Absa Group Ltd., a prominent South African lender, has revealed a significant impact on its profits attributed to hyperinflation in Ghana, amounting to 403 million rand ($21.6 million).
This revelation highlights the challenges posed by soaring price growth in the West African nation, with the bank warning of potentially larger effects on earnings in the current year. The adverse effects of hyperinflationary pressures have cast a shadow over Absa’s financial performance, dampening what could have been a more favorable outcome for the institution.
Chris Snyman, acting Financial Director of Absa, shed light on the intricacies of hyperinflationary accounting during a presentation, emphasizing the interplay between inflation rates and the balance sheet of the operation in question.
Snyman noted saying, “It’s the combination of those things that results in the guidance that we provided — it will increase somewhat from the 2023 position.” This acknowledgment pointed out the impact of hyperinflation on Absa’s financial standing and its future outlook.
Ghana, in particular, has experienced a surge in annual consumer price growth, reaching a peak of 54% in December 2022. Despite efforts to rein in inflationary pressures, the rate has remained stubbornly above 20% since then. The unexpected rise in January marked the first increase in six months, posing challenges to the central bank’s efforts to stabilize the economy. With the key interest rate set at a high 29%, prospects for a significant reduction in borrowing costs appear dim, further complicating the economic situation.
The repercussions of hyperinflation in Ghana have reverberated across Absa’s financial statements, leading to a notable decline in profits for the first time since 2020. This downturn is attributed to a surge in bad loans within Absa’s South African home market. The sluggish recovery in consumer confidence, coupled with high borrowing costs, has exacerbated the bank’s challenges, culminating in a less than favorable financial performance
Absa Group Ltd. Faces Declining Earnings
Moreover, the bank’s net income fell 1.8% to 19.89 billion rand ($1 billion) in the year ended Dec. 31, missing the median estimate of 21.5 billion rand in a Bloomberg survey.
Impairments also jumped 13%, while the lender’s credit-loss ratio- a measure of bad loans as a percentage of the total book- climbed to 1.18% in the period. That’s above Absa’s target range of 75 to 100 basis points, and ahead of all its peers.
Absa’s shares fell as much as 4.4% in Johannesburg, the most since Dec. 8. The bank’s costs increased faster than its income, while South Africa’s moribund economy is likely to keep the bad-loan ratio above the bank’s target range, Absa said.
Analysts have expressed disappointment with Absa’s earnings performance, highlighting the bank’s underwhelming results in comparison to its peers. Adrienne Damant, an analyst at Avior Capital Markets Pty, noted that rival Nedbank Group Ltd. reported 14% earnings growth, while Capitec Bank Holdings Ltd. demonstrated a significant improvement in credit experience in its latest trading update. The disparity in performance underscores the competitive pressures facing Absa in a challenging economic environment.
Meanwhile, the backdrop of high borrowing costs in South Africa further compounds Absa’s challenges, with interest rates at their highest levels since 2009. Elevated borrowing costs add to the burden faced by consumers and businesses, potentially exacerbating loan delinquencies and impairments for financial institutions like Absa.
The revelation of reduced profits due to hyperinflation underscores the broader economic implications of inflationary pressures in emerging markets. Absa’s experience serves as a cautionary tale for financial institutions operating in regions susceptible to rapid price increases. As the global economic landscape continues to evolve, proactive measures will be essential for mitigating the adverse effects of hyperinflation on financial stability and profitability.
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