Absa CEO, Daniel Mminele said the bank’s surge in impairments was a result of “erring on the side of caution”.
- Absa’s headline earnings fell 93% in the six months to June as bad debt provision charges shot up.
- The bank said the 297% increase in its credit impairment charges was driven by its management’s decision to book bad debt provision early on.
- Should the forecast credit losses materialise in the second half of 2020, it will use the provisions already set aside on the first half.
Absa says it is in a better position to weather Covid-19 storms in the second half of 2020 because it has taken most of the pain on its balance sheet already.
The bank, which published its financial results for the six months to June on Monday, reported what looks likely to be the biggest drop in earnings in the sector at 93%.
But CEO Daniel Mminele said the bank chose to be cautious in the first half of the year so that it wouldn’t have to worry about credit impairment charges in the second half.
Erring on the side of caution
“We have erred on the side of caution with regard to the highly uncertain environment that we still find ourselves in,” said Mminele.
With credit impairments four times higher than they were in the first half of 2019, Absa’s diluted headline earnings per share fell to under a rand, at 67.7 cents, from R9.18 a year earlier.
The bank booked credit impairments of R14.7 billion in the first half, 297% more than in June last year. Mminele said half of that provision was from bad payment behaviour by customers and the remainder was attributable to management’s cautious move to frontload the bank’s expected impairments provisions for the rest of the year.
The impairment charge included R5.5 billion in Covid-19 related adjustments, which factored in deteriorating macroeconomic expectations and payment relief given to customers.
“You look at your economic scenarios and if they are deteriorating in an unprecedented way like this, you book provisions early based on potential stress,” said Absa Absa CFO Jason Quinn.
For instance, after analysing its client base, Absa moved customers who work in industries most affected by Covid-19 to Stage 2 loans, one step closer to non-performing loans, which required the bank to book more credit impairment provisions for them.
Similarly, in the corporate and investment banking business, Absa modelled higher losses and default for clients who are in distressed industries like hotels and aviation resulting in credit impairments being seven times higher in that business than they were in June last year.
We’ve dealt with the downside
“We believe that this puts us in a strong position. We’ve basically dealt with the downside as we see it and that should put us in good position into the second half of the year. We’ll be utilising that provision against the losses if and when they occur,” said Quinn.
Absa also said it expects good collections from customers who had been granted payment relief up to June. While Standard Bank, for instance, revealed that risk profiles of about a fifth of customers who were granted payment holidays or other relief have subsequently deteriorated as some lost their jobs and incomes permanently, Absa said customers who have already started repaying their loans was encouraging.
Absa granted payment relief to 22% of its loans and advances book. Most of the relief was provided to the retail and banking customers in SA with a third of home loans and vehicle and asset finance clients benefitting from the payment holidays.
After June, customers who requested further relief were asked them to make partial payments, said Quinn. But unlike Standard Bank, Absa has not disclosed how many of its clients asked for an extension of their payment holidays, saying that it will have more insight into that and their payment patterns by the end of September.
“We are monitoring this very closely,” said Quinn.
Good growth before impairment charges
Before making impairment provisions, Absa’s profit had grown 9% to R18.5 billion, significantly ahead of Standard bank which reported a 4% increase over the same period. According to Mminele, it was also the bank’s the strongest growth since the first half of 2016 when it benefitted from favourable currency movements.
Nolwandle Mthombeni, investment analyst at Mergence Investment Managers, said Absa’s good showing there indicated that its strategy post Barclays split had positioned it well against other banks.
“The pre-provision growth was good, largely due to strategy implemented after Barclays separation that should result in Absa growing ahead of peers,” she said.