Nedbank to resume dividend payments after South Africa’s rosier economic outlook

South Africa’s economic growth is looking slightly rosier in 2021 than it was a year ago. A year ago South Africans had weathered almost 100 days of lockdown, 35 of them the hard lockdown of Level 5. Over the full year, the economy contracted by almost 7% and banks braced themselves for the worst, suspending dividends as per the instruction of the Prudential Authority. 

Caution became the watchword and the banks reported impairment charges that ran into the billions – R7.7-billion in the case of Nedbank.

A year later operating conditions and business confidence have improved, with economic growth gaining some momentum off the low base. This has allowed Nedbank to unwind some of its provisions.

“Operating conditions in the first half of 2021 were better than we expected at the start of the year,” said Nedbank CEO Mike Brown at the release of the results. “This was evident in upward revisions to GDP growth, vaccine roll-outs gathering pace, and positive developments on key reforms in SA.”

The bank reported first-half headline earnings up by 148% to R5.3-billion, numbers that look good on paper but remain 24% below H1 2019 levels.

Earnings growth benefited from lower than expected impairments, higher net interest margin, and disciplined expense management, Brown says. 

Underlying non-interest revenue growth (in other words, transactional revenue) bounced upwards, thanks to higher levels of client activity and improved insurance income; however, at R11.7-billion this remained 3.3% lower than in 2020 and 8.3% lower than in 2019. 

Net interest income, home and vehicle loans as well as personal loans and credit cards, of R15.8-billion, were supported by the 53-year low in interest rates and have surpassed 2019 levels. 

Against this progress, demand for corporate loans remained muted, with companies using excess cash to repay debt rather than invest in the local economy.

With the vaccine roll-out under way and a somewhat clearer view of the future, management allowed for impairments of R3.3-billion, an improvement on the R7.7-billion provided for in the comparative period.  

“We expect this to wind down with time. Part of it relates to IFRS-related provisioning [which requires that companies provide for uncertainty in advance], and part of it is fiscal conservatism on the part of management,” says Nolwandle Mthombeni, senior banking analyst at Intellidex.

The biggest component of these provisions is held at the centre and relates to the expected fourth wave of Covid-19 and other macroeconomic risks, she says. But the biggest move in provisions is within the Corporate and Investment Banking (CIB) division where clients in sectors such as hospitality, aviation, construction and retail are still facing challenging conditions.

In addition to macroeconomic risks, CIB has about 166 clients who were affected by the recent violence and looting in Gauteng and KZN. At this point, they have not requested assistance from the bank, Brown says. In addition, all commercial property clients have Sasria cover, he adds.

Nedbank did not escape unscathed from the violence. During the first week of unrest, 226 branches (52% of all branches) and 60 Boxer outlets (55% of outlets) were closed. In total, 55 of these were vandalised. In addition, 325 ATMs (8% of total ATMs) were vandalised. All damages to Nedbank premises and equipment, currently estimated at R250-million to R300-million, are fully recoverable under Sasria (government’s unrest insurance cover), with zero excess. 

“These developments are a stark reminder of the importance of accelerating structural economic reforms to deliver higher levels of sustainable economic growth to address the challenges of poverty, unemployment and inequality,” says Brown. 

“Law and order and the protection of citizens’ assets are the foundation for investment and economic growth. Those responsible must be speedily held to account.”

Key drivers of shareholder value creation also showed positive trends, with net asset value per share up 8% year on year and the group’s ROE increasing to 11.7% (H1 2020: 4.8%).

Nedbank aims to grow earnings per share by more than 20% over the full year. Over the medium term, the bank aims to exceed its 2019 diluted headline earnings per share level of 2,565 cents, achieve an ROE greater than the 2019 ROE level of 15%, and reduce its cost-to-income ratio to below 54%. 

“Banks ultimately reflect the growth or lack thereof in the underlying economy,” says Reuben Beelders, CIO at Gryphon Asset Management. “Banks have done well over the past few years in a constrained economic environment to cut costs and re-engineer their systems for profitability and efficiency; however, I believe that they have probably reached the end of that road.”

Meanwhile, dividend repayments have resumed, with Nedbank declaring an interim dividend of 433 cents per share. DM/BM