The world is changing fast and to keep up you need local knowledge with global context.
I got a little bit of a frown from Sasha Naryshkine a bit earlier, when I said to him ‘these are disappointing numbers from Nedbank’. ‘You were up 16 percent in the first half’. ‘You’re 13 percent for the year as a whole’. It looks like things have slowed down in the second half. Tell us the truth.
I think things did slow down in the second half Alec, and I think we expected them to slow down. Overall, 14 percent growth at a headline earnings level, slightly less than that at diluted headline earnings per share. We’ll probably, still finish the year better than we expected. If I had been sitting in your chair here a year ago, we said our forecast for diluted headline earnings per share growth was going to be above nominal GDP. GDP plus CPI, our medium to long-term target is GDP plus CPI plus five, and we didn’t add that extra five percent in our forecast last year. Looking back, we actually just achieved it, depending where GDP finishes.
Take us through that because you are very good at targeting and you have cost of capital, shareholder’s capital plus five percent, is the target that you are looking at, for instance, on return on equity.
I remember, years gone by, banks would say ‘well at least 20 percent’. In fact, when you were coming out of the trough you were saying, at Nedbank, a 20 percent return on equity.
Now cost of capital plus five is a long way from 20 percent. Yet, in the year ahead, you’re not sure that you’re going to get even there.
Cost of capital plus five percent is our ROE target and, right now that would probably be somewhere around about 18 percent. The return on capital we produced in last year’s numbers was 17.2 and I think generally, what you’re seeing is that the world of banking has changed dramatically since five or six years ago. Capital levels have increased significantly.
How much does that cost you, the increase in the capital levels?
I think, in terms of ROE, at least five percent, probably more, and interestingly if you look at the components of ROE. ROE, without getting too technical, is effectively your return on assets times gearing, and our return on assets now, at one-point-two-seven percent is very similar to what it was, pre the global financial crisis. Our capital levels at 11.6 are significantly higher.
What are some of the challenges then, in counteracting this growth?
I think the real challenge at the moment is the macroeconomic environment. Banks maybe more than any other industry are a product of the macroeconomic environment that they operate in, so the slower growth environment, particular here in South Africa, does make it difficult. Particularly on the retail side of our business, where we see consumers under pressure, and then we’ve got to try and say ‘well if growth in South Africa is going to be slower how do we continue to grow our franchise by following many of our corporate customers who are looking for growth, in the rest of Africa’?
The way that we think about is, strategically we’ve said that in Central and West Africa we’ve chosen a partnership approach, and ETI or Ecobank as our partner. In Southern and East Africa, these are markets that are closer to home, where we think our business has competitive advantage to compete as Nedbank, so Southern and East Africa we want to grow the Nedbank franchise.
Abil was a big story around August, clearly right in the middle of this Financial Year. How did that affect Nedbank?
From a financial point of view, very little effect. We had no direct exposure to African Bank. Clearly, a number of our customers would have exposure in Money Market Funds, where the underlying funds themselves were invested in African Bank. That was very difficult for us. It is very difficult when your customers don’t make the returns that you would expect them to make. Fortunately, we had relatively small exposure there. I know I was one of the customers invested in our Money Market Fund, so I didn’t make the return that I was expecting. It certainly likely to have an impact on the banks’ ability to access debt-capital markets going forward because at its most basic level, I think many asset managers weren’t appropriately taking account of the risk that they were taking, for the extra return that they were getting. For investing in instruments like African Bank, senior debt or African Bank, subordinated debt, so I think, going forward, anybody issuing into debt capital markets is likely to pay a premium above what they previously would have paid.
Having a look at the year ahead, you’ve now put on the table 13 percent headline earnings growth, 15 percent dividend growth. You’re saying that in your targets that your ROE won’t get up to your target levels. What kind of numbers are you working on, internally for profits?
I think if we go back to the forecast that we give the market, which is diluted headline earnings per share. What we are saying to the market is exactly what we told them 12 months ago. ‘We think we can grow diluted headline earnings per share, more than nominal GDP growth in 2015, but again, too early to say whether we’ll be able to get that five percent above that again.
Mike, that’s poor. That’s hardly, with one-and-a-half percent GDP, add five percent inflation, with the petrol price coming in, and you’re talking six-and-a-half percent. That’s a very low-ball focus.
Clearly, we say greater than that, so we would like to grow more than that but it is quite difficult to say six-and-a-half, seven percent. You put five on top of that. You’re pretty close to 12. We’ve just produced 13 in the prior period, and I think 2015 is going to be another difficult year, so it is difficult to put the five on this early in the Financial Year.
Can banks ever go back to shooting the lights out, as they used to do in the past, given these new capital ratios that you have?
I think that return on capital is certainly likely to be sustainably five percent lower than it would have been, when banks were hitting 25 percent ROE’s. I do think it is possible to get return on capital levels, certainly for Nedbank, closer to the 18 to 20 percent than where we currently are now.
To do that, it is going to require the economy to grow at three or four percent, and that certainly, in our view, is probably two or three years out.
With the Budget Speech coming up on Thursday, are you optimistic?
I think the Minister has got a very difficult task, during the course of this week. I think he’s got to demonstrate to both global investors and rating agencies that we’ve got a handle on expense growth, from a Government point of view, but at the same time that some of the very unfortunate issues that we’ve seen emerging in the Revenue Service, which has been one of our finest institutions. It hasn’t impacted on their revenue collection abilities, and hence the fiscal deficit. I think he’s got a very tight line to tread this week.
We’ll leave it there. Thank you so much to Nedbank’s Chief Executive, Mike Brown.
Have we made it through this interview without having an earth tremor, thank you Mike? You moved the world last time you were here but I think shareholders are quite happy with this. It is no doubt that one must have a look into the future with banks as you’ve just articulated to us with a more conservative approach towards the returns.
Alec, I think that’s right but if you look at where analysis consensus was, it was for 11 percent growth and we produced 13. If you were a Nedbank shareholder last year, with dividends and share price growth, you would have had 23 percent growth during the course of 2014. We think that that’s a solid outcome.
Thanks again for your time Mike. That was Mike Brown, Chief Executive of Nedbank.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.