Tough start to 2024 for Nedbank – with the rest of the year not looking much better

 ·31 May 2024

Nedbank says the economic environment remains challenging, and expected improvements in the second half of the year will be marginal.

In a trading update, the group said that the operating environment in the first four months of 2024 was challenging despite lower levels of load shedding and the easing of transportation bottlenecks.

“Generally, economic activity was weak, impacted by geopolitical uncertainty, high interest rates
and high inflation,” said the group.

“Household finances remained under pressure as real incomes contracted and job prospects remained muted. Corporate activity was also weak, impacted by the uncertain political and economic environment.”

Economic activity is expected to remain weak but improve in the second half of the year, with inflation expected to decrease further, allowing the SARB’s MPC to start cutting interest rates from their 15-year high.

Inflation is expected to average around 4.7%, with the group also forecasting 2 interest rate cuts of 25 bps each during the final four months of 2024, with the prime interest rate at 11,25% at the end of the year.

That said, the Nedbank Group Economic Unit has cut its SA GDP growth forecast for 2024 from 1.0% (February 2024) to 0.9%.

“The implications of the difficult macroeconomic environment for our clients and, therefore, banks are evident in continued elevated levels of consumer strain and slowing credit and transactional revenue growth across both wholesale and retail portfolios,” said the group.

The group’s financial performance in the first four months to 30 April 2024 reflected headline earnings growth of around mid-single digits.

This was supported by strong growth in Retail and Business Banking (RBB) from a low base and solid growth in Corporate and Investment Banking (CIB). However, a decline in headline earnings in Nedbank Wealth and Nedbank African Regions (NAR) partially offset this.

“Headline earnings growth was driven by softer net interest income (NII) and non-interest revenue (NIR) growth when compared to our 2024 full-year guidance, a decline in the impairments charge and good expense management,” said the group.

Loan struggles

Credit impairments for the four months decreased when compared to the prior period, and the group’s credit loss ratio (CLR) declined but remained above the top end of the group’s board-approved through-the-cycle (TTC) target range (60 bps to 100 bps).

The group said that this outcome was in line with management expectations, with the CLR peaking in H1 2023.

Although RBB’s CLR declined due to better collections and improved loan origination, it remained above its TTC target range of 120 to 175 bps due to the continued high interest rate environment and normal seasonality in the first few months of the year.

The CLRs for CIB and Nedbank Wealth were within their respective TTC target ranges, while the Nedbank Africa Regions (NAR) CLR was slightly over its TTC target range.

“Stage 3 loans in CIB declined by just over R7bn since December 2023 post the resolution of a few high-profile exposures, while the average monthly increase in stage 3 loans in RBB in the period slowed materially when compared to H1 2023 and was broadly similar to the average monthly increase in stage 3 loans in H2 2023,” said the group.

“The group’s CLR is expected to remain elevated but decline further from the levels in 4M 2024 in line with the full year 2024 guidance provided (being to move back to within the top half of the group’s TTC target range), although the risk of interest rates remaining higher for longer and/or unexpected corporate defaults could pose upside risk.”

Changing of the guard

Former Absa interim CEO Jason Quinn officially joined the group on 22 May 2024 and will assume the role of CEO following Mike Brown’s planned retirement from the boards at the conclusion of the group’s annual general meeting today, 31 May 2024.

Brown will remain employed by Nedbank for an additional three months as a senior advisor to ensure
a seamless handover to Quinn.

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