Absa Group Limited (ABG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Absa's pre-close call for the first half of 2026. I will make a few introductory comments on where we are as a group -- the momentum we see in our customer franchise and the operating environment. And thereafter, Deon will share our financial guidance, after which we'll question. Firstly, 2026 is a critical transition year for Absa. Our new operating model is in place, and we'll report 3 Pan African business units for the first time as well as on South Africa and Africa region basis. We have made significant progress on key appointments with leadership of all the business units in place. These new leaders will time to refine their strategies, build out their teams and execute against their plans. I am very confident in the category of these senior appointments we set us up well to accelerate momentum over the medium to long term. Secondly, our business fundamentals are strong, with encouraging customer trends and a healthy pipeline across the franchise. In the first 5 months, our Corporate and Investment Banking client revenue grew by high single digit year-on-year with strong growth in investment banking and global markets in particular. Transactional banking client growth will take longer to fill, but we've started to see some large wins which is encouraging and will provide momentum into next year. In Personal and Private Bank in South Africa, we continue to grow active transactional customers, particularly in the affluent and the private and wealth segments. Further growth in digitally active customers and the words demonstrate deepening relationships across our base. The Africa region's growth in active transactional customers remain solid with substantial growth in digitally active customers. In Business Bank in South Africa, the customer base grew and its balance sheet momentum improved with high single-digit growth in customer loans and deposits. Business Banking continued to grow active transactional customers, supported by strong growth in digital active customers. Lastly, our operating environment remains challenging and then set. As you know, the Middle East concrete increased global inflation expectations and dampened global growth. As a result, we have reduced our GDP growth expectations slightly in our largest countries, namely South Africa, Ghana and Kenya. In South Africa, the increased the policy rate in May, whereas we previously expected further rate cuts. Conversely, the rate in has reduced materially and is lower than we expected, creating a near-term drag, although it should stimulate growth over time. In summary, 2026 is a transition year for us -- although we are seeing positive growth in our client franchise despite some short-term rate headwinds. Then we will now hand over to Deon.

Thanks, Kenny, and good morning, everyone. Since you may not have gone through the detail of our trading update, I will cover it now. Starting with our guidance for the first half of 2026, my commentary refers to the percent year-on-year change in our financial results versus the first half of 2025. Revenue is expected to grow by low to mid-single digits with noninterest income growing faster than net interest income. Net interest income remains muted, growing by low single digits, reflecting margin compression largely due to lower policy rates in Africa regions. Net customer loans and customer deposits are expected to grow by mid-single digits. PBB net customer loans are expected to grow by mid-single digits. In PBB South Africa, solid vehicle and asset finance growth should offset modest growth in home loans and unsecured lending. Business Banking and CIB net customer loans are expected to grow by high single digits. We expect mid-single-digit growth in noninterest income. Within this, growth in fee and commission income and in insurance in South Africa is expected to be solid, while trading growth moderated after a strong first quarter. Operating expenses is expected to grow by low to mid-single digits, resulting in slightly negative and a slightly higher cost-to-income ratio with low single-digit pre-provision profit growth. As mentioned previously, our investment in talent continues to be funded by productivity gains realized. In addition, we've also been able to offset higher fraud losses and some cost to achieve in Africa regions. We expect broadly flat credit impairments and an improved credit loss ratio. We expect slightly lower PBB credit impairments driven by better delinquency performance, partly offset by the deteriorating macroeconomic forecast build. We expect business banking and CIB credit impairments to increase the latter of a no base. Consequently, headline earnings are expected to grow by mid- to high single digits for the first half of 2026, resulting in a similar ROE to the 14.8% in the first half of 2025. We expect our group CET1 ratio to finish the half of 2026 above the top end of our Board target range of 11% to 12.5%. And we plan to maintain a dividend payout ratio of around 55% for the half. As Kenny mentioned, we will report all 3 of our business units on a pan-Africa basis. At a divisional level, we expect broadly flat CIB headline earnings with solid growth from investment banking and global markets and lower earnings from transactional banking. PBB is expected to report low double-digit headline earnings growth, in part due to lower credit impairments. We expect modest business banking headline earnings growth with solid growth in South Africa, while Africa regions is lower given the margin compression. Lastly, we expect a smaller head office loss due to better ALM performance in treasury, South Africa, strong cost management and productivity gains. The stronger rand will reduce group revenue, cost and headline earnings slightly. We expect strong headline earnings growth in South Africa, given solid pre-provision profit growth and a lower credit loss ratio. Conversely, we expect African Regions headline earnings to decline due to lower net interest income and higher credit impairments. Turning to full year guidance. Given the elevated geopolitical and macroeconomic uncertainty, we will provide detailed guidance when we report our interim results on the 18th of August. We expect to achieve a full year ROE of around 15%, which is lower than previously guided. This reduction is mostly due to weaker net interest income than we originally anticipated given margin compression in Africa regions. However, we are confident that revenue and earnings momentum remain on track in the medium term, given healthy growth in our client franchise and NIM stabilization, both the rate cutting cycle, particularly in Africa regions. Thank you for your attention. We'll now take your questions.

Just one question from my side. I wanted to just drill in on the NII line item. Basically reconciling March guidance to where you are now on loan growth and NIM compression, it seems that there's quite a big deviation in 3 months. And it's obviously quite a large and this.

Shall we take a few?

Go ahead with your questions.

Okay. So Charles has sort of covered the theme, if I can maybe just drill down into that a bit and just ask about you specifically called out from a NIM perspective, you called out Africa Regions in Ghana. So just wondering how much did the policy rate trajectory differ from your expectations? And two, related to that, what were the other key regions or I guess, countries that contributed to that lower-than-expected NIM? And then just on loan and loan and deposit growth, mid-single-digit expectations for H1, obviously tracking below full year guidance. So just wondering, is that sort of in line? I know you're working on your guidance still? Or has that also been weaker than expected?

Maybe I should deal with those. We say all linked. Yes. So I think one of the main items is NIM compression, as you've called out. Look, the one that -- we've got NIM compression. We had lower rates in our forecast. Kenya, Zambia as well as Ghana. I think the big one is Ghana. We had significant cuts quarter 1 of this year. And it's a fairly large liability base that we set to it. It's a ZAR 40 billion liability base. About ZAR 20 billion of that is unhedged because the market is illiquid. It's difficult to hedge the full component. So that's a 12% rate drop year-on-year. We had anticipated a rate drop of about 6%, so it was more severe than we expected. So yes, Charles as, I think, about ZAR 300 million or 200 basis points for Ghana. And then you get to fairly sizable NII numbers given the size of rate cuts that we've had in banner. So Ghana was unexpected, but year-on-year, it's Ghana, Kenya, Zambia.

Go ahead.

Questions on interest income covered. But can you possibly elaborate on the solid growth that's coming through in the South African fee and insurance income, maybe how material the step-up as compared to December. And also, just if you could elaborate on the higher earnings growth that's coming through in the business bank in South Africa, please?

Shall we take one more?

Darren, go ahead with your question.

I guess my question is around the longer-term ROE target of 16% to 19%. Just obviously, given the clearly challenging macro, I mean, how comfortable are you with that target range? Does this result or the near-term outlook change how you think about that target?

Yes. Harry, if I can go and fee and commission income, I think you would have seen here SA performance as strong. We've got good top line growth, but positive, solid pre-provision profit, lower impairment. So SA is looking quite positive. I think if you look at fee and commission income, particularly better in Business Banking South Africa, retail South Africa, they build up momentum slowly. So you can see some momentum building up there. Around Business Banking South Africa, we've seen lower impairments, and we've seen reasonable revenue growth compared to what we've seen last year. So Business Banking South Africa quite pleasing to see. Darren, in terms of medium term, maybe a couple of comments there. So first of all, we are convinced 16% to 19% is the right medium-term target range for us. We have new leaders in seat, as Kenny has mentioned. They are busy developing strategy, strategy execution plans and targets for their business units. And we'll present that at the Investor Day in the fourth quarter. together with the bottom-up detail around KBDs, et cetera. And I think this gives us good grounding of the business unit medium-term plans and the drivers of the group ROE. So I think medium-term targets, we remain confident, 16% to 19% is the right range for the group. I think we've got to allow our business leaders just the time to develop the bottom-up detail, which we will share at the fourth quarter Investor Day.

Alex, go ahead with your question. So Charles, go ahead.

I just wanted to present on that loan growth question from earlier. That also seems to be lower than your initial expectations. If you could kind of break that down, how the disappointment is unfolded, whether that's SA or Africa.

Yes, Charles, underlying -- if you look at what we've said in our guidance around the wholesale parts of our business kind of part mid-single digits, retail SA lower than that. We do see that improving into the second half. If you look at more near-term month-on-month lead indicators and pipeline. We're certainly seeing better strength come through into the second half. So it is true for the first half, mid-single digits, slightly lower than our full year guidance on this. But we'll probably guide in more detail in August, but we're seeing better performance pipelines, et cetera, overall.

Go ahead.

Two questions on my side. I guess, on the back of Charles' question. It just seems your CIB growth is lending peers in this half. Just a bit of color around -- I mean, were there deals that were moved or is it just overall weakness or perhaps you saw how the impact from a more cautious approach from new corporates or your side of the business due to the on Iran-U.S. war? And then secondly, on costs. I mean, in line I guess, overlaid by the slower momentum on revenue growth, but then strategically understandably so all the hires that were made. Just your thoughts around how does that shape the near-term sort of emergence of revenue given -- and the headwind potentially all seen play out between that -- those 2 in the near term and sort of the impact on your sort of the cadence of you getting towards your medium-term 16% to 19% ROE guidance.

Okay. I'll make a few comments on those and Kenny, you can add if you'd like. So CIB, we've guided that Global Markets and Investment Banking growth is solid. Transactional banking is down. It's similar to trends to what we saw in H2 last year. And this is a business that takes a bit of time to turn the momentum around. Within transactional banking, lower NII in the Africa regions, particularly Ghana, but a number of those markets that I mentioned, they have been liability basis. And therefore, the interest rates affect them as well as Business Bank Africa regions the most. Last year, the team would have called out some pressure on NIR due to client repricing, we're required to maintain the primary relationship. And that was mainly in South Africa. More recently, we've seen some good client wins and pipeline, but onboarding these clients and monetizing that takes a bit of time. So I think more medium-term prognosis looks a bit better. But short term, what we saw second half of last year flowing through to this year. So transactional banking in the main in CIB. I would say Global Markets had a very strong first quarter. It moderated in the second quarter. Some of those opportunities, good client flow, good growth in client revenues within global markets, but that ability to monetize like the expo last year wasn't there. And last year, there was a significant growth in the first half. I think it was 29% up. So the base was really high in a. So still good growth in global markets off a high base, but moderated a little bit in the second quarter. Then a comment on costs, Kabelo, and I think we're very focused on costs. The investments we have to make in leadership is required for the medium term, and those cannot be delayed. And we are very focused to deliver sustainable performance in the medium term. At the same time, we are seeing opportunities in the short term to take out discretionary costs, as well as manage our strategic investments very carefully in the current environment. And then in the medium term, we are making good progress in building out our structural cost program, where we think we have opportunity to take out absolute costs in the medium term to support our 16% to 19%. We'll provide those details at the quarter 4 Investor Day.

If I may -- I mean the following I mean the appointments that have been made are aimed at doing the following. Firstly, strengthening the bench strength, particularly in our trade business lines, you'll see that these appointments have been concentrated in the way we build in profile leadership at across the 3 business units. And the leaders are now in the assets, even though there are some people who will only be joining us in July and August. So we haven't really seen the full impact of the appointments that have been made. And in any event, even those in the assets, the longest is they who started in January, started in sort of March, April, and Leon only started just over a month ago. And so as we are encouraged them by the caliber of the people that we have appointed that we are under no illusions that will need a couple of months to assemble their own teams review the strategies that are already in place and where is the need for intervention and strengthening of the plans that ought to be executed, they will have to do so. So which is why we're describing this year is a transition year, and that we're changing parts of the engine whilst the plane is in flight. And I think we have learned that very good caliber people will help us drive the culture change, increase the focus of clients and ultimately ensure that we are able to deliver on our medium-term plans.

Go ahead.

I'm sorry. On the ROE guidance for H1 and FY '26. Just wondering about the denominator effect here. So previously, you've called out the change in other reserves and the impact that's had -- just wondering if there's any detail you could add on that.

Shall we take another one.

Go ahead.

Just to follow up on the points around the new hires. I just wanted to get a sense if you're starting to see any impact from the new hires in CIB in terms of revenue generation. And I'd also like to get a sense whether you see -- given the current lending growth momentum and revenue momentum scope to deliver positive operating leverage in 2027.

Ross, around denominator effect, we've not seen the same impact on reserves for last year. So I think if you look at growth on results, it's far more normalized. We did call out capital above top end of range. So we -- in the second half, something we'll continue to look at in terms of capital allocation and where we can see turns and opportunities. What I would say around new hires in CIB, look, some have landed, but clearly, there's still quite a few to land in July where the actual start. Maybe you want to comment on that?

Yes. Yes. I mean another question, are we seeing any signs of wins, absolutely. Then we make reference to some of the early wins that we've had, and these are large client sort of deals, mainly in our transactional banking business. But by definition, traditional banking takes time to onboard the clients just given the logistics and the IT work that needs to be done to integrate into their own systems and so on. And we're fairly confident that, that should be completed by the end of the third quarter of this year. So we'll start to see the actual revenue impact in the sort of fourth quarter of this year and definitely then carry the full year benefits in 2027. The nature of the engagement with clients even from an investment banking point of view and the quality of how we're structuring deals and some of the advisory money that are starting to come through higher reflection of the step-up that we have done in the caliber of people that we have in our CIB business. So the momentum is there, the green shoots are there. There's a question on the end of just going through the time lag before we start to see the revenue impact. And so that revenue impact will definitely be seen in 2027. We are also building capability that we didn't have at all, i.e., our capability to do structured deals that involve both the skill set in our lending business as well as in global markets with the view of accelerating distribution and so on. That skill set was underdeveloped, and we're driving this and operating back to bear, and we'll start to see deals of that nature coming through as we to the fourth quarter.

Harry around positive operating. I think what we'll see now, given that revenue performance that we've seen in the first half, kind of flat to slightly negative is kind of more the direction for this year. Look, second half remains uncertain in terms of macroeconomic outlook. Like Kenny said, particularly in CIB, there while we've -- while some people have started, others are serving notice. And a lot of these individuals lead in trades. So those types of things are less easy to see in terms of how they manifest on the top line. So we are a bit cautious around full year outlook, given that there is some macroeconomic uncertainties, we also need to see people land and actually start to deliver and execute given notice periods and the like. So we'd rather be cautious at this point. I think flat slightly negative, but there is some event revenue that could turn that.

Kabelo, just checking, is that a old hand or a new one? James, go ahead.

Can you hear me now?

Yes, yes.

Just on the forward-looking information applied under IFRS 9, I mean, have you used any different macro variables from what was applied with your FY '25 results so we can just get a sense of what it compares in the 5-month period.

James, this has been changing monthly, since March. So I will say we have -- these models take time to run, et cetera. We applied kind of May macro forecasts which were significantly negative if you look particularly the down scenario relative to what we saw at the end of last year. I did call out impairments flat. But within that, we have had -- we have built model-related MEV provisions as a result of that deteriorating macro. What I would say is that it was much bigger at the end of May. We've moderated it a little bit, given the developments that we've seen now in June, but we still got a net build as a consequence.

Go ahead with your question.

Just little bit linked to James' question. Just in the guidance, where you kind of break up the result per region we speak about Africa Regions earnings declining due to the lower NII, which has been discussed at but you also site higher credit impairments. Can you just talk about the credit impairments piece dragging Rest of Africa lower? I mean is that specific to certain regions, certain kind of specific isolated credit losses in CIB? Or is it kind of central provisions? Can you just break out some detail on that impairment piece in Africa, please.

Yes, Jared, I would say that there's nothing abnormal there. We had a very low base, including recoveries last year if you look at Business Bank even in CIB. So it's more base effects rather than a normalization rather than any big standout impairment losses.

I don't see any more hands, but there is a question in the chat from Adam who asks, when can we expect to see a decrease in our cost income ratio?

Yes. Look, it's a key focus for us, Adam. We expected this year to see the first signs of that. I think yes, we are seeing some of that pressure on the top line. Our cost growth plans are well on track for this year. So it's more top line. Clearly, our 16% to 19% requires positive. So this is a key focus for us. Both revenue line as well as cost take out are key priorities for us.

I mean the full benefit for the structural cost initiatives that are underway will only come to in the subsequent sort of years starting in 2027. And there are quite a number of initiatives, including some cost takeouts and that come with the additional unfortunately expenditure this year. We are comfortable, though, that despite the fact that there are all sorts of changes that are taking place within the organization new hires that we're still able to maintain a very, very tight cost discipline as reflected by our cost growth of sort of low to sort of mid-single digit figures for this year. But the actual benefit of these additional initiatives will only flow in the subsequent year.

0 Jared's got another question. Questions?

Maybe just 1 more from me. Just kind of -- you spoke earlier about still being confident in kind of the medium-term guidance and based on kind of operational metrics that you're seeing and gains. I mean is it fair to say just given the challenging environment and kind of rate environment being slightly different than you expected the definition of what is medium term and how long it will take to get there is slightly changed? Or is that not a fair assumption?

Yes, Jared, I think if you look at medium term, we should have bottomed the Africa regions rate cycle by this year. Now who knows -- but we've seen significant rate cuts already. Garner's come from 28% down to kind of just around 13%, 14%. So we've seen the big moves happen. We should see bottom out and wash out. This is where we have our biggest interest rate sensitivity in the Africa regions. So on the basis that, that washes out, it's mainly in our base for this year. That said, it's a good base to build once again into the medium term. So short term, we've got to let that wash out, but medium term, it should be supportive in terms of growth from yes.

Asanda, go ahead.

So to the extent, thanks for the time -- so to the extent that the macro business as what we've seen. So be it growth as well as, let's say, inflation and so on. Would you say that the 16 to 19 is either under threat or sort of remains intact as far as guidance is concerned, even with, let's say, a deteriorating or less than favorable macro. So I'm just trying to get a sense of to what extent do you think -- or is that guidance and how much of it is reliant on a favorable macro environment outside of what you're going to be doing in 2?

I mean we're not changing our sort of medium-term guideline and we had a time host that. We're all sudden shifting the time horizon. Let me take a step back and reflect on the net interest income headwinds in Africa. We have a very, very high concentration in Ghana and Kenya. If you look at the Africa regions sort of business. those 2 geographies are overweight, which is why we have been talking about the need for us to accelerate the diversification of our business. because if 1 sort of major accident happened in 1 of those, we feel it at a group level. And that's exactly what the sort of impact of sort of lower NII in Africa region has demonstrated that we are absolutely correct in one thing to accelerate the diversification of our business in Africa region. And secondly, that NII sort of that is lower than what we expected is driven largely by deposit NII, and I think Deon has made that point because it is the deposit interest income that is susceptible to massive rate decreases regard all of the surplus liabilities, and we have to deploy them. We deploy them either to the asset side of the book or we apply them to sort of cover of par and the paper and the significant decline in the interest rate environment in Ghana has meant, therefore, and that our earnings that relates to the deployment of our surplus liquidity to care paper is significantly less than what we thought it would be. So whilst the micros, yes, have some headwinds. If 1 looks at the detail and the underlying has to why we have effectively had this lower NII on a bet islets in the main to can and in particular, in interest rates in cat, in particular, given the size of Ghana relative to the rest of our portfolio.

Charles, go ahead.

Just a follow-up on this rate story in Ghana and sorry to belabor it. But the rates in Ghana haven't changed since the 18th of March. Been 14% since that. And over the course of this year so far, only reduced by 1.5%, 15.5% at the beginning of the year, 14%, 18th of March, and then it's been flat since that I think the question is, how has this caught you off guard because the rates were known last time we spoke.

Charles, you're right. We had a big rate cut in Jan. We had a big rate cut in March. The effect of that is going to wash out this year as we see the full year impact. We also called out a very strong trading performance in quarter 1. So you do have swings and robots in the bigger business and the performance of the business up to quarter 1 was strong. So quarter 2, things have moderated.

No more hands, but there's a question from Kabelo in chat. Apart from Sholo who assumes his duties in July, how many new hires are yet to land in the CIB business? And what are their expertise?

Well, as I will be taking on our investment banking will also be starting in July. How many are and unbelievable investment banking sort of expertise coming from the channels. The Head of Transactional Banking sales, which is a business that is currently underperforming will also be starting in July, that will strengthen the sales capacity and the rebuild of that sales team, international banking. We've got 2 other sector heads with the reinforcing line coverage team. Again, you can see that all of these investments are aimed at strengthening the client-facing side of the business, and in particular, our ability to originate deals and make sure that they are close to the sales of agency. So it was quite a huge, but I'm fairly confident that as we bring people on board were also, in some instances, exiting people whom we've been not appropriate but naturally with these as of feel, we tend to focus more on the new investments that we are making as opposed to some of the changes and the exits that we have to undertake in order to create space for the new entrants.

Okay. no more questions. Thanks, everyone, for your time this morning. If you do have any more questions, please drop me an email. Thanks for joining us.

Thanks, everyone.

Thank you very much.

Thank you. Bye-bye.