Absa takes a hit from stronger rand

The strengthening of the rand over the past few months will see Absa’s headline earnings fall slightly for its 2024 financial year.

Absa informed shareholders on Thursday that, in 2024, the operating environment in South Africa and the bank’s other African regions has been largely as expected year-to-date.

However, it noted that conditions in Kenya, Zambia and Mozambique are more challenging.

It said weaker average exchange rates versus the rand remain a drag on group revenue and headline earnings for the period and are expected to reduce both by about 3%.

This does not mean that Absa’s 2024 revenue or headline earnings will be 3% lower than 2023 revenue and headline earnings.

Regardless, the bank said it expects materially stronger earnings growth in the second half of 2024 off a relatively low base.

“Our 2024 guidance is unchanged, besides that we expect a slightly better credit loss ratio now than we did previously,” the company said. 

“Conversely, the impact of applying hyperinflation accounting in Ghana is slightly more than we expected.”

The bank expects mid-single-digit revenue growth, with broadly similar growth in net interest income and non-interest income.

Specifically, Absa expects net interest income growth to slow in the second half of 2024 due to lower growth in South African retail lending, the introduction of deposit insurance in South Africa, and the impact of higher cash reserving requirements in some African countries.

Therefore, the bank expects mid to high-single-digit customer loan and deposit growth for the year.

In addition, the bank said non-interest income growth should improve noticeably in the second half of 2024.

This improvement, in part, reflects the non-recurrence of the Naira losses in the second half of 2023 but is also due to better growth in fee and commission income and insurance revenue.

Absai expects mid-single-digit growth in operating expenses, down from 8% in the first half of 2024, given cost actions the bank took in the first half of 2024 and the base effects of higher Barclays separation costs.

As a result, the bank expects low to mid-single-digit growth in pre-provision profit and a similar cost-to-income ratio as the 53.2% it reported in 2023.

“Our credit loss ratio is expected to improve to midway between 2023’s 118 basis points and the top end of our through-the-cycle target range of 75 to 100 basis points,” the bank said. 

“We expect our credit loss ratio in the second half of 2024 to decline noticeably to within the upper half of our through-the-cycle range.”

The bank expects to report a strong performance in South Africa, saying its retail books in South Africa are positive, particularly vehicle and asset finance and personal loans. 

South Africa is expected to drive group earnings growth in 2024, mostly on lower credit impairments in retail lending and relationship banking. 

Absa’s earnings in other African regions are likely to decrease slightly due to the stronger rand, increased cash reserve requirements in certain countries, higher credit impairments off a low base, plus a challenging operating environment in several markets. 

“However, we expect strong revenue and pre-provision profit growth from African regions in constant currency,” the bank said.

Looking ahead, Absa expects moderate revenue growth in 2025, which means the bank’s operating JAWS is likely to be slightly negative. 

“We expect the stronger rand to remain a drag on revenue next year,” the bank said. 

However, Absa expects its credit loss ratio to improve further to within the top end of its through-the-cycle target range of 75 to 100 basis points next year, largely reflecting continued improvement in its retail charge in South Africa.