Elections could take the focus off fixing economy, says Nedbank chief

• Banking group’s share price rises on its better-than-expected results

SA’s general election is likely to mean there will be less focus on the “hard yards” of fixing the economy and more focus on electioneering, but the country cannot continue with economic growth as low as it is, especially given the public sector’s large funding needs, outgoing Nedbank CEO Mike Brown warns.

Brown was speaking after the big four banking group reported a stronger thanexpected 11% increase in headline earnings to R15.7bn for the year to end-December, prompting its share price to jump more than 3% on Wednesday against a near-1% decline in the banking sector overall.

With the government borrowing about R2bn a day, excluding weekends, Brown has long warned that SA’s public debt level is unsustainable. Banks have already raised their ownership of government bonds to levels that the Reserve Bank has flagged as a risk to financial stability. There is growing concern among bankers that they will come under pressure to do more in coming years to fund the state, through measures such as taxes on their balance sheets or more reserve requirements or pressure to fund ailing state-owned enterprises.

Brown said the test of the financial system was whether banks would be able to push back when the government was not being sensible. “There is a range of potential areas of pressure, but I do think our system is strong enough to withstand that pressure,” he said in an interview with Business Day.

This was the 40th set of fullyear or interim financial results to be presented by Brown, who spent six years as Nedbank’s finance director before he took over as CEO 14 years ago. He will step down at the group’s AGM at end-May to be replaced by former Absa finance director Jason Quinn, but will stay on for three months as senior adviser to facilitate a smooth handover.

Brown said Nedbank was materially better in every respect than it was 20 years ago. SA was also better off but not by as much as it should be. “We have not capitalised as much as we should on the endowment we have as a country,” he said.

TARGETS REACHED

Nedbank was one of the first banks to set post-Covid targets in March 2021 and though the market was sceptical at the time, it has now met all its 2023 targets, and set fresh targets for 2025, including lifting its return on equity to 17% from the 15.1% it achieved for 2023.

Brown said that the group had delivered on its stretch targets of three years ago had given it credibility in the market. It had also beat consensus forecasts in a difficult environment. The market had also been watching closely to see whether the worst of the bad debt cycle was over and had welcomed the fact that Nedbank cut its credit loss ratio to 109 basis points for the full year, from 121 in the first half, with the bank expecting a further improvement in 2024.

The group increased profit before bad debt provisions by 15%, offset by a 30% jump in credit impairments for the full year, though this was lower than the 57% at the halfway stage.

‘SELF-HELP’

Brown said there had been some “self-help” in the reduced credit losses, with Nedbank implementing measures to improve retail collections from March/April last year that delivered material benefits in the second half of last year. But the environment that generally hurt consumers most was when interest rates were rising faster than expected; bad debts have stabilised now that interest rates have been stable, albeit higher, since May 2023.

“Over time, people also reorganise their financial positions to deal with higher rates,” he said. New accounting rules also ensure banks take the pain earlier than they used to.

The group’s Africa regions put in a particularly strong performance off a low base, contributing a record R1.9bn, or about 20% of its earnings. Brown said it was a strategic ambition to expand Nedbank’s Africa regions.

“We don’t plan acquisitions, but we continue to scan the environment for anything suitable,” he said. The group could also grow digitally in Africa.

GROW FOOTPRINT

Nedbank aims to grow its footprint in the Southern African Development Community (Sadc) countries and East Africa, as well as in Central and West Africa through its 20% stake in Ecobank, which has a presence in 33 African countries.

Ecobank continued its turnaround during 2023, benefiting from releasing a R175m aside bad debt against provision’ Ghana s it sovereign had set bond default.

Nedbank’s headline earnings per share increased 15%, which was ahead of its headline earnings growth thanks to a R5bn share buyback the group implemented to optimise its capital.

Nedbank expects 75 basis points of interest rate cuts in the second half of 2024, with a further 50 basis points in 2025, with economic growth of just 1%-1.5% expected over the next two years.

By market close on Tuesday, Nedbank’s share price had gained the most in nearly three months, up 3.34% to R223.74.

WITH THE STATE BORROWING ABOUT R2BN A DAY, BROWN HAS LONG WARNED THAT SA’S PUBLIC DEBT LEVEL IS UNSUSTAINABLE