After delivering a solid set of results this week, Nedbank chief financial officer Mike Davis has insisted that impending interest rate cuts won’t flatten the group’s performance this year.
(Nadine Hutton/Bloomberg via Getty Images)
After delivering a solid set of results this week, Nedbank chief financial officer Mike Davis has insisted that impending interest rate cuts won’t flatten the group’s performance this year.
On Tuesday morning, Nedbank reported an 11% rise in its headline earnings to R15.7 billion at the end of 2023. The banking group recorded this strong growth in the face of poor macroeconomic conditions, which ratcheted up credit impairments by 30%.
South Africa’s banking sector has managed to weather strong headwinds thanks in part to interest rate hikes, which pushed the cost of borrowing to a 15-year high. But with the South African Reserve Bank expected to unwind interest rates sometime this year — and with economic growth expected to remain muted — the question is whether the country’s biggest banks end up losing steam.
Speaking to the Mail & Guardian on Tuesday, Davis noted that Nedbank’s net interest income (NII) — the difference between the revenues generated by interest-earning banking assets and the cost of servicing liabilities — grew strongly at 14%. Roughly half of that was driven by balance sheet growth while the other half was the result of higher interest rates.
In 2021, the prime interest rate had fallen to 7% following cuts during the Covid-19 pandemic. Following successive hikes, the prime interest rate rose to 11.75%. Nedbank expects that the lending rate will be cut by 75 basis points in the second half of 2024, followed by a further 50 basis points in 2025. “That will obviously unwind some of the endowment benefit,” Davis said.
“But you are still moving from a base of 7%. If we end 2025 at 10.5%, you’ve still got 350 basis points back in the bank’s income statements, as it relates to NII. ”
If Nedbank’s forecasts are proven to be correct, the average prime interest rate for 2024 will still be slightly higher than it was in 2023 — even after a 75 basis point cut, according to Davis.
“There will be no adverse endowment in 2024. And then rates will be lower in 2025 versus 2024, but at the same time impairments will unwind … So as a result of rate cuts, you give up a bit of endowment in 2025, but you’ve got a credit loss ratio that is unwinding,” he added.
Nedbank’s credit loss ratio — a measure of the credit risk the bank is exposed to — was 109 basis points in 2023, an improvement on the 121 basis points recorded at the half-year mark when interest rates peaked.
Higher interest rates increase the risk of bad debts, pushing up the credit loss ratio. When monetary policy becomes restrictive, as it did in May 2023, it also dampens credit demand.
Recent data shows that private sector credit extension growth decelerated to a two-year low of 3.2% year-on-year in January 2024 from 4.9% in December 2023. This was far weaker than Nedbank’s projection of 4.5%.
Growth in loans and advances — bank credit excluding the bills and investments category — also fell to around a two-year low of 3.3% from 4.7%.
In a research note published late last month, Nedbank’s economists said they expect credit demand to remain subdued in the first half of 2024 as interest rate hikes continue to hamstring the economy.
“Confidence also remains fragile, given the poor growth prospects and heightened policy uncertainty ahead of the national elections … We expect credit growth to improve gradually during the second half of the year as the interest rates ease and the economy recovers slightly,” Nedbank added.
Earlier this year, S&P Global reported that South Africa’s banks have largely been immune to domestic economic headwinds.
The ratings agency noted that although the Reserve Bank’s tight monetary stance in the first half of 2024 will constrain credit demand, it will also support net interest margins. S&P also noted that despite credit losses having risen, they remain manageable.