FIFI PETERS: Let’s hit Nedbank’s results [for the six months to end June 2022]. Nedbank was the first bank out of the big five to release numbers today. Profits were up quite strongly on the back of higher revenues, and the bank paid a pretty good dividend – up 81%. In fact, its dividend now is higher than the dividends paid before the pandemic.
We’ve got Mike Davis, the CFO of Nedbank, on the Market Update for more on the numbers. Mike, thanks so much for your time. Really strong profit growth this time, strong revenues and even confidence to really pay a much higher dividend. But what can you tell us about what the Nedbank customer is saying about the state of the South African economy?
MIKE DAVIS: First of all, thank you for having me. Just to reiterate, we did put out a very pleasing set of financial numbers, I think, to the points raised, driven by top-line revenue growth and, importantly, expense discipline, and then a reasonably small increase in the cost of risk or the level of defaults or impairment charge through the income statement, given the levels previously provided.
As you indicated, that did lead to a nice, strong dividend to shareholders who, I think, would be pleased with that increase in dividend. In terms of what’s happening in terms of the consumer and what we are seeing out there, I think you need to look at the first half as sort of two quarters.
One, you saw the strong momentum off the back of 2021 roll into the first quarter, and you saw that translating into that sort of 1.9% quarter-on-quarter growth. But you certainly saw a tougher second quarter with, again, higher levels of load shedding, higher interest rates, higher levels of inflation.
It is starting to have an adverse impact, certainly in some of the consumer segments that we obviously lend into and that we track, and we are expecting further tightening into the second half of 2022 which, again, could put consumers under more pressure.
But there are also opportunities, particularly in the corporate segment, particularly in the energy segment, which may offset some of that slower growth that we may see translate out of the consumer segment in the second half.
FIFI PETERS: All right. But talk to us about the retail book then, and what it’s looking like right now. What are your retail clients coming to you for by way of loans? You indicated that you are expecting a bit of pressure, but in which part of the book are you presently seeing that pressure starting to kick in?
MIKE DAVIS: I think, first of all, the consumer started the year in a far better position, having de-geared and increased levels of saving. So that certainly has helped the consumer through the early part of 2022. We are seeing consumers starting to draw down on their higher savings levels and you are starting to see some pressure in, for example, the unsecured lending segment and/or in the lower segments in the bath……3:13 market. So there are pockets where you are starting to see distress or higher levels of distress at this particular stage in the cycle.
But we still believe that the RBBB, or the retail and business banking book, will continue to grow at similar levels in the first half, [at] around 6%. So there are still opportunities across different products and different segments.
FIFI PETERS: And defaults? I know you touched on that as well, and I’m wondering, given the fact that we are experiencing this cost-of-living crisis from rising prices and inflation, how is that going to influence the approach that you take to lending in this environment?
MIKE DAVIS: It’s a very pertinent question and it’s something we’ve already responded to. So if we’ve recognised areas or segments or parts of the business in which we see early signs of distress – obviously taking into account higher interest rates – we already adjust for that from a credit-scoring or credit-evaluation perspective. So the bank has already responded to that in quarter two.
FIFI PETERS: What was that response?
MIKE DAVIS: We were tightening credit criteria. We would obviously build in higher levels of expected interest rates in the way that we score individuals who choose to borrow at the prime lending rate. So we respond through an appropriate risk-adjusted approach towards granting new credit.
FIFI PETERS: Okay. Then let’s get to the corporate clients. You touched on energy, but what kind of activity are you seeing from them?
MIKE DAVIS: We saw reasonably slow growth in quarter one and into the early parts of quarter two. We’ve grown that book in the first half on an average basis by 2%, but we saw strong growth in the last month of quarter two. So [there are] some signs of some of the pipelines converting, but there’s a lot of pipeline business. We have strong pipelines. There’s a lot of pipeline that didn’t convert in half one. So we are expecting that, particularly as it relates to renewable energy and embedded energy. Clients are looking to, on their own, create energy certainty, and we are expecting that to convert in the second half. So I think there are going to be opportunities, particularly if you link that to the energy drive and the energy programme that the president has spoken to, as that converts in the second half.
FIFI PETERS: What about opportunities for deals or deal activity right now? I had a conversation earlier about business confidence gradually returning to normality, and I’m wondering if any of your corporate clients are coming to you for support on deals and buying other companies out there right now. Are you seeing that kind of activity from them?
MIKE DAVIS: We have seen that type of activity, but I would suggest that slowed into quarter two. We’ll see whether that bounces back in the second half. But we certainly have seen some clients look for opportunities and we’ll see what that translates to in the second half.
FIFI PETERS: All right. Mike, in your outlook you do guide that Nedbank is on track to meet its medium-term targets in terms of profits returning to and even exceeding pre-pandemic levels – and other metrics which are important to you to measure your performance. I’d like to know, in this environment [in which] we are expecting growth to slow, what that means for Nedbank?
MIKE DAVIS: We set three financial targets. One is the diluted headline earnings per share – getting that back to pre-Covid levels, being R25.65. That we actually expect to deliver by the end of 2022. That was originally a 2023 target. As a result of stronger profitability we think we’ll get there a year earlier.
The other two, financial medium-term targets, we see as a 15% RoE [return on equity] by the end of 2023, and a cost-to-income ratio of less than 54% by the end of 2023. Both those, in setting those targets early in 2021, we did indicate have stretch in them. But we’ve continued to target both those metrics by the end of next year, and we believe we are on track, but noting that there remains stretch in those targets.
Some of the RoE will be driven by higher interest rates as banks benefit effectively from what we call endowments, so that should support getting to that RoE or 15% by the end of next year, as well as on the revenue side of the cost-to-income ratio. So we are sticking to those three financial targets.
FIFI PETERS: And the forecast and expectation [for] your operations outside of South Africa, which performed really strongly also this time around? What can your shareholders and investors look forward to there?
MIKE DAVIS: We run a reasonably small SADC-based business in terms of our Nedbank Africa regions across five jurisdictions. We’ve seen a nice bounce back in the profitability of that part of our business but, we have to acknowledge, off a low base.
And then we hold a 21% stake in Ecobank, which is a business or bank that is largely positioned across Central and West Africa. That business had a really great, effectively, quarter four last year, [and] quarter one this year – and we report one month in arrears. So our first half incorporates their last-quarter 2021, first-quarter 2022. They had a really strong rebound, up 74%. Importantly in that business they’ve got really tangible proof points around strategic execution, which is really pleasing.
So we think that [the] Nedbank Africa Region part of our business can continue to generate stronger profitability, which is really good news.
FIFI PETERS: Mike, thanks much for that analysis. We’ll leave it there. Mike Davis is CFO of Nedbank.