Nedbank navigates challenging environment to deliver solid earnings growth

Nedbank announced today a solid set of financial results for 2017, with headline earnings (the JSE measure of profits) growing 2,8% in a very difficult operating environment, characterised by weak economic growth and heightened political and policy uncertainty.

Headline earnings from managed operations, which include all operations except Nedbank’s approximate 20% share in associate Ecobank Transnational Incorporated (ETI), grew strongly by 7,8%.

Despite the difficult economic climate in South Africa, Nedbank grew net asset value by 7,3%, dividends were up 7,1%, and return on equity (excluding goodwill) was steady at 16,4%.

Nedbank Group Chief Executive Mike Brown said Nedbank had proven its resilience in a tough economic environment. “Our headline earnings of R11,8 billion reflects a good performance from our managed operations, underpinned by tight cost management and a high-quality advances book.”

Pleasingly, the impact of Nedbank’s share of the loss from ETI following its Q4 2016 results (included in Nedbank’s Q1 2017 results) decreased in the second half of the year as the ETI business returned to profitability. This, together with the strong performance of managed operations, resulted in full-year headline earnings being up 2,8% – an improvement on the 2,9% reduction in headline earnings Nedbank reported in the first half of 2017.

Brown said he was optimistic about the 2018 outlook. “While during 2017 consumer and business confidence had slumped to the lowest levels in many years, contributing to a slowdown in lending and transactional activities, particularly in our corporate and investment and wealth businesses, there was a marked change in confidence after the election of Cyril Ramaphosa as ANC President and, subsequently, as President of South Africa. Challenges remain but we expect the political and macro conditions in South Africa to continue to improve this year. This, combined with the ongoing turnaround at ETI, should help Nedbank deliver a stronger performance in 2018.”

Nedbank’s achievements of the past few years have provided the bank with a solid base and the business continues to deliver on the strategies and building the capabilities that will enable it to meet refined 2020 targets that have been set, including an ROE (excluding goodwill) of 18% or more and an efficiency ratio of 53% or lower.

Nedbank also made strides in its digital and innovation strategies during the year. “We released exciting digital innovations such as the new retail Nedbank MoneyTM app, the Nedbank Private Wealth app, the Karri app, chatbots and UNLOCKED.ME (an exclusive e-commerce marketplace for millennials). We also continued to gain share of transactional banking clients in both our retail and wholesale businesses,” said Brown.

During this reporting period, the bank strengthened its capital levels and improved net interest margins. According to Nedbank Group Chief Financial Officer Raisibe Morathi the bank continued to strengthen the balance sheet as the core tier 1 capital adequacy ratio grew to 12,6%, above the upper end of the bank’s target range. “The increase in the net interest margin was driven by endowment and asset mix, and I’m pleased to report that the sovereign-credit-rating downgrades have not had a material impact on funding costs,” she added.

In an environment of weak economic growth and low levels of consumer and business confidence, advances grew by 0,5%, with solid growth and market share gains across retail portfolios, offset by early repayments in Corporate and Investment Banking. Deposits were up by 1,3% with good transactional and Basel III-qualifying deposit growth, particularly in Retail and Business Banking, which saw an 8,5% increase on the back of ongoing market share gains.

“Non-interest revenue was up 2,4%, a resilient underlying performance given market conditions,” said Morathi. “The credit loss ratio saw an improvement underpinned by a quality advances portfolio and proactive risk management. In CIB the credit loss ratio improvement was driven by the successful resolution of a number of previously stressed counters and provision reversals resulting from this.”

Morathi added that ETI had shown a recovery during the period, with a positive contribution in the three quarters to 30 September 2017. “The performance of ETI reflected a tough, but improving environment, particularly in Nigeria, and we saw an accompanying improvement in ETI’s carrying and market values.”

The Old Mutual managed separation process is expected to be materially concluded in 2018. Old Mutual plc previously stated that a new SA holding company, to be named Old Mutual Limited (OML), would retain a strategic minority shareholding in Nedbank Group after the implementation of the managed separation.

OML will do a primary listing on the JSE and a secondary listing on the London Stock Exchange at the earliest opportunity in 2018, following the publication of Old Mutual plc’s 2017 full-year results. The decrease in OML’s shareholding in Nedbank Group will be achieved through the unbundling of Nedbank Group ordinary shares to OML’s shareholders. This will result in OML, immediately after the implementation of the unbundling, holding a 19,9% strategic minority shareholding in Nedbank Group. The unbundling will occur at an appropriate time and in an orderly manner.

“Nedbank has an independent strategy and governance led by the Nedbank Group board and we have not integrated our systems or brands, so the managed separation will not affect our operations, staff or clients,” said Brown. The unbundling of shares expected in the second half of 2018 will lead to a much wider shareholder base for Nedbank and substantially increase the free float. “We are supportive of the managed separation process and look forward to welcoming our new shareholders and continuing to demonstrate the strong case for investing in Nedbank,” said Brown.

Nedbank’s prospects for 2018 look positive, with an anticipated cyclical recovery in the economy as confidence improves. This is expected to initially benefit the Corporate and Investment Banking, and Wealth Clusters, before spreading to the rest of the business. “I’m pleased to report that our 2018 guidance is for stronger earnings growth, driven by a recovery in revenue, progress with the turnaround at ETI, and continued focus on expense optimisation and risk management,” explained Brown. “Nedbank’s guidance for 2018 is for growth in diluted headline earnings per share of at least gross domestic product growth, plus consumer price inflation, plus five percentage points.”

2017 Highlights

Headline earnings growth of 2,8% (7,8% from managed operations), with a stronger second half. Improvements were driven by lower impairments, while income from associates was negative in the first half and positive in the second half.

Return on equity of 16,4% (18,1% from managed operations excluding goodwill), compared with 16,5% last year (PY:18,1% from managed operations excluding goodwill).

Net asset value per share grew 7,3% to R169,90, Final dividend per share of 675c – a 7,1% increase from last year.

CET1 capital adequacy ratio of 12,6%, up from 12,1% last year.

Credit loss ratio of 0,49% compared with 0,68% last year, with a strong recovery in Corporate and Investment Banking and an improvement in Retail and Business Banking, offset by a slightly higher ratio in Wealth and Rest of Africa. This was underpinned by a high-quality advances book.

Advances growth of 0,5%, driven by stronger growth across retail businesses, offset by a decline in wholesale term loans.

Net interest margin of 3,62%, compared with 3,54% last year, underpinned by a shift in asset mix and endowment impact, while sovereign downgrades had a minimal impact on funding costs.

Non-interest income grew 2,4%, driven by growth in trading income (+3,7%) and commission and fee income (+4%), offset by lower earnings from private equity and insurance.



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