Banking

Sparks of hope for South Africa – despite consumer crunch

Luke Fraser

 ·5 Mar 2024

Nedbank reported strong growth in earnings for the full year 2023 – but still took a blow from constrained customers being unable to pay back their loans.

However, the group is also hopeful that the South African economy is turning things around.

Speaking in the group’s financial results for the year ended 31 December 2023 (FY23), CEO Mike Brown said that the operating environment for banks in 2023 was more difficult than initially expected.

“In addition to a weaker global economy, domestic economic activity was impacted by record levels of load shedding, logistical constraints, higher-than-expected levels of inflation and, as a result, higher-than-expected increases in interest rates,” Brown said.

“Collectively, these conditions have put increasing pressure on consumers’ finances and led to reductions in business confidence and investment in most sectors other than energy.”

In the face of this operating environment, though, Brown expressed that there is a spark of hope with the partnership between businesses and the government in dealing with South Africa’s big issues.

“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 that are collectively resulting in very low levels of economic growth in South Africa and a weakening fiscal position,” he said.

Despite the challenges, the group reported improved headline earnings per share, which increased by 11% to R15.7 billion, underpinned by revenue and associate income growth of 12% and cautious expense management that enabled pre-provisioning operating profit (PPOP) growth of 15%.

However, the growth was partially offset by a 30% increase in the impairment charge. This was an improvement from the 57% increase seen in H1 2023.

The group’s credit loss ratio (CLR) thus improved from 121 bps (H1 2023) to 109 bps for the full year.

Although there was an improvement throughout the year, the CLR was still far higher than the 89bps seen in FY22.

Several financial institutions have highlighted elevated CLRs amid a strained consumer environment.

For instance, FNB’s credit loss ratio increased from 128 bps in the six months ended 31 December 2022 to 155 bps on 31 December 2023.

Nedbank did, however, see an improvement in headline earnings from Nedbank Africa Regions, albeit from a low base.

There were also “solid” performances in headline earnings and return on equity (ROE) from Nedbank Corporate and Investment Banking, Nedbank Retail and Business Banking and Nedbank Wealth.

The group thus upped its final dividend by 18% to 1,022 cents per share – a payout ratio of 57%. The full-year dividend was thus upped by 15% to 1,893 cents per share.

Outlook

Although there are several geopolitical uncertainties that increase risk, Nedbank expects the economic environment in South Africa to improve off a low 2023 base.

Nedbank’s economists expect GDP to increase by 1%, while the prime lending rate sees a cumulative decline of 75 bps in the second half of 2024 and end the year at 11.0%.

“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,” Brown said.

“Our strong financial performance in 2023, together with the progress made in executing on 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.”

Absa financial director Jason Quinn will replace Brown as CEO on 31 May 2024.

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