Nedbank’s special R700m bad debt knock suggests a tough reporting season for other banks through unsecured lending, First Strut

Executives at all the other major SA banks are taking a very close look at Nedbank’s interims released yesterday. There were messages and challenges aplenty – not just to rivals but also those who own banking shares.

Abil and Capitec are sure to face even tougher questions about the level of their provisions; FirstRand and Investec will need to deliver an equally cogent message on their own First Strut losses; ABSA’s top team will wonder how different life could have been under a less avaricious parent; and Standard Bank will be particularly interested Nedbank’s strengthening Chinese connection.

Those details aside, there has been a lot to like about the progress made by Africa’s fourth largest banking group since hugely

Tom Boardman - the ex BOE chief who steadied the Nedbank boat after Richard Laubscher's ousting
Tom Boardman – the ex BOE chief who steadied the Nedbank boat after Richard Laubscher’s ousting

ambitious CEO Richard Laubscher was cast off a decade ago. First Tom Boardman and now Mike Brown – both absorbed through Nedbank’s 2002 acquisition of BOE – have stuck to the basics, avoided the flamboyant and beavered away with little fanfare.

The result has been a stronger, more solid operation that is getting back to the Nedbank of old. The country’s most admired, highest rated banking group which lived by its tag line of being the group that attracted people “serious about your money.” Which, after all, is what most of us want from our bankers anyway. Brown (47) has been Nedbank CEO since 2010. Like Boardman he’s a chartered accountant, a profession which produces the executives boards (and shareholders) favour most during tough times. Even in gold mining where SA’s two major producers are today led by CAs – unthinkable in the past.

Another potentially excellent set of results from Nedbank was tarnished by two bad debt issues. The bigger, a near R500m write-off against profit to provide for losses in the unsecured lending book. The other, a hit of R182m on a R240m exposure, flowing from Nedbank’s exposure to the First Strut mess. Without those two knocks, pretax profit would have come in 22% higher.

The difficulties faced by Abil and Capitec in the unsecured lending market have been well documented. But such a big write-off by Nedbank ups the ante still further. Relatively speaking, Nedbank’s exposure to this dangerous end of the market is tiny (4.2% of total consumer advances). Things must be really bad in that space if the Green Bank sees the need to make such an aggressive provision. Last August’s disaster at Marikana exposed the Garnishee Order cancer and its direct relationship to the unsecured lending boom. The smart money has been moving away from micro lenders ever since. Nedbank’s approach to its exposure suggests we haven’t seen the half of it yet.

Almost as sick is the First Strut story. From what has already been exposed, its kingpin Jeff Wiggill role modelled himself on the lying financial thief Brett Kebble right down to arranging his own “suicide” when things got too hot. Once again, Investec is front and centre. But this time FirstRand is right alongside – with the added embarrassment that its RMB subsidiary was the promoter of the R925m First Strut bonds that are now worthless.

You have to feel for RMB. There is really little defence when your “client” only lies when they open their mouths. Kebble didn’t just take Investec and Allan Gray for a ride. But from the exposure already publicly exposed, next to Wiggill he was an amateur.

During our interview with Brown on CNBC Africa yesterday (video under the table below), I prodded him on capital. His

Nedbank CEO Mike Brown - like Boardman, came across in the BOE acquisition. Made of the same stuff as his highly rated predecessor
Nedbank CEO Mike Brown – like Boardman, came across in the BOE acquisition. Made of the same stuff as his highly rated predecessor

answer will be very interesting to the ABSA top team. After declaring almost R5bn in a special dividend (62% of which went to its cash strapped parent Barclays Plc), ABSA’s Tier One capital ratio is now 11.2%. Nedbank’s equivalent, Brown told me, is 11.8%. Why not follow ABSA with a special divi? No chance, he answered. There are too many opportunities, especially on the continent to even consider that. In Nedbank’s case, it means having the money to consider following an option buy a chunk of Togo-based Pan African banking group Ecobank. Brown says this opportunity would require a capital investment of R5bn.  Almost exactly the number which ABSA last week chose to return to shareholders.

The other positive signal from the results was Nedbank’s preference for partnerships and alliances instead of outright takeovers. There’s much to be said for courting before consummating, in life and business. The Ecobank relationship is a clear reflection of this culture. As is Nedbank’s purchase of an initial 36.4% of Mozambique’s Banco Unico.

In a similar vein, Nedbank has now “formalized” its alliance with Bank of China, the world’s 9th biggest banking group. Only time will tell whether this is the precursor for a second major Chinese investment in an SA bank. Given its parent Old Mutual’s previously stated desire to divest, it is not impossible. Given the recent performance of Nedbank, those running its parent must be rethinking all that. And even if a sale to the Chinese eventually happens, there would be benefits from avoiding a repeat of Standard Bank’s wham-bam marriage to ICBC.

Nedbank Group
Yearend December
Head Office Sandton
Shares in issue 510 204 377
Sector Banks
Market price © 18168
Tangible net asset value (c/share) 10444
Price to book 1.74
Market value (Rm)  92 694
Six months to: Jun-12 Jun-13 Rise %
Operating profit (Rm)  7 550  8 652 15%
Loans and Advances (Rm)  516 088  557 349 8%
Gross new advances (Rm)  69 000  83 000 20%
Net interest margin (%) 3.54 3.58
Bad debts (Rm)  2 702  3 325 23%
Bad debts (%) 1.11 1.31
Pretax profit (Rm)  5 039  5 460 8%
Attributable profit (Rm)  3 453  4 254 23%
Diluted headline earnings (c/share)   738   831 13%
Dividend (c/share)   340   390 15%
Dividend cover (times) 2.2 2.1
Tangible nav  9 435  10 444 11%
ROE excl Goodwill (%) 15.8 16.1 2%
ROA (%) 1.07 1.15 7%
Cost to income ratio (%) 55.6 54.2
Tier 1 equity 11.6 11.8
Number of employees  28 678  28 889 1%

 

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