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In 2023, the operating environment for South African banks was more challenging than initially forecasted. In addition to a weaker global economy, domestic economic activity was impacted by record levels of load-shedding (electricity shortages), logistical constraints, higher-than-expected levels of inflation and, as a result, higher-than-expected increases in interest rates. Collectively, these conditions have put increasing pressure on consumers’ finances and reduced business confidence and investment in most sectors other than energy. Progress, albeit slow, is being made in the partnership between government and business to help address the key issues of energy security, transport and logistics, and crime and corruption, collectively resulting in very low levels of economic growth in South Africa and a weakening fiscal position.
Despite this difficult and volatile operating environment, Nedbank Group produced a strong financial performance in 2023. Headline earnings (HE) grew by 11% to R15,7bn, underpinned by strong revenue and associate income growth of 12% and prudent expense management that enabled pre-provisioning operating profit (PPOP) growth of 15%. This growth was partially offset by a 30% increase in the impairment charge, a decrease from the 57% increase reported in H1 2023. As a result, the group’s credit loss ratio (CLR) improved from 121 bps (H1 2023) to 109 bps for the full year. The diversification benefit across our portfolio of businesses was evident in very strong growth in HE from Nedbank Africa Regions, albeit off a low base, alongside solid performances in both HE and return on equity (ROE) from Nedbank Corporate and Investment Banking, Nedbank Retail and Business Banking and Nedbank Wealth. The group’s balance sheet metrics remained strong, enabling the declaration of a final dividend of 1 022 cents per share, up by 18%, at a payout ratio of 57%. The R5bn capital optimisation initiative announced in March 2023 was completed successfully through a share repurchase programme and odd-lot offer executed at attractive levels, enhancing both ROE and earnings growth per share.
A highlight of the year was achieving all the group’s post-Covid-19 targets for 2023, which were announced in March 2021. Two of these targets were already achieved in 2022 – exceeding the 2019 diluted headline earnings per share (DHEPS) of 2 565 cents and ranking #1 on Net Promoter Score (NPS). In 2023, we increased DHEPS to 3 199 cents, up by 14% yoy, and maintained our #1 NPS ranking among South African banks. Pleasingly, at the end of 2023, we also met the remaining 2 targets by reporting an ROE of 15,1% ahead of the target level of 15,0% and a cost-to-income ratio of 53,9%, lower than our target of 54,0%.
These targets were achieved as a result of ongoing progress on the delivery of our strategy, with a focus on growth, productivity, risk, and capital management. Growth trends across average interest-earning banking assets (AIEBA) (+7%), net interest income (NII) (+14%), non-interest revenue (NIR) (+6%) and associate income (+64%) remained robust. Levels of productivity improved, evident in our cost-to-income ratio declining to 53,9% from 55,8% in 2022. Capital and liquidity ratios remained strong, with a common-equity tier 1 (CET1) ratio of 13,5%, an average fourth-quarter liquidity coverage ratio (LCR) of 135% and a net stable funding ratio (NSFR) of 117%, all well above board targets and regulatory minimums. The group’s total expected credit loss (ECL) coverage increased to an annual high of 3,62% (Dec 2022: 3,37%), and we remain conservatively provided in a difficult macroeconomic environment.
Our world-class technology platform, delivered through our Managed Evolution (ME) programme, which has reached 95% completion, supported continued double-digit growth in all digital-related metrics; client satisfaction scores remaining at the top-end of the South African banking peer group; higher levels of cross-sell; main-banked client gains across all segments; market share gains in key product categories; and improved efficiencies. We continued to create positive impacts through R145bn of exposures that support sustainable development finance (SDF) aligned with the United Nations (UN) Sustainable Development Goals (SDGs); maintained high levels of employee satisfaction; supported clients during difficult times; retained our top-tier rankings on environmental, social and governance (ESG) scores; and maintained our level 1 broad-based black economic empowerment (BBBEE) status under the Amended Financial Sector Code (FSC) for the sixth year in a row.
Looking forward, although geopolitical uncertainties increase forecast risk, we currently expect the economic environment in SA to remain challenging but improve off a low 2023 base. The Nedbank Group Economic Unit forecasts SA’s gross domestic product (GDP) to increase by 1% in 2024 and inflation to continue to decline. The forecast is for the South African prime lending rate to decline by 75 bps in the second half of 2024 to end the year at 11,0% and private sector credit growth to be muted at around 5%.
While we were pleased to have achieved all our 2023 targets while operating in a more difficult economic environment, we aspire to deliver ongoing improvements in ROE to increase shareholder value. Our strong financial performance in 2023, together with the progress made in executing our strategy and underlying momentum in the business, gives us confidence in delivering on our medium-term targets* and, in particular, our aim to increase our ROE to 17% by 2025 and above 18% in the long term.
As I reach the final stretch of my 14 years as Chief Executive of Nedbank Group, I look back with pride on our achievements and the challenges we have overcome together. When I retire at the annual general meeting in May 2024 and hand over to Jason Quinn, I know I will leave behind a better Nedbank than what I was entrusted with and that Jason and the Nedbank team will inherit strong foundations from which to build an even better future for all our stakeholders.
Thank you to all the Nedbankers who have been part of this journey and our more than 7,3 million retail and wholesale clients for choosing to bank with Nedbank. We also appreciate the investment community, regulators, and other stakeholders’ ongoing support. As Nedbank, we continue to play a constructive and positive role in society as we fulfil our purpose of using our financial expertise to do good for the benefit of all our stakeholders.
Mike Brown – Chief Executive, 5 March 2024
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Nedbank CEO sees South Africa policy continuity with ANC dominance
By Adelaide Changole
(Bloomberg) – South Africa investors should expect the nation’s embattled ruling party to retain power in the May 29 election, which would keep its policies in play even if it doesn’t win an outright majority, the head of Nedbank Group Ltd. said.
According to outgoing Nedbank Chief Executive Officer Mike Brown, investors are likely to be patient as they await the outcomes of polls in more than 60 countries worldwide this year, including in the lender’s home market of South Africa, where the African National Congress has had a majority for 30 years since the advent of democracy in 1994.
“What every single poll tells you is that the ANC is likely to be — by far — the largest party in parliament — they may be just below 50% or just above 50%. And that means largely existing policies are likely to remain intact,” Brown said in an interview with Bloomberg Television’s Jennifer Zabasajja.
The ANC won plaudits during the the first half of its rule for growing the economy and expanding access to running water, electricity and welfare grants. Its performance deteriorated markedly during President Jacob Zuma’s almost nine-year tenure, which was marred by a succession of corruption scandals, inappropriate appointments, and policy missteps.
Zuma stepped down in early 2018, but his successor, Cyril Ramaphosa, has struggled to overcome chronic electricity shortages, logistics constraints and rampant graft. A series of opinion polls show support for the party slipping below 50%, meaning it would have to enter into a coalition with one or more rivals to continue governing.
Policy concern
The lack of change will be a double-edged sword, because it means policy continuity on much-needed reforms but also no change on unpopular initiatives mooted by the state, such as a controversial national health-insurance plan.
“Some policies — certainly for business — are a concern,” Brown said, adding that the private sector sees the NHI as “unconstitutional, unaffordable and unimplementable.” Conversely, he said the work toward resolving the energy crisis — which includes enabling generation by the private sector — is “absolutely foundational” to addressing the problem.
The South African economy probably expanded 0.5% in 2023, with growth set to increase to between 1% in 2024, constrained by continuing power cuts and deteriorating rail and port services, according to Nedbank. The subdued environment is likely to hamper private-sector credit growth, which the lender sees muted at around 5%.
Brown said South African inflation “has firmly peaked,” and that the lender expects 75 basis points of interest-rate cuts in the second half of 2024, “which should help consumer confidence and improve debt-service capabilities.”
Lower interest rates will help boost the credit environment, and allow Nedbank to reduce its credit-loss ratio toward its target range of 60 to 100 basis points in 2024, compared with 109 basis points in the year to December, he said.
Nedbank’s profit attritable to shareholders rose 7.1% to 15.3 billion rand ($803.4 million) in the year to Dec. 31, as interest income climbed 14%, the Johannesburg-based company said in a statement.
The bank declared a final dividend of 10.22 rand per share, surpassing analyst estimates. Its stock climbed as much as 4.6% — the most since Dec. 14 — before paring gains to 4.2% by 10:39 a.m. in Johannesburg.
