Retail & business banking drive Absa’s bottomline

• Adds a substantial 62.11% to net earnings

According to Imara Capital’s Equity Research Report of June 2022, the growth was largely a reflection of a decline in expected credit losses, which decreased by 55.03 percent to P99.2 million from P220.7 million in 2020. “The segment’s non-interest income line also grew by 17.13 percent to P429.0 million from a contraction of 7.55 percent in the prior comparable period,” said the report. “Net interest income decreased by a marginal 0.05 percent to P800.7 million compared to P801.1 million in the prior period and contributed 76.37 percent to the bank’s total net interest income. The subdued interest income for the segment emanated chiefly from the Central Bank rate cuts that occurred in 2020.”

Conversely, net fee and commission income was up 15.55 percent to P390.4 million (P337.9million in the 2020 financial year) from a contraction of 1.81 percent in 2020. The arm contributed 90.34 percent to the bank’s consolidated net fee and commission income line. Subsequently, total income reported by the segment increased by 5.34 percent to P1.23 billion from P1.17 billon in the 2020 financial year, with a contribution of 74.56 percent to ABSA’s consolidated total income. Its operating expenses increased by 7.32 percent to P715.3 million (2020: P 666.4million), thus the arm’s cost-to-income ratio edged up 107 basis points to 58.17 percent (2020: 57.10 percent).

The segment’s total assets grew by 7.29 percent to P13.0 billion on the back of a 9.49 percent growth in loans and advances to customers to P11.1 billion from P10.1billion in 2020. As at 31 December 2021, the RBB segment’s total assets contributed 60.53 percent to the bank’s consolidated assets. According to Imara Capital, total liabilities for the segment were up 9.95 percent to P11.0 billion from P10.0 billion from the prior comparable period on the back of a 63.76 percent  growth in customer deposits to P10.1 billion  (2020:P9.1 billion).

“In attempt to curb the adverse effects of the COVID-19 pandemic and adapt to the new norm, the bank managed to increase its digital usage by 21 percent in the year under review, from 34 percent in the prior comparable period buoyed by the provision of self-service and alternative banking channels by the bank. “ABSA collaborated with Mascom Botswana with the aim to grant the bank’s customers free access to the ABSA Botswana Banking app and is set to collaborate with other mobile network providers for this initiative,” said Imara.

Giving an outlook on ABSA, the investment management company said that going forward the diversification of bank’s revenue streams will gradually become a critical factor for survival and resilience against adverse economic conditions. According to the Imara report, with 63.57 percent of ABSA’s income generated from net interest streams, the bank is more exposed to the possibility of profitability erosion compared to its local peers who have an average of 59.56 percent of net interest income to total income, which augments the impetus for the bank to diversify its revenue streams.

However, Imara Capital says an accommodative interest rate environment may somehow benefit the bank in the form of improved credit quality and reduced non-performing loans as borrowers’ debt service ratios will be less burdensome. The counter continues to outperform its regional peers about cost management, with a cost-to-income ratio of 55.20 percent coming in below its five-year average of 55.83 percent and surpassing the domestic peer average of 72.71 percent.

The bank also exhibits a healthy and commendable loan book, this affirmed by its loan loss ratio improving to 0.55 percent from 1.93 percent in 2020 on the back of a significant decline in credit provisions in tandem with the recovery of the economy. “Notwithstanding ABSA’s aforementioned proportion of net interest income to total income, improving local operating conditions as well as Botswana’s improved credibility subsequent to its removal from the Financial Action Task Force (FATF) grey-list and the European Union (EU) blacklist positions the bank favourably to augment its non-funded income line,” the report noted.

Split into two broad segments, ABSA’s operations are namely Retail & Business Banking (RBB) and Corporate & Investment Banking (CIB). The RBB segment provides commercial banking products and services to medium, small businesses and retail customers. The bank’s Head Office, Treasury and ABSA Insurance Services (Pty) Ltd are housed under the RBB arm. Products offered under the retail banking segment include home loans, vehicle and asset financing, card services, personal loans as well as transactional and deposit products.