Nedbank misses targets as recession bites

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The banking group expects earnings for the year ahead to be in line with subdued economic growth.

As Statistics SA confirmed on Tuesday, the country entered a technical recession in the final quarter of 2019, Nedbank said its financial performance last year fell below expectations after the weak economy and load shedding resulted in subdued demand for credit, lower growth in transactions and rising defaults in the banking industry. It has also guided investors to expect subdued growth this year.

The economy shrank by 1.4% in the three months to December, building on a 0.8% contraction in the third quarter. That resulted in full-year growth of just 0.2%.

Releasing results for the 12 months to end-December, the banking group said it experienced slower-than-expected growth as recessionary-like conditions prevailed. Combined with frequent power outages, the country’s unsustainable fiscal trajectory, ongoing policy uncertainty and a worsening global outlook, it said company profits and household finances deteriorated during the year.

Headline earnings fell 7.3% to R12.5 billion and its return on equity, excluding goodwill, declined to 16%, missing its target of at least 18% it gave with the release of its interim results last August. Apart from the challenging environment, it said headline earnings were impacted by hyperinflation in Zimbabwe, impairments, revaluations of a number of its private equity investments and the exercise of an option that will increase its shareholding in Mozambique’s Banco Único from 50% to 87.5%. This was partially offset by an improvement in costs, it said.

Despite the pressure on earnings, it said it made good strategic and operational progress and its balance sheet remained solid, with advances rising by 7.2% to R764 billion and deposits by 9.5% to R904 billion. Assets under management increased by 11.4% to R331 billion.

The bank grew net interest income by 4.7% to R30.2 billion. Its impairment charge increased 66.2% to R6.13 billion, resulting in a credit loss ratio of 82 basis points, up from 53 basis points and at the mid-range of its target. Non-interest revenue was flat at R26 billion due to lower private equity revaluations and a high base from renewable energy deals in 2018. Expenses increased by 1.7% to R32.2 billion. It earned R668 million from its stake in West African-associate Ecobank Transnational International. Diluted headline earnings per share declined by 6.3% to R25.65 and it has maintained its dividend at R14.15 per share.

Nedbank said the outlook for the global economy remained uncertain with risks increasing. The conclusion of a first-round US-China trade deal and the 75-basis point reduction in US interest rates since last August had been overshadowed by the outbreak of the highly contagious corona virus early this year. These developments had fuelled renewed risk aversion and re-awakened concerns over global growth prospects, it said.

“SA’s economic growth prospects remain subdued, undermined by persistent energy constraints, weak government finances and slow progress on structural reforms combined with a weaker outlook for global growth,” CEO Mike Brown said. “In this difficult SA macroeconomic environment, where we currently forecast GDP growth in 2020 to be only 0.7%, and given our 2019 base, our guidance for growth in diluted headline earnings per share for 2020 is to be around nominal GDP growth.”

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