A deterioration in Zambia’s fiscal posture leading to sovereign downgrade has not spared commercial banks in Africa’s second largest copper producer. Absa Zambia PLC FY20 earnings bore the brunt of high risk weightings in widened credit impairments whose stock totaled K249.3million, weighing its after tax profits (PAT) lower by 41.2% on an annual basis to K143.8million.
Adding pressure to revenues were widening non-interest expenses that grew 64.1% to K1.2billion weighed most likely by disease pandemic related spend, revaluation effect on foreign currency invoices and promotional spend on new branch rollout throughout the year. With steep depreciation of the Kwacha, exchange rate related costs remained a persistent theme across all commercial banks in 2020. As a consequence, Absa’s cost to income ratio widened to 73% from 51% a year ago.
Total revenue grew 15.3% to K1.4billion supported by 8.7% stronger interest income supported by duration risk related investment in treasury assets and advances income reflecting the aggressive 22.2% growth in its loan book. Supporting a 9.2% upward growth in non-interest income was a 21.2% growth in foreign exchange trading earnings while fee and commissions were flat compared to a year ago. Autopsy effects of the central banks directive to eradicate unwarranted fees is an evident theme across the banking sector.
It is highly likely that credit extension through relief packages in the COVID year coupled with revaluation effects in part impacting the foreign currency portions of loan books has been a consistent theme for asset book growth for many banks. Absa Zambia’s credit book furthered its aggressive expansion to K7.1billion (FY20) from K5.9million (FY19).
ABSA’S AGGRESSIVE ASSET GROWTH AND DIGITAL TRANSFORMATION
Despite earnings erosion due to sovereign risk posture in higher than usual impairments, in the COVID year 2020, Mizinga Melu’s strategy is still evidently skewed towards booking future earnings through an aggressive asset growth and her appetite for digitization in a fast evolving ecosystem.
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Doing so will ensure a more sustainable string of interest earnings in years to come while current elevated impairments are simultaneously future write backs when the higher risk weighted facilities do fully liquidate. Digital strides strides such as WhatsApp (Chat) banking, Novo -FX (foreign exchange trading) App, Vertical Contactless debit & credit card in addition to many more digital enhancement solutions have sent Absa Zambia ahead of the curve especially in a COVID era that has seen appetite for Artificial Intelligence or Machine Learning products to spur banking.
The Kwacha Arbitrageur