Absa Group, a South African lender, said yesterday due to the uncertain economic outlook for next year, it expects its credit impairments to increase due to higher interest rates negatively affecting consumer finances.
In its trading update for the 10 months ended October 31, 2022 the group said credit impairments increased, with its credit loss ratio in the upper half of its through-the-cycle target range of 75 to 100 basis points.
Personal loans’ credit impairments were also expected to increase materially, in part, due to new business strain.
“Within our South African retail portfolio, higher inflation and the 325 basis point rise in policy rates are expected to increase credit impairments.
“Vehicle finance credit impairments are expected to grow materially, despite improving noticeably in the second half, while home loans should normalise off a reversal in the previous year,” it said.
Absa said Corporate and Investment Bank (CIB) and Product Solution Cluster’s credit impairments grew noticeably off low bases, while retail and business banking, Absa’s regional operations, and relationship banking decreased.
Revenue growth for the period was broad-based, with the total increasing by low teens, a similar rate to the first half.
“Reflecting strong loan growth and the margin benefit of rising interest rates, net interest income grew by low teens,” the group said.
Non-interest income also increased by low teens.
The rebound in life insurance revenue, off a low base that included significant Covid19 claims and provisions, and mid-to-high single-digit growth in fee and commission income, offset slightly lower markets revenue, Absa said.
Operating expenses rose by high single-digits, although excluding performance costs, the increase was mid-single digit.
But Absa said its return on equity for the period improved noticeably to 17%.
“Our capital levels remain strong. Absa Group’s common equity tier 1 (CET1) capital ratio was 12.4% on September 30, 2022, including unappropriated profits, after paying our interim dividend,” the group said.
Looking ahead, Absa said revenue for the year was likely to increase by low teens year-on-year, driven by strong non-interest income growth in part, due to a recovery in life insurance revenue off a low base.
“We expect low double-digit net interest income growth, benefiting from rising interest rates, high single-digit growth in gross customer loans, and mid-single-digit growth in customer deposits,” it said.
The group said operating expenses were expected to increase by high single-digits year-on-year, reflecting higher performance costs, some rand depreciation, and continued technology investment.
“Our return on equity is likely to improve substantially year-on-year to around 17%, well above our cost of equity. Given our strong CET1 capital ratio, we expect to increase our dividend payout ratio to at least 50% for the year,” Absa said.
BUSINESS REPORT
.