Steady as she goes

Be wary of the big num­bers

Finweek English Edition - - COMPANIES & MARKETS - BRUCE WHIT­FIELD brucew@fin­

TO MAKE SOME SENSE of Ned­bank’s sparsely worded sec­ond quar­ter 2011 trad­ing up­date you have to go back six months, ex­trap­o­late a bit and read the tea leaves to try to fig­ure out what is hap­pen­ing op­er­a­tionally in­side SA’s num­ber four bank. Ned­bank’s up­date sticks to the reg­u­la­tory min­i­mum, say­ing only it will beat Q2 2010 by at least 20%. Be­fore you crack open the Cap Clas­sique, bear in mind a sin­gle growth num­ber can be mis­lead­ing – as the lack of sup­port­ing in­for­ma­tion sug­gests. At least there doesn’t ap­pear to be any bad news in the off­ing.

So where is the growth com­ing from? In an en­vi­ron­ment of low 3%/year GDP growth – plus a slow re­cov­ery in con­sumer spend­ing and con­se­quent glacial re­cov­ery in credit ex­ten­sion – re­tail bank­ing is con­strained by high lev­els of con­sumer debt. House­hold dis­pos­able in­comes re­main un­der pres­sure, pri­mar­ily due to ris­ing ad­min­is­tered prices, es­pe­cially en­ergy costs, while the cor­po­rate sec­tor re­mains in con­sol­i­da­tion mode amid con­cerns about the medium fu­ture of the global econ­omy and the threat to in­ter­na­tional cap­i­tal mar­kets of sov­er­eign de­faults.

Against that back­drop, share­hold­ers should prob­a­bly be happy Ned­bank is de­liv­er­ing more of the same steady re­cov­ery. There’s no fancy stuff, but it rather looks like the group is con­tent in bid­ing its time through a tough eco­nomic cy­cle, keep­ing ex­penses growth in check and be­ing sat­is­fied with al­low­ing its fi­nan­cial po­si­tion to grad­u­ally strengthen while its clients re­cover from the global credit binge that fu­elled the fi­nan­cial cri­sis.

In any “nor­mal” cy­cle, bor­row­ing would be on the up by now and banks would be hap­pily lend­ing to their debt-hun­gry clients, cour­tesy of SA’s low­est in­ter­est rates in around 40 years. But so se­vere is the hang­over this time that clients haven’t only gone tee­to­tal but the bar­man re­mains in­tent on call­ing “time” early ev­ery day to en­sure his pa­trons don’t over-im­bibe.

While banks in­sist they’re open for busi­ness and loans are be­ing granted, it’s be­ing con­ducted more on their terms than at any point in the past decade as they strug­gle to get over one of the worst bad debt cy­cles.

Ned­bank said in its prospects state­ment in Fe­bru­ary it ex­pected credit ex­ten­sion to be far more mod­est than had pre­vi­ously been the case, with loan growth in the high sin­gle dig­its at best. Cer­tainly, any as­set growth there is is slug­gish, es­pe­cially in the whole­sale mar­ket. There’s some life in the re­tail bank­ing sec­tor, where there’s ap­petite for ve­hi­cle fi­nance.

How­ever, the mort­gage sec­tor re­mains un­der pres­sure amid on­go­ing un­cer­tainty about house prices. Sur­veys by sev­eral banks have shown a de­cline in real prop­erty val­ues year-on-year. That’s caus­ing buy­ers to sit on the side­lines and banks to price more ag­gres­sively for those in­ca­pable of wait­ing.

Re­tail bank­ing is see­ing some mar­gin ex­pan­sion as im­pair­ments slow and new busi­ness – writ­ten at higher mar­gins – comes on stream. Ned­bank has made it clear it’s no longer in the busi­ness of writ­ing the sort of debt it did in the mind­less pur­suit of mar­ket share. That prac­tice was in­stru­men­tal in push­ing its re­tail divi­sion to a loss of more than R1bn two years ago.

Mar­gins are steadily im­prov­ing, Ned­bank’s re­tail strat­egy ap­pears to be pay­ing off and it’s grad­u­ally ac­quir­ing new clients. Its tar­get of 85% non-in­ter­est rev­enue (NIR)/ex­penses ra­tio means it’s charg­ing them more for us­ing its ser­vices.

Its cur­rent fo­cus is on ef­fi­ciency. It needs to re­turn its cost-to-in­come ra­tio to the right side of 50% – it was 10% higher than that six months ago – and it also needs to chip away at its im­pair­ment lev­els to reach its tar­get of 0,6% to 1%. Bad debts will con­tinue to bedevil the sec­tor for some time as the pric­ing on new ad­vances more ap­pro­pri­ately re­flects the level of risk the bank is tak­ing.

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