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ASA
AMAGB
ASA - Absa Group - Audited Financial Results For The Year Ended 31 December 2007
and dividend declaration
ABSA GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1986/003934/06)
ISIN: ZAE000067237
JSE share code: ASA
Issuer code: AMAGB
(Absa, Absa Group or the Group)
ABSA GROUP LIMITED: PROFIT AND DIVIDEND ANNOUNCEMENT
AUDITED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007
GROUP SALIENT FEATURES
Year ended
31 December
2007 2006 Change
(Audited) (Audited) %
Income statement (Rm)
Headline earnings** 9 413 7 872 19,6
Profit attributable to 9 595 8 105 18,4
ordinary equity holders of
the Group
Balance sheet (Rm)
Total assets 640 909 495 112 29,4
Loans and advances to 455 958 373 825 22,0
customers
Deposits due to customers 310 512 279 848 11,0
Financial performance (%)
Return on average equity 27,2 27,4
Return on average assets 1,68 1,74
Operating performance (%)
Net interest margin on 3,37 3,28
average
assets
Net interest margin on 3,83 3,72
average
interest-bearing assets
Impairment losses on loans 0,58 0,45
and
advances as % of average
loans and advances to
customers
Non-performing advances as % 1,6
of 1,3
loans and advances to
customers
Year ended
31 December
2007 2006 Change
(Audited) (Audited) %
Non-interest income as % of 47,0 50,2
total
operating income
Cost-to-income ratio 51,8 53,8
Effective tax rate, excluding 28,7 27,6
indirect taxation
Share statistics (million)
Number of shares in issue 678,6 672,0
Weighted average number of 671,5 666,1
shares
Weighted average diluted 716,4 703,2
number of
shares
Share statistics (cents)
Earnings per share 1 428,9 1 216,8 17,4
Diluted earnings per share 1 341,4 1 154,4 16,2
Headline earnings per share 1 401,9 1 181,8 18,6
Diluted headline earnings per 1 316,1 1 121,3 17,4
share
Dividends per ordinary share 560,0 473,0 18,4
relating to income for the
year
Dividend cover (times) 2,5 2,5
Net asset value per share 5 537 4 717 17,4
Tangible net asset value per 5 493 4 682 17,3
share
Capital adequacy (%)
Absa Bank 12,5 12,3
Absa Group 13,1 13,1
* The comparatives for the year ended 31 December 2006 have been reclassified
throughout the document. See section on "Reclassifications" below.
** After allowing for R313 million (December 2006: R73 million) profit
attributable to preference equity holders of the Group.
GROUP INCOME STATEMENT
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Net interest income 18 890 14 887 26,9
Interest and similar 55 123 37 569 46,7
income
Interest expense and
similar charges (36 233) (22 682) (59,7)
Impairment losses on loans and
advances (2 433) (1 573) (54,7)
Net interest income after
impairment losses on loans and 16 457 13 314 23,6
advances
Net fee and commission income 11 600 10 153 14,3
Fee and commission income 12 873 11 247 14,5
1.1
Fee and commission (1 273) (1 094) (16,4)
expense
Net insurance premium income 3 192 2 994 6,6
Net insurance claims and
benefits paid (1 603) (1 319) (21,5)
Changes in insurance and
investment liabilities (489) (748) 34,6
Gains and losses from banking
and trading activities 1 622 1 376 17,9
1.2
Gains and losses from
investment activities 1 561 1 891 (17,5)
1.3
Other operating income 845 672 25,7
Operating income before
operating expenses 33 185 28 333 17,1
Operating expenditure (19 209) (17 029) (12,8)
Operating expenses 2.1 (18 442) (16 089) (14,6)
Non-credit related (58) (75) 22,7
impairments 2.2
Indirect taxation (709) (865) 18,0
Share of retained earnings
from associated undertakings
and joint ventures 91 113 (19,5)
Operating profit before income 14 067 11 417 23,2
tax
Taxation expense (4 042) (3 151) (28,3)
Profit for the year 10 025 8 266 21,3
Attributable to:
Ordinary equity holders of 9 595 8 105 18,4
the Group
Minority interest - ordinary 117 88 (33,0)
shares
Minority interest -
preference shares 313 73 >(100,0)
10 025 8 266 21,3
Headline earnings 3 9 413 7 872 19,6
NOTES TO THE ANNUAL FINANCIAL RESULTS
1. NON-INTEREST INCOME
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
1.1 Fee and commission income
Credit-related fees and 10 208 9 054 12,7
commission
Cheque accounts 2 575 2 405 7,1
Credit cards 1 551 1 390 11,6
Early redemption penalty 196 256 (23,4)
income
Electronic banking 2 657 2 248 18,2
Foreign exchange fees and
commissions 285 229 24,5
Savings accounts 1 801 1 512 19,1
Other 1 143 1 014 12,7
Corporate finance fees 289 136 >100,0
External administration fees 217 157 38,2
Insurance commission received 877 771 13,7
Pension fund payment services 489 452 8,2
Portfolio and other management 255 209 22,0
fees
Trust and estate income 228 201 13,4
Unit/property trust income 310 267 16,1
12 873 11 247 14,5
1.2 Gains and losses from
banking and trading activities
Designated fair value 878 (147) >100,0
Debt securities in issue (112) - (100,0)
Loans and advances and 261 (381) >100,0
deposits
Investments 783 389 >100,0
Debt instruments (71) (50) (42,0)
Equity instruments 854 439 94,5
Statutory liquid assets (54) (155) 65,2
Associated undertakings and
joint ventures 2 167 (98.8)
Dividends from associated
banking entities 8 - 100,0
(Loss)/profit realised on (6) 167 >(100,0)
disposal
Held for trading 663 1 357 (51,1)
Ineffective hedges 79 (1) >100,0
Cash flow hedges (60) (5) >(100,0)
Fair value hedges 139 4 >100,0
1 622 1 376 17,9
1.3 Gains and losses from
investment activities
Designated fair value 920 1 527 (40,0)
Cash, cash balances and
balances with central banks 111 95 16,8
Debt securities 99 142 (30,3)
Equity instruments 710 1 290 (45,0)
Associated undertakings and 41 74 (44,6)
joint ventures
Profit realised on disposal 37 54 (31,5)
Dividends received 4 20 (80,0)
Subsidiaries
Profit realised on disposal 36 50 (28,0)
Held for trading
Derivatives (16) (280) 94,3
Investments linked to
investment contracts 580 520 11,5
Cash, cash balances and
balances with central banks 100 31 >100,0
Investments 480 489 (1,8)
1 561 1 891 (17,5)
2. OPERATING EXPENDITURE
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
2.1 Operating expenses
Amortisation on intangible 85 37 >(100,0)
assets
Audit fees 67 67 -
Audit fees current year 63 58 (8,6)
Other fees 4 9 55,6
Cash transportation 347 298 (16,4)
Depreciation 781 739 (5,7)
Computer equipment 477 391 (22,0)
Freehold property 31 33 6,1
Furniture and other 240 284 15,5
equipment
Leasehold property 28 26 (7,7)
Motor vehicles 5 5 -
Equipment rental and 295 245 (20,4)
maintenance
Information technology 1 185 1 159 (2,2)
Lease rentals on operating 817 757 (7,9)
leases
Marketing costs 931 746 (24,8)
Other operating costs 1 760 1 501 (17,3)
Other professional fees 1 260 1 128 (11,7)
Printing and stationery 312 259 (20,5)
Staff costs 9 944 8 577 (15,9)
Telephone and postage 658 576 (14,2)
18 442 16 089 (14,6)
2.2 Non-credit related
impairments
Financial instruments
Available for sale investments - (5) (100,0)
Other 58 80 27,5
Computer software development 21 66 68,2
costs
Repossessed Properties 37 - (100,0)
Equipment - 4 100,0
Investments in associated
undertakings and joint - 10 100,0
ventures
58 75 22,7
3. DETERMINATION OF HEADLINE EARNINGS*
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Headline earnings is
determined
as follows:
Profit attributable to
ordinary equity holders of the 9 595 8 105 18,4
Group
Adjustments for:
IAS 16 net profit on
disposal of property and (57) (8) >(100,0)
equipment
IAS 21 recycle foreign
currency translation reserve,
disposal of investment in (29) - (100,0)
foreign operations
IAS 27 net profit on
disposal of subsidiaries (26) (36) 27,8
IAS 28 & 31 net profit on
disposal of associated
undertakings and joint (31) (167) 81,4
ventures
IAS 28 impairment of
associated undertakings and - 7 100,0
joint ventures
IAS 28 underlying
associated undertakings and
joint ventures earnings (45) (54) 16,7
IAS 36 impairment of - 3 100,0
assets
IAS 38 net profit on
disposal and impairment of (43) 47 >(100,0)
intangible assets
IAS 39 release of
available-for-sale reserves 49 (21) >100,0
IAS 39 impairment of
available-for-sale assets and
strategic investments - (4) 100,0
Headline earnings 9 413 7 872 19,6
* After tax and minorities.
GROUP BALANCE SHEET
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Assets
Cash, cash balances and 20 629 16 461 25,3
balances
with central banks
Statutory liquid asset 22 957 20 829 10,2
portfolio
Loans and advances to banks 54 025 21 800 >100,0
Trading assets 25 824 18 014 43,4
Hedging assets 725 645 12,4
Other assets 24 303 12 175 99,6
Current tax assets 185 24 >100,0
Loans and advances to 455 958 373 825 22,0
customers
Reinsurance assets 485 390 24,4
Deferred tax assets 111 129 (14,0)
Investments 29 327 26 147 12,2
Investments in associated
undertakings and joint 1 469 693 >100,0
ventures
Intangible assets 301 230 30,9
Property and equipment 4 610 3 750 22,9
Total assets 640 909 495 112 29,4
Liabilities
Deposits from banks 58 033 24 817 >100,0
Trading liabilities 34 919 24 125 44,7
Hedging liabilities 2 226 1 261 76,5
Other liabilities and sundry
provisions 12 301 10 220 20,4
Current tax liabilities 183 1 181 (84,5)
Deposits due to customers 310 512 279 848 11,0
Debt securities in issue 156 424 98 940 58,1
Deferred tax liabilities 2 576 2 537 1,5
Liabilities under investment
contracts 7 908 5 655 39,8
Policyholder liabilities
under 3 318 3 187 4,1
insurance contracts
Borrowed funds 9 949 8 420 18,2
1
Total liabilities 598 349 460 191 30,0
Equity
Capital and reserves
Attributable to ordinary
equity holders of the Group:
Share capital 1 350 1 338 0,9
Share premium 2 292 2 067 10,9
Other reserves 406 412 (1,5)
Retained earnings 33 527 27 876 20,3
37 575 31 693 18,6
Minority interest - ordinary 341 236 44,5
shares
Minority interest - preference 4 644 2 992 55,2
shares
Total equity 42 560 34 921 21,9
Total equity and liabilities 640 909 495 112 29,4
Contingent liabilities -
banking related 53 197 49 036 8,5
NOTES TO THE ANNUAL FINANCIAL RESULTS
BORROWED FUNDS
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Subordinated callable notes
14,25% (AB02) 3 100 3 100 -
10,75% (AB03) 1 100 1 100 -
3-month JIBAR + 0,75% (AB04) 400 400 -
8,75% (AB05) 1 500 1 500 -
8,10%(AB06) 2 000 2 000 -
8,80% (AB07) 1 725 - 100,0
Accrued interest 297 253 17,4
Fair value adjustment (326) (85) >(100,0)
Redeemable cumulative option-
holding preference shares 153 152 0,7
Shares issued 158 158 -
Elimination of Absa Group
Limited Employee Share
Ownership Administration (5) (12) 58,3
(ESOP)Trust
Redemption of preference
shares by Absa Group Limited
Employee Share Ownership
Administration (ESOP) trust (7) - (100,0)
Accrued dividend 7 6 16,7
9 949 8 420 18,2
The fair value adjustment relates to subordinated callable notes designated
as hedged item in a hedge relationship.
GROUP STATEMENT OF CHANGES IN EQUITY
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Share capital 1 350 1 338 0,9
Opening balance 1 338 1 327 0,8
Shares issued 13 10 30,0
Transfer from share-based
payment reserve 0 0 -
Share buy-back in respect of
Absa Group Limited Share (0) (0) -
Incentive Trust
Elimination of treasury
shares held by Absa Group
Limited Share Incentive Trust (0) 1 >(100,0)
Elimination of treasury
shares held by Absa Life
Limited and Absa Fund Managers (1) 0 >(100,0)
Elimination of treasury
shares held by Absa Group
Limited Employee Share
Ownership Administration (0) - (100,0)
(ESOP) Trust
Share premium 2 292 2 067 10,9
Opening balance 2 067 1 875 10,2
Shares issued 345 170 >100,0
Transfer from share-based
payment reserve 93 23 >100,0
Share buy-back in respect of
Absa Group Limited Share (130) (17) >(100,0)
Incentive Trust
Elimination of treasury
shares held by Absa Group
Limited Share Incentive Trust (5) 4 >(100,0)
Elimination of treasury
shares held by Absa Life
Limited and Absa Fund Managers (73) 12 >(100,0)
Limited
Elimination of treasury
shares held by Absa Group
Limited Employee Share
Ownership Administration (5) - (100,0)
(ESOP) Trust
Other reserves 406 412 (1,5)
Opening balance 412 622 (33,8)
Movement in foreign currency
translation reserve (59) 332 >(100,0)
Movement in regulatory general
credit risk reserve 435 46 >100,0
Movement in available-for-
sale 60 58 3,4
reserve
Movement in cash flow hedges (540) (485) (11,3)
reserve
Movement in insurance
contingency reserve 20 38 (47,4)
Movement in associated
undertakings and joint
ventures` retained earnings 91 113 (19,5)
reserve
Disposal of associated
undertakings and joint
ventures - release of reserves - (374) 100,0
Share-based payments for the 81 85 (4,7)
year
Transfer from share-based
payment reserve (94) (23) >(100,)
Retained earnings 33 527 27 876 20,3
Opening balance 27 876 21 931 27,1
Subsidiary step-up 2 (43) >100,0
acquisitions
Transfer to regulatory
general credit risk reserve (435) (46) >(100,0)
Transfer to insurance
contingency reserve (20) (38) 47,4
Transfer to associated
undertakings and joint
ventures` retained earnings (91) (113) 19,5
reserve
Disposal of associated
undertakings and joint
ventures - release of reserves - 374 (100,0)
Transfer from share-based
payment reserve 1 - 100,0
Profit attributable to
ordinary equity holders 9 595 8 105 18,4
Dividends paid during the (3 401) (2 294) (48,3)
year
37 575 31 693 18,6
Minority interest - ordinary 341 236 44,5
shares
Opening balance 236 246 (4,1)
Disposals - (40) 100,0
Other reserve movements (12) (58) 79,3
Minority share of profit 117 88 33,0
Minority interest - preference 4 644 2 992 55,2
shares
Opening balance 2 992 - 100,0
Shares issued 1 658 3 000 (44,7)
Costs incurred (6) (8) 25,0
Profit attributable to
preference equity holders 313 73 >100,0
Preference dividends paid
during the year (313) (73) >(100,0)
Total equity 42 560 34 921 21,9
GROUP CASH FLOW STATEMENT
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Net cash generated/(utilised) 7 016 (4 016)
from operating activities >100,0
Net cash utilised from
investing activities (4 996) (2 342) >(100,0)
Net cash (utilised)/generated
from financing activities (214) 2 799 >(100,0)
Net (decrease)/increase in
cash and cash equivalents 1 806 (3 559) >100,0
Cash and cash equivalents at
the 4 787 8 343 (42,6)
beginning of the year 1
Effect of exchange rate
movements on cash and cash 3 3 -
equivalents
Cash and cash equivalents at
the end of the year 2 6 596 4 787 37,8
NOTES TO THE CASH FLOW
STATEMENT
1. Cash and cash equivalents
at the beginning of the year
Cash, cash balances and 3 936 3 431 14,7
balances
with central banks
Loans and advances to banks 851 4 912 (82,7)
4 787 8 343 (42,6)
2. Cash and cash equivalents
at the end of the year
Cash, cash balances and 5 091 3 936 29,3
balances
with central banks
Loans and advances to banks 1 505 851 76,9
6 596 4 787 37,8
PROFIT CONTRIBUTION BY BUSINESS AREA
Year ended
31 December
2007 2006
(Audited) (Audited) Change
Rm Rm %
Banking operations
Retail banking 5 071 4 222 20,1
Absa Private Bank 237 178 33,1
Personal Bank 2 070 1 479 40,0
1
Absa Home Loans and
Repossessed Properties 1 288 1 086 18,6
Absa Card 706 700 0,9
Absa Vehicle and Asset 770 779 (1,2)
Finance
Absa Corporate and Business 1 922 1 384 38,9
Bank
Absa Capital 1 733 1 115 55,4
African operations 2 103 77 33,8
Corporate centre 3 (3) 203 >(100,0)
Capital and funding centre 59 131 (55,0)
Total banking 8 885 7 132 24,6
Bancassurance 1 502 1 500 0,1
Total earnings from business 10 387 8 632 20,3
areas
Synergy costs (after tax) 4 (479) (454) (5,5)
Minority interest - preference (313) (73) >(100,0)
shares
Profit attributable to
ordinary equity holders 9 595 8 105 18,4
Headline earnings adjustments (182) (233) 21,9
Total headline earnings 9 413 7 872 19,6
REVENUE CONTRIBUTION BY BUSINESS AREA
Year ended
31 December
2007 2006*
(Audited) (Audited) Change
Rm Rm %
Banking operations
Retail banking 21 899 18 273 19,8
Absa Private Bank 1 403 1 208 16,1
Personal Bank 1 11 025 8 951 23,2
Absa Home Loans and
Repossessed Properties 3 893 3 170 22,8
Absa Card 2 466 2 134 15,6
Absa Vehicle and Asset 3 112 2 810 10,7
Finance
Absa Corporate and Business 6 152 5 168 19,0
Bank
Absa Capital 3 810 2 519 51,3
African operations 789 592 33,3
Corporate centre 3 (337) 57 >(100,0)
Capital and funding centre 103 184 (44,0)
Total banking 32 416 26 793 21,0
Bancassurance 3 202 3 113 2,9
Total revenue 35 618 29 906 19,1
NOTES
1. Personal Bank includes the results of Digital Banking, Micro Lending,
Personal Bank Ventures and Alliances, Small Business, Telephone Banking and
Entry Level Banking.
2. To provide comparability, the equity accounted earnings of Capricorn
Investment Holdings, which was sold in 2006, has been moved to Corporate
centre.
3. In the prior year Corporate centre included the gains on disposal of
Bankhaus Wolbern, Capricorn, AST and JSE shares.
4. Synergies relate to the integration of Absa and Barclays following the
acquisition by Barclays of a majority share in Absa. Synergy costs are one-
off costs incurred in achieving synergy benefits.
* The comparative period has been restated for:
Migration of clients from Private Bank to Personal Bank in the current
year.
- AllPay Consolidated Investment Holdings (Proprietary) Limited was
moved from Corporate centre to Retail banking during the year under
review.
- Absa Development Company Holdings (Proprietary) Limited was moved from
Corporate centre to Absa Corporate and Business Bank during the year
under review.
RECLASSIFICATIONS
GROUP BALANCE SHEET - 31 DECEMBER 2006
Reclassification of certain assets and liabilities.
31 31
December December
2006 2006
(Audited) (Audited)
(As
previousl Reclassi-
y
Rm Commentar reported) fications (Restated
y )
Assets
Cash, cash balances and 16 461 16 461
balances with central banks -
Statutory liquid asset
portfolio 20 829 - 20 829
Loans and advances to banks 21 800 - 21 800
Trading assets 1 17 983 31 18 014
Hedging assets 1 676 (31) 645
Other assets 12 175 - 12 175
Current tax assets 24 - 24
Loans and advances to 2&3 386 174 (12 349) 373 825
customers
Reinsurance assets 390 - 390
Deferred tax assets 129 - 129
Investments 2&3 13 798 12 349 26 147
Investments in associated
undertakings and joint 693 - 693
ventures
Intangible assets 230 - 230
Property and equipment 3 750 - 3 750
Total assets 495 112 - 495 112
Liabilities
Deposits from banks 4 35 156 (10 339) 24 817
Trading liabilities 1 23 484 641 24 125
Hedging liabilities 1 1 902 (641) 1 261
Other liabilities and sundry
provisions 5 10 746 (526) 10 220
Current tax liabilities 1 181 - 1 181
Deposits due to customers 4 368 449 (88 601) 279 848
Debt securities in issue 4 - 98 940 98 940
Deferred tax liabilities 2 537 - 2 537
Liabilities under investment
contracts 5 5 129 526 5 655
Policyholder liabilities
under 3 187 - 3 187
insurance contracts
Borrowed funds 8 420 - 8 420
Total liabilities 460 191 - 460 191
Equity
Capital and reserves
Attributable to ordinary
equity holders of the Group:
Share capital 1 338 - 1 338
Share premium 2 067 - 2 067
Other reserves 412 - 412
Retained earnings 27 876 - 27 876
31 693 - 31 693
Minority interest - ordinary
shares 236 - 236
Minority interest -
preference shares 2 992 - 2 992
Total equity 34 921 - 34 921
Total equity and liabilities 495 112 - 495 112
GROUP INCOME STATEMENT - YEAR ENDED 31 DECEMBER 2006
Reclassification of interest and investment gains on fair value through profit
and loss assets as well as IFRS 7 reclassifications.
Year ended Year ended
31 December 31 December
2006 2006
(Audited) (Audited)
(As
previously Reclassi-
Rm Commentary reported) fications (Restated)
Net interest income 2 & 6 14 941 (54) 14 887
Interest and similar 38 368 (799) 37 569
income
Interest expense and
similar charges (23 427) 745 (22 682)
Impairment losses on loans
and advances (1 573) - (1 573)
Net interest income after
impairment losses on loans
and advances 13 368 (54) 13 314
Net fee and commission 10 374 (221) 10 153
income
Fee and commission 7 & 8 10 951 296 11 247
income
Fee and commission 8 (577) (517) (1 094)
expense
Net insurance premium 2 994 - 2 994
income
Net insurance claims and
benefits paid (1 319) - (1 319)
Changes in insurance and
investment liabilities (748) - (748)
Gains and losses from
banking and trading 2 & 8 1 347 29 1 376
activities
Gains and losses from
investment activities 2 1 916 (25) 1 891
Other operating income 7 938 (266) 672
Operating income before
operating expenses 28 870 - 28 333
Operating expenditure (17 566) 537 (17 029)
Operating expenses 8 (16 620) 531 (16 089)
Non-credit related (75) (75)
impairments
Indirect taxation (871) 6 (865)
Share of retained earnings
from associated
undertakings and joint 113 - 113
ventures
Operating profit before 11 417 - 11 417
income tax
Taxation expense (3 151) - (3 151)
Profit for the year 8 266 - 8 266
Attributable to:
Ordinary equity holders
of the Group 8 105 - 8 105
Minority interest -
ordinary 88 - 88
shares
Minority interest -
preference 73 - 73
shares
8 266 - 8 266
Headline earnings 7 872 - 7 872
COMMENTARY ON THE CHANGE IN ACCOUNTING POLICY AND RECLASSIFICATIONS
Reclassifications
Trading and hedging assets and liabilities
Certain trading assets and liabilities previously aggregated with hedging assets
and liabilities have been separated.
Abacas
Abacas is a conduit vehicle within Absa Capital that buys longer-term rated
bonds and issues short-term paper. This vehicle is consolidated by the Group and
the assets were reflected under "Loans and advances to customers". This is now
classified as "Investments".
Equity and shareholder loans
Shareholder loans granted to Private Equity, Commercial Property Finance and
Incubator Fund clients have been reclassified as part of the net investment in
that entity. Previously these were shown as "Loans and advances to customers".
Debt securities in issue
Negotiable certificates of deposits and other funding paper issued were
previously reported as a sub-category of "Deposits due to customers" and
"Deposits from banks". This is disclosed on a separate line on the face of the
balance sheet, called "Debt securities in issue".
Liabilities under investment contracts
The "General Fund", a fund which Absa Life is required to consolidate under
IFRS, has been reclassified as an investment contract. The impact of this is the
liabilities to policyholders have been moved from "Other liabilities and sundry
provisions" to "Liabilities under investment contracts".
Reclassification of interest
Hedging income and expenses have been reclassified to better eliminate
mismatches.
Fees from trust and other fiduciary activities
Unit/property trust income has been reclassified from "Other operating income"
to "Fee and commission income".
Fee expenses and similar
While implementing IFRS 7, the Group adopted a policy where all fees paid
relating to either a financial instrument or fee income, should be classified as
a fee expense. Similarly any fees related to trading should be moved to "Gains
and losses from banking and trading activities".
PROFIT AND DIVIDEND ANNOUNCEMENT
Overview
The Group increased headline earnings by 19,6% to R9 413 million, compared with
headline earnings of R7 872 million for the year ended 31 December 2006, with
strong contributions from commercial and investment banking.
Headline earnings per share increased by 18,6% to 1 401,9 cents per share and
fully diluted headline earnings per share grew by 17,4% to 1 316,1 cents per
share. The dilution in headline earnings per share flows from the option rights
to obtain shares that have been issued to Batho Bonke Capital (Absa`s black
economic empowerment partner) and the Group`s share incentive schemes.
The Group recorded a return on average assets of 1,68% for the year (2006:
1,74%) and a return on equity of 27,2% (2006: 27,4%).
A final dividend of 320 cents per share has been declared, bringing the total
dividend for the year to 560 cents per ordinary share. This is up 18,4% from the
473 cents per share declared in respect of the year ended 31 December 2006 and
represents a dividend cover of 2,5 times.
The key features of the Group`s performance for 2007 include:
advances growth of 22,0%;
top-line income growth of 19,1%;
an increase in the proportion of earnings from commercial and investment
banking;
improved operational efficiency; and
an increase in retail credit impairment charges.
Operating environment
Despite mounting global uncertainties, the South African economy remained
resilient in 2007, bolstered by strong commodity prices and favourable foreign
financing. Economic growth is likely to have remained near 5% and this has
underpinned solid growth in the financial services industry. When compared with
the last three years, there have been important structural shifts in the nature
of growth during 2007, with the consumption-led impulse of recent years slowing
and investment-led growth pushing to the fore.
Absa was well positioned to leverage off this shift, as is evidenced from the
strong earnings growth posted in both commercial and investment banking.
Inflation has emerged as an important concern, with CPIX rising above the South
African Reserve Bank`s (SARB) 6% upper target in April and ending the year at
8,6%. This prompted a further 200 basis points in interest rate increases, on
top of the 200 basis points delivered during 2006. The prime rate increased to
14,5% by the end of 2007, as compared to 10,5% in May 2006. As a consequence of
higher debt servicing costs, consumer spending and credit extension have both
moderated, particularly during the second half of 2007 as credit conditions for
some households tightened further with the introduction of the National Credit
Act.
Group performance
Balance sheet
Absa`s asset base grew by 29,4% to R640,9 billion as at 31 December 2007.
Interest-bearing assets increased by 27,9% and comprise 86,4% of total assets.
Loans and advances to customers - increased by 22,0% to R456,0 billion
Loans and advances to customers increased by 22,0% to R456,0 billion, compared
with R373,8 billion as at 31 December 2006. Mortgages (including commercial
property finance (CPF)) instalment finance and credit card advances increased by
22,9%, 12,2% and 23,0% respectively over the year. However, advances growth has
started to show signs of a slowdown, owing to the impact of higher interest
rates and rising oil and food prices on consumer spending. In addition, the
subdued growth in new motor vehicle sales and continued price pressure in the
used vehicle market resulted in lower instalment finance growth. Absa Corporate
and Business Bank (ACBB) reported growth in advances of 25,3% for the year, with
particularly strong growth of 31,9% in CPF.
Net asset value - increased by 17,4% to 5 537 cents per share
Improved profitability for the year enabled the Group`s net asset value per
share (excluding the Absa Bank non-cumulative, non-redeemable preference shares)
to grow by 17,4%.
Capital to risk-weighted assets - 13,1% at 31 December 2007
On the basis of the prescribed consolidated regulatory capital requirements, the
Group`s capital stood at 13,1% of risk-weighted assets at 31 December 2007
(2006: 13,1%). The Group`s primary capital ratio was 10,1% (2006: 10,2%) and its
secondary capital ratio was 3,0% as at 31 December 2007 (2006: 2,9%).
The Group successfully implemented the Basel II Capital Accord (Basel II) on 1
January 2008. The preparation for this event required considerable time and
effort from management and the board as well as a substantial investment of just
over R300 million. The SARB played a major role in the success of this project,
and the South African banking system as a whole has taken a giant step forward
in risk management and the determination of appropriate capital levels.
The capital level of Absa Bank as an entity was not materially affected by Basel
II, but there have been substantial changes to the capital required for certain
classes of business conducted by the Bank. These changes to capital requirements
will gradually flow through to more appropriate pricing for risk.
Basel II has resulted in a moderate reduction in the capital adequacy ratios of
the Absa Group. The excess capital of insurance entities, above their respective
minimum regulatory requirements, is excluded from the qualifying capital base of
Absa Group under Basel II.
Income statement
Net interest income - increased by 26,9% to R18 890 million
Net interest income increased by 26,9% due to improved margins and growth in
major advances products. The improvement in the net interest margin stems
largely from the higher interest rate environment and greater net flows in
capital and rate-insensitive retail deposits. Funding costs increased,
reflecting higher wholesale funding levels and the reluctance of depositors to
lengthen the tenure of their deposits in a rising interest rate environment.
Credit impairments as a percentage of average advances increased by 0,13% to
0,58%
The impairment charge to the income statement increased by 54,7% to R2 433
million. While impairments of the retail operations increased sharply, the
impairment loss ratio is well within the long-term industry average. Although
consumers are under increasing pressure, impairment charges have been somewhat
curtailed by an increased focus on the collection process and the timely
revision of credit criteria. Impairments in the commercial sector have remained
low, as the impact of higher interest rates has a tendency to lag for a longer
period for these customers.
Non-interest income - increased by 11,4% to R16 728 million
Growth in non-interest income was achieved on the back of increased transaction
volumes in retail banking and ACBB as well as strong growth in Absa Capital. The
increase in transaction volumes was supported by a growth of 7,1% in the
customer base to 9 million and the deployment of additional delivery channels.
An additional 133 points of presence, 640 ATMs, 155 self-service kiosks and 148
internet kiosks were installed during 2007. As a result, net fee and commission
income, regarded as annuity income and constituting more than two thirds of non-
interest income, increased by 14,3% to R11 600 million (2006: R10 153 million).
Short-term insurance premiums grew by 21,2% and related claims increased by
23,7%. Long-term insurance premiums decreased by 9,7%, mainly as a result of the
impact of the National Credit Act, in terms of which single premiums were
changed to recurring premiums. Absa Capital made a good contribution to the
growth in non-interest income because of the strong growth in fee income in
Primary Markets, trading and private equity gains.
Cost-to-income ratio down 2% to 51,8%
Revenue growth of 19,1% exceeded cost growth and drove down the cost-to-income
ratio from the 53,8% recorded for 2006 to 51,8% for 2007. The past year has seen
a strong focus on efficiency improvement initiatives and revenue growth.
The Absa-Barclays integration programme delivered a sustainable increase in
profit before tax of R1 428 million
The objective of this programme was to improve profit before tax by R1,4 billion
by implementing best practices applied by Barclays. The Group is pleased to
report that this target was achieved by year-end, 18 months ahead of plan.
Actual sustainable synergies as at 31 December 2007 were R1 428 million,
comprising R698 million of revenue-generated synergies and R730 million in cost
savings.
African expansion
There has been limited progress made on the Group`s plan to acquire the sub-
Saharan banking operations of Barclays. This is primarily the result of the
impact on price of the rapid growth in profits of the Barclays sub-Saharan
businesses in 2006 and 2007.
The Absa board, mindful of its responsibility to act in the best interests of
all its shareholders, has concluded that it is unlikely to be able to generate
acceptable returns given the likely acquisition cost of these businesses today.
Discussions with Barclays are continuing with respect to Tanzania, where the
operations of the Group and Barclays could be combined to the satisfaction of
all stakeholders.
Recognising that the African continent offers exciting prospects, Absa will
continue to pursue opportunities beyond South Africa`s borders where the Group
is confident of acceptable returns.
Cluster performance
Retail banking - attributable earnings up by 20,1%
Attributable earnings of R5 071 million were achieved as a result of volume
growth in advances, deposits and transactions, whereas impairments were
contained to below the market average. Mortgage and credit card advances, in
particular, increased by 21,9% and 23,0% respectively. Instalment finance
advances grew by 12,2% over the year, despite the decline in the demand for new
motor vehicles and the declining values of used motor vehicles. The overall
composition of advances remained unchanged, with secured lending comprising
87,9% of the total advances book.
Transaction volumes increased by 8,2% emanating from an increase in the customer
base, improved product use and improved accessibility. The retail customer base
increased by 7,2% to 8,9 million as at 31 December 2007, compared with 8,3
million as at 31 December 2006. There was good growth in internet (20,0%) and
cell phone banking transactions (26,0%) and moderate growth in ATM transactions
(8,2%).
Net interest margins remained broadly in line with those in 2006. Margins on
deposit products widened following the increase in interest rates and the
composite asset margin was slightly better because the advances mix changed in
favour of higher-yielding advances. These benefits were countered by increased
competition and the larger proportion of wholesale funding used.
The retail impairment ratio for 2007 was 0,74%, compared with 0,49% for 2006.
Consumers are under pressure as a result of higher interest rates and increased
indebtedness. Credit criteria were strengthened early in 2007 in anticipation of
the tougher environment and this has led to a marginal reduction in market share
in some retail products. In addition, the capacity and technology of the
collections department have been upgraded to deal with the increased number of
customers that require assistance to manage their debt.
Operating expenses increased by 13,2%, mainly as a result of the continued
expansion of the delivery footprint and higher business volumes. Initiatives
were implemented to enhance efficiency, especially relating to process
streamlining.
Absa Corporate and Business Bank (ACBB) - attributable earnings up by 38,9%
ACBB increased its attributable earnings to R1 922 million from the R1 384
million achieved in 2006. This performance was driven by growth in advances,
deposits and transaction volumes. The quality of the advances book is sound, as
evidenced by an impairment loss ratio of 0,23% compared with 0,67% for 2006.
Non-interest income increased by 8,6% over the past year. Electronic banking
transaction volumes, which grew by 17,4%, underpinned the growth in non-interest
income and the commercial property finance portfolio also performed well,
contributing R318 million (14,1% of non-interest income) for the year. Cheque
accounts and corporate overdraft fees, which constitute a third of non-interest
income, grew moderately by 4,1% as customers migrated to more sophisticated
electronic channels and products.
Operating expenses grew by 14,1%, mainly owing to an increased employee
complement and the investment in upgrading expertise and skills.
Absa Capital - attributable earnings up by 55,4%
Absa Capital increased attributable earnings to R1 733 million from R1 115
million in 2006 due to a strong performance across all business units. A key
driver of this growth has been the ability to leverage off the synergies between
Barclays Capital and Absa Capital in terms of technology, operating models,
products and distribution.
The revenue of Secondary Markets grew by 95,6% in 2007, and now contributes
37,2% of Absa Capital`s revenue. Secondary Markets has become an area of
strength for Absa Capital by providing a broader product offering and increasing
the deal flow from new and existing clients.
The revenue of Primary Markets grew by 29,1% in 2007 and contributed 45,8% of
Absa Capital`s revenue for the year. Fee income, in particular, grew by 149,0%
compared with 2006. Absa Capital has invested significantly in the Primary
Markets business to enhance the team and transform the business approach
according to a client-centric model that offers comprehensive international and
local solutions. This has resulted in increased client deal flow and strong
performances in the securitisation, leveraged finance and global loans
businesses.
The business of Equity Investments and Investor Services grew by 45,0% in 2007
and contributed 17,0% of Absa Capital`s revenue for the year, with a significant
proportion of earnings attributable to the realisation of investments. Active
management of the investment portfolio has positioned Equity Investments
favourably for future growth and Investor Services continues to perform well by
deepening relationships with key mandates.
Bancassurance - attributable earnings sustained at R1 502 million
The Group`s bancassurance operations posted attributable earnings of R1 502
million for 2007 and achieved a return on equity of 37,8%. New business volume
growth underpinned a strong operational performance. However, investment income
for the benefit of shareholders declined by 22,5% as a result of a less buoyant
equity market in 2007 compared with 2006.
The Group`s short-term insurance operations increased earnings by 12,6% and
contributed 35,8% (2006: 31,8%) to the Group`s bancassurance earnings. Gross
premium income increased by 20,5%, which was primarily driven by strong growth
in personal, agricultural and commercial business. However, a high claims
experience in the motor and personal lines business, and losses on crop
insurance tempered growth.
Absa Life contributed 34,9% (2006: 39,4%) to earnings but experienced an 11,3%
decrease in earnings compared with 2006, primarily owing to the lower equity
market performance. Embedded value earnings of R543 million for 2007 represented
a return on embedded value of 21,8% (2006: 37,2%).
The Investment Management business unit grew earnings by 13,5% to contribute
15,1% (2006: 13,5%) to the earnings of the bancassurance cluster. Assets under
management and administration as at 31 December 2007 grew by R21,6 billion
(22,4%) to R118,3 billion as a result of improved inflows from retail and
institutional investors.
Fiduciary Services increased its earnings by 27,5% from 2006 owing to increased
business volumes in pension fund administration and growth in assets under
administration.
African operations - attributable earnings up by 33,8%
Total revenue for the Group`s African portfolio increased by 33,3% compared with
2006. This increase was driven by strong performances from the National Bank of
Commerce (NBC) in Tanzania, and Barclays Bank Mozambique, previously known as
Banco Austral, Sarl. Advances and deposits grew by 45,8% and 23,0% respectively.
The Group`s African operations increased their presence in their respective
markets by expanding their retail networks. Thirty branches were opened and 49
ATMs were installed during the year.
Basis of presentation and changes in accounting policies
The Absa Group`s annual financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS).
The Group adopted IFRS 7 - Financial Instruments: Disclosures and IAS 1
Presentation of Financial Statements: Capital Disclosures (amendment) during the
year ended 31 December 2007. The adoption of IFRS 7 and the amendment to IAS 1
impacted disclosures made in the financial statements. The Group also made some
reclassifications in the income statement as a result of the implementation of
IFRS 7. The adoption of the standard had no impact on the reported profits or
financial position of the Group.
The Group`s results for the year ended 31 December 2007 have been audited by the
Group`s auditors, PricewaterhouseCoopers Inc. and Ernst & Young Inc. Their audit
report is available for inspection at the Group`s registered address, 3rd floor,
Absa Towers East, 170 Main Street, Johannesburg, 2001.
Prospects
Global uncertainties will continue to impact on financial markets and the
banking environment in 2008. South Africa`s large and rising current account
deficit, in particular, leaves key financial markets exposed to the sentiment of
foreign money managers. There are new domestic challenges as well. Recent
disruptions to electricity supply, and the clear need to manage lower
electricity demand, present a major challenge to business, particularly the
energy-dependent mining and manufacturing sectors. This is likely to lead
economic growth lower, particularly in the first half of 2008. Inflation,
already high, looks likely to face further upward pressure in the near-term
before beginning a downward trajectory later in the year. However, interest
rates are expected to remain at current levels for much of the year. Household
indebtedness, coupled with the increased cost of credit, will continue to impact
on affordability, resulting in a more moderate growth in advances and may lead
to a further increase in the impairment charge.
On the other hand, record high commodity prices, particularly in precious
metals, will help offset some of the impact felt in these sectors arising from
the electricity supply problems. More generally, buoyant public and private
investment spending looks likely to continue in 2008, not only helping to
improve South Africa`s long-term growth potential but also mitigating downside
risks to economic growth in the near-term and supporting corporate and
commercial lending and investment banking activities.
The resilience of the Group will be tested in 2008. Strategies and action plans
are in place to address these challenges and opportunities going forward.
Declaration of final ordinary dividend number 43
Shareholders are advised that a dividend of 320 cents per ordinary share has
been declared on Tuesday, 19 February 2008, and is payable to shareholders
recorded in the register of members of the Group at the close of business on
Friday, 14 March 2008.
In compliance with the requirements of Strate, the electronic settlement and
custody system used by the JSE Limited, the following salient dates for the
payment of the dividend are applicable:
Last day to trade cum dividend Friday, 7 March 2008
Shares commence trading ex dividend Monday, 10 March 2008
Record date Friday, 14 March 2008
Payment of dividend Monday, 17 March 2008
Share certificates may not be dematerialised or rematerialised between Monday,
10 March 2008, and Friday, 14 March 2008, both dates inclusive.
On Monday, 17 March 2008, the dividend will be electronically transferred to the
bank accounts of certificated shareholders who use this facility. In respect of
those who do not, cheques dated 17 March 2008 will be posted on or about that
date. The accounts of those shareholders that have dematerialised their shares
(which are held at their central securities depository participant or broker)
will be credited on Monday, 17 March 2008.
On behalf of the board
Sarita Martin
Group Secretary
Johannesburg
19 February 2008
Enquiries
Jacques Schindehutte
Group Executive Director
Absa Group Limited
5th floor, Absa Towers East, 170 Main Street, Johannesburg, 2001
Tel: +2711 350 4850, Fax: +2711 350 8433
e-mail: jacquessc@absa.co.za
Eric Wasserman
Group Executive: Group Finance
Absa Group Limited
4th floor, Absa Towers East, 170 Main Street, Johannesburg, 2001
Tel: +2711 350 5887, Fax: +2711 350 6487
e-mail: ericwas@absa.co.za
Sponsor:
Merrill Lynch South Africa (Proprietary) Limited
Date: 19/02/2008 08:00:32 Produced by the JSE SENS Department.
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