Good afternoon, ladies and gentlemen, and welcome to Absa Group's first half 2024 pre-close call. Joining us on today's call, we have Chief Executive Officer, Arrie Rautenbach, and Financial Director, Deon Raju. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star then zero. Please note that this call is being recorded. I would now like to turn the conference over to Chief Executive Officer, Arrie Rautenbach. Please go ahead, sir.
Thank you. Good evening, and thank you for joining us for Absa Group's first half 2024 pre-close call. You may have seen the trading update that we just released. Deon Raju, our Group FD, will spend some time taking you through our trading update. I will then make some closing comments, and then we'll answer your questions. I'll now hand over to Deon.
Thank you, Arrie, and good evening, everyone. Recognizing that you might not have had time to go through the details of our trading update, I will cover the key points. Starting with our operating environment, as many of you would be aware, the macro backdrop remains challenging for South African banks. Firstly, given elevated interest rates, South African consumers remain under pressure. Retail credit growth is also slowing. As you know, we have a large retail franchise that obviously reflects the state of the South African consumer. Secondly, while economic growth is more robust in our Absa Regional Operations , which I will refer to as ARO, some central banks have maintained restrictive monetary policies, including increasing reserve requirements materially.
Finally, weaker average exchange rates versus the rand have been a slight 1%-2% drag on group revenues, operating expenses, and headline earnings for the period, and are likely to remain so into the second half. Turning to our performance for the first half of 2024, my comments refer to the percentage year-on-year change in our interim financial results versus the equivalent period in 2023. We cautioned in March that our first half 2024 earnings growth was expected to be weaker than the full year. This was driven by our first half 2023 earnings base being 14% higher than the second half. This was and is different from our usual pattern, whereby our second half earnings are typically larger than the first.
As a result, our first half 2024 comparisons are weaker versus the equivalent period last year, but we expect the second half 2024 to be stronger. We also guided that some items which negatively impacted the second half of 2023 would continue into the first half of 2024. These include applying hyperinflation accounting in Ghana. Secondly, further losses on the naira as we exited that position. Thirdly, costs related to our Broad-Based Black Economic Empowerment transaction. None of these items impacted the first half 2023 base. Since we no longer normalize our results for the impact of separating from Barclays PLC, we also have the final element of those costs to absorb, although they are expected to be significantly lower year-on-year. In total, the combined impact of these four items is expected to reduce first half 2024 earnings by approximately 3%.
For the first half of 2024, we expect low single-digit revenue growth. Within that, we expect high single-digit net interest income growth, which is broadly in line with our customer loan and deposit growth. However, we expect non-interest income to decrease by low single digits. Within non-interest income, we expect modest growth in fee and commission income, outweighed by noticeably lowered net trading income, predominantly due to the Naira losses, lower net insurance income, partially due to the increased consumer strain mentioned earlier. In addition, we are experiencing lower investment income in this business. Turning to operating expenses, we expect high single-digit growth, resulting in slightly lower pre-provision profit in the first half of 2024 versus the equivalent period last year.
As previously guided, our first half credit loss ratio is expected to be similar to the 127 basis points in the first half of 2023. Within this, we expect lower credit impairments in Product Solutions Cluster , Everyday Banking , and Relationship Banking . These reflect the substantial action that we have taken in collections and also some reductions in risk appetite in personal loans. In South African retail overall, we have seen a trend of improving early arrears, while late-stage delinquencies remain sticky and will take time to work out. We expect increased charges in Corporate and Investment Bank as we dealt with some consumer-facing single names, including higher charges in ARO RBB. Both these areas are coming off a low base. Overall, we continue to expect our credit loss ratio for 2024 to improve slightly from the 118 basis points incurred in 2023.
Combining these drivers, we expect Absa Group's headline earnings to decrease by mid- to high single digits for the first half of 2024, with basic earnings declining by high single digits to low double digits. As a result, we expect to report an ROE of around 14% for the first half, down from 15.7% in the first half last year. Our Group CET1 capital ratio remains strong and at the top end of our Board target range, and as a result, we expect to declare a flat interim dividend per share. For the rest of the year, from a macro perspective in South Africa, we see delayed interest rate cuts in the second half, with a 125 basis points reduction in the fourth quarter and a further 50 basis points in the first half of 2025.
We currently also expect muted GDP growth of 0.9% in 2024, slightly less than we did in March. In addition, and importantly, we expect ARO currencies to remain weaker versus the rand. Based on our anticipated first half performance and on these macroeconomic expectations, we make the following changes to our full-year 2024 guidance. For 2024, we now expect mid-single-digit revenue growth, with an improved non-interest income performance in the second half, while net interest income growth is likely to slow somewhat, in part due to higher reserve requirements in some ARO countries. Previously, our revenue growth guidance was for high single digits for the year. In response to the lower revenue growth expectations, we are taking appropriate actions on costs and expect mid-single-digit operating expenses growth for the year. Our previous cost guidance was mid- to high single-digit growth.
As a result, we expect cost-to-income ratio to be broadly similar to our 53.2% in 2023. Lastly, we expect an ROE of 14%-15% for 2024, from 14.4% last year. Our previous ROE guidance was for 15%-16% this year. Thank you for your attention. I will hand you back to Arrie.
Thank you, Deon. In closing, let me summarize the key reasons that we are not going to meet our previous guidance and expectations, which is something we don't take lightly. Lowering our expected revenue growth is the main reason, largely due to reduced non-interest income, specifically in insurance and lower growth in fees and commission than originally anticipated, despite the stronger customer growth in the first half. Moreover, we expect some net interest margin compression in the second half of 2024 because of increased cash reserving requirements in certain ARO countries and slower growth in personal loans. Given this lower revenue outlook, we have taken appropriate actions in the first half that will manifest in the second half.
Lastly, I would like to add that it is pleasing to see that the credit loss ratio in our SA Retail portfolios has responded to the actions we implemented on risk appetite and collections, and has largely reduced in line with our expectations. We are taking action and seeing the business responding. We will now take your questions.
Thank you, sir. Ladies and gentlemen, at this stage, if you would like to ask a question, please press star and then one now. If you decide to withdraw your question, please press star and then two. Again, if you would like to ask a question today, please press star and then one now. The next question we have comes from Harry Botha of Anchor Stockbrokers. Please go ahead.
Hi, good afternoon. Thanks very much for the call and the updates. You've answered a few of my questions with your fairly detailed comments. Thank you. I just had a question about the pre-provision profit graphic you're seeing in the retail business banking segment in the first half of the year, and how that's trending compared to your expectations. Particularly, if you could comment around the everyday banking non-interest revenue growth, that would also be helpful. Thank you.
Yeah, thank you.
Thank you. Harry, can you hear us?
Yes, thank you.
Yeah, Harry, yeah, given that this is an interim trading update for half year and full year outlook, we don't give detailed guidance at a business unit level. I think if you look at our NIR commentary, where we said for the first half was down low single digits, I can give you some data points there. Insurance income is where we've seen a drag, particularly in areas of investment income returns. We've also made risk cutbacks in personal loans, so you see some of that cross-sell not come through as expected. And generally, there's been higher lapses given the overall consumer environment. So that's the data point that I'll pull out for you. Fee and commission income has generally been growing in that environment.
The one area I will call out is relationship banking, where we are seeing pressure on cash and acquiring volumes, and revenues. We did anticipate some of that, but it has been higher than expected, as volumes have come off faster than we thought, given the economic environment. So those are the data points I'd probably call out, that can help you in that particular area.
Yeah. Thank you, Deon. Harry, I trust that helps you, as you've indicated, that your focus today is so clearly on our guidance for first half and full year without going into the detail. We'll have the opportunity in August to go into the detail on a segment and business unit level basis.
Okay. Thanks very much.
Thank you, Harry.
Thank you. The next question we have comes from Charles Russell of SBG Securities. Please go ahead.
Good afternoon. Thanks for the opportunity. Just three questions, if I may. To clarify, what sort of range do you expect your full year guidance to be on earnings growth? Second question is, what are some of the cost initiatives that you've employed to lower your cost growth, and is any of this FX related? And then finally, if you could just elaborate on loan growth expectations into the full year, and if you can maybe just make some comments on where you see this political outcome sort of being positive or negative for your business.
Charles, thank you very much for those questions. I'm gonna ask Deon to cover the ranges in terms of earnings, and possibly even touch maybe on some of the balance sheet items, Deon. Charles, let me start on the cost side, because I think this is obviously a big focus for us, as I've indicated. I think if we look at the first half of this year, let me list out for us five drivers that was underlying to that cost growth. The first one is the higher staff costs, which reflects the 3% rise in headcount, and also the salary increases of 4.5% in April. Investment in frontline staff was made during H1 2023, and came through fully in H2 2023.
This higher headcount remained in the business for the first half of 2024. So of course, the headcount investment was a big one for us. However, we've also invested in higher marketing efforts to support our new brand investment in the first half. We've got our increased amortization, and as Deon indicated earlier, the BEE deal costs that went in the first half of last year. And then lastly, to your point, higher inflation in some of our other countries was also a factor. As I've indicated in my comments, we have taken appropriate actions in the first half that will manifest in the second half, so we now expect mid-single digit cost growth for the full year. Now, near-term actions included a headcount lock, which will result in flat headcount in H2, and also significantly reducing discretionary spend across our franchise.
We have started a groupwide productivity program, which has longer term lead time, and we will provide an update on this program in the second half of the year. However, we do have some base tailwinds, as we see separation costs are much lower in H2, and the BEE costs started to be incurred in H2 last year. We have considered the impact of our franchise on our cost actions, and are comfortable that we are creating performance- we are creating performance headwinds with the cost actions. Our efforts in 2024 are focused on discretionary cost and freezing headcount, and we are invested in the right areas previously and aren't reversing these decisions now, Charles. Our cost program is a longer-term program, and we will come back to you in the second half on the plan in the medium term.
However, we don't expect any costs to achieve in the second half of this year. Deon, touch on the range for us-
Yeah.
and loan growth, and then maybe we can make some comments on the GNU-
Yeah.
Charles, Charles's comment.
Yeah. Yeah. So Charles, thanks for those questions. Hope you're well. Yeah, Charles, we don't specifically guide on, guide on full-year earnings. The data points we give for full year is an ROE of 14-15 for 2024. I think we've shared the mid-single-digit revenue growth, its full year expectations. As Ari mentioned, he's given you the reasons why we, why we get to mid-single-digit operating expense growth for the year. So we've taken the, we pulled the cost lever, given the revenue growth slowdown. We've said cost to income ratio are broadly similar to our 53.2% in 2023. So I think that, that gives you a sense, data points around, around your question on earnings.
In terms of balance sheet, Charles, we're actually seeing pretty good customer loan growth across most segments, particularly in CIB and in our ARO RBB business. Similarly, we've seen deposit growth. It's broad-based, strong growth in ARO and relationship banking. Although there is more growth in lower margin deposits in our relationship banking business.
Thanks, Deon. Charles, just on your question around the political environment, I think it's safe to say that it's very early days for us to try and make predictions. I think the big risk to us is obviously uncertainty. However, clearly it will have a positive impact and has had a positive impact on the rand already, as well as our equity markets, and have also reduced bond yield. So it could drive improved growth in South Africa, specifically in the shorter to medium term, which is a big part of our franchise. So hopefully that gives you a sense of just the early thinking as far as the political landscape is concerned. Charles, I trust we've covered your questions.
Thank you. That's perfect.
You're welcome.
Thank you.
We can go to the next question.
Of course. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from James Starke of RMB Morgan Stanley. Please go ahead.
Hi, good afternoon. Good evening, Harry and Deon. Thanks for the opportunity. Two questions from my side. You, you mentioned investment returns, as the source of underperformance on the NIR. Perhaps you could just clarify, is that in any way linked to shareholder return on shareholder funds in your insurance business or is entirely separate? The second question on fees and commission, Deon, I know you already mentioned cash and acquiring under pressure. Could you expand and comment on some of the other fee and commission streams more generally, and how you find that things are going there? Thank you.
Yeah, Charles, thanks for that. Deon, why don't you start, and then if you need, I'll add to that as well.
Yeah. Yeah. Again, your first question was investment returns. Just to be clear that is in our, in our, insurance side business, specifically in life. And I think the investments there that we make are in fixed income instruments, where we've seen the yields reduce quite significantly year on year. So that gives you a sense of the investment returns. Maybe just a couple of comments on NIR, because I think that was the key basis of the second part of your question. So in terms of fees and commission, we said up low single digits.
But just to give a broader sense, you know, the main drag on half year revenue performance, as I see it, was non-interest income, decreasing by the low single digits year-on-year. There was a noticeable decrease in their trading income, but that's predominantly due to the continued Naira losses. But as I mentioned, in my remarks, we exited that position. But that we knew about. The net insurance income was higher than we expected, the drag in that business. Also, the relationship banking non-interest income decrease. Given the pressure on cash and acquiring revenue was also higher than expected. We also have quite a strong rand versus ARO currencies-
Yeah.
- which is quite much higher than expected, you know, about 2% drag on revenue generally. And it also impacts NIR. So that is also much higher than expected.
Yeah. I think while we don't comment on the newest statements, we are encouraged by what we've seen coming out of some of our retail businesses on fees and commission. James?
Thank you.
Thank you. The next question we have comes from Keamogetse Moseki of Citi. Please go ahead.
Hi, Arrie and Deon. Thank you for the opportunity. Two questions from my side. I think that you've already answered part of it, but can you provide a sense of the SA and ARO performance year-to-date and expectation completion? Can you touch on constant currency performance within your ARO business? And for SA, I'm expecting earnings to bounce, actually, given the low base that last year presented. And the second question is possibly touching; can you please touch on the nature and the quantum of non-headline earning items, which you expect in the first half? And how should we be thinking about this line item going forward, just given the discrepancy between earnings and headline earnings growth guidance? Thanks.
Yeah, Keamo, thank you for those questions. I'm actually gonna ask Deon to try and cover that set of questions for us.
Yeah.
Some of it is quite technical.
Yeah. Yeah. Thanks, Keamo. Thanks for that question. Hope you are well. Around your SA ARO split, I think, we don't, we don't actually share the data in our update, but I think the trends we saw at the end of last year continue in terms of, SA being weaker, and the regions outside South Africa being better than SA. That being said, the regions outside of South Africa are impacted by this currency drag that I mentioned, reported versus constant currency. In our region, a 1%-2% drag, across all the line items, revenue, OPEX, and headline earnings. So, that and that was higher than we expected.
The regions outside South Africa also are impacted by cash reserves that have increased across many markets, and it's fairly substantial, Keamo. If you look at Ghana, you know, that's gone from 15%-20%. And these are high-yielding markets, and we earn zero on these cash reserves, okay? In Mozambique, this has gone up to 39%. So basically, 39% of your asset base is now earning zero. Once again, a very high-yielding market. And Zambia has gone from 17%-29%. So once again, you know, even though the balance sheet is still not big in a group context, you can imagine the net, the impact on net interest income, that has. Now, central banks may reduce cash reserves in future. We have not assumed that in our forecast.
We've assumed that that continues for the rest of the year. That's part of the, let's call it, NIM drag for the full that we see in the second half of the year. But you are right, Keamo, in that we've got a very low base in the second half. So just to give you a sense, the shape of our earnings last year, we made ZAR 10.7 billion in the first half, and we made ZAR 9.4 billion in the second half. So that's a 14% difference just in the base. So the base is not as is very undemanding in the second half.
You know, a large part of the recovery in NII we see in the second half is in CIB, for example, who can grow strongly given that they had the NII losses, the bigger NII losses at the end of last year. So hopefully that gives you a sense of earnings and base. In terms of the non-recurring items, yeah, those are a bit lumpy and a bit endgame style. The example for the first half would be sale of property in our downtown Johannesburg, one of our head office properties. Where you will remember that that was part of our ongoing credit program to optimize our head office property portfolio. And, you know, the pricing pressures in the CBD, Johannesburg, you can understand what that looks like.
But what that does is it gives you run rate benefit into the future, as you don't have to maintain and run those properties, et cetera. So I think it's important strategically that we get those done. So typically, Keamo, those would be the examples of what sits between headline and basic earnings.
But again, I think we'll provide a lot more color on that when we get to the August results update, Keamo. So I trust that, that covers your, your questions. You comfortable? Yes, it does. Thank you very much. Thank you, Keamo.
Thank you. Ladies and gentlemen, just a final reminder, if you would like to ask a question today, please press star and then one now. The next question we have comes from Ross Kerr of Investec. Please go ahead.
Good evening, everyone. Thanks for the call. Sorry, my call cut off earlier. Most of my questions are answered. I just have one more two-part question just on the NII line. It sounds like, based on your commentary, that it's mainly the net interest margin that's driving low expectations. So, I don't know if you can talk a bit about the run rates of loan growth into H2, and apologies if I missed this earlier. And then maybe the shape of NIM and how it's gonna look relative to the prior year. If you can just get some context on that. Thank you.
Yeah, Ross, thank you for those. Welcome, welcome back. Deon, I'm gonna ask you to cover that.
Yeah.
You did touch on numbers earlier, but let's just repeat that again for Ross's benefit.
Yeah. So just, Ross, just coming back to our guidance, which you may not have had time to study. We said for half year, we expect high single digit net interest income growth, which is broadly in line with our customer loan and deposit growth. So that's what we said about the first half. In terms of second half, we said, net interest income growth is likely to slow somewhat. So maybe just some data points around that. So if you look at elements in the second half, that calls slowing. We think balance sheets remains, you know, the momentum remains on balance sheet. A couple of things impact, NIM. The, this cash reserve requirement item, I don't know if you heard, when I answered Keamo. That's quite a big drag.
Yes.
Yeah. So it's quite a big drag, you know, given the high margin markets that we function in. I think the second bit is this currency effect, you know, out from regions, from all our income actually, outside South Africa. Like I mentioned, that's a 2% drag on its own. And the last bit on NII is that we did make risk cutbacks on some high margin products in retail, like personal loans. Now we've seen the improvement in impairment, but we've certainly seen, let's call it the top line effect, which comes through on NIM. And it comes through on my comment on insurance NII, where there is a strong cross-sell into that product. So we've also seen far better and strong growth out of CIB.
So the mix, there's a bit of a mix effect there, with the retail a little bit slower, but CIB proving still to be strong. And I think if you look at the, you know, all the deep data that comes out of the South, you'll see that's the case as well, in terms of private sector credit expansion. Retail slowing, but, your wholesale sector is remaining, remains very strong.
And then some momentum continue in ARO.
Yeah. The loan momentum, deposit momentum remains good outside South Africa.
Ross, you're comfortable?...
Yep, yep, thanks, Arrie. Thanks, Deon.
Thank you. You're welcome.
Thank you. The last question we have comes from Kevin Harding of Investec Wealth and Investment. Please go ahead.
Hi, Arrie, Deon. Thanks for taking the time. I just want two questions from my side. Perhaps you've, you've spoken to good loan growth momentum in CIB. Perhaps if you could just provide some color in terms of where you're seeing that growth coming from, whether it's ARO or within SA, and if you're able to give any commentary around which sectors are driving that. Then I know it might be early days, but perhaps if you could both provide any updated views on your Kenyan operations, just given what's going on in the country. Thank you.
Kevin, thank you for those questions. Look, I think what's important here, and we've also stated this a little bit earlier, is that level of detail for us to answer at, you know, at this point is probably not at... I understand that you're asking the questions, but I think we'll provide a lot of that color as we go into the August update. Let me also just say that I think we're very close to the Kenyan matter, and operationally, there's no impact on our business in Kenya. We're just watching the political environment very closely. In fact, I saw an update just now that it looks like some of those tax actions may have been reversed. You know, so Kenya is a high-focus market for us, and our team is very focused on, you know, on the, on the ground there.
It's one of our bigger markets. And of course, you would expect that we stay very close to that, Kevin. But on the actual detail, we will provide you that once we, once we come back in August, if you, you know, if you're okay with that for now.
Perfect. Thanks, Arrie. Thanks, Deon.
Thank you, Kevin.
Thanks, Kevin.
Thank you. So at this stage, there are no further questions on the conference call. Would you like to make any closing comments?
Thank you for that. Let me just in turn say thank you for joining us. We look forward to having conversations with you post this, and, you know, as we build up to the August results announcement. So thank you for joining us for tonight. We really much appreciate your time.
Yeah. Thank you, everybody.
Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.