The economy continued to recover in the first half of 2010. However, the upswing comes off a low base and remains fragile. Household spending has been slow to recover, with high personal debt levels, tight credit conditions and further employment losses hampering consumption. High wage settlements and lower interest service costs have led to an improvement in disposable income, but the benefits of these have been thinly spread, with many households still under credit-related pressure. Capital formation benefited from the strong effort to complete infrastructural projects ahead of the 2010 FIFA World Cup™ , but the underlying trend in the private sector demand for credit remains weak, given low capacity utilisation levels and continuing uncertainty over future prospects.
Headline earnings increased by 8,3% from R1 988 million for the period to June 2009 to R2 153 million for the six months to June 2010. Diluted headline earnings per share increased by 0,2% from 474 cents to 475 cents, which is lower than the increase in headline earnings as a result of the added dilution from the issue of shares for the Nedbank Wealth joint ventures acquired from Old Mutual in June 2009 and a higher than usual acceptance level of the scrip dividend alternative. Diluted earnings per share decreased by 22,4% from 611 cents in June 2009 to 474 cents. As previously reported, 2009 diluted earnings per share were boosted by a once-off International Financial Reporting Standards (IFRS) revaluation gain of R547 million (after taxation) from the consolidation of the Nedbank Wealth joint ventures acquired.1
These results reflect an improving operating environment. They also highlight the continued endowment-related pressure on margins following an unexpected 50 basis point decrease in the prime lending rate in March 2010 and slower than forecast wholesale credit growth. These factors were partially offset by asset repricing over the past 18 months and continued low impairments in Nedbank Corporate and Nedbank Business Banking.
Given the groups strategy to grow non-interest revenue (NIR), it is pleasing to report core commission and fee income growth on a comparable basis of 15,7%. Total comparable NIR grew by 7,8%, with NIR being negatively impacted by a R195 million change in the credit-related fair-value adjustments of the banks own subordinated debt as our credit spreads improved.
Nedbank Retail celebrated a milestone during the period with the total retail client base exceeding five million clients.
Lower interest rates have benefited impairments and the downward trend in early arrears remained intact. However, improvements in retail defaulted advances have taken longer to come through, compared with past cycles, as a result of the comparatively higher levels of debt to disposable income. This delay has been increased by challenges experienced in the debt counselling process. Recent discussions between the SA Reserve Bank, commercial banks and the National Credit Regulator on improving the debt counselling process are expected to have a positive impact, with new debt counselling inflows slowing and overall levels of advances in the debt counselling process stabilising. The level of defaulted advances in Nedbank Retail has improved to 11,9% from 12,2% in December 2009.
The group achieved a return on average ordinary shareholders’ equity (ROE), excluding goodwill, of 12,2% and an ROE of 10,7% (restated), resulting in an overall economic loss (earnings after deducting the cost of capital employed) of R352 million for the period (June 2009: loss of R24 million).1
The groups net asset value per share continued to increase, growing by 6,6% (annualised) from 9 100 cents in December 2009 to 9 397 cents in June 2010.1
|Cluster performance||Return on risk-|
|Rm six months ended||change||2010||2009*||2010||2009*|
|Nedbank Business Banking||(17,9)||437||532||28,9||23,7|
|Operating units||(8,1)||1 941||2 112||12,9||14,6|
|Total||8,3||2 153||1 988||10,7||11,6|
Nedbank Capital recorded a good RORAC and an economic profit of R232 million. The clusters headline earnings decreased mainly as a result of higher impairments and a drop in trading income from difficult trading conditions in the second quarter.
Nedbank Corporate recorded a solid RORAC and an economic profit of R123 million. The clusters headline earnings decreased primarily due to reduced endowment from lower interest rates and a negative swing in fair-value adjustments of R96 million year-on-year attributed mainly to downward movement in the short end of the yield curve in the fixed-rate advances book and associated interest rate swaps.
Nedbank Business Banking continued to generate a high RORAC and strong economic profit of R223 million. This was achieved despite the lower endowment earnings both from the environment of lower interest rates and the balance sheet efficiency exercise undertaken during 2009 and 2010 that reduced risk-weighted assets. As a result, capital utilisation was down by R1,5 billion in 2010 and headline earnings, on an aligned capital base, decreased by 9,5%.
Nedbank Retail recorded an economic loss of R859 million and a headline loss of R115 million. While this is marginally worse than in H1 2009, it represents an improved performance on H2 2009. The losses were mainly driven by lower endowment income and continued high levels of impairments. These were offset to an extent by continued asset repricing, an ongoing drive, in line with the group strategy to grow NIR, which grew by 14,7%, and disciplined cost growth, which amounted to 9,8%.
Nedbank Retail has undertaken a strategic review of the business and is being repositioned to be profitable on a sustainable basis through a greater emphasis on delivering distinctive client-centred banking experiences to all in South Africa, underpinned by worldclass risk management practices. This will include increasing the number and depth of client banking relationships; a distinctive low-cost offering for the unbanked and entry-level banking market; refining the Small Business Services offering to deliver more effectively to the distinct needs of this market; creating one private bank and high-net-worth offering through Nedbank Wealth; leveraging the strengths of the monolines as an enabler to generate deep banking relationships; and setting risk appetite metrics, including credit granting criteria to accord with the desired earnings and return profile. These strategic thrusts are aimed at improving the foundation for medium- and longer-term profitability and growth.
Nedbank Wealth continued to show a strong RORAC and recorded economic profit of R133 million. On a pro forma basis, adjusting for the acquisitions of the joint ventures and additional group cost allocations, headline earnings grew 2,4%.
The joint ventures of Fairbairn Private Bank, BoE (Pty) Limited and Nedgroup Life Assurance Company were purchased in 2009. While low United Kingdom interest rates and difficult local economic conditions have had an impact on the financial performance of Fairbairn Private Bank and BoE (Pty) Limited, the overall annual return on investment at 15,4% was higher than what was originally envisaged.
Imperial Bank delivered improved headline earnings, reflecting its strong position in the used-vehicle market. The low ROE of 11,9% underlines the importance of the drive to integrate the business into the broader Nedbank Retail and Nedbank Business Banking offerings to enhance cross-sell and improve returns.
The planning for the integration of Imperial Bank into Nedbank is going well, with clear accountability established for Motor Finance Corporation (MFC) by Nedbank Retail, for Supplier Asset Finance and Professional by Nedbank Business Banking and for Property by Nedbank Corporate Property Finance.
The group currently awaits approval of the section 54 application to transfer the assets and operations of Imperial Bank to Nedbank. The application was submitted to the Registrar of Banks and the Minister of Finance. The decision not to retrench any affected people during 2010 has ensured business continuity, which is beneficial for successful integration. The period not to retrench affected people will be extended to June 2011.
Further segmental commentary and detail can be found on the group website at www.nedbankgroup.co.za and in the results booklet.
Net interest income (NII)
NII decreased by 1,3% to R8 082 million (June 2009: R8 185 million), largely as a result of endowment-related margin compression. The net interest margin for the period was 3,34%, down from 3,44% for the period to June 2009 and 3,39% for the year ended December 2009. Average interest-earning banking assets increased by 2,8% (annualised) (June 2009 growth: 17,4%).¹
Changes in margin were mainly caused by:
- reduced endowment income on capital and current and savings accounts from the 294 basis point reduction in average interest rates;
- liability margin compression reflecting a higher cost of funding, including the cost of increased duration;
- the cost of holding additional liquidity buffers;
- a relative benefit in interest-earning assets repricing more quickly than interest-bearing liabilities as rates did not fall as aggressively nor as quickly as last year; and
- the benefit of improved asset pricing on new business.
Impairments charge on loans and advances
Improving conditions have resulted in the credit loss ratio on the banking book decreasing to 1,46% for the period, compared with 1,60% (restated) for the same period in 2009. Given the uncertain global economic conditions, we remain cautious on the wholesale sector as this sector tends to lag retail. Wholesale credit loss ratios, with the exception of Nedbank Capital and Commercial Property Finance within Nedbank Corporate, improved. Nedbank Corporates credit loss ratios remain below expectations for this stage of the cycle.
In the retail sector impairments for unsecured lending decreased as a result of improving arrears, the better quality of advances and recoveries. Stabilising defaulted advances and higher levels of restructured loans of R2,4 billion (December 2009: R1,2 billion) in secured lending have started to reduce impairments in these categories.
During the period the group aligned impairment methodologies for common clients of Imperial Bank and Nedbank. The group raised an additional R42 million in impairments through this process.
|Credit loss ratio (%)||H1 to||H1 to||H2 to||Year to|
|Nedbank Business Banking||0,32||0,79||0,25||0,52|
Defaulted advances increased by 9,9% (annualised) to R28 367 million, from R27 045 million reported in December 2009. Total impairment provisions increased by 24,5% (annualised) to R10 989 million for the same period, although the rate of increase has slowed dramatically compared with last year (June 2009: R9 142 million).
NIR increased 14,5% to R6 158 million (June 2009: R5 377 million). On a comparable basis, adjusting for the acquisition in 2009 of the Nedbank Wealth joint ventures, NIR growth was 7,8%. The ratio of NIR to expenses was 78,2% (June 2009: 75,5%).1
Commission and fee income grew strongly by 21,9% (on a comparable basis by 15,7%) from growth in transactional volumes and annual inflation-linked fee increases. This strong growth is pleasing in the light of the groups strategy to grow NIR. In Nedbank Retail the 8,2% year-on-year increase in primary clients as well as an improved mix contributed to NIR growth. This was further supported by strong growth in electronic banking, cash handling and cash management volumes in Nedbank Business Banking and Nedbank Corporate.
Trading income decreased by 3,9% from R928 million in 2009 to R892 million. The high base was due to outperformance in the Treasury and Global Markets businesses that benefited from trading conditions in the cycle of decreasing interest rates in the first half of 2009. Difficult conditions were experienced in the same period this year, although this was partially offset by equity trading that performed reasonably well.
NIR from the private equity portfolios increased by R98 million, driven primarily by the equity portfolio in Nedbank Capital.
|NIR from private equity (Rm)||Jun||Jun|
|Nedbank Capital private equity||86||10|
|Nedbank Corporate property private equity||(15)||(37)|
|Total NIR from private equity||71||(27)|
NIR includes a loss of R110 million (June 2009: profit of R85 million) relating to the credit-related fair-value adjustment of the banks own subordinated debt as Nedbanks credit spreads improved.
The group maintained a strong cost discipline ensuring that increases in expenses were below managements expectations. Expenses grew by 10,5% to R7 872 million (June 2009: R7 121 million), largely as a result of the acquisition of the Nedbank Wealth joint ventures and consolidation of Merchant Bank of Central Africa (MBCA), and on a comparable basis expenses increased by 7,5%.1
- Staff expenses increased by 12,3% (9,4% on a comparable basis), resulting from annual salary increases and an adjustment of R70 million (June 2009: R47 million) for the growth in the Nedgroup Pension Fund surplus assets. Staff numbers have decreased by 0,8% annualised since December 2009.
- Marketing and public relations costs increased by 23,0% largely due to the marketing spend ahead of the Nedbank Cup and the 20 0 FIFA World Cup , and increased spend within NedbankWealth joint-venture businesses on new-product marketing, cross-selling initiatives and ongoing advertising.
- The groups black economic empowerment (BEE) transaction expenses decreased from R66 million to R60 million mainly due to the maturing of the Retail Scheme.
The groups efficiency ratio deteriorated from 52,5% to 55,3% as expected and in line with negative growth in NII from the lower endowment income and margin on current and savings accounts.
The taxation charge (excluding taxation on non-trading and capital items) decreased by 10,1% from R642 million in June 2009 to R577 million with a decrease in the effective tax rate from 22,2% to 19,9%.¹ This was due mainly to:
- a lower provision for secondary tax on companies (STC), owing to an increase to 81,5% of shareholders who elected to take scrip for the 2009 finaldividenddistribution(2008finaldividenddistribution:32,0%),which does not attract STC;and
- reversals of tax risk provisions.
Non-trading and capital items1
Income after taxation from non-trading and capital items decreased from a R576 million profit to a R3 million loss at June 2010 following the once-off R547 million revaluation of BoE (Pty) Limited and Nedgroup Life in the first six months of 2009 on the acquisition of the remaining shares in the joint ventures.
Ongoing strong balance sheet management has maintained the groups capital ratios well above the groups internal targets and at levels similar to those of December 2009. As reported at the end of the first quarter, the acquisition of the minority shareholding in Imperial Bank was settled in cash, resulting in an approximate 0,5% decrease in the groups capital adequacy ratios. This was partly offset by a 0,28% increase in capital from higher levels of takeup under the scrip dividend alternative in the second quarter.
|H1 10||Q1 10||FY 09||target||Regulatory|
|Core Tier 1 ratio||9,9||9,8||9,9||7,5 to 9,0||5,25|
|Tier 1 ratio||11,5||11,4||11,5||8,5 to 10,0||7,00|
|Total capital ratio||14,8||14,7||14,9||11,5 to 13,0||9,75|
|(Ratios calculated including unappropriated profits.)|
All risk and capital methodologies and models are reviewed regularly to ensure they remain in line with best practice and industry and regulatory developments.
As previously advised, a number of enhancements relating to capital allocation to business clusters would be implemented in 2010. The main effects of these adjustments have been to allocate a large proportion of the surplus capital held at group to the clusters as well as refining the capital allocated in respect of credit risk to emphasise tail risk. This has been done and the comparative results for the operational clusters have been restated.
The key enhancements implemented were:
- an increase of the groups internal target solvency standard from 99,9% (or A-) to 99,93% (or A) (implemented in 2009);
- an update of the credit portfolio modelling correlations and revision of the credit economic capital allocation methodology, taking into account recent global developments and experience, and current best practice;
- a change in internal measurement of operational risk for economic capital purposes using the advanced measurement approach; and
an increase of the aggregate amount allocated to business clusters using bottomup calculated economic capital via the allocation of a capital buffer (limited to an effective 10% core Tier 1 regulatory ratio level for the group) and thus aligning the clusters more closely with group regulatory capital levels.
The above had no impact on the groups overall capital level, but significantly increased the quantum of capital allocated to each business cluster and impacted the RORAC recorded by the clusters on a steady-state basis.
Funding and liquidity
Nedbank Groups liquidity position remains sound. The group remains focused on diversifying its funding base, lengthening its funding profile and maintaining appropriate liquidity buffers.
Nedbank Group successfully increased its long-term funding ratio from 18,1% in December 2009 to 23,9% in June 2010, mainly from increased capital market issuances under the domestic medium-term note programme (R6,23 billion) and increased duration in the money market book.
The groups liquidity position is further supported by a strong loan-to-deposit ratio of 96,0% and a low reliance on interbank funding and foreign markets. Nedbank Group is able to leverage off its favourable retail, commercial and wholesale deposit mix, which compares well with domestic industry averages.
Basel III developments
We welcome the updated Basel III proposals as announced on 26 July 2010. While we believe that the capital proposals remain reasonably achievable, it is pleasing that the revised liquidity proposals are more supportive of the SA banking industry in areas such as:
- widening of the definition of liquidity assets to include an element of certain assets held by banks, such as government and public sector assets, which are risk-weighted 20% under Basel II, and certain high-quality non-financial corporate bonds; and
- extension and possible refinement of the net stable funding ratios during the observation period until 2018.
Advances grew by 4,9% (annualised) to R461 billion at June 2010 (December 2009: R450 billion). The advances by division are as follows:
|Nedbank Capital||57 640||55 315||8,5|
|- Banking activity||41 666||41 550||0,6|
|- Trading activity||15 794||13 765||29,7|
|Nedbank Corporate||142 010||137 173||7,1|
|Nedbank Business Banking||52 039||50 115||7,7|
|Nedbank Retail||139 868||138 411||2,1|
|Imperial Bank||52 742||50 451||9,2|
|Nedbank Wealth||17 378||19 089||(18,1)|
|Total||461 303||450 301||4,9|
In Nedbank Capital core banking advances, excluding foreign correspondents, overnight loans and trading advances, grew by a modest 0,6% (annualised) from December 2009. Nedbank Corporate and Nedbank Business Banking grew by 7,1% and 7,7% respectively. In Nedbank Retail personal loans performed in line with the groups strategic focus on this product, increasing by 37,1% (annualised). Cards and vehicle asset finance grew moderately by 7,6% and 6,2% (annualised) respectively and home loans decreased by 0,8% (annualised). The decrease in Nedbank Wealth resulted predominantly from a decision to invest an amount of £125 million in United Kingdom (UK) Treasury bills rather than placements with other banks, as well as from the strengthening of the rand.
Deposits increased by 4,8% (annualised) from R469 billion at December 2009 to R480 billion at June 2010, remaining in line with advances growth.1
Nedbank Group continued to focus on improving its funding mix and building on its strong retail and business banking deposit franchise. However, retail deposit growth remains challenging given the environment of low interest rates and a highly competitive market, while in the professional fund management market the cost of funding has increased as a result of the increased demand for higher-yielding negotiable certificates of deposit (NCDs).
The outcome from the Competition Commission process, announced in May 2010, has been positive, with no evidence found of collusion in the setting of fees and charges on transactional products.
Nedbank Group welcomes the pragmatic proposals emanating from the National Treasury process and they will further benefit clients. These proposals have resulted in Nedbank Group undertaking several strategic initiatives as part of the banks commitment to continue offering value-added banking.
The alliance with the Pan-African banking group Ecobank gained further momentum during the period following alignment of specific operating models to support various tailored product offerings through joint systems enablement. Our respective multinational corporate client bases in particular are starting to enjoy the benefits of this network, which offers the potential for revenue uplift. For the benefit of Ecobank retail clients Nedbank ATMs were enabled for regional cardholders.
Africa remains a key potential growth area in the longer term. The group, together with Ecobank, will continue to look at opportunities in Africa as they arise.
Conditions during the remainder of the year will be heavily influenced by developments in the global economy. South Africa has benefited from rising commodity prices and improved capital inflows, but international prospects remain uncertain. Domestic spending is expected to rise, although some loss of momentum is probable after the initial boost provided as companies restocked in early 2010 and as World Cup™-related spend fades. Interest rates are forecast to remain low well into 2011, given low inflation and below-trend economic growth.
Retail banking should fare better as household credit demand improves, house prices edge higher, and impairments moderate, although the defaulted portfolio is taking longer to cure than in previous cycles. Wholesale banking areas are expected to remain under pressure with slow credit growth as fixed-investment activity remains subdued, but transactional volumes are expected to improve gradually.
The negative endowment effect of capital and margin compression on current and savings accounts is anticipated to reduce during the second half if rates remain at current levels. At the same time asset quality improvement and impairment reductions are expected to continue, albeit at a gradual pace given the high levels of consumer indebtedness.
The group remains cautious in its outlook for the remainder of 2010 and performance is now expected to reflect:
- advances growth in the mid single digits;
- margin compression, on the 2009 margin, of around 15 to 20 basis points;
- ongoing, gradual improvement of the credit loss ratio;
- NIR growth for the year in early to mid double digits, subject to unforeseen moves in fair-value adjustments;
- expense growth for the year in early double digits; and
- maintaining strong capital ratios and funding structure.
Given this outlook for the second half, we currently anticipate that it will be challenging to meet the groups medium-term target for diluted headline earnings per share growth of the average consumer price index plus gross domestic product (GDP) growth plus 5%. As a result improvements in ROE for the balance of the year are expected to be muted.
Given the strength of the groups balance sheet, the development of the strategy to grow NIR and the benefits of the acquisitions made in 2009, the group is well positioned to take advantage of the economic upswing when it emerges more fully.
Shareholders are advised that these forecasts have not been reviewed or reported on by the groups auditors.
Bob Head and Jabu Moleketi resigned from the board with effect from 19 February 2010 and 1 March 2010 respectively. As previously reported, Tom Boardman was appointed a non-executive director of Nedbank Group and Nedbank with effect from 1 March 2010 following his retirement from the group.
Nedbank Group Limited is a company domiciled in South Africa. The condensed consolidated interim financial results at and for the half-year ended 30 June 2010 comprise the company and its subsidiaries (the group) and the groups interests in associates and jointly controlled entities.
Nedbank Groups principal accounting policies have been prepared in terms of IFRS and have been applied consistently over the current and prior financial years.
Nedbank Groups condensed consolidated interim results have been prepared in accordance with the recognition and measurement criteria of IFRS, interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and the presentation and disclosure requirements of International Accounting Standard (IAS) 34: Interim Financial Reporting, the Companies Act of South Africa, as well as the AC 500 standards as issued by the Accounting Practices Board or its successor.
In the preparation of these condensed consolidated interim financial results the group has applied key assumptions concerning the future and other indeterminate sources in recording various assets and liabilities. These assumptions were applied consistently to the group financial results for the six months ended 30 June 2010. These assumptions are subject to ongoing review and possible amendments.
The ratios for ROE and return on assets (ROA) have been restated with the denominator changing from simple average to daily average for equity and total asset values respectively. The calculation of the credit loss ratio has been changed from simple average advances to daily banking advances (thereby excluding trading advances from the calculation). Comparatives for ROE and ROA changes do not affect the segmental ratios, but do affect the group ratios while credit loss ratio changes affect both.
The comparative results for the operations segment reporting at 30 June 2009 and 31 December 2009 have been restated in line with the groups implementation of a revised economic capital allocation methodology. The restatement has no effect on the group results and ratios, and only changes segment cluster results and ratios.
There are no material events after the reporting period to report on.
KPMG Inc and Deloitte & Touche, Nedbank Groups independent auditors, have reviewed the condensed consolidated interim financial results of Nedbank Group Limited and have expressed an unmodified review opinion on the condensed consolidated interim financial results. The auditors review was conducted in accordance with International Standards on Review Engagements (ISRE 2410): Review of Interim Financial Information Performed by the Independent Auditor of the Entity. The condensed consolidated financial results comprise the consolidated statement of financial position at 30 June 2010, consolidated statement of comprehensive income, condensed consolidated statement of changes in equity, condensed consolidated cashflow statement for the six months then ended and selected explanatory notes. The selected explanatory notes are marked with ¹. The review report is available for inspection at Nedbank Groups registered office.
This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Nedbank Group and its group companies that, by their nature, involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, global, national and regional economic conditions; levels of securities markets; interest rates; credit or other risks of lending and investment activities; as well as competitive and regulatory factors. By consequence, all forward-looking statements have not been reviewed or reported on by the groups auditors.
Notice is hereby given that an interim dividend of 212 cents per ordinary share has been declared, payable to shareholders for the six months ended 30 June 2010. In accordance with the provisions of STRATE, the electronic settlement and custody system used by JSE Limited, the relevant dates for the dividend are as follows:
|Last day to trade cum dividend||Friday, 3 September 2010|
|Shares commence trading ex dividend||Monday, 6 September 2010|
|Record date (date shareholders recorded in books)||Friday, 10 September 2010|
|Payment date||Monday, 13 September 2010|
|Share certificates may not be dematerialised or rematerialised between Monday, 6 September 2010, and Friday, 10 September 2010, both days inclusive.|
On Monday, 13 September 2010, the dividend will be electronically transferred to the bank accounts of all certificated shareholders where this facility is available. Where electronic funds transfer is either not available or not elected by the shareholder, cheques dated Monday, 13 September 2010, will be posted on that date.
Holders of dematerialised shares will have their accounts credited at their participant or broker on Monday, 13 September 2010.
The above dates and times are subject to change. Any changes will be published on the Securities Exchange News Service (SENS) and in the press.
For and on behalf of the board
|Dr Reuel J Khoza||Michael WT Brown|
|Chairman||Chief Executive Officer|