Still a solid banking stock pick
The bank has set up a vehicle to absorb Ecobank’s bad debts in Nigeria — effectively a recapitalisation
Most of Nedbank’s key numbers look stronger than those reported in the Barclays Africa interims. While Barclays Africa had a 1% decline in revenue, Nedbank’s was up 3.7%. The return on equity (ROE) from managed operations for the green bank in the six months to June was 18.9% compared with 16.8% for Barclays Africa. Absa’s retail and business banking (RBB) in SA might still be substantially bigger than the competing business in Nedbank, but it is in decline, with earnings falling 9% to R4.2bn while Nedbank’s increased by 7% to R2.5bn.
And Nedbank will benefit from its managed separation from Old Mutual, which will increase the free float of the bank by about R30bn. Old Mutual’s shareholding will fall from 53% to about 20%.
Nedbank CEO Mike Brown says the life office will retain an appropriate strategic minority holding in the bank to bolster the current commercial relationship. Not that it has been as successful as, say, the Standard Bank/liberty relationship — the two green teams compete directly in wealth management and unit trusts. And credit life, the main building block of bancassurance, is now offered in-house at Nedbank.
Nedbank acquired its 21% holding in Ecobank under intense pressure from Old Mutual, which was looking for a quick entry point into life insurance in Nigeria. Old Mutual quickly swallowed up Ecobank’s life office there. But both groups underestimated the difficulties of getting into Nigeria. In the first half, Nedbank lost quite a chunk of change from Ecobank — R1.16bn. Including this loss, Nedbank’s ROE slipped down to 15.1%.
COO Mfundo Nkuhlu says a resolution vehicle has been set up at holding company level to absorb most of the Nigerian bad debts, effectively recapitalising the Nigerian bank.
The good news is that after a catastrophic Christmas period Ecobank made R142m in the first quarter. Nkuhlu says there has been a recovery in confidence since a new foreign exchange regime was introduced by the Central Bank of Nigeria on April 21, which allows selected repatriation of dividends, leading to a more buoyant stock exchange.
On paper, Ecobank looks like an invaluable partner to Nedbank, as it has branches in 40 countries, giving access to deal flow in central and western Africa.
Nedbank CFO Raisibe Morathi says she is more than comfortable to see the dividend increase by a solid 7% to 610c/share. In particular there was a 10.2% increase in retail deposits to R279bn. Like RBB, the Corporate & Investment Bank (CIB) has had about 7% headline earnings growth.
Under Brian Kennedy, the CIB’S earnings of R3.2bn are about double those of Absa’s
CIB. The heart of the Nedbank business is its dominant commercial property operation, in which loans and advances increased by 10%, while the rest of the book was flat. This may be no bad thing; Kennedy says exposure to state-owned enterprises and mining were reduced while construction remained at about 1% of the book. Trading income increased as the business adopted a more client-centric approach; there were fewer corporate actions and fees were down.
In RBB Nedbank still battles to get traction on main-banked clients. It’s been more than a decade since its ill-fated attempt to become a rich man’s bank, and with 2.7m main-banked clients it lags the rest of the big four and even Capitec. Nedbank is spending lavishly on a catch-up strategy, aiming for middle- and entry-level customers, with slogans such as “Your time is now” and “Live the savvy life”.
Even before these customers join, the metrics look satisfactory. There was a solid 6% increase in noninterest income to R5.1bn, with card-issuing revenue exceeding R1bn for the first time in a half-year.
Nedbank Wealth’s 15% fall in headline earnings disguises a multitude of sins. At 10% of group earnings it is more important than its equivalent business in SA banking. Its asset management business has R295bn under management — exactly the same as Absa. The performance of the Nedbank funds, though, has been substantially better. But there was a 14% fall in the value of new life business to R148m and lapses in credit life and funeral policies. In shortterm insurance, losses from the Western Cape storms and the Knysna fires wiped out actuarial reserves recently released into the business.
Brown says risk management in the banking operation has been “excellent” and selective origination of new business should lead to a lower level of impairments than at its peers. The group credit ratio has fallen from 1.31% in 2013 to 0.47% in the reporting period. Nonperforming loans, though, are still huge in absolute terms, at R20.2bn.
Brown says the bank has revised its guidance for the full year, expecting average banking assets to grow below nominal GDP growth and some increase in noninterest revenue in the mid-single digits — banks always find creative ways to charge fees. And he says it looks like the bottom of the credit loss cycle, with losses anticipated to grow from 47 basis points back up to 60 or 70 points.
Nedbank was the Financial Mail’s Hot Stocks tip in the banking sector for 2017. With a p:e below 10 it is still a “hold”, and remains our sector pick, but in the short term it will battle to show real growth.
It’s been more than a decade since Nedbank’s ill-fated attempt to become a rich man’s bank, and with 2.7m mainbanked clients it lags the rest of the big four and even Capitec