RYK VAN NIEKERK: Nedbank reported its financial results for its 2020 financial year to the end of December today (March 17). The bank reported a sharp drop in profitability, mostly due to a massive increase in its provisions for bad debts and a decline in client activity. The bank’s revenue declined by 3.6% to R48 billion. The headline earnings fell 57% to R5.4 billion and the bank decided not to declare a dividend.
On the line is Mike Brown, the chief executive of Nedbank. Mike, thank you so much for joining me. Let’s start with the dividend. Nedbank joined Absa in not paying a dividend, while Standard Bank and FirstRand recently announced that they would pay dividends. It must’ve been a very interesting discussion in the boardroom, but why did you decide not to pay a dividend?
MIKE BROWN: Hi. It certainly was an interesting and difficult discussion to decide not to pay a dividend. A number of factors came into that conversation. Firstly, we were very cognisant of the spirit of the guidance notes issued by the South African Reserve Bank around dividend payments, and the need for prudence.
I think secondly, despite finishing the year with strong capital and liquidity positions – actually our capital levels are pretty much in the middle of our target ranges in the peak of a very deep crisis, and our liquidity levels at the end of the year were stronger than at the start of the year – the board decided it was appropriate to conserve capital at this point in the cycle for potential growth opportunities that may emerge in the cycle, also being cognisant of potential risks in the vaccine-versus-virus rollout that’s happening.
I think if you stand back from it, certainly from a board point of view, if those growth opportunities are lower than we think they might be or if the vaccine and virus rollout is as we think, then clearly, if there is capital that we are not utilising we have a number of opportunities in the future to return that capital to shareholders.
RYK VAN NIEKERK: Let’s talk about the impairment charge, which nearly doubled to R13.1 billion. Of course, that is a provision. What are you seeing with bad debts? Are you seeing an increase, are you seeing a trend in the bad debts within the business?
MIKE BROWN: Certainly from our point of view the first half was the most stressed in our client base, in particular in the second quarter. And from an accounting point of view, we now have to be much more forward-looking. Our credit-loss charge in the first half was 1.87%; in the second half that improved to 1.34%, giving us the 1.61% average for the full year. I think if we stand back and look at it, our clients have recovered probably slightly better than we would have anticipated when we were looking at the economic environment in June. But we are cognisant, clearly, that risks still remain.
RYK VAN NIEKERK: That is interesting, but do you think the pain is behind you? Do you foresee any future significant increases in the provision?
MIKE BROWN: It’s our current forecast – and we do provide some guidance with these results – that our credit loss ratio for the full year in 2021 will be somewhere between 110 and 130 basis points, so that is down on any of the metrics in 2020. We believe that we are appropriately conservatively provided, and for as long as there isn’t a return to lockdown Level 5 – our current projections have a third wave in them – but only going back to lockdown Level 3 or adjusted Level 3, we do believe that the peak in bad debts is behind us and not in front of us.
RYK VAN NIEKERK: I’ve spoken to the CEOs of most of the banks who have already reported, and from the reaction of our listeners it was really clear that some of the clients of the banks are concerned about these significant drops in profitability. But if you just stand back a bit and include Nedbank’s with the results of the other banks, it’s definitely a case that banks have come through this very resiliently. It was managed really, really well and the banks are still in a very, very strong financial position.
MIKE BROWN: I would agree with that. I don’t know how many radio interviews [I’ve done] in the second quarter of this year and TV interviews, where I pointed to the strength and resilience of the South African banking system, how well our system had done in the global financial crisis and the fact that we entered this crisis in a much stronger condition than in the global financial crisis. So I certainly think, looking backwards, a crisis that largely had bank earnings down somewhere between 40 and 60% – depending on which bank you choose – is a very good crisis. The banks did extremely well to manage that balance between helping our clients and customers on the one hand, but ensuring that the safety and soundness of the system was never at risk on the other hand.
RYK VAN NIEKERK: You did provide significant cash flow relief to your clients, to the tune of R120 billion. What was the impact on the bank’s financial performance by extending these relief measures?
MIKE BROWN: Clearly we felt that this was an environment for the whole year where we had less focus on profitability for profitability’s sake – other than as a buffer against capital – and a huge focus on the health and safety of our staff and helping our clients in their time of need. So we did provide R120 billion of cash flow relief. By the time we got to the end of the year that had reduced to R28 billion, of which only R2 billion remains for retail customers. So it does look like that relief was enough to help customers get back on their feet again.
But clearly that relief has caused us to increase our bad debts. So the biggest impact of the relief and the environment is higher bad debts on the one hand, and lower transactional and trading volumes on the other hand.
RYK VAN NIEKERK: Your Corporate and Investment Bank saw a decline in headline earnings of just over 40%, and this segment is actually the largest within the banking group. The Retail and Business Bank however took a hit of nearly 70%. I would have thought it would have been the other way round.
MIKE BROWN: I think if you look at it, these businesses react differently in the volatile and stressed environment. In our Corporate Investment Banking [CIB] franchise, there was clearly pressure on bad debts. But within that our trading businesses benefitted from the volatility, and trading income was actually up 16% year on year. That was a buffer to the overall CIB results, whereas our retail and business banking environment really didn’t have a business that outperforms in this sort of volatile environment. They only had higher bad debts and lower client volumes.
RYK VAN NIEKERK: One interesting thing I’ve seen is that Nedbank launched the tap-on-phone service, which allows business owners to convert their cellphones into payment-acceptance devices. A very interesting initiative. How was it accepted?
It’s early days yet, but it’s part of an ongoing digital journey at the bank, where we have invested significantly in technology. We are at a really exciting phase of being able to turn that into customer-value propositions.
We have seen some good initial take-up of that. I think if we stand back more broadly, what’s really pleasing is to see things like digitally active clients increasing 25%, Money app volumes up 70%, Money app values up 53%. So pretty much anything to do with digital is showing strong double-digit or more growth in this environment.
RYK VAN NIEKERK: I think many people regard their cards as a potential health risk, because they are handled by other people, and [the tap-on-phone service] just removes that physical contact. But does it replace the normal speed point of a bank? How does it really work?
MIKE BROWN: Correct. It’s another option. Instead of using a point-of-sale device, you can just use your mobile phone. The other thing that we’ve done that’s also pretty cool is we’re the only bank now where off your mobile banking app you can create a QR code. If you go to an ATM machine you can, with that QR code, withdraw cash without having to physically interact with the ATM machine in this Covid environment.
RYK VAN NIEKERK: Just lastly, 2021 – it’s going to be an interesting year. What are your expectations?
MIKE BROWN: We have given some guidance for 2021 and in particular through to June, in other words the first half, we already have what would be called reasonable certainty under the JSE rules that our earnings will be up by more than 20% on the first six months of last year, bearing in mind, of course, that the first six months of last year experienced a peak Covid impact from a bad debt point of view.
So while we are cautious, we certainly are expecting a bounce off the low base moving into 2021.
RYK VAN NIEKERK: Mike, thanks for your time. That was Mike Brown, Nedbank’s chief executive.