Nedbank results show that it’s back to business

Things in the South African business world are returning to normal, if Nedbank’s interim results and management’s comments are anything to go by.

The bank surprised with an increase in headline earnings of 148% to R5.25 billion – earning nearly as much in the six months to June as it did in the whole of the previous financial year when it reported headline earnings of R5.44 billion.

“Nedbank’s financial performance in the first half of 2021 reflects a strong financial recovery off a low base, and key resilience metrics have all strengthened to above pre-crisis levels,” said CEO Mike Brown, indicating that the business world is returning to normal.

“Operating conditions in the first half of 2021 were better than we expected at the start of the year. This was evident in upward revisions to GDP growth, vaccine rollout gathering pace and positive developments on key reforms in SA.

“Interest rates are the lowest [they’ve] been in 53 years. [This] supported demand for retail credit, while transactional activity increased off a low base and benefitted from ongoing strong digital growth.”

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Brown presented a host of figures in a presentation to analysts and shareholders covering the transactional volumes of Nedbank clients in different business sectors that show things are improving. “The high-frequency data from client transactional turnover shows an improvement in operating conditions in the second half of 2020 and the first half of 2021,” he said.

Sector analysis

The Nedbank analysis shows that the airline industry is still dead, as are hotels and other accommodation concerns.

Banking transactions in the airline and hotel industry have been between 50% and 80% lower in just about every month during the last year compared with the base of March 2020.

Businesses in the telecommunications, retail and entertainment industry, as well as restaurants, have been improving steadily. Brown noted that transactional volumes of Nedbank clients in these industries have been up to 120% higher than in March 2020.

The numbers

Mike Davis, chief financial officer, reiterated in his overview of the figures that the half-year under review was “a much better period for banks and shareholders”.

He pointed out that all key drivers of shareholder value have shown recovery. “Net asset value has shown strong growth and return on equity has recovered, although not yet back to 2019 levels.”

Return on equity has recovered from the very low 4.8% a year ago to 11.7% during the six months to June 2021.

Nedbank also resumed the payment of ordinary dividends, although the rather low interim dividend seems to signal that management remains cautious.

While headline earnings have recovered to close to 2019 levels, the interim dividend of R4.33 per share is much lower than the R7.20 paid in 2019.

Indeed, Brown warned that the business environment remains risky, volatile and uncertain.

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It seems larger companies are equally cautious. Nedbank experienced lower demand for corporate loans as businesses opted to rather use excess cash to reduce debt levels, said Brown. “This was particularly noticeable in the commodity sector.”

Outlook

The obvious reason for the cautious approach is the ongoing Covid-19 pandemic. “The third wave of Covid-19 infections in SA led to the government imposing stricter adjusted Level 4 lockdowns towards the end of June.

“More recently, civil unrest in parts of Gauteng and KwaZulu-Natal is expected to negatively impact economic growth, with damage to physical assets, temporary interruptions of supply chains and many people left without an income,” said Brown.

Read: Lockdown, looting – how these showed up in consumer spending

He mentioned that while the unrest was restricted to a few areas, it will affect the entire country.

“The civil unrest is likely to reduce economic growth by 0.4% in 2021, while the new lockdown measures will affect growth by a further 0.4%.”

Thus, Nedbank expects GDP to increase by around 4.2% this year compared with earlier forecasts of 5%.

“Law and order and the protection of citizens and their assets are foundations for democracy, investment and economic activity, and it is important that steps are urgently put in place to prevent any recurrence and that those responsible are held accountable,” said Brown.

“It has been encouraging to see images of a united SA replace images of unrest and violence. Thousands of South Africans joined clean-up efforts, distributed food to communities in need and generally spread a message of positivity and togetherness.”

Nedbank management seems optimistic and expects a continued recovery in the business environment.

“Given the progress on our strategy and the group’s financial performance in the first half of 2021, we expect that headline earnings per share and earnings per share for the full financial year will increase by more than 20%,” said Brown.

“Our medium-term targets remain unchanged, as we aim to exceed our 2019 diluted headline EPS [earnings per share] of R25.65, increase return on equity to above the 15% achieved in 2019, and reduce our cost-to-income ratio to below 54%.”

Share price

While Nedbank is on track to recover from the difficulties of the last 18 months, the share price still has some way to go.

It is still some 25% below its pre-Covid levels of R240.

It also seems as if investors expected somewhat better results.

Nedbank dropped 1.1% after it announced its results on Wednesday, while the bank index ended the day flat. The share price of R181 might reflect the missed dividends and the lingering uncertainty that management warned of.

Read: Old Mutual investors to share R10.4bn of Nedbank stock