Nedbank had the dubious distinction of being the first of the big retail banks to publish its results for the six months to end June, setting the tone for what investors can expect from the banking sector this year. Absa and Standard Bank will follow within weeks with their interim figures, and FirstRand with its annual results.
It seems the market was relieved that the figures were credible, given the extremely difficult economic environment facing business in general and banks in particular. While Nedbank could only eke out an increase of 2.6% in headline earnings in the interim period, the results did not contain any bad surprises – everybody knows the economy is performing poorly and the banking industry is one of the first to reflect this.
CEO Mike Brown is not shy to spell out the problems. “The SA economy performed worse than expected in the first six months of the year and our forecast for GDP growth has been reviewed down from 1.3% to 0.5%.
“Significantly more urgency is required with the implementation of structural reforms to stem the current economic and fiscal deterioration in the economy.
“If we are unable to do this, all the hard work done to maintain our last investment grade rating from Moody’s will be in vain.”
Group CFO Raisibe Morathi, in an interview with Moneyweb, mentioned a few pertinent problems confronting the economy. “Policy uncertainty, the problems at Eskom and the land debate all impact on the economy.”
The Eskom effect
In a Nedbank commentary on the trading environment during the last six months, management points out that the effect of the problems at Eskom should not be underestimated: “The decline in economic growth was largely as a result of electricity shortages and load shedding at a frequency and intensity not experienced since the 2008 electricity crisis. This impacted on the energy-intensive and export-orientated mining and manufacturing sectors.”
The results for the period clearly show that households and businesses are very cautious in the current economic environment. Nedbank reported that advances increased only 6.7% in the first half of the year, while deposits increased by 8.1%.
“There are still indications of stress and many people have adopted a wait-and-see attitude,” says Morathi.
She adds that people tend to take smaller loans than they can afford, or choose to reduce debt rather than take out new loans.
Nedbank noted a definite cut back in spending by households as increased unemployment levels, slowing growth in incomes and rising fuel prices eroded households’ spending power.
Net interest income increased by a rather subdued 5.8% and non-interest revenue by 5.2%. An increase of 5.5% in operating expenses and a massive increase of 40% in provisions saw profit grow by only 2.7% to R7,2 billion for the six months. Headline earnings per share increased more, by 3.5% to R14.35 per share, partly due to a decrease in the number of issued shares after Nedcor completed a buyback of small parcels of shares.
It is also important to remember that the latest results come off fairly high bases after Nedbank posted a big increase in profits in its previous financial year.
The large increase in provisions for bad and doubtful debt are as a result of lower-than-normal provisions in the previous period rather than a deterioration in the quality of Nedbank’s advances, says Morathi. “Provisions are now within the target range.”
However, changes in customers’ credit ratings have been necessary which impacted on its corporate book. Nedbank noted that it continues to see stress in some sectors, particularly in cement, construction, retail, agriculture and selected state-owned enterprises (SOEs).
The bank maintains that its corporate book is healthy overall, and it actively worked to reduce the worst of the bad and doubtful debt. Nearly 80% of the so-called Stage 3 impairments are concentrated in 10 counters, according to Nedbank’s risk analysis.
Pushed on the issue of loans to SOEs, Morathi says Nedbank has outstanding loans of R20 billion to different state companies, all covered by government guarantees. The exposure reduced from R24 billion at the end of December.
Nedbank pulled out all stops to reduce costs. As is the case with other banks, it took a hard look at its branch network and the possibility of increasing its digital banking offering.
“Nedbank differs from other banks in that we increased our footprint in cities and large towns during the era of expansion, rather than in smaller places,” says Morathi. “Our efforts are concentrated on reducing our floor space within existing branches and not necessarily our staff numbers by closing branches.”
A total of 1 500 employees were affected, with 1 400 moved to different positions within the group. “We are in the process of placing the remaining 100,” says Morathi.
She is optimistic that the second half of the financial year will again produce better results than the first half, and indicates that shareholders can expect Nedbank to reach its target of producing earnings growth in excess of the nominal growth in the economy in the current year.
Nedbank seems to feel comfortable that it will achieve good growth, measured by the board’s approval of an increase of 3.7% in the interim dividend to R7.20 per share, notwithstanding the earnings growth of only 2.6%.
It is noteworthy that Nedbank has achieved growth in earnings every year over the last decade, even if only a few cents in some years. The latest results show once again the resilience of the SA banking sector and its ability to tackle challenges.