Absa Earnings Surge on Margin Squeeze, Share Price Remains in Uptrend Despite Dip
Absa Group’s first-half 2025 results highlight its ability to deliver strong earnings growth even in an unstable operating environment.
Quick overview
- Absa Group reported a 17% increase in headline earnings, driven by lower credit impairments and strong pre-provision income.
- Despite a 3% drop in share price, the company's underlying performance reflects positive investor confidence and strategic progress.
- The Group's South African operations experienced double-digit earnings growth, while challenges such as narrowing net interest margins and rising operating expenses persist.
- Looking ahead, Absa's resilience and disciplined approach position it well for future growth, though it must navigate economic pressures and efficiency improvements.
Absa Group’s first-half 2025 results highlight its ability to deliver strong earnings growth even in an unstable operating environment.
Earnings and Growth Drivers
The Group achieved a 17% jump in headline earnings, reflecting improved profitability supported by lower credit impairments and stronger pre-provision income. While the company’s share price closed 3% lower at R18.83, the underlying trend remains positive, underscoring investor confidence in its strategic progress.
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A notable 14% reduction in impairments was driven by a disciplined approach to collections, refinements in its credit models, and stricter requirements for new-business lending, especially within vehicle finance and unsecured lending. Broad-based loan and deposit growth further supported the momentum, while non-interest income rose strongly alongside steady net interest income, ensuring a healthy revenue contribution across divisions.
Solid Performance Despite Margin Pressures
Earnings and Returns
- Headline Earnings: Up 17% to nearly ZAR12 billion.
- Diluted HEPS: Increased by 16%.
- Return on Equity (ROE): Improved to 14.8%.
- Return on Regulatory Capital: 14.3% in South Africa, 16.9% in Africa regions.
Income and Revenue
- Net Interest Income: Grew by 3%.
- Noninterest Income: Rose by 10%.
- Total Revenue: Increased by 5% to ZAR56 billion.
- Net Interest Margin: Narrowed by 11 bps YoY.
Costs and Efficiency
- Operating Expenses: Up 6%.
- Cost-to-Income Ratio: Slightly higher at 53.2%.
Balance Sheet and Capital
- Net Asset Value (NAV): Grew 11% to ZAR200 per share.
- CET1 Capital Ratio: Slightly lower at 12.5%.
- Dividends Per Share: Up 15%, with a payout ratio of 55%.
Loans and Credit Quality
- Loan Growth: Increased by 7%.
- Deposit Growth: Broad-based, with strength in CIB and ARO RBB.
- Stage 3 Loans (NPLs): Grew 4% to ZAR86 billion.
- Credit Loss Ratio: Improved to the top end of the target range.
Regional Performance
The Group’s South African operations delivered double-digit earnings growth, benefiting primarily from the sharp drop in impairments. In contrast, Absa’s wider Africa operations drew strength from pre-provision profit growth, underpinned by a rising customer base and expanding activity across regional markets. Together, these regional performances reinforced Absa’s ability to diversify earnings and maintain stability across different geographies.
Challenges and Pressures
Despite the strong set of results, challenges remain. Net interest margins narrowed by 11 basis points, largely due to weaker deposit margins, while operating expenses continued to trend higher. Business Banking struggled with flat revenue and rising impairments, resulting in a decline in earnings for the segment.
More broadly, the Group’s return on equity, though improving, still lags behind the cost of equity, pointing to the need for further financial recovery. On top of this, South Africa’s sluggish economy, with GDP growth of just 0.1% in the first quarter of 2025, continues to weigh heavily on performance, creating an uncertain backdrop for earnings sustainability.
Outlook
Overall, Absa’s half-year results confirm its resilience, with robust earnings growth, disciplined dividend policy, and healthier credit outcomes positioning it well for the future. Yet the pressures of margin compression, elevated costs, and weak domestic economic growth highlight the importance of ongoing efficiency improvements and careful capital allocation. If these headwinds are managed effectively, Absa’s diversified regional presence and earnings momentum could allow it to consolidate its gains and continue delivering value to shareholders.
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