Absa Group headline earnings more than doubled to R18.6 billion in 2021 (R8 billion in 2020), well in excess of 2019 earnings, as pre-provision profit increased and as the impairments charge reduced substantially.
The improvement in part reflects a stronger than expected economic recovery in South Africa, where Absa generates most of its income. South Africa’s gross domestic product improved from a low base in 2020 and showed improving momentum for most of the year. All of the countries in which Absa has a presence seem to have returned to positive economic growth during 2021.
“This is a strong set of results, which reflects the benefit of not only the improved operating environment in 2021 but also the deliberate actions we have taken to ensure that Absa remains resilient and poised to resume our growth plans in a favourable environment,” said Jason Quinn, Absa Interim Group Chief Executive. “Our purpose-led approach to supporting our clients and communities defined our success in a tough environment while creating value for shareholders,” he said.
Revenue growth remained resilient at 6 percent or 8 percent in constant currency, supported by strong growth in net interest income (up to 9 percent). Non-interest income was in line with 2020 levels, as the negative impact of COVID-19-related claims in the insurance business eroded the benefit of strong income increases in areas including global markets.
Solid revenue growth and cost management helped to deliver positive pre-provision profit growth over the past two years.
Absa continues to make material investments in information technology (IT), where costs increased by 19 percent to R4.9 billion as it sought to build on the gains made during the past three years in improving system reliability and stability for customers, and to strengthen security and controls. Impairment charges were significantly lower than the previous year – as few customers defaulted on loans, and the outlook for defaults improved on the back of improved macro-economic conditions.
Customer deposits grew by 12 percent, supported by strong performance in the retail and business banking, corporate deposit portfolios and closure of the Absa Money Market Fund, with a significant portion of those customers electing to migrate to Absa deposit products. Growth in gross customer advances at 7 percent was supported by strong growth in secured assets in South Africa, where home loans increased by 9 percent and vehicle asset finance rose 10 percent as Absa continued to gain market share in those areas.
“We have come through the crisis in a strong position, having focused on managing operating leverage, building balance sheet resilience and preserving capital,” said Punki Modise, Absa Interim Group Financial Director. “These actions and our financial performance resulted in a return on equity that exceeds our cost of equity, years ahead of expectation,” she said.
Return on equity improved to 15.8 percent in 2021, while Absa Group’s Common Equity Tier 1 (CET1) ratio was strong at 12.8 percent. At this level, Absa’s capital reserves are above the board target level and above the minimum regulatory capital requirement level.
Retail and Business Banking (RBB)
RBB earnings more than doubled as significantly lower impairment charges were partially offset by a 3 percent contraction in pre-provision profit, reflecting the impact of high excess mortality claims in the life insurance business, customer fee cuts of R600 million to alleviate strain on customers, and increased performance costs. RBB operations outside South Africa contributed to the improved performance and returned to profitability in 2021.
Since onset of the COVID-19 pandemic, RBB has focused on being close to customers and responding proactively and empathetically with initiatives to support them. This approach continued in 2021 as customers were supported during lockdowns and civil unrest with bespoke relief measures, including debt restructuring, debt consolidation and assisted asset realisation.
In 2021, the focus shifted from mitigating financial consequences of the COVID-19 pandemic to growing the business in a sustainable and selective manner, through dynamic execution of the strategic transformation journey launched in 2018. The customer franchise strengthened as reflected in key performance indicators in South Africa, including:
- a 49 percent increase in home loan registrations.
- vehicle asset finance production increasing by 24 percent.
- new personal loans increasing by 40 percent in South Africa.
- cheque account sales increasing by 73 percent, which is 24 percent higher than 2019 levels.
RBB SA is in the second phase of its 2018 strategy, focusing on smart growth. Its main priorities include improving customer primacy, making progress with digitisation and growing capital-light revenues, including in our integrated bancassurance operations.
In 2021, RBB revamped key capabilities within the customer relationship matrix, including the launch of a behavioural rewards programme – Absa Advantage – which, as a data-driven customer communication approach, has improved the understanding of customer preferences and therefore enhanced our ability to engage empathetically in all interactions.
Social media engagement with customers has been elevated across the business, as evidenced by improvements made in the 2021 BrandsEye Net Sentiment Banking Index – where Absa came out on top after being the bottom-ranked bank for a number of years.
Absa also remained at the forefront of digital payment innovation with the launch of Apple Pay in South Africa, as well as contactless payments with Garmin and FitBit wearables and introduction of the universal QR scan to pay functionality in the Absa app in 2021.
Corporate and Investment Banking (CIB)
CIB headline earnings increased to levels higher than the period before the pandemic, with strong growth recorded across corporate banking and investment banking across regions. Earnings performance was supported by income growth of 10 percent as the client franchise grew and primary-banked client numbers increased. Improved credit performance and a 78 percent drop in impairment charges further supported earnings.
All core business units delivered double-digit revenue growth in constant currency, with strong performance from markets despite the high base. A 14 percent increase in global markets income was supported by solid franchise growth across both corporate and institutional client base.
Having completed the balance sheet-led phase of its strategy and separation from Barclays, CIB is also successfully prioritising customer primacy as well as deposit and non-interest revenue growth, carefully balancing growth and returns.
Absa made significant progress in building on existing environmental, social and governance (ESG) capabilities, and in its aspiration to become an African leader in this space. Absa was the first South African bank to announce sustainable finance targets with the aim of financing or arranging over R100 billion for ESG-related projects by 2025. We also announced Africa’s first certified green loan from the International Finance Corporation, with a value of US$150million.
An active force for good
Absa actively contributed to creating inclusive sustainable economic growth in Africa, investing close to R195 million in support of communities through various education and youth employability, advocacy and thought leadership, as well as COVID-19 and civil unrest response initiatives. These included, among others:
- Launch of the Absa Fellowship Programme, which aims to support the development of authentic, accountable and ethical future leaders with the potential to play a shaping role in their respective communities in Africa.
- The Absa Cross-Skilling programme, a collaboration with our CIB clients to cross-skill 238 young people after COVID-19-related job losses.
- 17,873 unemployed youth supported through technical, vocational and digital skills among others.
- Absa invested in initiatives that promote fairness, equality and transparency across all our African markets. These included, among others, financial contributions and leadership support toward the Gender-Based Violence and Femicide Response Fund in South Africa.
- Absa also contributed to initiatives in support of business relief for informal traders and micro- enterprises affected by COVID-19 and Civil Unrest in South Africa.
The global economy’s outlook for 2022 is particularly uncertain. Events in Ukraine are acute, and sharp moves in commodity prices and potential interruptions to supply are likely to trigger significant re-assessments. Absa currently expects South Africa’s economy to grow by 2.1 percent in 2022, returning to pre-COVID absolute GDP levels by end of the year. In countries outside South Africa where Absa has a presence, GDP-weighted economic growth of 5.3 percent is expected.
Based on these assumptions, and excluding further major unforeseen political, macroeconomic or regulatory developments, Absa expects high single-digit revenue growth in 2022 and return on equity at similar levels to 2021.
“While the global economy’s outlook in 2022 is particularly uncertain, we feel positive about the strong base that we have built in the past few years and how this has positioned us to deliver on our strategic objectives,” said Quinn. “We will pursue growth opportunities appropriate to the environment and shore-up buffers as needed to ensure that the bank remains resilient.”
Jason Quinn, Absa Interim Group Chief Executive
Punki Modise, Absa Interim Group Financial Director