risk off and particularly around mortgages, if you could give us a sense on how you're thinking about that market, growth in that market, pricing in that market? And the second question relates to your outlook on margins and how do you see those trending, particularly NIM? How do you see those trending into the second half from current levels?

Yes. James, thanks. Yes, we certainly see asset growth into the second half. That's always -- I think we even called that out at our year-end that we always expected a soft entry into this year given some of those risk appetite calls we've made. I've spoken about slightly delayed wholesale lending given what deals were on the table in the first quarter and our choices that we've made. I think what gives me confidence into the second half is, firstly, the pipelines that we are seeing in wholesale. I spoke about the delay in agri and what we're seeing starting to emerge. So I think in the wholesale side, there's a fair amount of -- there is line of sight there. I think if you look at ARO, particularly ARO RBB, there's been very strong growth. We expect that to continue lower rates, lower inflation, improving consumer environment. I think in South Africa, your pointed question is about risk appetite. I would say that we certainly pull back specifically on personal loans and VAF given the impairment performance. We've seen the benefit on impairment, and it's turned, and it's really been supportive into the first half. I think as I talk about the growth in the second half, we do see opportunity to selectively increase growth in all of our retail environments again. So yes, not maintaining the same risk appetite. We do see opportunities. We do see a slightly better consumer, slightly lower interest rates, and we've seen our impairment performance really come back. So we see those opportunities even in those segments that I called out. You then asked about mortgages specifically. Look, the market growth has been low. We've grown slightly lower than the market. We've seen very competitive pricing in this market. We've also seen the growth occur regionally in South Africa, very strongly in the Western Cape versus kind of elsewhere in the country. So that's some of the trends we've seen. The growth that has been emerging, very competitive pricing, fine margins, but we've grown slightly slower than the market. We do have regard to making sure we maintain our strength and our market share in that market, and we'll certainly be very competitive as I look at the second half as well. And I think you had then a question on margins and NIM and how we're seeing that play out. Look, I'll talk about a couple of the things that probably touch on NIM. We have an eye to the rates across the Africa regions. Clearly, lower inflation, lower rates, we do have some drag there. I would say that we were preemptive in hedging some of that going into this year. And therefore, we've got some protection in the first half, but you can't fully hedge. There's no derivative market. You need the liquidity to be able to hedge. So I expect that to be a bit of a drag. Look, I think we did see that mix around less retail growth versus wholesale, more investment deposits versus transactional. So I think that kind of mix trend continues. Spoken about competitive pricing. The 2 areas I've called out is home loans as well as corporate -- vanilla corporate lending, very, very tight pricing that we've seen. So we've seen some of that come through. I think some of this is offset by the ALM optimization activities that I've called out and that we said that we were going to go hard after. So in the first half, South Africa, in particular, we've seen some margin compression. As I look into the second half, these trends will probably be there into the second half. to some extent. But given the structural hedge in South Africa, et cetera, we've got offsets here. So there will be some margin compression, James. And I think we'll give you all the data points as we publish our interims.

Daniel, go ahead.

Quick one from my side. If you think of FLAC as a regulator essentially mandating a minimum holding of more expensive funding, do you anticipate a discernible impact on funding cost as you issue more FLAC?

Yes, Daniel, thank you for that. I think the issuer and the investors have to find each other in terms of price. I think initially a little bit, Daniel, like you call out, initially, this is going to be an instrument. It's going to be issued at holdco level. We've got some structural subordination around this. It's a new instrument, investor mandates need to change. Is there as much funds available to invest in this. I think that's why the regulator has given us quite a long winding period before we have to be fully compliant around this. Daniel, I can only call out what we've seen internationally is that initially, the pricing starts off much higher than regular, let's call it, senior unsecured bank level debt. But over time, it converges. Because ultimately, it's demand and supply, and there is no more senior unsecured. And then the only thing available is FLAC. So demand-supply dynamics generally get you back to more or less aligned pricing. But I think your observation is right in that initially, it will be a little bit more expensive before it winds out. But in the bigger scheme of things, we don't think this is material.

Irena, go ahead with your question.

Just 2 questions from my side. Deon, thank you for referring to the priorities for the group. Can you maybe just comment on the pace of delivery against those priorities being the reorganization, RoE, optimization of the capital stack, et cetera, just where you are versus where you thought you would be? And given that you had a very strong half in the second half last year and sort of hearing your tone around better asset growth, but potentially lower growth in NII and NIR due to sort of base effects, as you've mentioned. Do you think that as things stand at the moment, that you could deliver real growth in the second half year-on-year?

Yes. Thanks for that, Irena. So look, in terms of pace, very pleased to have completed the reorganization in time as we've communicated. We've got interim leadership in place, the co-head structure there. But below them, everyone is in their seats covering the key portfolios, and that ExCo is working on the business and deliver. So very pleased because it is -- it was a bit of a distraction in the first half, big reorganizations like this. So I think that's absolutely on track. In terms of our head office, we're absolutely on track. We've made some big calls there. All the business unit-related costs have been dropped to the business units. We've also increased the capitalization levels. We previously capitalized at 11% and then we had this big drag at the head office. We increased that up to 12%. So all the surplus capital is sitting there as well. So very pleased with that. The ALM optimization, you'll see that in the treasury results as we report half and the head office number, I think was very -- I'm pleased with the first half performance. And I think there's more to come in the second half. And it's all about timing and deposit pricing and maturities, et cetera. So very much on track there. We bought back our expensive pref shares. So another funding optimization tool. Productivity programs on track. I do say that a lot of this is second half, but all the programs that we look at, the major programs are on track to deliver. If I then look at -- we spoke about discipline in capital allocation. We've invested in the capability to do this at a group level, at a BU level. We've set up the frameworks to be -- to do that. We've adjusted performance scorecards around prioritizing RoE, but also earnings growth. We want both RoE and earnings growth has been the 2 main measures now around scorecards. And that certainly sets the tone in terms of focus, but also discipline around RoE targets, pricing targets, those frameworks are all in place. So very pleased with that in terms of delivery. So I think we're comfortable with the pace of delivery. I think we clearly want NIR franchise to be a fast -- we want that to be a better driver of earnings performance, particularly in our South African businesses, retail, Business Bank. Look, I think, like I said, they're delivering stable NIR growth, some customer growth. That's an area that I think long term will determine our success, and we have a very strong regard for that need to shift in the go forward. And I think the teams are very focused on that. So I think that's more longer-term franchise health thing. So broadly, Irena, we're comfortable that we're on track. But certainly, don't discount, we've got hard yards ahead of us as well. Yes, in terms of second half trends, I think you would have seen -- you would have heard me talk a little bit about shape. I talk about muted NII in the first half as we had expected. I think we do expect better asset growth. So we should see NII improve in the second half. But like I said, NIR will moderate because of base effects as we go into the second half. And we're also not counting on strong trading. That's like an upside if you get it. You can't predict that necessarily. So we have a more general eye to trading performance in H2. Clearly, lots of risks around SA growth, consumer environment, weaker geopolitical corporate sentiment and impact on that. There's some ARO sovereign risks out there in Mozambique, for example. So look, if downside risks do emerge on things like asset growth, NII, we do think we have a counterbalance on impairments and costs. So if I think about the second half, we should have revenue, particularly NII coming through that's better that helps us with that earnings growth in the second half and particularly as we look to build momentum into 2026. But clearly, there is risk out there, Irena.

Qaqambile, you've got questions about cash reserve requirements and insurance income. Go ahead.

I think my first question is regarding the cash reserving requirement. I think last year, it was a drag on NII. And I just wanted you to give me a bit of color. Has that actually moderated both in Ghana and Mozambique. If I'm correct, those were the 2 regions where you had an impact. So has that moderated? And how does your cash balance look now? And has that actually been deployed into front growth across both those regions? Second question is, can you just give us a bit of color on insurance? I think you did highlight that it's slightly softer, if I did read the commentary right. And then can you give us as to what drove that moderate growth on insurance? Is it on life? And is it on credit life? Or is it in the short-term insurance line?

Good to chat to you again. I did say last year that we did have the risk on ARO rates reducing in this year, given an improving macro in many of these markets, and that has started to happen. I also said that a counterbalance to that was better economic environment means that there isn't the need for using tools like higher cash reserves. And we've started to see some of that moderate, of course. So these 2 things do counterbalance each other to some extent. We've certainly seen the announcement in Ghana, but it's been very recent around the moderation around foreign currency cash reserves and be able to reserve that in that currency as opposed to local currency. But a lot of that is still ahead of us. So like the impact on moderating interest rates, a lot of these cash reserve requirements, benefits that offset that are also ahead of us. Look, I suppose the underlying insurance revenue is not bad. But clearly, with IFRS 17, there's a lot of provisioning noises in terms of how you can recognize that. I think the one thing I would say about insurance, the ability to package insurance as part of a lot of your unsecured lending is more muted when you are doing less unsecured lending. And there's been some impact as a result of that. But like I mentioned, we do see better environment in the second half. So that also has a play through into insurance. Kobelo?

Just a question on -- just to get a sense around growth or potentially holding back some capital for growth. You mentioned wholesale SA, retail SA. Your thinking around Africa and linked to that growth in Africa and then strategically, maybe could be preempting it, I mean, can you just start it, but the whole -- your whole thinking around maybe building a more resilient portfolio in Africa, is that part of where the capital would be going to increase or try build a sort of a portfolio impact, sort of portfolio effect as well? How should we think about capital or at least growth in those regions?

Yes, Kobelo, I think you're spot on. I mean, we have said before that capital will go where there's growth. Our portfolio outside of South Africa has had very strong pre-provision profit growth, revenue growth and the GDP growth in those markets are a lot stronger than South Africa. So typically, capital will follow where we see growth. And yes, we operate across the markets that we do. And if we see opportunities in those markets, we'll certainly assess that and allocate capital as we see growth and returns potentials for that capital. So it's certainly a big picture part of our strategy.

Yes, that looks like there's no more questions. So thanks a lot for joining us this morning. If you do have any outstanding questions, please drop me a mail.

Thank you, everyone. Good to chat to you again. Bye-bye.

Thank you very much.