ETI’s great recovery boosts parent’s purse

Nedbank delivered blistering earnings and dividend growth at its interim stage due to a reversal of fortunes at Ecobank Transnational Incorporated (ETI).

The pan-African banking conglomerate, listed on the Nigerian Stock Exchange, is 20% held by Nedbank. It has pulled itself out of a steep dive, contributing headline earnings of R134m to Nedbank’s results for the period. This follows a R1.1bn loss a year ago.

With headline earnings growing at just 2% from Nedbank’s “managed operations” — all the businesses in which Nedbank owns a controlling stake — ETI was the primary reason the group lifted headline earnings per share for the six months to June by 26% to R13.61. While Ecobank does not yet pay a dividend, Nedbank’s strong capital base and cash generation meant the group could lift its dividend by 14% to R6.95 per share.

More good news could flow from ETI. The banking group has had six consecutive quarters of profitability following executive changes that have contributed to a drastic improvement in the quality of its credit book. Its credit impairment charge declined by 35% over the reporting period.

Due to lags in reporting, in ETI’s most recent quarter the bank posted profits of R162m (Nedbank’s share) which were not included in the group’s results at the interim stage, but which will be included in the full-year numbers.

Another benefit that could flow to Nedbank shareholders from its stake in ETI is the possible reversal of a R1bn impairment charge the bank raised against its investment, following a string of poor quarterly performances. The provision

will be reviewed at year-end and should the encouraging operational performance continue at ETI, Nedbank could reverse a part or all of this provision. A full reversal could result in an 8% boost to Nedbank’s full-year headline earnings by our estimates.

While growth was anaemic at the group’s core “managed operations” there were some positive developments. First, the bank’s net interest margin (the difference between its cost of borrowing and its cost of lending) increased by nine basis points, from 3.58% to 3.67% over the period.

This contributed to net interest income rising 3.4% to R14bn. Noninterest revenue, generated primarily from fees, rose by 4.3% to R12.2bn. With expenses contained at 2.7% over the period, headline earnings from the bank’s core operations rose 2%.

Nedbank CEO Mike Brown attributed some of the impressive cost control to the group’s investment in technology, running at about R2bn a year. “We have strategically focused our investment in technology and it’s becoming more and more evident in our results. We expect the investment to continue increasing revenues and efficiencies.”

Nedbank’s p:e of 9.4 has caught the eye. Patrice Rassou, head of equities at Sanlam Investment Management, says: “Given where our market is trading, finding stocks on a single digit price:earnings multiple is very attractive.”

While Rassou believes the bank has a strong corporate and investment banking franchise which contributes about 60% of the group’s profits, he believes growth in earnings is more likely from the retail and business banking division (40% of profits).

“The recovery can be led by the retail business, which I believe can grow its earnings the fastest. It has done well on the customer acquisition side, but we are struggling to see it translate into volumes and ultimately profits.”

With Old Mutual shareholders likely to receive three Nedbank shares for every 100 held in the forthcoming unbundling, the results might give pause to consider holding on to them.