/ 6 August 2008

Nedbank reports increase in earnings

Nedbank Group has reported a 6,8% increase in diluted headline earnings per share from 673 cents to 719 cents for the six months ended June.

Nedbank Group has reported a 6,8% increase in diluted headline earnings per share from 673 cents to 719 cents for the six months ended June.

Headline earnings increased by 6,1% from R2,775-billion to R2,943-billion.

The group maintained its interim dividend at 310 cents per share.

“In the context of a tougher economic environment the group’s wholesale businesses continued to perform well, but earnings in the retail businesses decreased as a result of higher impairment charges,” Nedbank CEO Tom Boardman said on Wednesday.

“In February this year,” he continued, “we cautioned that the deteriorating macroeconomic outlook was likely to make 2008 significantly more challenging for the South African economy and the banking sector.

“Underlying growth in assets and net interest income has remained solid, but impairment levels, arising mainly from the retail portfolios, have now risen above the group’s through-the-cycle expectations.

“To manage the business through the current high interest-rate cycle, Nedbank Group has, for some time, been strengthening collection and risk processes, controlling cost growth and improving capital ratios.

“At the same time we continue to focus on and invest in areas with medium- to long-term growth potential and capitalise on the opportunities created by more volatile market conditions.”

The group’s return on average ordinary shareholders’ equity (ROE), excluding goodwill, decreased to below the group’s medium- to long-term target, declining from 24,7% to 21,3% for the period.

This decline resulted from a reduction in gearing as the group increased its core Tier 1 capital adequacy to position the bank in the current environment, and from a lower return on assets caused mainly by higher retail impairment levels and lower private-equity-related earnings. ROE declined from 21,2% to 18,7%.

The group’s wholesale businesses increased headline earnings, benefiting from favourable trading conditions and good client volumes.

However, the group’s financial performance was negatively affected by retail impairment levels rising above the group’s through-the-cycle expectations. In addition, market movements in the equity and property markets have negatively affected private equity valuations.

Basic earnings benefited from an after-tax profit of R637-million on the disposal of the group’s shares in Visa.

Following the introduction of black economic empowerment and management shareholders in Bond Choice, the group reduced its investment in the mortgage originator from 62% to 25,5%. Consequently, Bond Choice is no longer classified as a subsidiary of the group with effect from January 1 2008.

Net interest income grew by 21,2% to R7,96-billion (June 2007: R6,568-billion). This increase was driven mainly by the 22,9% growth in average interest-earning banking assets.

The net interest margin declined to 3,83% for the period from 3,9% for the period to June 2007 and 3,94% for the year to December 2007.

“This reduction in margin was in line with expectations as deposit margins were impacted by strong competition for funding. Furthermore, the cost of the bank’s funding increased as the proportion of assets funded through wholesale versus retail deposits continued to increase and as the group lengthened the maturity profile of liabilities,” the banking group said.

Margins on advances declined during the period. This was due to asset mix changes with the growth of lower-risk, lower-margin assets, particularly within the personal loans portfolio.

According to the group, the pressure on home-loan margins has begun to slow and wholesale margins on new assets are improving. This pressure on deposit and asset spreads was partially offset by the endowment benefits of higher interest rates.

Non-interest revenue increased by 4,5% to R4,954-billion for the period (June 2007: R4,742-billion). Excluding Bond Choice’s commission and sundry income in 2007, non-interest revenue grew by 10,6% on a like-for-like basis.

The group’s retail Bancassurance and Wealth Division performed well, with headline earnings increasing by 20,5% from R161-million to R194-million in June 2008.

Advances increased by 18,3% (annualised) to R408-billion, with strong asset growth across all business units.

Overall deposits increased by 26,1% (annualised) from R385-billion in December 2007 to R435-billion in June 2008, with higher interest rates increasing demand for savings and investment products.

Despite strong growth in retail funding, deposit growth was still largely concentrated in the wholesale market. Management has remained focused on optimising the funding mix and profile of the group through using alternate funding sources, making a focused effort on the retail and business banking deposit bases, and pricing competitively for term deposits.

The group’s liquidity position and funding franchise remain strong. — I-Net Bridge