Nedbank earnings plummet as it warns of weak economic recovery in South Africa

Nedbank on Wednesday (26 August), reported a 69% drop in headline earnings for the six months ended June 2020, to R2.1 billion, impacted by a significant increase in the impairment charge – up 202% to R7.67 billion, driven by expectations of rising job losses and a deteriorating economy.

Diluted headline earnings per share of 434 cents was down by 69.2%, while revenue of R27.2 billion, was down by 1.8%, it said.

The cost-to-income ratio of 56.4%, was up from June 2019: 55.4%, while no interim dividend was declared, from 720 cents declared in 2019.

“We have not retrenched any staff as a result of Covid-19 and have paid our 28,697 staff members salaries and benefits of R8.1 billion,” said chief executive, Mike Brown.

“At Nedbank our primary focus since the crisis started has been on resilience: ensuring the health and safety of our staff and clients; invoking business continuity plans; ensuring IT systems stability; supporting our clients in managing their finances through this very difficult period; and managing liquidity, credit risk, capital and discretionary costs closely,” said Brown.

In South Africa, recessionary conditions deepened in the first quarter of 2020, fuelled by power outages, the slow pace of structural reforms, a fiscal position that is unsustainable without a material increase in economic growth, as well as shrinking global activity due to the Covid-19 pandemic, which in turn prompted a strict economic lockdown at the end of March.

The rapid escalation of the Covid-19 pandemic was followed by the Moody’s and Fitch downgrades of the SA sovereign credit ratings, which combined to place unprecedented pressure on the local economy in the second quarter.

Nedbank said that prior to the lockdown, disposable income had declined, with consumer spending over the first quarter held up by increased borrowing, albeit at a slower pace.

As a result, the ratio of household debt to disposable income rose slightly to 73.7% from 73.0%, compared with a peak of 87.8% during the GFC.

The lockdown placed significant pressure on households’ already fragile finances and consumer spending is expected to contract sharply in the second quarter. Industry turnover data from point-of-sale (POS) devices and digital channels highlight a large decline in overall sales activity in April and subsequent recovery in May, June and July.

Compared to that for March, overall industry turnover data from POS devices and digital channels for April, May, June and July was 47%, 73%, 82% and 89% respectively.

Industries that held up well include telecommunications, grocery retail and wholesale stores, while airlines, entertainment, hotels and restaurants were most adversely affected, the bank said.

Nedbank said that the outlook for the South African economy remains weak. Household finances are forecast to remain under pressure in the second half of the year. Unemployment is expected to rise sharply over the next two quarters and is unlikely to recover quickly.

“Some improvement is expected later in the year, which, coupled with record low interest rates, is forecast to provide some support to consumers, reducing debt service costs and freeing up disposable income for discretionary spending.

“However, the recovery is expected to be weak and too late to prevent a sharp contraction in real GDP over the year as a whole. We currently forecast a contraction of around 7.0% in 2020, followed by a modest growth of around 2.5% in 2021,” it said.

The lender said that full-year HEPS and EPS are expected to decline by more than 20% when compared to the 12-month period ended 31 December 2019 (HEPS: 2 605 cents, EPS: 2 500 cents).

Read: Nedbank chief financial officer steps down

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Nedbank earnings plummet as it warns of weak economic recovery in South Africa