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Announcement of annual results for the year ended 31 December 2011

Absa delivers strong results amidst a tough trading environment

Group declares a record dividend

Highlights of the Absa Group’s full-year financial results:

• Diluted headline earnings per share (HEPS) grew 21% to 1350,0 cents.
• Total dividend of 684 cents per share, up 50%.
• Net interest margin on average interest-bearing assets widened to 4,11% from 3,94%.
• Non-interest revenue grew 10% and accounted for 46,7% of total revenue (2010: 45,5
• Operating expenses growth contained to 6%, improving Absa’s cost-to-income ratio to 55,5% (2010: 56,2%).
• Loans and advances to customers declined 1% to R504 billion.
• Credit losses decreased 15% to R5 081 million, resulting in a 1,01% credit loss ratio (2010: 1,18%).
• Return on average equity (RoE) improved to 16,4% (2010: 15,1%).
• Return on average risk-weighted assets increased to 2,35% and return on average assets (RoA) to 1,32% (2010: 1,99% and 1,10% respectively).
• Net asset value (NAV) per share grew 11% to 8 690 cents (2010: 7 838).
• Absa Group’s Core Tier 1 capital adequacy ratio improved to 13,0% (2010: 11,7%), well above regulatory requirements.

Absa Group, the largest retail bank by customer numbers and a member of Barclays plc, today kicked off the banking reporting season, by unveiling a strong set of financial results for the year ended 31 December 2011, with headline earnings increasing 21% to R9 719 million. Diluted HEPS rose 21% to 1 350,0 cents while RoE improved to 16,4%, reflecting a higher RoA of 1,32%. The Group’s pre-provision profit increased 9% to R20 374 million.

The Group also declared a final dividend of 392 cents per share, 70% above the corresponding period in 2010, after considering regulatory changes, its strong Core Tier 1 ratio, its strategy and growth plans as well as near-term business objectives.

“In an uncertain environment, we have achieved our targets and delivered good results, created value for our shareholders and further strengthened our balance sheet, while positioning Absa to continue growing,” says Ms Maria Ramos, Absa Group Chief Executive.

“Improved non-interest revenue growth, lower credit losses, better cost containment and a wider net interest margin were the primary reasons for Absa’s headline earnings growth. These drivers outweighed the impact of lower loans and advances, and a higher effective tax rate,” says Ms Ramos.

Retail Banking’s 33% headline earnings growth was the principal driver of the Group’s 21% increase. Financial Services and Absa Business Bank (ABB) increased earnings 7% and 5% respectively. Absa Capital’s headline earnings decreased 10% after a difficult second half.

The Group’s total assets rose 8% to R787 billion as at 31 December 2011, reflecting strong second half growth in its trading portfolio assets and loans and advances to banks. Absa’s statutory liquid asset portfolio increased 19% to R57 billion.

Ms Ramos, who is also chief executive of Barclays Africa, reports that the continent, which accounts for over 16% of Barclays adjusted group revenue, is contributing meaningfully. In 2011, Barclays made £1,6 billion in pre-tax profits in Africa.

Group performance
Loans and advances to customers: Absa’s loans and advances to customers declined by 1% to R504 billion. Retail Banking’s loans and advances decreased 1%, reflecting sustained focus on risk appetite and pricing. Retail mortgages (including Commercial Property Finance), which constitute 47% of total Group gross loans and advances to customers, decreased 4%. Credit cards grew 4% and personal loans 7%. Muted client demand also dampened ABB’s loans and advances, which declined 4% due to lower Commercial Property Finance, instalment credit agreements and wholesale overdrafts. Absa Capital’s loans and advances increased 6%, reflecting strong growth in foreign currency loans and overnight finance.

Deposits due to customers: Absa continued to improve its liquidity, growing customer deposits 14% to R441 billion and increasing its proportion of long-term funding to 24,5%. With solid growth in most key categories, Retail Banking’s deposits increased 9%, to maintain its leading market share. Its proportion of high margin deposits improved further. ABB’s deposits increased 13%, given strong growth in cheque account and call deposits. Absa Capital’s deposits rose 18%, after solid growth in fixed deposits and notice deposits. Deposits due to customers accounted for 72% of funding compared to 64% in 2009, while the proportion from debt securities in issue dropped to 21% from 30%. The Group’s loans-to-deposits ratio declined to 88% from 92%.

Net asset value: The Group’s NAV increased 11% to R62 billion, as it generated retained earnings of R5,9 billion during the year.

Capital to risk-weighted assets: The Group’s risk-weighted assets increased 0,4% to R424 billion. Absa maintained its strong capital levels, which remain above board targets and regulatory requirements. At 31 December 2011, Absa Group’s Core Tier 1 and Tier 1 capital adequacy ratios were 13,0% and 14,1% respectively. The Group’s total capital ratio improved to 16,7%. Absa Bank’s Core Tier 1 ratio increased to 12,1% and its total ratio was 16,2%. Factoring its strong capital position and medium-term plans, the Group was able to increase its total dividend per share by 50%.

Statement of comprehensive income
Net interest income: Net interest income increased 5% to R24 429 million, despite loans declining slightly and a 0,87% lower average prime rate during the year. The growth stems from the Group’s improved net interest margin (4,11% from 3,94%) due to its hedging strategy, better new business pricing and lower reliance on wholesale funding. These outweighed the negative endowment effect on capital and deposits, competitive pricing pressure on deposits and the cost of lengthening funding and increasing surplus liquid assets.

Credit losses: Absa’s credit impairments improved 15% to R5 081 million. Retail Banking, where credit losses decreased 17% to R3 965 million, was responsible for most of the reduction. Early cycle delinquencies improved as lower interest rates helped consumers to recover, and the benefits of effective collections and sound credit policy became evident. ABB’s credit losses dropped 24% to R873 million.

The Group’s credit loss ratio improved to 1,01%. Retail Banking’s credit loss ratio declined to 1,23%, as every category improved, particularly Absa Card and Personal Loans. ABB’s credit loss ratio fell to 0,72% from 0,93%. Absa’s non-performing loan coverage declined to 27,8%, in part due to 24% higher write-offs of impaired advances.

Non-performing loans (NPLs) as a percentage of loans and advances improved to 6,9%, due to reduced new NPLs, greater write-offs and rehabilitating more accounts. Absa’s loans subject to debt counselling reduced to R3,4 billion from R7,0 billion the previous year.

Non-interest income: Despite muted trading and retail client activity, Absa’s non-interest income grew 10% to R21 403 million, owing to growth in targeted areas. Net fee and commission income, which constituted 71% of non-interest income, grew 6% to R15 293 million. Retail Banking’s net fee and commission income rose 6%, while ABB’s demonstrated improving momentum growing 8%. Net revenue from Financial Services, excluding investment returns on shareholder funds, grew 14%. Absa Capital’s net trading increased 1% to R2 166 million, despite difficult second half conditions in fixed income. The Group sold its stake in Visa Incorporated in 2011, recording a R30 million gain compared to a R128 million loss in the prior year. Private equity and commercial property finance revaluations accounted for less than 1% of total non-interest revenue.

Operating expenses: The Group’s operating expenses increased 6% to R25 458 million, reflecting cost containment while continuing to invest in target growth areas. Staff costs, which increased 9%, constituted 54% of the total. Non-staff costs grew just 2%, as containing discretionary spend was a priority. Total IT-related spend grew 5% to R5,3 billion, which represents 21% of Group costs. Absa’s cost-to-income ratio improved to 55,5% from 56,2%.

Taxation: The Group’s taxation charge grew 23%, as its effective tax rate rose to 28,3% from 27,5%.

Prospects
The Group expects global economic conditions to remain challenging. Key structural weaknesses in the Eurozone still need to be addressed, the US economy faces the uncertainty of an election year and emerging markets look to navigate the downside risks created in developed countries. However, Sub-Saharan Africa’s GDP is expected to grow 5,5% this year.

For South Africa, the external environment is unlikely to support stronger growth and Absa expects the economy to grow just 2.8%. Slightly higher inflation will place some pressure on real household income and the labour market is expected to remain weak, which suggests consumers will remain vulnerable and corporates cautious in their business decisions. The Reserve Bank is expected to increase interest rates in the fourth quarter, albeit at a slow pace.

“Therefore, against this backdrop of a fragile macroeconomic environment, sector asset and revenue growth is likely to remain muted. However, Absa should continue to benefit from its hedging strategy. Containing costs remains a priority and management is committed to keeping cost growth below revenue growth again this year. Together with an expected credit loss ratio of below 1%, the Group’s profitability should improve further. And, we will continue to work closely with Barclays to capture the opportunities the combined franchises offer in the rest of Africa. Absa remains well positioned for expected regulatory changes with a strong capital position and will continue to improve its liquidity”, says Ms Ramos.