FIFI PETERS: Today, August 16, 2021, Absa reported dizzying profits in the six months to June, and the amount of money customers deposited in the bank increased beyond 1 trillion rand for the first time. Punki Modise, Absa’s Group Acting CFO, joins SAfm’s Market Update to review the figures.
Punki, thank you very much for your time. Let’s talk about earnings because I see that earnings per share, which is what is commonly used to measure earnings, skyrocketed more than 1400% when compared to the six months in the prior period. My calculations could be wrong, and please. feel free to correct me there, but this is not normal growth. So please tell us about exactly what drove your earnings so strongly.
POINT MODE: Thanks Fifi. I think that is correct. If I look at our earnings, our earnings and returns were better than expected. At their point, they have grown significantly. From a general profit point of view, we grew 500% to a general profit of R8.6 billion. That was largely due to much lower credit impairments.
And then at the same time, from a revenue standpoint, our revenue grew 3%, which I think was reasonable, considering the difficult macroeconomic context, as well as the substantial impact that Covid-19 has had on our business. of life.
And then I think the other key factor to mention is that operating expenses were pretty well managed. They grew at 5%, resulting in a slightly higher cost-to-income ratio of 55%. All of those components eventually ended up producing 1% more profit before provisioning on an annual basis.
FIFI PETERS: Are you comfortable with the current equation right now, whereby your expenses have increased a little more than your income?
POINT MODE: I’m comfortable, Fifi. And really, from my side, the main factor that drives that is the provisions that we have had to take in our life business. If I exclude the impact of the life trading dispositions that we have taken, we can clearly see that the underlying momentum is still quite strong. So within that combination, I still feel pretty comfortable that that’s the right level of growth that we’re seeing.
FIFI PETERS: And Punki, with this phenomenal earnings growth the bank reported today, how far apart are earnings before the pandemic?
POINT MODE: As for you, I think it is important to mention the fact that we obviously made significant provisions last year, just to strengthen the balance sheet and ensure that, given the difficult macroeconomic environment, we can continue to effectively support our clients as well. how to run a franchise that is healthy. So from that perspective, the growth that you see is largely a factor in provisions that have not been repeated from last year.
FIFI PETERS: Let’s talk now about that deposit number and the fact that many more clients choose it to safeguard their money in this environment. Are these new customers or existing Absa customers who are depositing a lot more in this period?
POINT MODE: I’d say it’s a combination, Fifi. At the same time, banks are almost a safe haven in today’s environment. So we are seeing a significant shift towards banks, which is more like a flight to safety. And that’s largely what drives a significant proportion of that growth.
At the same time, I think that when you look at companies, to a large extent companies are much more on the defensive during this time. And I also think that business confidence is a bit low. You’re finding that there is a lot of liquidity that is there without spending, and that is what is really driving this strong deposit growth that you see.
FIFI PETERS: But Punki, are you seeing a difference between your big corporations and your smaller companies, your SMEs, because there is so much research out there? [indicates] that these are the individuals or companies that have been most affected by the pandemic. What kind of activity are you seeing from the SMB space compared to some of your larger clients?
POINT MODE: You are right. I think the bigger clients, like I said, are a lot more defensive right now. I agree with you that SMEs have been the hardest hit by the pandemic.
The other big sector that is experiencing quite a bit of stress is the entertainment sector. From that point of view, you still see pressure in that space.
FIFI PETERS: Entertainment, tourism, hospitality. The question then is that for SMEs in the space, some of which are currently not making as much money in business because Covid-19 is still a huge risk, and some research reports that we have not yet passed the third wave. What type of assistance has the bank been able to provide to some of these companies?
POINT MODE: As I said, we have a balance sheet that we strengthened and we are strengthening for our clients. At the end of the day, it doesn’t matter where those customers are in the targeting. And we encourage SMBs to come and talk to us before they experience significant stress, because it’s generally much better when customers are arriving faster than late and their businesses are in trouble. But also, for companies that are in danger, we look to them to see the future potential of the companies and help them appropriately. I think we fully appreciate the fact that this is an ecosystem and without SMEs, to be honest, it is very difficult to grow economies anywhere in the world.
FIFI PETERS: Hmm. On the other side of the equation, when we look at your loan book, there has been a lot of activity in lending to your retail customers or normal customers who want to buy new homes, who want to buy new cars in this environment. Again, are these new Absa customers knocking on your door or are they existing customers? And can you just describe the shape of this consumer, given what we’ve seen with rising unemployment, with increasing wage cuts, in this environment around Covid-19?
POINT MODE: I think for your point on clients, it’s a combination; And if you look at home loans to a large extent, it is the new bank customers who are applying for loans. We are obtaining them through the relationships we have built with our mortgage originators.
So I think that, at the same time, in vehicle and asset financing, we are seeing similar trends taking place. So from a credit lending point of view, I think we apply a smart growth approach as a bank, which speaks largely of responsible lending because while we want to see growth, we want to see sustainable growth. And largely in today’s environment where interest rates are very low, our affordability criteria emphasize those to ensure that if interest rates rise and rise very quickly, clients will still be able to meet their obligations. .
FIFI PETERS: Punki, the low interest rate environment is great for us who want to get more credit, but not the best news for lenders like you who make more money when interest rates are a little higher. So, tell us about what the bank’s road ahead will look like and how confident you are of future growth.
POINT MODE: I think that as a bank we are very aware of the pressures that a low interest rate environment can put on a bank. Like Absa, we have our hedging capabilities, which we use heavily to cushion the impact of that. And then, given the coverage we currently have, we continue to comfortably lend because it’s really pushing us, as a bank, to be able to leverage effectively [out] this period when interest rates are significantly low.
So I think as we go along, yes, macros are still pretty fickle. However, I believe that we are in a good space to continue supporting our clients.
FIFI PETERS: All good. Good to know, Punki. Thanks for your time. That’s Puki Modise, the CFO of Absa’s interim group, as opposed to the CFO, who today also rewards his shareholders by paying a dividend. You will recall that around this time last year the bank chose to keep the cash in the event of the worst case scenario. That clearly hasn’t happened this time.