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The South African economy held up relatively well as global economic conditions deteriorated significantly in the first half of 2022. Russia’s invasion of Ukraine, the hard lockdowns in China and supply chain constraints resulted in a surge in global inflationary pressures, particularly in energy and food prices, and faster-than-expected monetary policy tightening. These conditions dampened global demand and triggered fears of recession in both advanced and developing countries.
Early in the year South Africa’s (SA’s) economy continued to gather momentum off the back of favourable terms of trade, resulting in strong seasonally adjusted gross domestic product (GDP) growth of 1,9% quarter on quarter (qoq) in Q1 2022. However, the second quarter was considerably more challenging as local economic activity was disrupted by the floods in KwaZulu-Natal, severe load-shedding, weaker global demand, escalating domestic inflation and the faster-than-expected rise in interest rates. We currently expect SA real GDP to contract by 1,2% qoq in Q2 2022. Electricity supply is a binding constraint on economic growth and job creation and urgent implementation of the Energy Action Plan is needed.
Nedbank Group’s financial performance in the first half of 2022 reflects an excellent performance across all key metrics in a complex and difficult external environment. We delivered strong revenue growth of 11%, a credit loss ratio (CLR) that was flat year on year (yoy) at 85bps and good cost management. As a result, headline earnings (HE) increased by 27% to R6,7bn. The group’s return on equity (ROE) increased to 13,6% (June 2021: 11,7%), and all our business clusters generated ROEs above the group’s cost of equity (COE). The group ROE was diluted by an average of R11bn of surplus tier 1 capital held at the centre as we remain appropriately conservative in an uncertain external environment. We retain surplus capital primarily for higher levels of future growth and dividend payments. Capital and liquidity ratios continued to strengthen as reflected in our common equity tier 1 (CET1) ratio of 13,5% (Dec 2021: 12,8%), tier 1 capital ratio of 15,1% (Dec 2021: 14,3%), average second-quarter liquidity coverage ratio (LCR) of 144% (Dec 2021: 128%) and net stable funding ratio (NSFR) of 120% (Dec 2021: 116%). These capital and liquidity outcomes support a strong interim dividend of 783 cents per share, which is up 81% and is now at levels above the 2019 pre-Covid-19 interim dividend.
During the past six months we continued to make good progress on our strategic value drivers of growth, productivity, and risk and capital management. Growth trends across net interest income (NII) (+9%), non-interest revenue (NIR) (+13%) and gross advances (+7%) improved from the Covid-19 pandemic lows, supported by main-banked client gains across our business clusters and strong growth in digital activity. Levels of productivity improved, evident in our cost-to-income ratio declining to 56,2% (from 58,5% in H1 2021) and a 17% increase in preprovisioning operating profit (PPOP). Key risk and capital management metrics remain robust, all having improved to above 2019 levels.
Our Managed Evolution (ME) technology strategy has reached 89% completion of the IT build, enabling continued double-digit growth in digital metrics. Client satisfaction scores are around the top end of the SA banking peer group, levels of cross-sell are increasing and cumulative TOM 2.0 cost savings of R1,2bn are ahead of target. Lastly, as we continue to create positive impacts, we remain committed to our market-leading Energy Policy as evidenced in renewable-energy lending exposures of R28bn, strong lending pipelines related to the Sustainable Development Goals (SDGs) and retaining our top-tier environmental, social and governance (ESG) ratings.
Looking forward, we currently expect SA’s GDP to increase by 1,8% in 2022; interest rates to increase by a further 75 bps, taking the repo rate to 6,25%; and the prime lending rate to 9,75% by the end of the year. Inflation is expected to peak in Q3 at around 7,8% and average 6,8% for 2022. A continuation of the good strategic and operational delivery, as evidenced in H1 2022, should support strong earnings growth for the full-year 2022 and a yoy increase in ROE. We remain on track to meet our medium-term targets* by exceeding our 2019 diluted headline earnings per share (DHEPS) level of 2 565 cents by the end of 2022 (a year earlier than planned) and achieving an ROE greater than the 2019 ROE level of 15%, a cost-to-income ratio of below 54% and the #1 ranking on Net Promoter Score (NPS) among South African banks by the end of 2023.
We thank all our employees for their commitment to delivering value to our clients and the economies in which we operate in line with our purpose of using our financial expertise to do good. As we continue to reintegrate increasing numbers of employees into the office in a phased manner, we look forward to reinforcing our strong Nedbank culture and reconnecting safely as one Nedbank.
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