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ASA
AMAGB
ASA - Absa Group - Audited Annual Financial Results For The Twelve Months
Ended 31 December 2006 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: PROFIT AND DIVIDEND ANNOUNCEMENT
AUDITED ANNUAL FINANCIAL RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2006
GROUP SALIENT FEATURES
Twelve months ended Nine
months
ended
31 December 31
December
2006 2005 2005*
(Audited) (Unaudited) Change (Audited)
(Pro forma) %
Income statement (Rm)
Headline earnings** 7 872 6 282 25,3 4 902
Profit attributable to 8 105 6 252 29,6 4 776
ordinary equity holders of
the Group
Balance sheet (Rm)
Total assets 495 112 404 561 22,4 404 561
Loans and advances to 386 174 306 856 25,8 306 856
customers
Deposits due to customers 368 449 303 945 21,2 303 945
Financial performance (%)
Return on average equity 27,4 25,6 26,5
Return on average assets 1,74 1,72 1,73
Loans-to-deposits ratio 104,8 101,0 101,0
Operating performance (%)
Net interest margin on 3,30 3,28 3,27
average
assets
Net interest margin on 3,69 3,65 3,65
average
interest-bearing assets
Impairment losses on loans 0,44 0,31
and 0,26
advances as % of average
loans and advances to
customers
Non-performing advances as % 1,3 1,8 1,8
of loans and advances to
customers
Twelve months ended Nine
months
ended
31 December 31
December
2006 2005 2005*
(Audited) (Unaudited) Change (Audited)
(Pro forma) %
Non-interest income as % of 50,9 53,8
total 52,6
operating income
Cost-to-income ratio 54,6 57,0 58,0
Effective tax rate, 27,6 31,2 31,1
excluding indirect taxation
Share statistics (million)
Number of shares in issue 672,0 666,9 666,9
Weighted average number of 666,1 658,0 662,1
shares
Weighted average diluted 703,2 684,0
number of shares 690,8
Share statistics (cents)
Headline earnings per share 1 181,8 954,8 23,8 740,4
Diluted headline earnings 1 121,3 920,3 21,8 710,9
per share
Earnings per share 1 216,8 950,3 28,1 721,4
Diluted earnings per share 1 154,4 915,9 26,0 692,7
Dividends per ordinary 473,0 n/a
share relating 295,0
to income for the
year/period
Dividend cover (times) 2,5 n/a 2,5
Net asset value per share 4 717 3 862 22,1 3 890
Tangible net asset value 4 682 3 834 22,1 3,861
per share
Capital adequacy (%)
Absa Bank 12,3 10,7 10,7
Absa Group 13,1 11,3 11,3
*The comparatives for the nine months ended 31 December 2005 have been
restated for the deconsolidation of certain cell captives, the
reclassification of certain assets and liabilities as well as the
reclassification of interest and dividends on fair value through profit and
loss assets. The comparatives have been restated throughout.
See section on "Changes in accounting policies and reclassifications".
**Excludes R73 million profit attributable to preference equity holders of the
Group.
GROUP INCOME STATEMENT
Nine months
Twelve months ended ended
31 December 31 December
2006 2005* 2005
(Audited) (Unaudited) (Audited)
(Pro forma) Change
Rm Rm % Rm
Net interest income 14 941 11 810 26,5 9 341
Interest and similar income 38 368 29 377 30,6 23 037
Interest expense and similar (23 427) (17 567) (33,4) (13,696)
charges
Impairment losses on loans (1 573) (875) (79,8) (569)
and advances
13 368 10 935 22,2 8 772
Net fee and commission 10 374 9 612 7,9 7 086
income
Fee and commission income 10 951 10 060 8,9 7 441
Fee and commission expense (577) (448) (28,8) (355)
Net insurance premium income 2 994 2 437 22,9 1 948
Net insurance claims and (1 319) (1 053) (25,3) (797)
benefits paid
Changes in insurance and
investment liabilities (748) (532) (40,6) (526)
Gains and losses from
banking and trading 1 347 1 136 18,6 855
activities
Gains and losses from
investment activities 1 916 1 584 21,0 1 259
Other operating income 938 596 57,4 548
Net operating income 28 870 24 715 16,8 19 145
Operating expenditure (17 566) (15 615) (12,5) (12 211)
Operating expenses (16 620) (14 598) (13,9) (11 433)
Impairments (75) (68) (10,3) (54)
Indirect taxation (871) (949) 8,2 (724)
Share of retained earnings
of associated undertakings 113 112 0,9 101
and joint ventures
Operating profit before 11 417 9 212 23,9 7 035
income tax
Taxation expense (3 151) (2 875) (9,6) (2 191)
Profit for the year/period 8 266 6 337 30,4 4 844
Attributable to:
Ordinary equity holders of 8 105 6 252 29,6 4 776
the Group
Minority interest - 73 - >100,0 -
preference shares
Minority interest - 88 85 (3,5) 68
ordinary shares
8 266 6 337 30,4 4 844
Headline earnings 7 872 6 282 25,3 4 902
*The comparatives for the twelve months ended 31 December 2005 have been
restated. See section on "Changes in accounting policies and
reclassifications".
DETERMINATION OF HEADLINE EARNINGS
Twelve months ended Nine
months
ended
31 December 31
December
2006 2005 2005
(Audited) (Unaudited) (Audited)
(Pro forma) Change
Rm Rm % Rm
Headline earnings is
determined
as follows:
Profit attributable to
ordinary equity holders of 8 105 6 252 29,6 4 776
the Group
Adjustments for:
Net profit on disposal of
property and equipment (11) (17) 35,3 (18)
Net (profit)/loss on
disposal of available-for-
sale assets and strategic (231) 19 >(100,0) 130
investments
Impairment costs 9 28 (67,9) 14
Associated undertakings and
joint ventures 10 - >100,0 -
Available-for-sale assets and
strategic investments (5) 14 >(100,0) 14
Goodwill impaired - 14 (100,0) -
Property and equipment 4 - >100,0 -
Headline earnings 7 872 6 282 25,3 4 902
GROUP BALANCE SHEET
31 December
2006 2005
(Audited) (Audited) Change
Rm Rm %
Assets
Cash, cash balances and 16 461 15 036 9,5
balances
with central banks
Statutory liquid asset 20 829 16 289 27,9
portfolio
Loans and advances to banks 21 800 20 805 4,8
Trading assets 17 983 23 450 (23,3)
Hedging assets 676 396 70,7
Loans and advances to 386 174 306 856 25,8
customers
Reinsurance assets 390 423 (7,8)
Other assets 12 175 6 762 80,1
Investments 13 798 9 904 39,3
Investments in associated
undertakings and joint 693 895 (22,6)
ventures
Intangible assets 230 191 20,4
Property and equipment 3 750 3 451 8,7
Current tax assets 24 17 41,2
Deferred tax assets 129 86 50,0
Total assets 495 112 404 561 22,4
Liabilities
Deposits from banks 35 156 25 745 36,6
Trading liabilities 23 484 20 915 12,3
Hedging liabilities 1 902 486 >100,0
Deposits due to customers 368 449 303 945 21,2
Current tax liabilities 1 181 417 >100,0
Liabilities under investment
contracts 5 129 3 459 48,3
Policyholder liabilities
under 3 187 2 736 16,5
insurance contracts
Borrowed funds 8 420 6 483 29,9
Other liabilities and sundry
provisions 10 746 11 812 (9,0)
Deferred tax liabilities 2 537 2 562 (1,0)
Total liabilities 460 191 378 560 21,6
Equity
Capital and reserves
Attributable to ordinary
equity holders:
Share capital 1 338 1 327 0,8
Share premium 2 067 1 875 10,2
Other reserves 412 622 (33,8)
Distributable reserves 27 876 21 931 27,1
31 693 25 755 23,1
Minority interest - 2 992 - >100,0
preference shares
Minority interest - ordinary 236 246 (4,1)
shares
Total equity 34 921 26 001 34,3
Total equity and liabilities 495 112 404 561 22,4
Contingent liabilities -
banking related 11 771 16 331 (27,9)
GROUP STATEMENT OF CHANGES IN EQUITY
31 December
2006 2005*
(Audited) (Audited) Change
Share capital 1 338 1 327 0,8
Opening balance 1 327 1 310 1,3
Prospective IFRS adjustment -
treasury shares Absa Life - (2) 100,0
Limited
Shares issued 10 24 (58,3)
Transfer from share-based
payments reserve 0 - >100,0
Share buy-back in respect of
Absa Group Limited Share 0 - >100,0
Incentive Trust
Elimination of treasury shares
held by Absa Life Limited 0 1 (100,0)
Elimination of treasury shares
held by Absa Group Limited
Share Incentive Trust 1 (6) >100,0
Share premium 2 067 1 875 10,2
Opening balance 1 875 1 611 16,4
Prospective IFRS adjustment -
treasury shares Absa Life - (40) 100.0
Limited
Shares issued 170 382 (55,5)
Transfer from share-based
payments reserve 23 - >100,0
Share buy-back in respect of
Absa Group Limited Share
Incentive Trust (17) - >(100,0)
Elimination of treasury shares
held by Absa Life Limited 12 13 (7,7)
Elimination of treasury shares
held by Absa Group Limited
Share Incentive Trust 4 (91) >100,0
Other reserves 412 622 (33,8)
Opening balance 622 383 62,4
Movement in foreign currency
translation reserve 332 (130) >100,0
Movement in regulatory general
credit risk reserve 46 - >100,0
Movement in available-for-sale
reserve 58 90 (35,6)
Movement in cash flow hedges (485) 97 >(100,0)
reserve
Movement in insurance statutory
reserve 38 11 >100,0
Movement in associated
undertakings and joint
ventures` retained earnings 113 101 11,9
reserve
Disposal of associated
undertakings and joint ventures
- release of reserves (374) - >(100,0)
Transfer from share-based
payments reserve (23) - >(100,0)
Share-based payments for the
year/period 85 70 21,4
Distributable reserves 27 876 21 931 27,1
Opening balance 21 931 19 969 9,8
IFRS adjustments applied
prospectively - (301) 100.0
Subsidiary step-up (43) - >(100,0)
acquisitions
Transfer to regulatory general
credit risk reserve (46) - >(100,0)
Transfer to insurance
statutory reserve (38) (11) >(100,0)
Transfer to associated
undertakings and joint
ventures` retained earnings (113) (101) (11,9)
reserve
Disposal of associated
undertakings and joint ventures
- release of reserves 374 - >100,0
Profit attributable to
ordinary equity holders 8 105 4 776 n/a
Dividends paid during the
year/period (2 294) (2 401) 4,5
31 693 25 755 23,1
Minority interest - preference 2 992 - >100,0
shares
Opening balance - - -
Shares issued 3 000 - >100,0
Costs incurred (8) - >(100,0)
Profit attributable to 73 - >100,0
preference equity holders
Dividends paid during the (73) - >(100,0)
year/period
Minority interest - ordinary 236 246 (4,1)
shares
Opening balance 246 232 6,0
Disposals (40) - >(100,0)
Other reserve movements (58) (54) (7,4)
Minority share of profit 88 68 n/a
Total equity 34 921 26 001 34,3
*Relating to the nine months ended 31 December 2005.
GROUP CASH FLOW STATEMENT
Twelve Nine
months months
ended ended
31 December
2006 2005
(Audited) (Audited) Change
Rm Rm %
Net cash flow (utilised (4 016) 940
in)/from operating activities >(100,0)
Net cash flow (utilised
in)/from investing activities (2 342) 1 976 >(100.0)
Net cash from/(utilised in)
financing activities 2 799 (1 370) >100,0
Net (decrease)/increase in cash
and cash equivalents (3 559) 1 546 >(100,0)
Cash and cash equivalents at
the 8 343 6 796 22,8
beginning of the year/period
Effects of exchange rate
changes on cash on cash 3 1 >100,0
equivalents
Cash and cash equivalents at
the end of the year/period 4 787 8 343 (42,6)
PROFIT CONTRIBUTION BY BUSINESS AREA
Nine
Twelve months ended months
ended
31 December 31
December
2006 2005 2005
(Audited) (Unaudited) (Audited)
(Pro forma) Change
Rm Rm % Rm
Banking operations
Retail banking 4 166 3 161 31,8 2 666
Absa Private Bank 260 191 36,1 153
Retail Banking Services 1 341 984 36,3 805
Absa Home Loans and 1 086 849 27,9 793
Repossessed
Properties
Absa Card 700 480 45,8 385
Absa Vehicle and Asset
Finance (AVAF) 779 657 18,6 530
Absa Corporate and 1 282 938 36,7 845
Business Bank
Absa Capital 1 115 764 45,9 491
African operations 127 102 24,5 90
Corporate centre 311 183 69,9 (109)
Capital and funding centre 131 (23) >100,0 (29)
Total banking 7 132 5 125 39,2 3 954
Bancassurance 1 500 1 397 7,4 1 092
Costs relating to the
Barclays transaction - (120) 100,0 (120)
Total earnings from
business areas 8 632 6 402 34,8 4 926
Synergy costs (after tax) (454) (150) >(100,0) (150)
Minority interest -
preference shares (73) - >(100,0) -
Profit attributable to
ordinary equity holders 8 105 6 252 29,6 4 776
Headline earnings (233) 30 >(100,0) 126
adjustments
Total headline earnings 7 872 6 282 25,3 4 902
CHANGES IN ACCOUNTING POLICIES AND RECLASSIFICATIONS
GROUP BALANCE SHEET
31 31 December
December
2005 2005
(As Accou-
previously nting Reclassi
policy
Rm Commentary reported) changes fications (Restated)
Assets
Cash, cash 1 15 043 (7) 15 036
balances and -
balances with
central banks
Statutory
liquid asset 16 289 - - 16 289
portfolio
Loans and 1 & 2 4 602 1 16 202 20 805
advances to
banks
Trading assets 3 22 830 - 620 23 450
Hedging 3 1 016 - (620) 396
derivative
assets
Loans and 2 & 4 322 097 - (15 241) 306 856
advances to
customers
Reinsurance 423 - - 423
assets
Other assets 6 762 - - 6 762
Investments 1 12 759 (2 855) - 9 904
Investments in
associated 895 - - 895
undertakings
and joint
ventures
Intangible 191 - - 191
assets
Property and 3 451 - - 3 451
equipment
Current tax 17 - - 17
assets
Deferred tax 86 - - 86
assets
Client
liabilities 4 961 - (961) -
under
acceptances
Total assets 407 422 (2 861) - 404 561
Liabilities
Deposits from 2 28 431 - (2 686) 25 745
banks
Trading 3 19 397 - 1 518 20 915
liabilities
Hedging 3 2 004 - (1 518) 486
derivative
liabilities
Deposits due 2 & 4 300 298 - 3 647 303 945
to customers
Current tax 1 438 (21) - 417
liabilities
Liabilities
under 1 6 287 (2 828) - 3 459
investment
contracts
Policyholder
liabilities 2 736 - - 2 736
under
insurance
contracts
Borrowed funds 6 483 - - 6 483
Other
liabilities and 1 11 824 (12) - 11 812
sundry
Provisions
Deferred tax 2 562 - - 2 562
liabilities
Liabilities to
clients under 4 961 - (961) -
acceptances
Total 381 421 (2 861) - 378 560
liabilities
Equity
Capital and
reserves
Attributable to
ordinary equity
holders:
Share capital 1 327 - - 1 327
Share premium 1 875 - - 1 875
Other reserves 622 - - 622
Distributable 21 931 - - 21 931
reserves
25 755 - - 25 755
Minority
interest - 246 - - 246
ordinary shares
Total equity 26 001 - - 26 001
Total equity 407 422 (2 861) - 404 561
and liabilities
GROUP INCOME STATEMENT
TWELVE MONTHS
Twelve Twelve
months months
ended ended
31 December 31 December
2005 2005
(Unaudited) (Unaudited)
(Pro forma) (Pro forma)
(As Accounting
previously policy Reclassi-
Rm Commentary reported) changes fications (Restated)
Net interest 5 12 154 - (344) 11 810
income
Interest and 28 704 - 673 29 377
similar income
Interest (16 550) - (1 017) (17 567)
expense and
similar charges
Impairment (875) - - (875)
losses on loans
and advances
11 279 - (344) 10 935
Net fee and 9 592 20 - 9 612
commission
income
Fee and 1 & 7 10 458 20 (418) 10 060
commission
income
Fee and 7 (866) - 418 (448)
commission
expense
Net insurance 2 437 - - 2 437
premium income
Net insurance (1 053) - - (1 053)
claims and
benefits paid
Changes in
insurance and 1 (1 017) 485 - (532)
investment
liabilities
Gains and
losses from 5 & 6 1 055 - 81 1 136
banking and
trading
activities
Gains and
losses from 1 & 5 & 6 1 591 (510) 503 1 584
investment
activities
Other operating 6 836 - (240) 596
income
Net operating 24 720 (5) - 24 715
income
Operating (15 622) 7 - (15 615)
expenditure
Operating 1 & 4 (14 604) 6 - (14 598)
expenses
Impairments (68) - - (68)
Indirect (950) 1 - (949)
taxation
Share of
retained
earnings of 112 - - 112
associated
undertakings
and joint
ventures
Operating
profit before 9 210 2 - 9 212
income tax
Taxation 1 (2 873) (2) - (2 875)
expense
Profit for the 6 337 - - 6 337
year/period
Attributable
to:
Ordinary
equity holders 6 252 - - 6 252
of the Group
Minority 85 - - 85
interest -
ordinary
shares
6 337 - - 6 337
Headline 6 282 - - 6 282
earnings
GROUP INCOME STATEMENT
NINE MONTHS
Nine Nine
months months
ended ended
31 31
December December
2005 2005
(Audited) (Audited)
(As Accounting
previously policy Reclassi-
Rm Commentary reported) changes fications (Restated)
Net interest 5 9 647 - (306) 9 341
income
Interest and 23 212 - (175) 23 037
similar income
Interest (13 565) - (131) (13 696)
expense and
similar charges
Impairment (569) - - (569)
losses on loans
and advances
9 078 - (306) 8 772
Net fee and 7 067 19 - 7 086
commission
income
Fee and 1 & 7 7 750 19 (328) 7 441
commission
income
Fee and 7 (683) - 328 (355)
commission
expense
Net insurance 1 948 - - 1 948
premium income
Net insurance (797) - - (797)
claims and
benefits paid
Changes in
insurance and 1 (1 026) 499 1 (526)
investment
liabilities
Gains and
losses from 5 & 6 781 - 74 855
banking and
trading
activities
Gains and
losses from 1 & 5 & 6 1 336 (519) 442 1 259
investment
activities
Other operating 6 759 - (211) 548
income
Net operating 19 146 (1) - 19 145
income
Operating (12 216) 5 - (12 211)
expenditure
Operating 1 & 4 (11 438) 5 - (11 433)
expenses
Impairments (54) - - (54)
Indirect (724) - - (724)
taxation
Share of
retained 101 - - 101
earnings of
associated
undertakings
and joint
ventures
Operating 7 031 4 - 7 035
profit before
income tax
Taxation 1 (2 187) (4) - (2 191)
expense
Profit for the 4 844 - - 4 844
year/period
Attributable
to:
Ordinary 4 776 - - 4 776
equity holders
of the Group
Minority 68 - - 68
interest -
ordinary
shares
4 844 - - 4 844
Headline 4 902 - - 4 902
earnings
COMMENTARY ON THE CHANGES IN ACCOUNTING POLICIES AND RECLASSIFICATIONS
Accounting policy changes
1. Deconsolidation of certain cell captives
The financial statements for the period ended 31 December 2005 included all
the assets of the investment and insurance cells recognised as financial
assets, and a liability equal to the amount of the assets was recognised in
favour of the cell owner.
Where the cell is created for a linked investment product, the inclusion of
assets and liabilities is no longer considered to be appropriate. This results
in a reduction in both the assets and liabilities at 31 December 2005. From an
income statement perspective only the fee received by the Group is now
reflected.
Where the cell captive has been established for third party insurance
purposes, a policy is issued by the Group. The policyholder therefore has a
claim against the Group who will in turn recover amounts from the cell
established and hence, consolidation remains appropriate.
Reclassifications
2. Change in banks/non-banks advances and deposits split
The financial statements for the period ended 31 December 2005 classified
wholesale funding with banks as part of balances with customers. The Group has
reclassified this funding as part of balances with banks.
3. Reclassification of non qualifying hedges
The financial statements for the period ended 31 December 2005 classified non
qualifying assets and liability hedges as hedging assets or liabilities. The
Group has reclassified these as trading assets or liabilities.
4. Clients liabilities under acceptances
The financial statements for the period ended 31 December 2005 disclosed
client liabilities under acceptances separately on the face of the balance
sheet. The Group has now included them as part of loans and advances
to/deposits from customers as they are of a similar nature.
5. Reclassification of interest
The financial statements for the period ended 31 December 2005 classified
interest on investments held at fair value through profit and loss in net
interest income. The Group has reclassified this interest and now discloses it
under gains and losses from banking and trading/investment activities.
6. Reclassification of dividend income
The financial statements for the period ended 31 December 2005 classified
dividends on non trading activities as part of other income. The Group has
reclassified these to gains and losses from banking and trading/investment
activities.
7. Fee and commission received/paid
The financial statements for the period ended 31 December 2005 grossed up
commission received in an agency capacity. The Group has now netted these
amounts to better reflect the financial position.
PROFIT AND DIVIDEND ANNOUNCEMENT
Introduction
This announcement deals with the consolidated annual financial results of the
Absa Group, its wholly owned subsidiaries, Absa Bank Limited (Absa Bank or the
Bank), Absa Financial Services Limited (Absa Financial Services) and its
holdings in other subsidiary and associated companies for the twelve months
ended 31 December 2006.
As a result of the change in the Group`s year-end from March to December, the
previous audited financial results for the Group were for the nine months
ended 31 December 2005. To facilitate evaluation and interpretation, the
financial results for the period under review are compared in the commentary
and tables with the unaudited pro forma financial results for the twelve
months ended 31 December 2005.
Financial performance
Absa delivered strong headline earnings growth for the twelve months ended 31
December 2006. Headline earnings for the period under review increased by
25,3% to R7 872 million compared with pro forma headline earnings of R6 282
million for the corresponding twelve-month period of the previous year.
Attributable earnings for the year under review increased by 29,6%.
All of the Group`s banking businesses delivered very strong growth in
attributable earnings. The retail, corporate, business and investment banking
clusters benefited from a buoyant operating environment and the earnings
uplift was assisted by the Barclays/Absa integration benefits. The
bancassurance cluster achieved good operational results, but attributable
earnings growth was modest.
Headline earnings per share increased by 23,8%, from 954,8 cents per share for
the pro forma twelve months ended 31 December 2005 to 1 181,8 cents per share
for the year under review. The Group delivered a return of 27,4% on average
shareholders` equity (twelve months ended 31 December 2005: 25,6%).
Fully diluted headline earnings per share amounted to 1 121,3 cents. This is
an increase of 21,8% compared with the same period of the previous year and
includes a dilution of 5,1% or 60,5 cents per share. This dilution flows from
the increase in the value of the options issued to Batho Bonke Capital
(Proprietary) Limited (Absa`s black economic empowerment partner), the Absa
Group Limited Share Incentive Trust and the Absa Group Limited Employee Share
Ownership Administrative Trust (the trust established to facilitate Absa`s
employee share ownership programme).
A final dividend of 265 cents per share has been declared, bringing the total
dividend for the twelve months ended 31 December 2006 to 473 cents per share
representing a dividend cover of 2,5 times.
Operating environment
The South African economy continued to expand, with real growth for 2006
estimated to be in the region of 4,9% compared with the 5,1% for 2005. Most
sectors experienced very good growth. The secondary sector was supported by
buoyant manufacturing and construction activity. Strong consumer spending and
a positive business climate supported the tertiary sector. The primary sector
continued its lacklustre performance despite the commodities boom and strong
consumer demand conditions. The challenges in the gold mining sector
continued, resulting in lower gold production, and agricultural output was
negatively impacted by a smaller maize crop.
A household debt level of 73% of disposable income was recorded by the third
quarter of 2006. Consumers` appetite for credit remained firm and private
sector credit growth edged upwards to over 27% year-on-year in the final
quarter of 2006.
Strong consumer spending in the first half of 2006 gradually made way for a
levelling-off in spending growth rates in the last quarter of the year, with
activity in real estate, new vehicle sales and financial services tapering
off. The South African monetary authorities have responded to the high demand
for credit, rising inflation, strong consumer demand and the widening current
account deficit by increasing interest rates by 200 basis points since June
2006.
Group performance
Net interest income - increased by 26,5%
The Group`s net interest income grew strongly from R11 810 million for the pro
forma twelve months ended 31 December 2005 to R14 941 million for the twelve
months ended 31 December 2006.
Loans and advances to customers increased by 25,8% from 31 December 2005. The
growth in advances was largely supported by high growth in mortgages, credit
cards and commercial property finance.
The Group recorded a net interest margin in respect of average assets of 3,30%
for the period under review (twelve months to 31 December 2005: 3,28%). The
interest margin has remained relatively stable as a result of the benefit of
prime rate increases and preference shares issued by Absa Bank, which was
offset by a greater reliance on wholesale funding and competitive pressure on
lending rates.
Impairment charge - increased by 79,8%
As expected, the impairment charge (R1 573 million) continued its move to more
normalised levels and was substantially higher than the R875 million recorded
for the corresponding period in 2005. The Group`s impairment ratio (income
statement charge as a percentage of average advances) for the current period
was 0,44% compared with the 0,31% achieved for the twelve months ended 31
December 2005. The higher interest rates and an increase in delinquencies in
the main consumer debt products impacted on the loss ratio. Furthermore, an
increase in provisions to cater for the expected lower recoveries embedded in
the Group`s advances book as a result of the National Credit Act (NCA) also
contributed to the higher loss ratio.
Non-interest income - increased by 12,5%
Non-interest income constituted approximately 50% of total operating income.
The solid growth was achieved on the back of increased transaction volumes,
strong growth in insurance related earnings and gains from the sale of a
number of strategic investments. The reported growth of total fees and
commission income was a modest 8,9%, largely as a result of the loss of fees
from the international operations that were sold or closed. Credit card
transaction fees increased by 23,6% and fees for both cheque accounts and
electronic banking were up 13%.
Insurance related income benefited from a 22,9% rise in net insurance premiums
received and the sale of strategic investments assisted in lifting gains from
investments by 21,0%.
Operating expenditure - increased by 13,9%
The favourable income growth of 19,0% outpaced operating expenditure growth by
5,1 percentage points. This led to a reduced cost-to-income ratio of 54,6%,
which compares favourably with the previous year`s ratio of 57,0%. The growth
in operating expenditure resulted from increased investment in the business in
order to facilitate the continued growth in volumes and customers. The growth
in operating expenditure is also attributable to an increase in the Group`s
employee complement, which increased by 1 611 to 35 154, above-inflation
salary increases and higher incentive payments following the excellent
performance of the Group. The investment in new delivery channels and new
business initiatives, including the launch of Virgin Money and Barclays
integration activities, also drove up costs.
Barclays integration programme
The Group has made excellent progress with initiatives to improve earnings by
implementing, where appropriate, the best practices applied by Barclays. As
previously communicated, the sustainable profit before tax earnings benefit
that the Group aims to derive four years from the date of acquisition by
Barclays of its controlling stake in the Absa Group amounts to R1,4 billion
per annum.
In the year under review, sustainable profit before tax benefits of R753
million were realised. This is well ahead of the 2006 target of R300 million.
The one-off cost of R640 million incurred to achieve this benefit was in line
with expectations. The board remains confident that the targets previously
communicated to the market will be achieved.
At the time that Barclays acquired its controlling stake in Absa in 2005, Absa
and Barclays expressed their intention to combine the other sub-Saharan
African Barclays operations with Absa with a view to creating the pre-eminent
African banking group. As a first step, Absa acquired Barclays South African
operations as at 1 January 2006, which contributed positively to earnings. The
overall objective continues to be strategically attractive and remains the
intention of both Barclays and Absa. However, concluding such a transaction
will take some time owing to the complexities and number of individual
businesses involved.
Business unit performance
Retail banking - attributable earnings up 31,8%
The attributable earnings of R4 166 million were achieved as a result of good
performances from Absa Private Bank, Retail Banking Services and Absa Card,
which reported earnings growth of 36,1%, 36,3% and 45,8% respectively. The
Group`s retail banking operations recorded strong advances growth of 27,9% for
the year. This enabled this cluster to maintain its market share in most
products and achieve a healthy gain in market share in credit card advances.
Mortgage advances, where the Group has retained a leadership position
increased by 29,8% and credit card advances grew by 61,3%. Although strong
growth was recorded in unsecured lending products, secured lending represented
86,9% of total retail advances.
Solid retail deposit growth of 15,0% was recorded on the back of growth in
savings, transmission and current accounts. Interest margins declined
somewhat, mainly owing to a slight change in the advances composition,
competitive pressures and a continued shift in the funding mix.
Strong growth in transaction volumes, which emanated from the increased
activities of existing and new customers, resulted in non-interest income
growth of 22,0%. The retail customer base increased by 9,5% to 8,3 million as
at December 2006. Volumes in the branch network grew moderately. Good growth
was experienced in automated teller machine (ATM), internet and cell phone
banking transactions.
The retail impairment ratio for the period was 0,48% compared with the 0,28%
of the previous twelve-month period. The higher impairment charge follows the
increases in the prime interest rate and additional provisions that were
raised in preparation for the impact of a more complex collections process
under the NCA. The good progress that was made with the collection of the
UniFer Holdings Limited (UniFer) book resulted in a provision release of R120
million.
Operating expenditure increased by 16,1%, mainly as a result of the expansion
of the delivery footprint and increased business volumes. During the period
under review, 31 staffed outlets were opened, predominantly in previously
disadvantaged areas, and an additional 1 218 ATMs were added. In addition a
further 37 outlets were upgraded and 208 internet kiosks and 114 self-service
kiosks were put in service.
Absa Corporate and Business Bank - attributable earnings up 36,7%
Absa Corporate and Business Bank increased its attributable earnings to R1 282
million from the R938 million of the previous year. This performance was
driven by strong growth in advances, deposits and transaction volumes. Listed
commercial property finance investments also performed very well.
The advances margin came under increased pressure as a result of heightened
competition. The quality of the advances book improved further, as evidenced
by an impairment loss ratio of 0,67% compared with the 0,90% of the previous
year.
During the year under review, the emphasis fell on implementing a new value
aligned performance measurement tool that assists relationship managers to
enhance customer profitability. This period also saw the introduction of a new
operating model in Medium Business and the incorporation of Absa`s corporate
segment into the business bank cluster.
Absa Capital - attributable earnings up 45,9%
Absa Capital increased attributable earnings to R1 115 million to elevate its
contribution to the Group`s earnings to 13,8%. This was largely as a result of
increased customer flows following the launch of Absa Capital during the
period under review. Absa Capital has been refocused into three business
units: Primary Markets, Secondary Markets, and Investor Services and Equity
Investments. As a result, certain customers and products were migrated to Absa
Corporate and Business Bank during 2006.
Primary Markets contributed 53% of Absa Capital`s revenue for the period under
review. Growth in this business was achieved as a result of an enhanced value
proposition, enabled through a comprehensive and holistic international and
local solutions approach, which in turn led to an increased customer deal
flow.
Investor Services and Equity Investments, which accounted for 17% of total
revenue, achieved strong growth by actively managing the investment portfolio
and positioning the portfolio for future expansion.
Secondary Markets, which increased revenues throughout the period under
review, accounted for 30% of total revenue. Better risk management, additions
to product depth and breadth and increased customer flows supported this
growth.
African operations - attributable earnings up 24,5%
The increase to R127 million in the earnings from investments in banks in
other African states was largely driven by a good operational performance from
the National Bank of Commerce (NBC - Tanzania), which recorded sound advances,
deposit and transaction growth over the past year.
Banco Austral, Sarl (Mozambique) increased its asset yields and experienced
higher transaction volumes, but had higher than normal credit losses in
commodity finance, and posted a decline in earnings as a result.
Bancassurance - attributable earnings up 7,4%
Absa`s bancassurance operations posted attributable earnings of R1 500 million
for the year under review. The life assurance operations contributed 39,4%, of
this following a particularly strong operational performance in 2006. A
revision of future claims assumptions following, inter alia, the application
of new Aids mortality statistics, boosted earnings for the year. The embedded
value of new business, particularly in respect of the credit life business
across all banking products, was up 68,6% to R263 million for the period under
review. The embedded value of the life business increased by 21,5% to R2 486
million for the twelve months ended 31 December 2006 (twelve months ended 31
December 2005: R2 046 million), yielding a return on embedded value of 37,2%.
The domestic short-term insurance operations increased premiums by 21% but the
claims experience for the motor and personal lines business deteriorated in
line with that of the industry.
Following a year of buoyant equity markets, investment income again
outperformed expectations, but not to the extent achieved in 2005 owing to
hedges put in place to protect the Group`s earnings against volatility in
equity markets. This together with the higher claims experience in the short-
term insurance operations resulted in the modest attributable earnings growth
of 7,4%.
Investment management operations reported strong growth in assets under
management and administration. These grew by R18,1 billion to R99,1 billion
for the twelve months under review. The Group is progressing well with its
strategy of becoming a more significant participant in this market.
Non-recurring items
The Group`s earnings for the year under review were bolstered by a number of
non-recurring items amounting to R315 million. Market commentators should take
this into account when estimating the future earnings of the Group.
Basis of presentation and changes in accounting policies
Absa Group`s annual financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS).
The transition to IFRS in the prior year caused significant change. This
altered the measurement and recognition of certain items having an impact on
the disclosure in the financial statements. Over the past year, there have
been refinements to interpretations in the application of the IFRS standards.
One such interpretation relates to the treatment of insurance cell captives.
Previously, all cell captives operated by the Group were consolidated,
resulting in the assets of the cells being recognised with a corresponding
liability equal to the amount of the asset in favour of the cell owner. In
terms of the current interpretation, cell arrangements in relation to linked
investment products will no longer be consolidated. The comparative
information has been restated accordingly.
This restatement has resulted in the balance sheet for the period ending 31
December 2005 reducing by R2,9 billion. There is no impact on the attributable
or headline earnings of the Group.
The Group has changed its accounting policy to recognise actuarial gains and
losses in accordance with the "corridor method" allowed under IAS 19 -
Employee Benefits. This change was prompted by the fact that the pension funds
of the various African subsidiaries are consolidated. Management is of the
view that this change results in more reliable and relevant information in
relation to the underlying operations of those entities. The result of this
change is immaterial at a Group level. Consequently, comparative information
has not been restated.
The Group`s results for the twelve months ended 31 December 2006 have been
audited by the Group`s auditors, Ernst & Young Registered Auditors Inc. and
PricewaterhouseCoopers Inc. Their audit report is available for inspection at
the Group`s registered address, 3rd floor, Absa Towers East, 170 Main Street,
Johannesburg, 2001.
Net asset value and capital adequacy
As a result of the Group`s strong operational performance, the net asset value
of Absa Group (excluding the Absa Bank non-cumulative, non-redeemable
preference shares) increased by 22,1% from 3 862 cents per share at 31
December 2005 to 4 717 cents per share at 31 December 2006.
During the period under review, Absa Bank issued a tier II bond (AB06). The
principal amount of the bond was R2 billion, with a final maturity date of 27
March 2020. The issue spread for the bond was 68,5 basis points above the R157
government bond. Absa Bank also issued R3 billion in non-cumulative, non-
redeemable preference shares during the period under review. These preference
shares were issued with a coupon rate of 63% of the prime overdraft lending
rate and were listed on the JSE Limited on 25 April 2006.
In February 2006, the Absa Group board authorised a R20 billion securitisation
programme for Absa Bank. In September 2006, Absa Bank entered the first series
of the programme by securitising R2 billion of its vehicle finance receivables
portfolio.
During the twelve months ended 31 December 2006, Absa Bank`s risk-weighted
assets increased by 23,6%. This was lower than the 24,5% increase in total
assets experienced by Absa Bank. This trend is expected to continue as the
bank increases its focus on balance sheet optimisation and capital efficiency.
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 2006
(31 December 2005: 11,3%). The Group`s primary capital ratio was 10,1% (31
December 2005: 8,6%) and its secondary capital ratio was 3,0% as at 31
December 2006 (31 December 2005: 2,7%).
Prospects
The domestic economic landscape is expected to remain favourable, but
inflationary pressures are expected to continue in 2007 with the CPIX
inflation rate likely to test the 6% upper limit of the target range. Under
such conditions, the South African Reserve Bank is expected to continue its
tight monetary policy during the early part of 2007. Real economic growth of
around 4,5% is expected in 2007.
Increasing household indebtedness, tighter monetary conditions, the NCA and
other legislative changes are expected to result in pressure on earnings
growth as a result of lower credit and transaction volume growth and a higher
impairment charge.
Absa is well positioned to benefit from the expected acceleration in fixed
investment spending and to deal successfully with the anticipated slowdown in
household consumption. The Group will continue in its relentless pursuit of
its strategic objectives, which are designed to position it to capitalise on
opportunities that arise.
On behalf of the board
D C Cronje S F Booysen
Chairman Group chief executive
20 February 2007
Declaration of final ordinary dividend number 41
Shareholders are advised that a dividend of 265 cents per ordinary share is
declared on Tuesday, 20 February 2007, and is payable to shareholders recorded
in the register of members of the Group at the close of business on Friday, 16
March 2007.
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, 9 March 2007
Shares commence trading ex dividend Monday, 12 March 2007
Record date Friday, 16 March 2007
Payment of dividend Monday, 19 March 2007
Share certificates may not be dematerialised or rematerialised between Monday,
12 March 2007, and Friday, 16 March 2007, both dates inclusive.
On Monday, 19 March 2007, 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 19 March 2007 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, 19 March 2007.
The announcement of the annual financial results of Absa Bank, which has been
released simultaneously with this announcement, contains the relevant
information regarding the dividend for the Absa Bank non-cumulative, non-
redeemable preference shares.
On behalf of the board
W R Somerville
Group secretary
20 February 2007
Enquiries
Jacques Schindehutte
Group executive director
Absa Group Limited
5th floor, Absa Towers East, 170 Main Street, Johannesburg
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
Tel: (+2711) 350-5887 Fax: (+2711) 350-6487
e-Mail: ericwas@absa.co.za
Issued by:
Jacques Badenhorst
Head: Investor Relations
Absa Group Limited
4th floor, Absa Towers East, 170 Main Street, Johannesburg
Tel: (+2711) 350-4061 Fax: (+2711) 350-6487
e-Mail: jacques.badenhorst@absa.co.za
Lead sponsor:
Merrill Lynch South Africa (Proprietary) Limited
Co-sponsor:
Absa Capital, a division of Absa Bank Limited
Johannesburg
20 February 2007
Date: 20/02/2007 07:03:01 Produced by the JSE SENS Department.
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