Absa Group Ltd. (ASA.JO), South Africa's largest retail lender, Monday said it expected to remain under pressure for the remainder of the year due to rising arrears and non-performing loans.

The Johannesburg company, which is majority owned by the U.K.'s Barclays PLC (BCS), posted a 39% drop in its first-half net profit after impairments rose and business volumes fell. Still, Chief Executive Maria Ramos said the banking group remains profitable and well-capitalized.

South Africa's largest banks have been buffeted by impairments as retail and corporate clients have defaulted on loans as Africa's largest economy struggles through its first post-apartheid recession.

Absa said the economy is unlikely to grow this year and, although a sharp fall in interest rates should bring some relief to households and businesses, consumption is likely to remain constrained. Business volumes are likely to show limited growth, while non-performing loans are expected to grow, it said.

Net profit for the period fell to 3.27 billion rand ($421.6 million) from ZAR5.34 billion a year earlier, the Johannesburg-based company said. Net interest income was 2% higher at ZAR10.77 billion, and non-interest income up 5.4% at ZAR10.21 billion.

Credit impairments to average advances increased to 1.86% from 0.93% in June 2008, and the charge to income increased by 122% to ZAR4.83 billion. Absa said it an impairment hit of almost ZAR1.1 billion to the value of four listed companies it took stakes in last December after a client defaulted on stock futures deals.

The half-year results weighed on Absa's shares, which at 0732 GMT were trading 0.6% lower at ZAR116.75 against a modest rise in its rivals' stock. Absa's shares have underperformed the wider market, rising by about 9% since the start of the year compared with a roughly 12% gain in Johannesburg's blue chip Top 40 index.

"On the retail side, we believe we are nearing the peak in impairments," Finance Director Jacques Schindehutte said during a conference call.

Corporate defaults, however, are expected to continue rising and may only peak some time in 2010, Schindehutte.

"At least for 2009, bank earnings (in the industry) are likely to remain under pressure," Schindehutte said, adding a possible recovery in retail lending could result in South Africa's banks seeing a slight recovery in 2010.

Standard Bank Group Ltd. (SBK.JO), Africa's largest lender by assets, late last month said its earnings per share in the first half of the year was likely to decline between 30% and 35%. Nedbank Group Ltd. (NED.JO) last month said its EPS for the period is likely to fall 29%-34%, while FirstRand Ltd. (FSR.JO) in June said its EPS for the year to the end of June was expected to be down by 39%-44%.

Company Web site: www.absa.co.za

-By Robb M. Stewart, Dow Jones Newswires; +27 11 783 7848; robb.stewart@dowjones.com