Good morning, and thank you for joining us for Absa's 2025 Full-Y ear Results Call. Today marks an important milestone since taking over as group CEO. I remain convinced of the quality and strength of the Absa's franchise and brand. While it is still early in the journey, I am confident in the direction we are taking, and we're already beginning to see encouraging signs in our results. I will begin by contextualizing last year's operating environment and the key financial highlights that demonstrate our progress before handing over to Deon, our Group Financial Director, to take you through the detailed results and our guidance for 2026. I will then conclude with the medium-term outlook, after which we'll take questions. We're executing our strategy in an increasingly volatile global environment.
The global economy entered 2025 amid heightened uncertainty, driven by significant policy actions from the new U.S. Administration, including higher tariffs alongside elevated geopolitical tensions. Despite this backdrop, global economic conditions proved more resilient than initially anticipated. Concerns around materially higher inflation, rising unemployment or a sharp slowdown in the U.S., Chinese, and broader global economy did not fully materialize. Reflecting this resilience, monetary policy eased across most major economies with the rate cuts in the U.S. And Europe, while Japan remained the notable exception. Across our other African markets, economic performance was mixed but robust overall. Ghana and Zambia delivered strong recoveries supported by commodity exports, while the diversified economies of East Africa continued to perform well. By contrast, Botswana faced pressure from weaker diamond markets and Mozambique remained constrained by security, fiscal, and foreign exchange challenges.
On a GDP weighted basis, Africa regions grew by approximately 4.8% in 2025. In South Africa, economic momentum improved during 2025, with 4 consecutive quarters of GDP growth supported by structural reforms, resilient commodity prices and lower interest rate, which largely offset the impact of higher U.S. tariffs. Confidence, however, remains subdued amid political tensions and strained diplomatic relations with the U.S. GDP growth for the year is expected to be around 1.4%. Inflation averaged 3.2%, the lowest level in more than two decades, and together with the agreement to gradually lower the inflation target, this enabled the South African Reserve Bank to cut interest rates 4 x, delivering cumulative easing of 100 basis points.
Through my early engagements with colleagues, customers, regulators and partners across our countries, it became clear that there's a shared belief in Absa's potential and strong alignment behind our growth journey. Our strong foundations provide me with confidence in our ability to execute on our ambition of becoming a leading Pan-African bank. We have made deliberate strategic choices that will allow us to effectively compete. Absa has solid businesses with a strong customer base. CIB is a high quality franchise with deep relationships across corporates, financial institutions and the public sector, and a steadily expanding diversified presence across Africa Regions. Our PBB and Business Banking operations serve just over 13 million customers. This strong customer base creates significant opportunities to broaden the services we provide across the continent. To achieve this, we must accelerate the shift of how we are organized around the client.
Our Africa Regions business now contributes around a third of Group's earnings and grew faster than our South African operations, reinforcing the strength of our Pan-African footprint and our ability to connect inter- and intra-Africa trade corridors. We see clear opportunities to increase Africa Regions' contribution by accelerating growth in markets such as Uganda, Tanzania and Zambia, while sustaining strong momentum in our larger markets, including Kenya and Ghana. We also see meaningful headroom to increase market share in South Africa across all our businesses. With a strong balance sheet and a CET1 ratio of 12.7%, we're well positioned to deploy capital deliberately to generate targeted returns aligned with our strategy. In my engagement across the group, I've been struck by the depth of capability and experience within our teams.
However, a period of frequent leadership change has at times meant we have not operated with the level of focus and integration that our scale demands. We are addressing this and remain confident in our ability to attract high caliber leadership as evidenced in the recent appointments of Zaid Moola, who has joined to lead our Corporate and Investment Banking business, and of Sitoyo Lopokoiyit, who will join us in April to lead our Pan-African Personal and Private Banking business. 2025 has been a year of transition for the group, supported by strategic and operating model shifts, with embedment continuing into 2026 and progressing over the medium term. Our strategy is underpinned by four pillars. Firstly, customers are at the heart of our business, and our focus on customer obsession represents a deliberate shift in how we operate. It is not a slogan.
It means organizing the group around the customer rather than internal structures, deepening relationships across our businesses, and holding ourselves accountable for the value we create for customers. As banking products continue to commoditize, we know that differentiation increasingly comes from the experience we deliver. This requires clear choices about where we compete, relentless focus on addressing pain points that matter most to our customers, and delivering a consistent, reliable service. We are beginning to see this translate into a stronger customer franchise. In Africa Regions, for example, active customer numbers grew by 14% alongside deeper relationships as average product holding rose by 3%. Secondly, we're building a diversified Pan-African business. Absa operates in 11 African countries outside of South Africa, and our Africa region business continues to demonstrate strategic importance, growing headline earnings by 25% and as mentioned, now represent 31% of our earnings.
We have identified substantial opportunities across the continent and within our business units, which we are well-positioned to capture. There is, however, important work still to do. That work is already underway, building on the leadership appointments I referred to earlier in CIB and PBB with Business Banking to follow. These changes will enable deeper Pan-African integration and allow us to unlock greater synergies and economies of scale across our businesses and markets. Thirdly, we're driving operational excellence. Reducing bureaucracy and internal complexity is a deliberate priority. Left unchecked bureaucracy is inefficient, stifles innovation, deters talent, and turns organization inward rather than towards the customer who reward us for delivering real value. We are therefore simplifying how we work, accelerating decision making, and reinforcing clear accountability to restore speed, focus, and execution discipline across the group.
While our cost-to-income ratio is not yet where we want it to be, our productivity initiatives are delivering tangible progress and will remain firmly on track to achieve ZAR 5 billion in gross cost saving by the end of 2025, reinforced by a more rigorous and disciplined approach to capital allocation. Our fourth pillar is pursuing new growth opportunities. Across parts of our industry tradition is being challenged, and neither legacy business models nor established ways of working can be relied on for continued relevance. Customers today have far greater choices and flexibility in how they access products and services. At the same time, advances in artificial intelligence are reshaping how value is created and delivered, opening new ways to serve customers more intelligently and efficiently. Against this backdrop, we are pursuing growth opportunities aligned to our strategic priorities, including partnerships, disciplined application of AI, and targeted acquisitions.
The acquisition of Standard Chartered Wealth & Retail banking portfolio in Uganda is one such example. Finally, on our strategy, I would like to highlight our people and culture as a critical enabler to this strategy. We are creating a culture that supports performance and long-term competitiveness. We are accelerating initiatives to foster an outward customer focus mindset and reduce bureaucracy. I am proud that for the fifth consecutive year, Absa has been recognized as a top employer by the Top Employers Institute. These pillars set clear direction and strategic focus for the organization, underpinned by disciplined execution for sustainable value creation. Within this context, the group has delivered a solid financial performance, supported by 12% increase in headline earnings and a steady 5% revenue growth. Our ROE improved to 15% while preserving a solid capital position, which continues to underpin our balance sheet resilience.
At the same time, we saw some pressure on the cost-to-income ratio as we invested to support delivery and strengthen our operating platform. We continue to deliver value to shareholders with a 12% increase in dividend per share and an 8% increase in our net asset value per share. We are clear on what is needed to improve efficiency and returns over time across our businesses while maintaining balance sheet strength. CIB delivered another strong year in 2025, with earnings up 14%, accounting for almost half of Group's earnings and returns of 21.1%. Performance was underpinned by strong top line growth of 9% driven primarily by global market alongside a 14% reduction in credit impairments. Net customer advances increased by 10%, including ZAR 35 billion in sustainable finance, contributing towards the ZAR 53 billion delivered by the group.
We are encouraged by the momentum in Personal and Private Banking South Africa. The strategic focus to improve ROE has yielded early improvements from 17% - 17.6% and headline earnings growing by 7%. Our customer focus is translating into positive leading indicators with transactionally active customers up 3%, product usage increasing by 5% and reward memberships growing by 28%. While this momentum is encouraging, further work is required to fully entrench customer-centric culture and to drive stronger growth in customer numbers across our chosen segments as we convert these early gains into sustainable performance. Business Banking is a franchise where we recognize the need for a more fundamental step change with headline earnings decreasing by 8%. We're clear about the challenges in the business and are addressing them deliberately with the strategy reset currently underway.
To unlock its full potential, we are being more deliberate about the customers we choose to serve, supported by clear value propositions and a transparent line of sight from strategy to value delivery. As I mentioned earlier, this transformation starts with leadership, and we are in the process of appointing a Pan-African head of Business Banking to drive the integration, focus, and execution required to reposition this franchise for sustainable growth. Africa region's PPB and Business Banking delivered a strong performance in 2025, with earnings up 51% year-on-year, underpinned by double-digit revenue growth driven by strong expansion in both the active and digitally active customer base. Credit impairments declined by 17%, reflecting improved portfolio quality and collection performance. Returns strengthened meaningfully with ROE increasing by 5 percentage points to 17.1%.
I would like to hand over to Deon to present a detailed overview of our financial results for 2025 and the guidance for 2026. Deon, over to you.
Thanks, Kenny, and good morning, everyone. I will unpack our results and set out our 2026 guidance. Starting with headline earnings. After strong first half earnings growth to ZAR 11.9 billion, our second half earnings increased 8% year-on-year and half-on-half to almost ZAR 13 billion. While revenue growth remained moderate at 5% in the second half, net interest income growth improved to 5% on the back of stronger second half loan growth. In addition, our second half credit loss ratio of 77 basis points was better than we expected. Turning to our full-year income statement drivers, headline earnings grew 12% to almost ZAR 25 billion. The increase was largely due to solid non-interest income growth plus lower credit impairments. Net interest income grew 4%, reflecting 6% higher average interest-bearing assets and some margin compression.
Non-interest income rose 7% given a strong trading performance. Hence, total revenue grew 5% to ZAR 116 billion. Operating expenses increased 6%, resulting in slightly negative operating jaws and 4% higher pre-provision profit. Our credit impairments decreased 6% given lower charges in most businesses. Other items include several items, notably no longer applying hyperinflation accounting to Absa Bank Ghana. Our net interest margin narrowed 10 basis points to 453 basis points as a result of lower deposit margin. Customer loans had a 1 basis point negative impact on our margin. Competitive pricing pressure in Business Banking and Transactional Banking SA offset the positive mix impact of stronger average Africa regions loan growth and muted home loans growth.
Customer deposits reduced the overall margin by 16 basis points, reflecting lower policy rates in Africa Regions and pricing pressure, particularly in Transactional Banking SA. Lower rates reduced the deposit endowment by 6 basis points. In South Africa, the endowment impact after hedging was neutral, since our structural hedge added 9 basis points to our margin. Our structural hedge in South Africa has kept our margin relatively stable in the past five years during a period in which Prime increased by 475 basis points and then declined by 150 basis points. Our hedge has performed exactly as it was designed to, offsetting moves in the equity and deposit endowment. The average structural rate earned on the program rose 13 basis points to 732 basis points, well above JIBAR.
The post-tax cash flow hedging reserve grew to a credit balance of ZAR 2.8 billion as at 31 December 2025. In a declining rate environment, South Africa's margin held up relatively well given the structural hedge, reducing 7 basis points to 3.8%. While Africa Regions with ability to hedge is more constrained, declined from 7.8% - 7.4%. Our interest rate risk post-hedging increased to ZAR 1.4 billion per 1% reduction in policy rates due to strong growth in Transactional deposits in Africa Regions. Turning to our balance sheet, loans to customers continued to grow, albeit at a slower pace, with the strong rand at year-end a drag on balance sheet growth. Net customer loans grew 6%, driven by 10% growth in CIB.
Growth in PBB remains low, increasing 3%, with home loans 2% and vehicle finance 7%. Business Banking grew 6% with solid growth in Commercial Asset Finance and CPF. Africa regions PBB and Business Banking was flat due to rand strength. However, it grew 10% in constant currency. Customer deposit growth slowed off a high base growing 6%. PBB was up 3% as fixed deposits decreased 4% and savings and transmission deposits grew 7% due to deposit optimization initiatives. Business Banking rose 7% with pleasing 11% growth in Transactional deposits. Africa regions PBB and Business Banking deposits rose 8% in constant currency. Lastly, CIB grew 6% with double-digit growth in both check and call deposits. Since reverse repos distort our loan trend somewhat, we show net customer loans excluding them to better reflect the actual growth in Lending.
On this basis, it is clear that loan growth improved in the second half with 7% annualized growth. In fact, loan growth improved for all our businesses on an underlying basis. Non-interest income grew 7% to account for 36% of group revenue. Unpacking it, net fee and commission income remained low, growing 3%, although it still represents almost two-thirds of the total. Within this, fee and commission income rose 5% as transactional fees and commissions increased 4% and merchant revenue grew 16%. However, fee and commission expenses increased 19%, driven by cash in transit and service charge reclassifications. Net trading income, excluding the impact of hedge accounting, grew strongly given significant markets SA growth. Net Insurance income declined 3% given the sale of three Africa regions insurance entities in the first half.
Insurance SA decreased 2% as revised assumptions and modeling changes in the second half and lower unsecured Lending volumes resulted in gross operating income declining 5% in life. Non-life increased 17%, driven by improved cross-sell and underwriting margin. Global markets income rose 31% to over ZAR 11 billion. Markets SA increased 41% with significantly higher FIC and commodities revenue that benefited from elevated volatility. Equities and prime reflected market share gains on sustained growth in client flows. Global markets Africa regions rose 23% to over ZAR 5 billion with strong growth in several markets despite a challenging operating environment overall. Turning to operating expenses, staff costs grew 8% while growth in non-staff costs was well contained at 4%. Staff cost growth was largely due to inflationary salary increases. Performance costs rose 15% as we invested in key senior talent and our performance improved.
Continued investment in new digital capabilities is evident in the higher IT related spend. Intangible assets decreased as we impaired ZAR 2.4 billion of computer software assets during the year. We expect intangibles to continue reducing as we become far more selective on investment spend. Marketing grew 8% given the increased spend on brand, campaigns and sponsorships. Conversely, continued optimization of our property portfolio produced low growth in depreciation and property costs of 2% and 1% respectively. Moreover, cash transportation costs fell as the market continues to decash with customers shifting from traditional channels to digital channels. Our productivity program remains on track. It delivered gross cost benefits of ZAR 1.7 billion, taking the cumulative benefits to ZAR 3.1 billion of the total gross commitment of ZAR 5 billion by 2027.
Savings came from optimizing back office and channels, third party supplier spend and technology infrastructure. A high proportion of this was reinvested in new digital data, AI and cybersecurity investments. We believe there are further opportunities to increase the net cost takeout to support our lower cost to income ratio medium-term ambitions. Moving to asset quality, our credit impairments decreased 6% to ZAR 13.4 billion as most businesses declined. Our credit loss ratio improved more than we expected from 103 basis points to 88 basis points, the midpoint of our through the cycle target range. Unpacking the portfolios, the largest PBB credit impairments declined 8% to ZAR 9 billion. Unsecured Lendings credit loss ratio reduced slightly, reflecting a large improvement in card. Despite improving delinquencies, personal loans rose given non-recurring benefits in the base from forward-looking assumptions and one-off model changes.
The pre-legal book in home loans continued to improve, although its late stage legal book remains under pressure. VAF declined materially due to enhanced collections, revised credit policies and exiting certain higher risk segments in prior years. In Business Banking, improved recoveries and model updates in SMEs partially offset higher single name commercial charges in the first half. Africa Regions PBB and Business Banking reduced noticeably due largely to strong collections in Business Banking and improved impairment models in PBB. Lastly, CIB improved to the bottom end of its target range, driven by lower stage three provisions in South Africa, while an improved portfolio construct reduced performing book provisions in CIB Africa Regions. Stage one gross customer loans grew 6%, reflecting book growth and improving loan quality while our distressed loans declined.
Total stage one and two coverage decreased mostly due to PBB's improved new business performance given tighter credit granting and a shift to higher quality origination. Gross stage three loans or non-performing loans declined 2% as most areas reduced. This was partially offset by Mozambique Sovereign moving to stage three. Consequently, NPLs improved to 5.6% of our loans from 6.1%. NPL coverage decreased to 46%, reflecting several large write-offs and recoveries. Combining these factors, total loan coverage reduced from 4.1% to 3.7%, which remains appropriate for the current environment. Moving on to our businesses, CIB maintained its positive momentum, growing earnings 14% to ZAR 13 billion, accounting for 48% of our earnings. Strong global markets growth and lower credit impairments were the main drivers. Importantly, its ROE remained over 20%.
CIB continues to benefit from business and geographic diversity. Transactional Banking earnings declined 9%, with South Africa driving the decline. Revenue growth was impacted by external pricing pressure and lower policy rates. Conversely, investment banking earnings were strong, growing 26% on the back of pleasing 16% revenue growth and 16% lower credit impairments. Global markets was the main top-line driver. From a geographic perspective, CIB SA's earnings rose 12% given 7% pre-provision profit growth and 16% lower credit impairments. Lastly, CIB Africa regions earnings rose 16% reflecting 16% growth in pre-provision profit and 9% lower credit impairments. PBB's earnings grew 7%, largely due to lower credit impairments. Revenue remained soft, growing 2%, although it improved in the second half. PBB's ROE rose, and we see scope to increase it further medium term.
PBB benefited from combining everyday banking and product solutions cluster into a single business with greater customer focus. Active Transactional customers grew 3% to 6.1 million, with digital accounts up 11%. Improved cross-sell and strong rewards growth shows increased customer engagement. This growth help offset fee declines in traditional channels and traditional payment rails as customers migrate to lower cost digital banking, resulting in overall non-interest income growth of 3%. Within PBB, transaction and deposits earnings grew 5%, largely due to 40% lower credit impairments, muted NII growth after deliberate risk cutbacks in personal loans dampened unsecured lending earnings, which declined 6%. Personal loans earnings fell 76%, while card grew 29%. Home loan earnings grew 10% as credit impairments declined and tight cost management offset muted revenue growth.
VAF earnings rose 52%, mostly due to 19% lower credit impairments and slight pre-provision profit growth. Business Banking earnings decreased 8% due to 5% lower pre-provision profits and 18% higher credit impairments. Its revenue remained under pressure, with non-interest income down 2% given 5% lower Transactional revenue due to PayShap adoption and 4% lower cash volumes with muted acquiring growth. Business Banking's second half performance was stronger with improved loan growth and credit impairments while Transactional deposits grew 11%. Customer numbers were flat, although digitally active customers grew 4% and we are seeing the positive impact of rolling out digital onboarding in late 2025. Commercial is the biggest segment within Business Banking by far, generating around 3/4 of the revenue.
While agriculture remains the largest business in commercial, we saw pleasing growth in target areas such as wholesaler, retailer, and franchise sectors as this business diversifies its client base. SME segment revenue grew 3% given 8% deposit growth and improved product holding. Business Banking's ROE declined to 22% from 24%. However, we plan to increase its return significantly over the medium term, driven by diversifying its client base and improving revenue growth. Africa Regions PBB and Business Banking earnings increased 51% or 45% in constant currency due to strong growth in Transactional customers and revenue, plus 18% lower credit impairments. Its ROE improved noticeably to 17% despite a 1% drag due to selling our Insurance business in Botswana, Zambia, and Mozambique, which reduced the Insurance earnings significantly.
Africa region's PBB and Business Banking maintained its strong growth in active customers, up 14% to 3 million, maintaining its 14% compound growth since 2021. Banking operations revenue grew 14% given solid growth in Transactional revenue and average balance sheet. This produced strong 24% growth in pre-provision profit, improving its cost to income ratio to 62% from the low 70s three years ago. Turning to capital, we remain well capitalized with our CET1 ratio improving to 12.7%, slightly above the top end of our 11%-12.5% board target range and comfortably above regulatory requirements. We remain capital generative as profits added 2% to our CET1 ratio. Importantly, increasing our ROE further medium term will improve our capital generation.
Risk-weighted asset consumption and dividend payments reduced our CET1 by 0.8% and 1.1% respectively during the period. Group RWAs grew 6% during the year, slightly less than total assets driven by 6% higher credit risk RWA. We implemented Basel IV from 1 July last year, which initially reduced our RWAs marginally. Finally, I'll set out our guidance for 2026. The macro forecasts on which our guidance is based were made before the latest developments in the Middle East, which could increase energy prices and inflation, plus reduce global risk appetite for some time. Prior to the conflict, our baseline forecast for South Africa was for 1.9% GDP growth, low 3% average inflation, and a further 50 basis points of rate cuts in 2026.
Our baseline was for 5.3% GDP-weighted growth across our Africa region countries with lower to flat policy rates for all besides Botswana. Based on these assumptions and excluding further major unforeseen political, macroeconomic, or regulatory developments, our guidance for 2026 is largely unchanged and as follows. We expect mid-single-digit revenue growth with non-interest income growth above net interest income. We expect mid- to high single-digit growth in both customer loans and customer deposits. Our credit loss ratio is expected to improve slightly into the bottom half of our 75-100 basis points through-the-cycle target range. We expect low- to mid-single-digit growth in operating expenses, producing positive operating jaws and mid-single-digit pre-provision profit growth. Consequently, we expect an ROE of around 16%.
As we noted previously, other reserves have increased our equity more than expected, reducing our ROE while supporting our NAV. We expect our CET1 ratio to finish 2026 at the top end of our target range. We expect to maintain a dividend payout ratio of 55% for 2026. Lastly, we expect rand appreciation to be a headwind to group revenue and earnings growth in 2026. Thank you for your attention. I'll hand you back to Kenny to cover our medium-term guidance.
Thanks, Deon. These results provide the basis of which we'll continue to show performance momentum, leveraging the strength of our franchise and driving disciplined execution aligned to our strategy. Our strategic direction is clear. 2025 was a transition year in which we delivered tangible proof points against our priorities, as outlined earlier in this presentation. We have a well-defined plan to improve scale and returns, and we're positioning the group to be well within our ROE target range of 16%-19% by 2028. First, we will accelerate non-interest income growth across all businesses. Second, we'll tighten cost discipline, particularly pre-incentives across all business lines with a sharper focus across Personal and Private Banking, Business Banking, and Head Office. Third, we expect net interest income growth to rebound from the muted levels of 2025, supported by improving balance sheet growth, especially across our Africa regions.
Together, these actions will widen operating jaws and drive our cost-to-income ratio down towards 50% by 2028. Capital remains a clear strength. We expect our CET1 ratio to be maintained at the top end of our target range over the medium term, enabling us to generate meaningfully higher economic profit over the time. I will now open the calls to questions. Thank you.
The first question comes from Baron Nkomo of JP Morgan. Given your strong capital position and CET1 expected at the top end of your target range, how are you prioritizing capital allocation across your different SA divisions and Africa regions?
Can we take two or three questions at the same time?
Okay. The next question, Chris Steward from Ninety One. Please could you give us your outlook for NIMS in 2026, given your best estimate view on rates in SA and Africa regions?
Yeah, let's take the last one.
Okay. Another one from Chris Steward from Ninety One. Please could you explain the 16% increase in merchant income given the high degree of competitive pricing in this area of the market?
Very good. Deon, do you wanna deal with those questions?
Yes, I can. On the question on capital allocation, we are prioritizing capital allocation to where we see growth emerging. You know, as we look at our outlook, you know, we do see continued growth in our Africa Regions. We do see growth opportunities within our CIB franchise. And similar to last year, we see that trend continuing, where the bulk of our capital allocation would go. We do see opportunities in retail South Africa as well as business bank South Africa. They are highly capital generative and typically generate capital for the group given their mature business. Selectively where we see growth opportunities, we'll continue to allocate capital there. Chris, in terms of NIMs and the outlook for 2026, we've guided to revenue growth of mid-single digits. Within that, NIR slightly stronger than NII.
We've guided to core customer loan growth of mid to high, as well as deposit growth. That does imply some NIM compression. The core driver of NIM compression we were expecting this year would be rates, particularly in Africa Regions, that will compress. We saw back end of last year the cutting cycle in markets like Kenya and Ghana, and we saw that translate into most of the countries in our region, with the exception of Botswana. That'll be the main driver of a bit of further NIM compression for the year. Chris, 16% merchant income growth, well spotted. We did have a reclassification into that line, particularly our debit card turnover that was previously on Bankserv has now shifted to Visa.
I would say underlying growth there, Chris, is a couple of % similar to the trends that you're seeing in the industry.
The next three questions come from Charles Russell from SBG Securities. One, can you speak about the opportunities for cost savings in professional fees up 6% in full- year 2025? Two, why was the credit loss ratio improvement so much better than expected in light of guiding just inside the top end of TTC range in your December pre-close? Three, can you further unpack the 9% reduction in CIB Transactional Banking?
I hope we have the roving mic because I would want to bring in some of the BU sort of CEs to take some of the questions. While that is being organized, Deon, do you wanna deal with opportunities in the professional fee line?
Yes. Pro fee costs were up 6%. The main drivers there is legal costs and credit bureau fees. Credit bureau fees has been a structural change in the cost, every time you ping, you know, the credit bureau. So there was growth there. Underlying costs on consulting were lower in the year. So we do see opportunities for this line item to be much lower going forward. I think if we look at discretionary costs, and I'd rather talk discretionary costs as opposed to line items, and ultimate single digit cost growth. We see a 1% cost takeout on discretionary expenses, and within that it's mainly in that consulting fee as well as marketing costs that we see that opportunity. The question on CLR. Why is it so much better?
Yes, it is much better than we had expected. We had a very strong close towards the back end of last year. Particularly as we saw recoveries coming through in Africa regions, Business Banking as well as CIB, and these are quite lumpy and sizable. It was much better than we expected. We had a better close across all of the books relative to expectation.
Zaid, do you wanna deal with the CIB question? I'm not sure. The cameras are here, so you may have to come and stand here so that the voice is appropriately projected. Well, Zaid Moola joined us from January this year as our Chief Executive for Corporate and Investment Banking, and he will deal with the TXB sort of decline.
Thank you, Charles, for the question, and good morning, everyone. Primarily what we saw in Transactional Banking last year was margin compression, across both loans and deposits. We equally saw competitive pricing around our fee and commission income, and generally just overall competitive environment that drove that headline earnings number down and put us under pressure. Thank you.
We are doing something about that, yeah.
Yes. We're well aware of the problem and the challenge that we've got in the business, and really focused on that. We did struggle to obviously acquire new clients in that business, and that's really where our focus is gonna be going into this 2026.
Thank you, Zaid.
Okay. The next question from Harry Botha of Bank of America Securities. How should we think about revenue growth in 2027-2029 to support your revenue targets, and what drives this performance? Should we expect any significant impact on NAV in 2026 outside of movements due to headline earnings and dividends? We have three questions from Ross Krige of Investec. Do you expect a pickup in the net fee and commission income growth in PPB and BB in 2026 after the slowdown in growth evident in the first half, in the second half? Number two, is the very strong momentum in global markets likely to persist through full- year 2026? And number three, on the 12 basis points NIM impact from deposit pricing, how is this likely to progress in full year 2026? Should we expect further pressure?
Charles, you can pick any of these questions. Before we split the others to the rest of the team. Yep, go ahead first.
Hi. Thanks, Ross, for the questions. I think in terms of projections of revenue growth, I think in terms of how we think about that, it goes back to strategy. It goes back to the focus on client-driven focus as we look to diversify our business. I think that to me does talk to a lot of the opportunity in the Africa regions. I would also just point out that while we've had great growth this last period in the Africa regions, it's also been a momentum story that's built over the last five or six years if you go back to 2019. It is continued investment.
It is about being focused and being precise about our customers, our clients, and client segments and where we wanna grow and how we wanna grow. I think that together with the change of the business operating model and the focus that that brings, I think we should be well positioned on the revenue story. Thanks.
Got it. Thank you. Thank you for that, Charles. Deon do you wanna deal with the NAV and the question?
Yeah. In terms of NAV, I have called out that other reserves have contributed to NAV. The change last year in other reserves was almost 50 basis points drag on ROE. This comes mainly from cash flow hedge reserve and AFS reserve. As rates rallied hard, the structural hedge and the liquid asset portfolio contributed a lot of positive NAV. Now you don't see that in earnings immediately. That comes over time. As we think about this year and in terms of our 16%, around 16% ROE guidance, we do forecast that NAV to come back by about two-thirds. Clearly, you know, if we look at our intangible assets, we did take an impairment of that, and that has been supportive.
We will look at that again during the course of the year. It's something that we do every year quite deliberately. Particularly as you get strategy shifts, we assess whether these, you know, assets that we built are still fit for purpose for going forward. We'll continue with that effort, you know, going forward and being very selective around what we capitalize going forward and very deliberate about our investments.
Just on the net fee and commission income for PBB and Business Banking. Those two businesses have a massive opportunity to grow the non-interest revenues. When we sort of did an analysis of the quality of the revenues across both of those businesses, there is no doubt that we've got decent market shares when it comes to Lending, and in some sectors we are extremely large and dominant. We haven't leveraged that optimally to cross-sell into ancillary revenues, and consequently, we find that despite our large market share when it comes to Lending, we are lagging the market when it comes to leveraging that to be able to crowd in the ancillary revenues. We are re-sort of tooling our teams to be on the front foot with regard to that cross-sell.
We're reorienting the business to focus on those revenue streams that are ROE accretive. I think this was purely a comfort zone, which unfortunately over a period of time became culturally embedded within the organization, and we're tilting that. Because we have the client relationships, we have already extended our balance sheet to clients, we think we have an ample opportunity for us to cross-sell. There was another question regarding GM.
Thanks for the question. I think it was just around the continued expectation of growth from the markets business. We have a strong markets business that's underpinned by a strong client franchise, and I think we do expect that to continue growing both in SA as well as on the continent. What I would say is obviously the last 10 days with some of the changes, globally with conflict in the Middle East, have proved or could prove challenging in terms of trading environments. We remain confident that that business can continue to grow. Thank you.
Thanks, Zaid. I hope we have answered all the questions. I mean, if there's anyone that we have missed, I'm sure they will bring that to our attention.
The next two questions from Chris Steward from Ninety One. Peers have experienced material declines in home loan impairments, largely due to improved forward-looking expectations on stage migrations and LGDs. Why has Absa not benefited similarly? Number two, could you please comment on the sustainability of the 126 basis points VAF credit loss ratio?
I don't see my sort of PBB colleagues. I mean, on the sort of home loans. That's fine. We'll deal with that. Deon, if I could start with you.
Yeah, Chris, in terms of Home Loans, we've we did call out the stress we are seeing in stage three portfolio, particularly the length of time it's taking to work out in that portfolio. Like you called out, the new vintage performances are performing well, and inflows into stage three is looking much better. Chris, we had to take a call around our forward-looking provisions. While they did predict a fairly better environment as we entered this year, we were quite cautious in how much of that we recognized. I think we wanted to be fairly conservative going into this year given the uncertainties. I think in some of that discretionary coverage, we've chosen to maintain that.
In terms of VAF, you know, how sustainable is the 126 basis point CLR? Chris, it is slightly lower if you look at the range of where we expect VAF to be. You know, around the 140 - 150 is where we expect that to be through the cycle sustainably on average. It is slightly under. You know, as we lend and as that book grows, you know, that should normalize.
The next question from James Starke, RMB Morgan Stanley. Regarding the intangible impairments that was excluded from the headline earnings, please can you elaborate on, number one, the underlying intangible software impairment. Number two, do you see a high likelihood that more of your intangible assets require impairments in the future? Number three, what was annual depreciation amortization charge that would have been associated with the intangible assets impaired in the period? Number four, of the ZAR 5 billion savings targets, how much relates to annual depreciation amortization on intangibles that have been impaired? On the loan growth outlook, please can you comment on which product areas you see as attractive and which product areas have seen the strongest production or pickup in loan production in the first two months of 2026?
I think we'll leave the first two months of 2026. We'll deal with that at the appropriate time. Let's deal with the ones related to intangibles. Deon?
Yeah. I think the first part of that question was really about the impairment we've taken and what was the nature of the impairment. I'd call out three buckets around this. The first one is things of a regulatory nature where we've had to, in the past, build new regulatory platforms for new regulatory changes. With Basel IV's full implementation and things like you know data regulations et cetera we've chosen to impair that because you know those have been built, the regulations implemented, and we don't see much future benefit in that. That's the largest component of the impairment, and that sits in our head office. The second biggest bucket is technological obsolescence and we see some of that come through in our Corporate and Investment Bank.
The third bucket is change in strategy in terms of what products customers and what technology customers are adopting. There were some legacy technology and client offerings that we've written off, particularly in our retail bank in South Africa. Those are the three buckets. I think there was a question in all of that around how much of amort savings do we get relative to what we thought we were gonna get in terms of depreciation. It'll be staggered, you know. It'll be higher in the initial years, and then it'll taper off in later years. On average, it's probably about ZAR 200 million per year over three years. It'll be higher in the first year, about ZAR 500 million, and then it'll taper off over the next three to five years.
Yeah. If I may add, I mean, on that point, that we have also lifted the capital capitalization flow to sort of ZAR 50 million, meaning that anything below ZAR 15 million need to be expensed by the sort of businesses or the functions. While there will be a saving, I mean, I guess from a depreciation point of view, we are likely to see people expensing directly any sort of investment that is less than ZAR 50 million. We are also sort of imposing that to enforce discipline in the choice of investments that we make to get people to think carefully about the returns and the cost benefit of whatever investment choices that at the end of the day we sort of incur.
We've already started to see a reduction in the number of products, or rather number of projects and initiatives that people are undertaking because they can see the impact almost immediately on the income statement as opposed to mortgaging the future.
There was a question there from James Starke on the loan growth. I think, James, it's gonna be related to, you know, what we experienced towards the back end of last year where loan growth picked up. Call out a couple of interesting areas. We are seeing the home loan market looking a little bit better, particularly in Gauteng, so you're seeing a little bit better growth there. You know, I think we were all disappointed in the industry growth in home loans last year just being 2%. Some green shoots starting to emerge there. Vehicle and asset finance continues to be strong. The unsecured market is a little bit two-paced. You know, we are seeing some areas where you can lend and get good outcomes, other areas that remain in fairly large distress.
Our Corporate and Investment Bank has seen opportunities emerge, particularly around renewable financing, infrastructure financing. That we expect to, you know, to continue to be a theme. Outside South Africa, as interest rates have come down, it's been quite a positive environment to lend into as customers' affordability is now much better. We continue to see infrastructure development, you know, across the continent that we'll continue to fund. All of that, you know, delivering good returns.
The next question from James Starke, RMB Morgan Stanley. Does your CET1 guidance include provision for targeted acquisitions? The second question from Asanda Notshe, Mazi Asset Management. What are the strategies to improve the ROE in Rest of Africa, given its current low level?
Charles, I think the second one is definitely yours. Once we are woken up here, Deon will deal with the first one.
James, I would say our CET1 guidance includes, for 2026, our known acquisitions at this point. You know, clearly, our medium-term guidance for those things that we don't know at this point, you know, it wouldn't.
Deon?
Charles, it's Asanda that asked that question. ROE Rest of Africa improvement.
Yeah. Great. Thanks very much for the question. Yeah, again, I think it lines up back to what Kenny communicates and in terms of strategy. We certainly see opportunity costs around efficiency. We see in terms of both structural costs as well as with regard to capital allocation and the precision of use of that across our respective businesses. I think as we look at our businesses on a Pan-African basis, as the CEO has learned, clearly there are opportunities that we can start to leverage across the broader organization with CIB having been the only business to this point that's operated on a Pan-African basis.
I think that coupled with some of the momentum that we've seen through the period, Kenny alluded to our customer growth in our PPB business, our digitally active customer growth of 29%, all of those talk to the underlying health of the franchise, which should lead to significant improvement of our ROE in due course.
Okay. Thank you, Charles.
The next question comes from Irina Schulenburg, Old Mutual Investment Group. On slide seven of the presentation, you quote ROEs across business units at 17.1%-21.5%, a good spread versus cost of equity and within the 16%-19% ROE target. How does one reconcile this to the group reported 15% ROE and the improvement in the group ROE to % target? Question two, any timeline you can offer on business bank head?
I can take the first one.
Yeah. I mean, the Business Bank Head, we are in the final stages of making that appointment. As I've cautioned before with regard to the previous appointments, that with these sorts of things, until such time that all the sort of i's have been dotted and all the t's have been crossed, we continue to sort of run a risk. In terms of what we know today, we're very close that we hope to be able to make an announcement or at least get to a point where we're able to make regulatory submissions within a month, touch sort of wood. Deon will deal with the first question, then I'll invite if there are any other additional comments from the BU sort of heads. We haven't heard from Faisal.
It might be useful to hear from him as well on some of the initiatives to improve ROE. Deon?
Yeah. Irina Schulenburg, three items sit in the difference between Group ROE versus the sum of the business units. You'll recall last year I mentioned that we have capitalized the business units up to 12%. Surplus capital is not a big component anymore. In head office, we've still got a ZAR 2 billion loss. It's made up broadly of central shareholder costs, but also the withholding taxes that we pay on the dividends we earn from Africa regions. Then finally, it's the item I called out in terms of our NAV growth. Cash flow hedge reserve and available-for-sale reserve was a 50 basis points drag on the Group NAV. Clearly there's a mismatch there.
We would expect future profits as a consequence from both those reserves, but you don't see that in earnings, but you do see that on your NAV. That's the main difference.
Okay. Going forward, I mean, from a Business Banking asset point of view, are there any comments?
No, thanks, Kenny, and good question around the efforts around improving the returns profile. I think if one reflects just on the numbers for Business Banking for 2025, very clearly that we had a scenario of two halves. The first half, very difficult, very challenging, you know, single-digit numbers and also very muted agricultural operating environment. The second half, a very strong show from the team in terms of closing the gap, very strong balance sheet momentum. What is important as we move forward is ensuring that, you know, we post a very strong set of client acquisition position, drive the acquisition that we are driving currently at the moment with regards to diversifying of the book beyond just agriculture and transport and logistics.
I think some of those things are starting to show, you know, positive momentum. Obviously, we're very encouraged as we start the new year, and we're seeing the diversifications and the balance sheet momentum that we've seen in the second half of last year coming through in 2026. I think just the discipline around execution around some of those plans is gonna be important as we reset the strategy to ensure that we drive much more stronger efforts around NIR as Kenny indicated, as opposed to just being focused around, you know, our strong Lending position. I think it's gonna be key to sustain the outcomes we require going forward. Thank you.
Good. Zaid has already commented on the work that's been done in TXB, which is a massive driver of non-interest revenue as well as NII that is ROE accretive given that it is NII at the back of deposit. There's a whole variety of initiative across the various businesses that are aimed at improving not just sort of ROE through playing around with the capital and balance sheet, but ensuring that we can optimize the quality of our revenues by leveraging the strength that we already have from a balance sheet point of view.
The final question from Simon Nellis of Citi. Can you elaborate on drivers of targeted NIR growth?
I mean, we have sort of strategies for each of our businesses, and all of them have developed detailed plans as to which line segments and sectors they are targeting with a clear decision logic as to which line segments are rich in non-interest revenues. Within that, being clearer about which ones do we think we have a higher probability of converting within a reasonable period of time. In addition, we are strengthening our originating set of origination teams.
We made an announcement, I mean, towards the end of last year, that Clive Porter will be joining us as the new Head of Client Coverage within CIB, which will take our client segmentation and sectorization to the next level and will also bring additional skills from an advisory point of view that we still need to build and expand in terms of the breadth of those skills within our CIB business, and Zaid and the team are on top of that. Within Business Banking, we have moved Anand Naidoo from CIB to go into Business Banking to help develop a similar sectorization and segmentation within Business Banking. The team has been doing a lot of work identifying client opportunities and chasing those.
We think we can benefit with a far more sharp outline segmentation and the experience that Anand brings from a CIB point of view will be invaluable in sharpening the focus within that business. We're also looking at other additional skills that are being injected in the client-facing teams within Business Banking to make sure that we lift the bar. I visit clients with our teams, and in most of the conversations that I sit in, seven out of 10, the conversation is led predominantly by debt. There's very little of anything else, which is a reflection of the composition of the skill, the experience, and the comfort zone. Clearly, by reorienting and ensuring that we keep people appropriately to be able to extend client conversation beyond debt is on its own a massive sort of uplift, we think, from our point of view.
Clients do tell us that they want to do more with us beyond debt. They value the fact that we've supported them during difficult times, but they think that we're not bringing ideas to them fast enough and often enough, which is why we're focusing on changing the skills mix and ensuring that we keep people appropriately to be able to do exactly what the client is asking of us. With Sitoyo Lopokoiyit coming to join and run our sort of PBB global business, again, we hope to leverage his own experience on the excellent work that they've done at Investec and how they've been able to scale the business across the different client segment and how they've been able to extend and expand client reach through digital platform.
That experience will benefit not only PBB, but we're of the view that it will also benefit Business Banking insofar as giving us the ability to increase our reach to that SMME client base, which at the moment we can't reach in sufficient scale because of the old traditional RM-led model, when quite frankly, we should be switching quite aggressively to a more digital channel type led model. We hope that the skill set of the people that we're putting into that business, including the crossover across the two businesses, will benefit the bank overall in driving the right kind of revenues and in particular, those revenues that are ROE accretive. I'm told that there's one more question.
Yes.
Let's deal with the last one.
Yes, sorry. The last question. Asanda Notshe from Mazi Asset Management. Statistics from your perspective on the ongoing online gambling in the country.
I don't have the figures with me right away, but our PPB team has done a detailed analysis, and it is a growing problem. In fact, they are starting to use the prevalence of gambling and gambling trends as part of the decision logic when Lending to client. Gambling and gambling trends are actually a very huge predictor to delinquents. We suggest then that the more clients become indebted, the more they gamble and the deeper the hole becomes. This is a massive problem that quite frankly we're worried about. It take resources away from economic use, productive economic use, that is. Secondly, as people get deeper into the debt spiral, the levels of gambling just shoots off the roof, and effectively the problems become bigger and bigger and bigger.
People enter that, downward, sort of, slope, and they can't claw themselves up that slippery slope. We can provide, I mean, the statistics later. We'll dust them off from the work that our team has done. As a generalized statement, it is a huge problem. Thank you very much for all the questions. We really appreciate you joining the call. We will engage further in the next couple of days in the one-on-one sessions with yourselves, with all the business heads being in attendance. We hope to be able to unpack and provide further information, should that be required, on any elements of our results. Thank you very much. That brings us to the end of our session. Thanks a lot.