Consumers buckling under the financial pressure of increasing interest rates (up 4.75 percentage points since November 2021) and rising inflation have increasingly defaulted on debt from home loans, credit cards, vehicle finance and personal loans. 

The net result on Monday showed that Absa’s credit impairment charges increased 60% to R8.3-billion over the six months to the end of June.

A large portion of the increase in impairments (defaults) was from credit cards at R2.4-billion, followed by everyday banking at R4.3-billion, another R1.3-billion in the vehicle finance category, and home loans bringing up the rear with defaults of R975-million.

Although headline earnings increased 2% to R11.2-billion, this was largely attributable to earnings for regions in Africa outside South Africa. Locally, headline earnings declined 17% on the back of 60% higher credit impairments.

“Our deliberate diversification strategy stood us in good stead in the first half of 2023, given weaker economic conditions and significant pressure on consumers in South Africa,” says Arrie Rautenbach, Absa Group’s chief executive officer. 

“We will further diversify going forward by deploying resources and capital into attractive growth prospects on the continent, which provides a natural performance hedge for the group while continuing to invest in South Africa.”

Measures to help consumers in distress

Demand in the home loans market slowed, with application volumes decreasing across the industry, reflecting the subdued property market, while vehicle sales displayed resilience. 

In the home loans and vehicle finance segments, Absa is doing the following to address the increase in non-performing loans:

• Proactive customer contact as a reminder of the installment amount and due date;
• All customers who miss payments are contacted to make alternative payment arrangements;
• Implementing more flexible loan restructure options and simplifying the customer process; and
• Increasing volumes through private and assisted sales to enable customers to trade out assets in the event that payment arrangements are not feasible.

The Eskom effect

Equipment costs grew 70% to R313-million, due largely to increased power costs as unprecedented load shedding led to increased diesel consumption. 

During the period under review, the bank launched a green asset finance solution offering financing of solar installations, including batteries, to keep businesses productive. SME customers who have financed their property with Absa qualify for a grant equivalent to 10% of installation costs, capped at R50,000.

Looking ahead, Rautenbach says the economic environment remains uncertain. 

Absa expects real GDP growth of 0.7% in South Africa, where the electricity supply remains a significant risk for the economy for the foreseeable future. 

Based on these assumptions, and excluding further major unforeseen political, macroeconomic or regulatory developments, Absa expects high single-digit revenue growth in 2023, driving high single-digit growth in pre-provision profit, while its credit loss ratio will likely improve substantially in the second half. DM