Steady as she goes
Be wary of the big numbers
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.