1H25 - A pause for consolidation before the growth phase

#themes: diversification, credit quality, IPO

Event: African Bank reported 1H25 results, with profits up 15% from the restated 1H24 numbers. Key highlights included book growth of 20% (including 49% in business lending), NIR up 39% (mostly driven by non-transactional income, up 48%) and credit costs down 10% (resulting in a CLR of 5.3%). Offsetting factors were NII (down 3%) and opex (+16%). 

Consolidation year: We view 1H25 as a “pause” in the medium-term growth outlook as the bank focussed efforts on (1) modernising and improving credit scorecards in personal lending leading to a knock-on 4% reduction in disbursements (which also negatively impacts insurance revenues), (2) bedding down recent acquisitions (Sasfin CPF and CEF books) which included an exercise to standardise salary and incentive costs across newly-integrated staff, incurring some upfront costs that have been included under “Employee benefits expense” (a line which accounted for 10% of total cost in 1H25) and (3) growth in customers from Alliance partners, leading to a break-even in this delivery channel, and new transactional income from steady growth in transactional accounts (however, both are still small in overall revenue). 

Diversification revenue: We calculate that the bank now generates >40% of revenue from diversified sources (i.e.: business banking, new types of personal lending, transactional income and VAS/Alliance income), significantly derisking the investment case and exposing the bank to new growth vectors. Notably, business lending now makes up >40% of net advances and the bulk of overall profits (although cost allocation between the divisions is yet to be harmonised).

Abnormal cost growth: Opex growth was 16%, negatively impacted by the harmonisation of salary scales across the existing business and newly acquired businesses and capabilities. Stripping this out, the average cost per head increased by 11% due to acquisition of higher-cost employees in Sasfin and accounting for inflationary increases. We expect cost growth to remain high for FY25e and moderate meaningfully in FY26e and FY27e into the mid-to-upper single digit range.

Conclusion: We expect that African Bank will continue to invest in FY25e for future growth which is likely to be material in FY26e and FY27e. Our forecasts in FY27e, however, fall shy of the “Excelerate” targets, particularly in net advances, overall profit and ROE, although acknowledge that growth could be well above our expectations. We maintain our FVVR of R11bn-R17bn.

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