Absa Group's Strong Earnings Signal Recovery in South African Banking

The South African banking sector is emerging from a period of cautious optimism, and Absa Group's recent financial results offer a compelling case for investors to reassess the sector's risk-rebalance and long-term potential. With pre-provision profit rising 5% to R51.4 billion in 2024 and a credit loss ratio (CLR) dropping to 103 basis points (from 118 bps in 2023), Absa's performance reflects a broader trend of stabilization and strategic reinvention. For investors, this signals a critical inflection point: the sector is no longer merely surviving but actively recalibrating its risk profile while unlocking value through disciplined capital allocation and improved credit management.

Credit Metrics: A Sector-Wide Turnaround

Absa's 8% decline in impairments to R14.3 billion in 2024, coupled with a second-half CLR of 85 bps, underscores the effectiveness of its risk management overhaul. This aligns with the broader sector's trajectory: South African banks collectively reduced their CLR to 89 bps in 2024, down from 102 bps in 2023. The National Credit Regulator's data further reinforces this trend, showing 10.2 million consumers with impaired records by Q3 2024—down from 10.8 million in 2023—while those in good standing rose to 18.13 million. These metrics suggest a structural improvement in credit quality, driven by tighter lending criteria, enhanced collections, and proactive restructuring of legacy non-performing loans.

Strategic Shifts: From Market Share to Sustainable Growth

Absa's leadership has prioritized long-term resilience over short-term market share gains. By refocusing on customer franchise profitability and disciplined capital allocation, the bank has reduced exposure to high-risk segments like unsecured lending and vehicle finance. This approach is paying off: its Personal and Private Banking (PPB) unit saw strong earnings growth in Q2 2025, even with muted revenue, while the Corporate and Investment Banking (CIB) segment benefited from lower impairments and robust trading revenue. The Group's CET1 ratio of 12.6% and a R5 billion cost-saving productivity program (already achieving R2.4 billion by 2025) further strengthen its capital position.

Sector-Wide Resilience: Digitalization and Regional Expansion

South African banks are leveraging digital transformation to offset macroeconomic headwinds. FirstRand's FNB app, for instance, saw a 14% increase in digital adoption, driving transactional volume growth. Meanwhile, regional expansion into sub-Saharan Africa is diversifying risk and unlocking new revenue streams. Standard Bank's African subsidiaries now contribute 44% of its headline earnings, a testament to the sector's Pan-African strategy. These moves are critical as domestic lending growth remains constrained by high interest rates and energy shortages.

Risk Rebalance: Navigating Macroeconomic Challenges

Despite progress, risks persist. South Africa's inflation and electricity supply issues remain headwinds, and the Reserve Bank's 7.5% key rate (as of January 2025) could pressure margins. However, banks are hedging these risks through higher net interest margins and improved digital efficiency. Moody's and S&P highlight that the sector's strong capital buffers and risk-adjusted returns (15%-16% in 2024) position it to absorb shocks while maintaining profitability.

Investment Thesis: A Sector on the Cusp of Renewal

For investors, the combination of improving credit metrics, strategic reinvention, and digital-driven efficiency creates a compelling case for South African banking stocks. Absa, in particular, stands out for its disciplined approach to risk and its alignment with sector-wide trends. Its projected CLR improvement to the top end of its 75-100 bps target range by 2025, alongside a stable CET1 ratio, suggests a path to sustainable earnings growth.

Historical backtesting of Absa's earnings release dates from 2022 to 2025 reveals a nuanced picture: while the long-term fundamentals are robust, short-term volatility around earnings announcements has been notable. For instance, the 3-day win rate after earnings releases is 50%, the 10-day win rate is 57.14%, and the 30-day win rate is 42.86%. This suggests that while the stock often recovers within a month, immediate post-earnings periods have historically seen mixed outcomes, with a maximum observed decline of -2.52% on day 57 after a release. These patterns underscore the importance of timing and patience for investors seeking to capitalize on Absa's turnaround.

Conclusion: Time to Re-Engage

The South African banking sector is no longer a value trap but a value generator. Absa's earnings recovery, supported by sector-wide credit normalization and strategic agility, offers a rare opportunity to invest in a sector that's redefining its risk profile. For those willing to look beyond short-term volatility, the rewards of this rebalancing could be substantial. As the sun rises on Absa's renewed strategy, the question for investors is not whether to bet on the sector—but how much to allocate before the next wave of growth gains momentum.