South African banking group Nedcor is well on the road to recovery, it seems. The group announced on Thursday that assuming exchange rates remain at current levels, the directors expect headline earnings per share for the six months to 30 June 2005 to be between 15% and 30% higher than the International Financial Reporting Standards (IFRS) restated 245 cents per share reported for the first half of 2004.
Headline earnings for the six months to 30 June 2005 are expected to be between 38% and 56% higher than the R802-million restated results under IFRS for the first half of 2004.
Based on this forecast range of headline earnings per share, attributable earnings per share for the six months to 30 June 2005 is estimated to be between 16% and 31% greater than the IFRS restated 247 cents per share reported for the first half of 2004, it added.
Nedcor is reporting in accordance with the IFRS with effect from 1 January 2005. The group’s 2004 results have been restated to reflect the impact of reporting under IFRS.
The major impact of IFRS relates to the accounting treatment of share options, goodwill, foreign exchange gains/losses, revenue recognition and impairments.
The group said on Thursday that its unaudited trading results for the three months to 31 March 2005 were in line with management expectations.
Compared with the quarter ended 31 March 2004, net interest income increased by 22,6% to R2-billion and non-interest revenue, which increased by 5% to R1,7-billion, is slightly behind internal forecasts, but this was offset by lower than expected expenditure levels, it said.
Average total assets increased by 8% to R324-billion and average interest-earning assets increased 8% to R265-billion.
Residential home loan and credit card balances increased by 10,7% and 9,5% respectively over the same period.
This loan growth continued to be lower than market growth rates, although the rate of market share loss in residential home loans, in particular, has decreased over the period. The structural and strategic actions taken in 2004 continue to impact performance positively, it said.
The group added that Nedbank Retail is starting to benefit from the turnaround strategy implemented during 2004.
The Peoples Bank integration was also progressing according to plan and was scheduled to be completed by the end of 2005, it added.
“Staff morale continues to be a key focus of management. Morale is improving following the staff roadshows by management during the period and frequent staff communication as well as the normalisation of bonuses which were paid in March,” Nedcor stated.
Strategic initiatives implemented through the recovery programme are also having a positive effect on the group and the implementation of the three-year plan is progressing well, it added.
According to the group, non-interest income (NII) continues to benefit from an improved funding profile and hedging strategies. Margin (based on average interest-earning assets) has improved from 2,80% for the three months ended March 2004 to 3,10% for the period. This, it said, can be ascribed to the uplift created from the rights offer cash received in May 2004 and reduced funding drag as a result of the banking book being relatively interest neutral following the hedging strategy.
Also contributing were income on the proceeds from the sale of non-core investments; the repatriation of certain foreign capital during 2004; and increased trading revenue reflected in NII.
“This improvement in margin was negatively impacted by the 1% reduction in the taxation rate for companies which resulted in a R54-million reduction in margin arising from the IAS 12 (previously AC102) treatment of structured finance deals. This debit is offset by a corresponding credit in the taxation line and reverses over time,” Nedcor stated.
Non interest revenue (NIR), it added, was marginally higher than the corresponding period in 2004. Trading revenue increased by approximately 8%, although NIR was negatively impacted as a higher proportion was reflected in NII than the corresponding period.
“The Nedbank Capital pipeline of potential transactions remains strong,” it added.
Total impairments amounted to R441-million for the period.
“Credit quality continues to benefit from the strong economic conditions and the impairment charge is expected to decrease from these levels for the remainder of the period.
Total expenses for the period totalled R2,5-billion and show no growth over last year. The cost to income ratio (excluding foreign translation gains/losses) has improved to below 70% from 77,6% in the comparative period last year. This improvement can be attributed to lower staff costs following the retrenchment programme in 2004, improved efficiencies across most areas of the group, a timing delay in some recovery expenditure and the growth in gross operating income.”
Income growth was also well ahead of expense growth, the banking group said.
Furthermore the taxation rate for companies had been reduced from 30% to 29%.
” While tax on earnings decreases as a result, the revaluation of the deferred taxation asset to take account of the corporate taxation rate decrease has had a negative effect of approximately R90-million in the first quarter.
Notwithstanding the benefit of the R54-million adjustment referred to above, this has resulted in the taxation rate being marginally higher than management’s expectations.”
Headline earnings and return on equity were also in line with expectations, it added. – I-Net Bridge