Nedbank Group Limited (NED) Earnings Call Transcript & Summary

Welcome to the Nedbank Group interim results presentation for the 6 months ended June 30, 2020.

Good afternoon, ladies and gentlemen. I'm Mike Brown from the Investment Analysts Society of South Africa. We're being hosted today by Nedbank Limited. This is a presentation of their interim results, and we're delighted to be able to hear what they've got to say. We're typically used to having a live presentations, so this is somewhat different and that it's a webinar. But any people participating in this will be allowed to send in their questions and to ask any questions I have on the teleconference as well. So this works pretty much as our normal live presentations too. And we're delighted as a society, the Investment Analysts Society has more than 1,000 members to be able to listen in effectively live to this presentation and to be able to hear what Nedbank and their team have got to say about their presentation. So without any further ado, I'd like to thank Mike Brown, the other Mike Brown, who is the Chief Executive of Nedbank, and ask him to start the presentation. Over to you, Mike.

All right. Good afternoon to everybody on the phone lines and on the webcast, and welcome to Nedbank's first virtual interim results presentation. We do live in unprecedented times given the COVID-19 pandemic and the subsequent lockdowns, which have impacted on individuals, families, businesses and society. And our interim results reflect the outcome of these on the financial health of our client base. I'd like to, again, offer our condolences to the family and friends of the 5 Nedbank staff members, who have passed away as a result of COVID and related illnesses. So after a relatively uneventful first quarter, where we reported net interest income up mid-single digits, noninterest revenue up low single digits and impairments increasing, but still remaining within the top end of our through-the-cycle target range of 60 to 100 basis points. In mid- to late March, the health and economic impacts of the pandemic escalated very quickly in South Africa, and the primary focus of Nedbank switched to one of resilience, meaning looking after the health and safety of our staff, supporting our clients in their time of need and ensuring maximum system uptime, maintaining a strong balance sheet and significantly enhanced communication to staff, investors and clients. And while our performance in headline earnings terms is significantly lower than last year, the Nedbank teams have done an excellent job in respect of the matters that I've just referred to under the banner of resilience. And I trust this will be evidenced in our presentation today. The first 6 months of 2020 was a very difficult environment for South Africa, our clients and banks, and we are fortunate that the banking system entered this period from a position of strength. As I said upfront, our primary focus has been on the health and safety of our staff and supporting our clients with less focus on profitability other than as an initial buffer against capital. We've maintained strong balance sheet metrics right throughout the crisis, all well above regulatory minima and Board targets. And we've increased our provisioning with a total coverage ratio of 2.95%, the highest since the global financial crisis. Given the times that we're in, we've changed the usual format of our results presentation. And instead of each of our customer managing executives speaking to their respective results, which are available for you in the booklet, Trevor Adams, our Chief Risk Officer, will speak after Raisibe on how we have managed the business through the crisis from a risk management perspective and give you what we think is very insightful data on our approach to credit risk, in particular, given its importance in the current environment. You will also see materially enhanced disclosures in our booklet in respect of credit risk. And after that, our CFO designate, Mike Davis, will speak on liquidity risk, market risk and stress testing. From a financial perspective, headline earnings was down 69% to ZAR 2.1 billion. And this reflects the impact primarily of a significant increase in impairments and the impact of the lockdown on activity-based revenue streams, particularly in the second quarter. Our annualized credit loss ratio was up to 194 basis points, inclusive of ZAR 2.9 billion of judgmental overlays and the impact of the IFRS 9 macro forward-looking assumptions. These essentially together are provision builds for real client losses that we currently forecast will emerge later on. Our results were also impacted by lower interest rates, lower transactional volumes since the lockdown and negative revaluations from unrealized private equity holdings, and Raisibe will unpack all of these in more detail. As usual, expenses were very well managed and were down 1%. During this period, we moved very quickly to tilt our strategic emphasis. And later, I will share my thoughts with you on the 3 key phases of this, being resilience, as I outlined earlier, and then shifting to transition and reimagining the future. Looking at the environment, it's common cause that South Africa entered the COVID-19 crisis on the back of an already very challenging macroeconomic environment. Unfortunately, the real cost of the damage done to the South African economy and government finances and government delivery capacity over the last 10 years has been even more starkly exposed by the crisis and the multiple credit rating downgrades the country has experienced, albeit that rating agencies continue to recognize the strength and depth of our financial system as a country strength. On the right-hand side of this slide, we list a number of key and well-known challenges that we face as a country. And the urgency with which growth enhancing structural reform is now required to avert the risk of a sovereign debt crisis cannot be underestimated. The medium-term budget statement will be a vital point for us to show progress in this regard. Last year, at this time, I said South Africa was fast running out of both time and money. And while it is not possible to accurately predict a so-called Minsky moment for our sovereign debt, the COVID pandemic and debt downgrades and their impact on the fiscus has certainly accelerated this trajectory. In South Africa, the COVID-19 pandemic quickly turned like it did globally, from a health crisis to an economic crisis. And it is escalating to a social crisis, as our already horrific unemployment levels increase even further with the fiscal position, unfortunately, preventing any material increase in the cost of the social safety net. The good news on the health front is that daily infections have now started to decrease and look like they may have peaked in South Africa. In our static countries to date, there appears to be a lower level of infection. And infection rates have lagged that of South Africa, although we do recognize that testing has also been less. Our Nedbank economic unit's current forecast for GDP in 2020 is to decline by around 7%, with the second quarter GDP expected to decline more than 40%. The recent lifting of the lockdown to level 2 will provide some support to the economy in Q3 off a low base, but ongoing concerns and risks of load shedding presents downside risk to this. On the social front, tensions are rising, and the allegations of fraud and corruption around COVID-19 tenders are alarming. Our economic unit expects 1.6 million job losses this year, with unemployment peaking at 35% in the second quarter before improving slightly to 31% by the end of the year. A key discussion point with investors over the last few months has been how the COVID pandemic, which gave rise to what is now being known as the great lockdown crisis, compares to the most recent crisis, the global financial crisis. Fortunately or unfortunately, I've been in banking for nearly 30 years and have seen a number of these events. In this table, we provide a high level comparison as to how we see the global lockdown crisis relative to the global financial crisis. The global lockdown crisis is much broader in nature, impacting economies and industries right across the world on both the supply and the demand side. And while the global financial crisis broadly played out within 2 to 3 years with the regulatory agenda arguably still continuing, there's still significant debate around whether the global lockdown crisis will be a V, L, U or even a W-shaped recovery, with much depending on the rates for a vaccine as well as the impact of any second waves of infection and needs for lockdown as we have seen in some other countries already. Importantly, the South African government and the SARB responded very quickly, much faster than was the case in the global financial crisis with a ZAR 500 billion stimulus package, 300 cumulative basis points reduction in interest rates as well as various bank regulatory relief measures and bond buying by the SARB albeit on a limited basis, all intended to limit, but certainly not offset all of the economic damage from the great lockdown. Taking our analysis one step further. On the left-hand side, we show how the South African economy was in much worse shape entering the global lockdown crisis, but on the right-hand side, how our banking system was in much better shape. The economy was in a relatively good position 10 or so years ago when we entered the global financial crisis. You can see government debt levels around 26% and budget surpluses. Today, government debt has increased to unsustainable levels, and we simply do not have the fiscal space for greater quantities of real stimulus. On a more positive note, inflation and interest rates are at near 47-year lows. From a banking point of view, South African banks managed very well through the global financial crisis where, in fact, banks were the cause of the problem. In the global lockdown crisis, banks are not the cause of the problem and are, in fact, part of the solution given the various support measures provided to our clients. Also, in recent years, credit growth has been much more prudent, around 5% to 7% per annum, compared to the around 20% credit growth in the lead up to the global financial crisis, and capital and liquidity levels are significantly stronger effectively given Basel III. A key difference, however, this time is in accounting for bad debts. And while real bad debts cannot change irrespective of the measure of accounting, what we know is that IFRS 9, the new accounting standard requires banks to take a forward-looking view and recognize accounting impairments much faster than was the case under IAS 39. Turning now to some focus on our own high-frequency data and how the COVID pandemic has played out in this data over the last couple of months. In these graphs, we show you client data, turnover data from our point-of-sale devices and digital channels. And with roughly 25% market share in point-of-sale devices in South Africa, we think this data is well representative of the overall economy and the industries. The green bars highlight the turnover for each industry in the months prior to lockdown. The red in April represents lockdown level 5. The lighter red and orange bars represent levels 4 and 3, respectively. So just a few highlights on a busy slide. In the top left-hand corner, you can see the total of all turnover across all industries. And as we entered lockdown, you can see in March how this turnover fell to less than half -- sorry, in April, you can see how this fell to less than half of the levels in March before recovering in May to 73%; June, 82%; and July back to 89% of March or pre-lockdown levels. The industries in the top row are those that have proven to be more resilient, primarily being telecoms and retail and wholesale stores. The industries in the second row are those that have taken slightly longer to recover, including the automotive industry, health care, and turnover here remains below pre-lockdown levels. The bottom row represents those industries that were most impacted and still remain under pressure, and many of them have only recently started recovering in June and July. Hotels and aviation still remain under pressure with very little activity to date. Turning now to our response to the crisis. As I noted right upfront, our primary focus was on the health and safety of our staff and clients as well as remaining open for business and supporting our clients through this difficult period. And we tilted our strategy to initially focus on the 3 buckets that you see on this slide. We have been fortunate to have a strong and experienced management team in place to deliver on this. In the second and third quarters, we focused on managing the crisis. We call this resilience. In this period, front of mind was a focus on liquidity, capital, market and credit risk. In addition, we ensured operational resilience, IT stability and continued to roll out our digital IT innovations even with more than 70% of our campus staff working from home. Stress testing and managing discretionary expenditure along with significantly heightened communication to staff clients and investors were also front of mind. Looking forward to the second and third quarter -- sorry, looking forward, to the third and fourth quarters, we aim to shift our focus into reintegrating our staff and as lockdowns are lifted. And we have started our forward-looking strategic planning where we are building on our strong digital foundations to reimagine a future for us and our clients, which is likely to be different from what we previously anticipated. On the strategy front, Nedbank investors will be very familiar with this slide that we consistently show as the spine of our strategy, and this has not changed. Our central focus remains to create great client experiences, and, as a result, grow our client base faster than the market in key value-creating areas with a particular focus on our transactional franchises. While COVID has slowed client behavior, our strategic intent remains. We enable this through our investments in technology with our managed evolution and Digital Fast Lane Programs as well as the changes we are making to our people practices and brand. Given its strategic importance, I will again highlight the progress that we've made in our technology strategy in the next few slides. Our Target Operating Model 1.0 is delivering in excess of the expected benefits with cumulative savings at the interim stage of ZAR 1.5 billion, already ahead of the ZAR 1.2 billion target we set for ourselves for the full year in 2020. Lastly, you will recall that in our May SENS announcements, we suspended our medium- to long-term financial targets, like many banks have done. And we currently expect to update investors on these at year-end once we hopefully have more certainty and clarity on the future health and therefore economic outlook. On the tech front, our new digital capabilities have been extremely beneficial during the crisis. We are making ongoing progress on our managed evolution journey despite the lockdown and are now 75% complete, targeting to be 80% or what we call material completion by the end of the year. On Eclipse, with end-to-end individual digital onboarding now fully in place, we have finalized the pilot of juristic onboarding and have started a full-scale rollout, which is progressing very well in Retail and Business Banking and has only just started in Corporate and Investment Banking. We digitized 3 additional products; card, investments and overdraft adding to transactional products and personal loans that we completed last year. As a result of this digital sales capability, digital sales increased from 18% a year ago to 53%. Digitally active clients have increased steadily reaching 25% in this half. In addition to digitizing products, we have also been digitizing services, and we reached 168 digitized services by June, up from 86 a year ago. And this has been very beneficial during the lockdown, where our clients could use their app and internet banking rather than go into a branch for these services. Lastly, it's always good to get some independent acknowledgment, and we were pleased to have one South Africa's best banking app, Best Technology Implementation and Most Innovative Digital Branch Design at the recent Global Banking and Finance Awards. During the crisis, we continued to launch the new and innovative digital products to our clients. A few of these include Avo, our super app or platform, where clients can procure goods and services, which was built from the ecosystem work that we did in 2019. We now have more than 700 businesses that clients can procure goods and services from and easily affect payment in a secure manner across Nedbank payment rails, and we aim to scale this further in the second half. Our tap-on-phone capability was a first for Africa, and merchants can now use their smartphones to accept payments without physical contact. We also increased our support for spaza shops and SMEs with appropriately innovative solutions. Our digital innovations were acknowledged by clients in the first half, and this is reflected in the very high level of our app rankings, various internal Net Promoter Scores and Nedbank remaining #1 in the BrandsEye social media sentiment for the 3 months post lockdown, highlighting the excellent work Nedbank's staff have done in helping clients in extremely difficult circumstances. Turning now to our response to the COVID pandemic from a staff, client and society point of view. For staff, the transition to working from home wherever possible has been seamless, and we have supported all of our staff with full salaries, regardless of their ability to work from home or not. Thankfully, infection rates seemed to have peaked from around 600 in July to currently around 200. Unfortunately, as I said upfront, 5 Nedbanker's have died as a result of COVID and related illnesses. For clients, a very important part of our client value proposition is to support our clients in good standing in their time of need. And our teams have done an amazing job in communicating and supporting the restructuring of over 400,000 client accounts, all done during lockdown. For society, we have contributed in many ways to COVID relief and have been active participants in various business organizations seeking to help the South African economy to grow. Lastly, we have worked very closely with our regulators, National Treasury and the Banking Association, who collectively have done an excellent job to ensure the safety and soundness of our financial system over the COVID-19 pandemic. This slide shows the key regulatory responses, directives and guidance notes issued by the SARB, with the underlying principle being that banks build up buffers in good times for these to be used in bad times in a way that produces procyclicality in the overall economy. I won't go into all of the detail as Trevor Adams will cover these later, but to note that from a liquidity perspective, our LCR is well above the revised 80% minimum, in fact, still well above the old 100% minimum. We provided D3 qualifying restructures to more than 375,000 clients on ZAR 119 billion of loans. Capital levels remained strong with a CET1 at 10.6% and a Tier 1 at 11.7%, and we have been able to issue ZAR 4 billion worth of Tier 2 capital, ZAR 2 billion in June and another ZAR 2 billion in July to replace the ZAR 2 billion of Tier 2 that was redeemed. The Nedbank Board has applied its mind to SARB Guidance Note 4 and decided that no interim dividend would be declared at the half year. Before I hand over to Raisibe for her last Nedbank results presentation, I would like to thank her for her valued contribution to the Nedbank Group over the last 10 years. It has been an absolute privilege and pleasure to work alongside her, and I will certainly miss her. And I wish her all the very, very best in the next stage of her career journey. In the current volatile environment, I am thankful we are able to use our bench strength to make an immediate appointment, and I am confident Mike Davis will step seamlessly into the CFO role from the 1st of October, and you will hear from him later in the presentation. So Raisibe, once again, a very big thank you. And over to you to go through some of the underlying detail in our financial results.

Thank you, Mike. As I present the results today, this being my 22nd and my last Nedbank results to the Investment Analysts Society, I want to express my deepest appreciation to Mike Brown for giving me the opportunity to work for him and continue to benefit from his wisdom and visionary leadership. I have lend the trade and have grown both in presence and in confidence during this time. In me, he created an avenue for many firsts. I have gained the next opportunity only because I am here doing what I'm doing today. The Nedbank Board and the 3 chairpersons of the Audit Committee that I worked for have also played a role in shaping me. And to all these wonderful leaders, I am truly grateful. Turning to results. The impact of the COVID-19 pandemic was most evident in significantly higher impairments. The last 6 months was a very difficult period, particularly when compared to the global financial crisis. Looking at the key drivers of value creation for our bank, net asset value per share decreased by 0.7% since December, and the group's ROE declined to 4.8%. And as Mike noted, no dividend was declared. Headline earnings and DHEPS both decreased 69%. Earnings per share was down 81%, reflecting the ZAR 750 million impairment we took on our ETI investment. Total comprehensive income declined by 40%, given the benefit of FCTR. However, balance sheet metrics were resilient as advances grew 7% and deposits by 9%. Our more substantive KPIs highlight resilience during the crisis, maintaining strong liquidity and capital positions. These metrics indicate that we were well above regulatory requirements. The credit loss ratio increased 194 basis points, supporting an increase in our total coverage ratio to 2.95%, a multiyear high. Turning to our usual waterfall slide, we show the key drivers of the headline earnings decline. NII increased marginally, and NIR was down on the prior year. Impairments, up more than 200%, was the key driver of the headline earnings decline. Expenses were well managed. And as you will see later, associate income declined 77% as we are countered for our share of ETI's restatement, which was included in their 2019 results and in Nedbank's current results. Total comprehensive income declined by 40%, less than the headline earnings decline of 69%, given the benefit of the currency translation gains. Reflecting on the quality of earnings, there were a few large moving parts in this half, namely declining interest rates resulted in ZAR 569 million lower headline earnings, while the impact of forward-looking macro model assumptions and the judgmental overlays reduced headline earnings by a further ZAR 2.1 billion. We benefited from fair value increases from our macro hedge accounting solution and the trading income outperformance at a combined ZAR 800 million. This were offset by unrealized losses in private equity, decreasing headline earnings by ZAR 786 million. And as indicated by Mike, and stated in our previous market updates, the ETI restatement shaved off ZAR 236 million from our first half's results. NII increased 1%, having been driven by 8% average interest-earning banking assets growth. Given the deep interest rate cuts of a cumulative 275 basis points, our net interest margin declined by 24 basis points, primarily as a result of the loss of endowment income. Funding pressure took off a further 6 basis points, but high-quality liquid assets improved NIM by 5 basis points. The impact of lower interest rates will run rate into the second half, and I wish to remind you that our sensitivity for 1% change in interest rates over 12 months is around ZAR 1.3 billion. Banking advances grew 7% year-to-date annualized, driven by strong growth in CIB's banking advances. The graph on the right provides more insight into the developments during the crisis with CIB benefiting from increased client drawdowns on existing credit facilities, while RBB was impacted as secured lending came to a halt. Payment relief through Directive 3 restructures supported advances and slower repayments ensured that RBB remained broadly flat for the 6 months. The high increase in CIB banking advances were carried in March 2020 as lockdown started, and this is reflective of increased drawdowns as clients required additional liquidity during the crisis and as foreign loan values increased due to exchange rate movements. This is evident in the graph on the right. In April, there was a significant reduction in new loans, while clients continue to draw down on existing exposures, resulting in a peak in banking advances. Repayments also reduced over this period as Directive 3 restructures increased. This trend started to normalize towards June, and we expect more muted growth in advances for the remainder of the year. CIB continues to focus on selective origination in both investment banking and property finance with a focus on optimizing returns on RWA. Providing a little more insight on RBB lending developments, home loans and MFC essentially came to a halt during level 5 of the lockdown as the dealers' office and motor dealerships closed. Growth in applications since then has been robust given the pent-up demand, reduced interest rates and reduced asset prices. Loan approval rates for home loans were at 52%, and MFC declined to 32%. Personal loans applications declined as well, but has not yet recovered. Reduced demand and physical branch closures impacted new applications, although digital sales increases had been from 6% to 28%. Approval rates are down on the prior year. In Business Banking, loan application spiked in April, similar to CIB, as we supported clients and their access existing credit facilities. These activities, they're a testimony to several initiatives that Mike mentioned, illustrating how we supported our clients through this tough period. Deposits grew 9% on a year-to-date annualized basis, ahead of advances, improving the group's loan-to-deposit ratio to 87%. Current accounts and savings accounts and cash management saw solid increases as clients propped up their short-term cash requirements, and, in many cases, by accessing existing loan facilities. Growth in call, term and fixed deposits were muted as the shift to short-term deposits took hold. NCDs and other deposits increased strongly on the back of strong client demand following interest rate cuts. Turning to NIR. Growth declined 5%. The key drivers were commission and fees declining 9% as the lockdown impacted client transactional activity in the second quarter, and we offered various fee concessions in April and May to the value of ZAR 104 million. The move to cheaper digital channels added to the pressure on NIR. Trading income increased 44% as we benefited from volatile markets and increased client volumes and the trading income outperformance. Insurance income declined 8%, impacted by increased actuarial reserves and higher retrenchment costs. Private equity, which I will unpack further, declined by more than 100%. Fair value increased by more than 100% as a result of gains from the group's fair value hedge accounting solution. A deeper dive into the RBB transactional drivers highlights the negative impact of the lockdown, particularly on physical channels with branch, point-of-sale devices and ATM withdrawals declining significantly in April. Volumes recovered by June, but remained below pre-crisis levels. Digital volumes increased strongly and recorded volumes similar to Black Friday, the annual November event. These occurred shortly before the first lockdown of the 26th of March 2020. Recovery of this high base has been slow given the staggered and protracted recovery amongst SMEs. Reassuringly, the July volumes are almost back to March levels. On the positive side, our Core Plus program along with Eclipse, have enabled to cross-sell on new clients to increase from 1.2x to 1.8x over the past 12 months. Given our definition of main-banked clients being dependent on a certain minimum transactional activity, many clients are less active during the crisis, and this resulted in our main-banked clients -- client numbers declining. Consistently, main-banked clients defined as clients who meet our transacting criteria consistently for 12 months, grew by almost 4%. Trading income grew strongly off a strong base with a good performance across all asset classes. Trading activity was buoyant over March and April with noticeable slowdowns occurring in May and in June. Forecast investment in the market sales and trading franchises over the last 4 years has built a dominant markets business, and it is emerging as a leader in key areas, such as flow and structured capabilities in both equities and fixed income. Private equity income was significantly impacted by negative revaluations to unrealized portfolio investments in the investment banking book, driven by lower listed prices and increases in cost of equity. In addition, in property finance, the decline was driven by reduced cash flows due to the relief provided to tenants during lockdown, portfolio overlays created to reflect expected valuation reductions over time, and the impairment of specific mezzanine loans. Taking a look at our insurance business, earnings were negatively impacted by lower interest rates, which affected reserves in the life business, and lower sales volumes and higher retrenchment claims due to the impact of COVID-19. This was partially offset by a better-than-expected non-life claims experience relative to the prior period. Life value of new business, or VNB, declined 50% to ZAR 162 million (sic) [ ZAR 116 million ], and the non-life gross written premiums decreased 6% to ZAR 586 million. Our asset management business performed well in a challenging environment with strong net inflows and high-performance fees. This was offset by a change in investor behavior, which resulted in a move from equities to cash and passive investments. Our assets under management increased 14% to now just under ZAR 370 billion. Impairments increased 202%, driven by an increase across all stages as IFRS 9 recognizes impairments faster than IAS 39. This is also evident in the credit loss ratio at 194 basis points with the light green bar representing stages 1 and 2 impairments or previously referred to as portfolio impairments, and this is now higher than historical levels. An alternate lens shows the increase in credit loss ratio being driven by a ZAR 2.9 billion increase in judgmental overlays and macro forward-looking adjustments to models. Trevor Adams will unpack the key drivers of this a little later. Excluding the annualization impact of the overlays and the macro adjustment, the credit loss ratio would have been around 157 basis points. On the right, all our cluster credit loss ratios increased significantly, and they were above the levels achieved during the global financial crisis. And this was similarly impacted by the annualization effect in the first half. In addition, the global financial crisis had largely impacted RBB. Turning to some positive news. Expenses declined 1%. This was driven by lower staff costs as headcount declined. And in addition, incentives were adjusted downward. The 3% decline was achieved notwithstanding ZAR 121 million higher leave costs due to lower-than-usual take-up. In addition, the first half's base -- the first half of 2019 benefited from the final PRMA settlement. Computer processing continued to increase from efficiency benefits derived from our digital channels and savings from the Target Operating Model, or TOM 1.0, as Mike stated earlier. COVID-19 had a dual impact on expenses. On the one hand, discretionary spend declined, and this being marketing, communication and travel expenses, whilst we had to increase additional spend to ensure the health and safety of our staff and our clients, and we received global consulting support relating to our provisioning and impairments. Turning to associate income. The key drivers of the decline in associate income from ZAR 381 million in the first half of 2019 includes the impact of a challenging Nigerian environment on ETI's fourth quarter 2019 and first quarter 2020 earnings. And these are reflected in the first and the second quarter of Nedbank's earnings, in line with our quarter in arrears and as well as our share of ETI's 2018 restatement, which is reflected in our half year results. ETI continues to produce solid results in its West and Central African operations, but Nigeria remains a challenge from a performance perspective. Although various scenarios supported a value induced calculation above the carrying value of our investment, we have taken cognizance of the current environment and giving more weight to downside scenarios, this resulted in the additional ZAR 750 million impairment of our asset. With respect to capital. Our CET1 ratio declined to 10.6%, given the impact of lower levels of profitability, the payment of the final 2019 dividend as well as increased levels of RWA driven by credit risk and market risk, respectively. The impact of the ZAR 750 million impairment of the ETI asset was 8 basis points on our CET1 ratio. And in the unlikely event of the remaining carrying value of ZAR 2.3 billion being impaired, the CET1 impact will be 26 points. Turning to the cluster performances. Many of these points would have been raised in my previous slides and in Mike's presentation. However, this gives you a cluster perspective. Headline earnings in CIB declined 57%, with the key drivers being strong advances growth, but NIM pressure and the trading performance that I spoke about earlier, being offset by a significant increase in impairments and the negative private equity revaluations. RBB's headline earnings declined 91%, given muted advances growth, NIM pressure, higher impairments and lower transactional volumes. However, expenses recorded ongoing optimization benefits. Nedbank wealth's headline earnings declined less than the other clusters as lower insurance revenues, the impact of lower interest rates in global markets and increased impairments were partially offset by strong asset management performance. In Nedbank Africa regions, our headline earnings incorporates the impact of ETI's restatement as well as headline earnings in our SADC operations declining 86% as impairments increased and revenue growth slowed. The Centre was down 43% from the PRMA, as mentioned before, and as well -- and this was offset by the fair value gains also mentioned earlier. Before I hand over to Trevor Adams, I want to congratulate my colleague, Mike Davis, for the new role. It is a well-deserved and well-earned promotion. I had the pleasure of working with Mike in the last 11 years, and I have learned a lot from him. I am truly grateful for having both Mike and Mike in my professional network and as a friend. I thank you and now hand over to Trevor Adams to take you through the next section.

Thank you, Raisibe. There's some debate in the risk world around whether COVID-19 is a black swan event, extremely unlikely with extreme consequences or a white swan event, inevitable, predictable and preventable, to some degree, with a much less impact had the world been better prepared. But what most will agree in any event is that COVID-19 is the biggest human and economic tragedy since World War II. But I'm pleased to report today that Nedbank has successfully managed its risks through the first half with a special focus on operational, market liquidity, credit and capital risks. In response to the COVID-19 pandemic and the crisis, we set up a supplementary governance structure as a foundation for our risk management success. Starting at the Board level, cascading down to Exco, which was underpinned by a market crisis and COVID-19 Executive Committee initially meeting weekly, and that, in turn, supported by various steering committees underneath it, and confirmed that there was no compromises to governance whatsoever during the lockdown, and a big thank you to our technology division for helping to enable that. Inherent risk increased significantly across our risk universe as a consequence of the COVID-19 market crisis and the resultant lockdown, as evidenced in the red-colored bars. But our enterprise risk management framework, once again, proved to be robust and resilient, and our internal control environment remains sound and effective. And so our residual risks were well-managed and largely ended the half year green with the exception, of course, of credit risk. Our business continuity plan was excellently executed on, and we've had no major issues. And aligned to that, operational risk, IT risk and cyber risk have remained low through the period. Liquidity and market risks typically play out early in a crisis, and that's exactly what we saw in this crisis, peaking right upfront in late March and into April. But by the end of May, both those risks have returned to business-as-usual levels. Credit risk, bad debts and the resulting impact on capital take longer to emerge. However, the accounting for that has to be upfronted in terms of a forward-looking expected credit loss as we've seen for the half year. I will now touch on the operational risk and credit risk in a bit more detail, and then I'll hand over to Mike Davis to cover liquidity market risks in a little detail and some stress testing, and Raisibe has already spoken to capital risk. Early activation of our Pandemic Steering Committee in February, an excellent preparation and tailoring of our business continuity plan for this particular pandemic was a key factor in the plan's success and the uninterrupted business continuity that we've enjoyed and servicing of our clients. We've enjoyed excellent system stability throughout the period and incurred no material operational risk issues or losses. In fact, our operational losses were down year-on-year. Cyber risk was heightened through the increased digital adoption and the work-from-home practices, but that too was well managed with no breaches to our own cyber defenses. Turning then to credit risk, and, firstly, to touch on the comprehensive COVID-19 credit program that we implemented to respond to and manage this 1 in a 100 year event, we reviewed and adjusted, either through in the model or out the model adjustments through underlays or overlays, our entire suite of credit models, both IFRS 9 and regulatory capital, or RWA, for the unprecedented macroeconomic environment and to take account of the regulatory relief measures. Our external auditors have commented back to us that this is one of the most comprehensive credit approaches to COVID-19 that they have observed globally. Our approach, though, was not just about the models. It included detailed client reviews, deep sector and industry analysis, deep dives in businesses such as property, finance and business banking, granular analysis at a product level in retail, detailed analysis of key macro factors, such as job losses and the forecasting thereof. And all of that overlaid with comprehensive stress and scenario testing. Another key point to emphasize is the abnormal level of expert judgment and interpretation that we've had to apply in this unprecedented economic climate and in the application of the various regulatory relief measures. We have then given that implemented a comprehensive credit governance system with comprehensive independent and assurance across our 3 lines of defense. Turning then to the accounting for credit risk, and firstly, again, reflecting on the economic state of the nation, and, as I've mentioned, the abnormal levels of uncertainty, the fact that some facts, such as the actual extent of job losses, will only play out in the second half of this year or even perhaps in 2021. And so forecast error remains high. Within that economic state, there's been 2 fundamental authorities that we've had to apply, but which are not completely aligned. IFRS 9, on the one hand, as we said, requires a forward-looking expected credit loss and, within that, the upfronting of the adverse macroeconomic impact. On the other hand, the SARB's Directive 3 and Guidance Note 3 regulatory relief, strongly encourages banks to avoid excessive procyclicality and so undue volatility in expected credit losses. Clearly then, a balance has been required, which we have applied, while also applying our general principles of prudence and conservatism, but just not being excessively procyclical. A last key point with respect to the forward-looking expected credit losses is that they have been based on our current approved set of macro factors and scenarios and forecasts. And they may well change in the second half of this year, possibly improving or getting worse. Only time will tell. Moving then on to the extensive relief that we've provided to our clients during these difficult times, and I'll touch on 3 such channels. Firstly, Raisibe spoke to CIB's ZAR 24 billion increase in its loan book, and that predominantly was in providing committed facilities and some new facilities to clients. In Business Banking, we have extended additional temporary overdrafts and have participated in SARB's ZAR 100 billion SME loan scheme, which, to date, we have approved ZAR 1.2 billion, and this remains open, and we continue to receive and process applications. Thirdly then have been the payment holidays in line with SARB's Directive 3. But in addition to that, other restructuring or normal restructuring, which we typically apply Directive 7 too. And on these, I'll discuss a little bit in more detail on the following slides. To the 30th of June, we've provided ZAR 119 billion of payment holidays to our clients. That amounts to 15% of our total lending book; we did see the pace of requests for such relief tapering off in the month of June. However, in July, as the first payment holidays start to mature, some of those, we will extend. The graph on the right-hand side indicates that predominantly these payment holidays are in our retail business and, more specifically, within property finance, MFC and home loans. We've raised a total of ZAR 3 billion of impairments against this Directive 3 book. Our Directive 7 loans, we've provided an additional ZAR 9 billion, an increase of ZAR 3 billion from the level of ZAR 6 billion at the previous year-end. Once again, these are predominantly in our retail business and specifically so in MFC and home loans. Against this Directive 7 book, we've raised ZAR 1.5 billion in impairments. This next slide provides some insights on payment success. Firstly, our non-Directive 3 book and the repayments thereof have performed better than we had expected, in fact, at levels better than pre COVID-19. However, our Directive 3 book has performed slightly worse, with payments resuming in the month of July, ranging between 75% to 87% across the 4 major product lines, as indicated in the bar charts. We have also extended thus far, 10% of the payment holidays that we originally granted. Raisibe touched on the 202% increase in the impairment charge or just over threefold increase year-on-year in impairments, and I'll touch on specifically the COVID-19 additional adjustments that we've made that sit within that. Firstly, in Retail and Business Banking, we raised ZAR 1.9 billion of COVID-19 related adjustments, and those were mainly ZAR 1.1 billion for the Directive 3 job losses. There was ZAR 500 million of benefits from the 275 basis point interest rate reductions to the half year that our models were indicating, but we did not release those impairments, but rather retained them. In Business Banking, we raised just over ZAR 300 million of COVID-19 adjustments. And then in CIB, the macroeconomic upfront impact adjustment was just over ZAR 1 billion. And on top of that, we raised an additional ZAR 200 million in our property finance business. Across the rest of the businesses in Wealth and Nedbank Africa regions, we also raised an additional just under ZAR 100 million. And then our central provision, we raised by ZAR 150 million to a total of ZAR 400 million. Looking at the staging of loans and advances. And as expected in the environment, stages 2 and 3 have increased quite significantly. And the key drivers for that are, firstly, in stage 2, the Directive 3 loans that we consider a significant increase in credit risk and under IFRS 9 get classified as stage 2. And that is predominantly the one -- most of the ZAR 1.1 billion job loss overlay that I referred to on the previous slide. In addition to that, we have seen some CIB client migrations. The increase in stage 3 is then largely due to the stage -- sorry, the Directive 7 loans that we've completed, but just generally, as expected, in the environment and aging or deterioration of the book to some extent. And within stage 3 loans and advances, CIB year-to-date has increased by 76% and RBB by 40%. Coverage then has also significantly increased, as expected, with the 202% increase in impairments. And within that, the ZAR 2.9 billion COVID-19 overlays, increasing in total to 295 basis points. Our Stage 1 coverage ratio increased materially from 49 to 65 basis points. And the key drivers of that would be, that is where the upfront macroeconomic adjustment sits, and the bulk of our Directive 3 payment holiday book is also sitting there in stage one. Stages 2 and 3, however, the coverage ratios declined year-to-date. And the reasons for those are around stage 2, mix changes and an increase in the number of CIB clients with a high exposure, but a low expected credit loss given the high levels of collateral. In stage 3, the reason for the decline is also very much because of mix change. As I mentioned, CIB's stage 3 advances increased by 76% as opposed to RBB at only 40%, and the wholesale clients carry a much lower coverage. Additionally, the Directive 7 loans we did, which are predominantly in retail secured loans, would also cover a lower coverage and contribute to that decline. Moving on then to some of the deep dives that we've done that I referred to upfront. On this and the next couple of slides, I will talk to CIB and property finance in the booklet slides, our insights on deep dives into businesses like MFC and business banking. On this slide talks to the analysis we've done around the COVID-19 impacted sectors, and the red being the particularly high impacted or high stress sectors being 7 of them. Those total 7 amount to only 14% of the CIB book and individually range from only 1% to 3% of the CIB book. Talking to the 3% items. Firstly, state-owned enterprises, our exposures we have continued to remain close to, but our most problematic exposures are government-guaranteed. The construction industry is a sector that's been under stress well before COVID-19 hit us, and we have been managing down our exposure successfully for some while. Commercial property finance continues to be a high quality business, supported by a strong client base and an experienced property team. This portfolio is very well diversified across listed property funds and income-producing real estate. And in the graph on the bottom left, there is our analysis of the COVID-19 stressed sectors, and it's really only the retail sector comprising 34% of our property finance book that is exposed to a high-impacted COVID-19 sector. Our most prominent feature of this portfolio is the very low loan-to-value. For over 10 years, we've run this book at an average loan-to-value below 50%. And going into this crisis, it was at 48%. And that has culminated in a credit loss ratio at this half year of 68 basis points, which compares to the 51 -- sorry, the 53% -- 53 basis points credit loss ratio in the global financial crisis, but bearing in mind that this half year number is an annualized number and has ZAR 200 million of additional overlays. The commercial property sector has performed much better than we had expected. I've emphasized the low LTVs, but, in addition to that, client rental collections have also been better than expected, currently at around 88%, up from a low of 67% in April. Our property finance clients are benefiting from year-to-date 300 basis points in interest rates as well as generally low levels of gearing. The reduced shareholder distributions are also good for bondholders, such as ourselves. And ultimately, we only have 74 million in arrears in this portfolio. But we remain focused on the risks. We have raised the additional ZAR 200 million of overlays that I referred to for industry stresses in retail, hospitality and other sectors. We've retained ZAR 106 million overlay that we previously held as a buffer against changes in valuations. And on valuations, it's important to emphasize that ours are consistently below those of the companies themselves. This has all been also subjected to various stress and scenario testing to confirm and reinforce the numbers that have -- we've ended up with. Finally then, Mike and Raisibe touched on the great lockdown crisis of today compared to the global financial crisis of 10 or so years ago. And again, analyzing our property book is an important reflection. On this slide, we look at both retail home loans and commercial property that I've been discussing. And while the macro today is certainly far more severe than the global financial crisis, both of these portfolios are much stronger. Firstly, our total property exposure today is significantly less at 44% of our total book compared to 49% in the global financial crisis. But what we've also seen going into this crisis is very much lower levels of growth and selective origination, which receive touched on earlier, and that has been particularly significant in home loans, which really was the one asset class that burned particularly badly in the global financial crisis. But even in property finance, we have followed selective origination and been able to do that comfortably given our market-leading position and high market share. The loan LTVs, I cannot emphasize enough and really make property finance a particularly well secured asset class through a crisis such as this. But even home loans, its average loan to value was down at only 77%. Another key feature of the property finance book is the high volatility commercial real estate component which today is only 4% whereas in the global financial crisis, it was at 12%, and was the key driver of the impairments in property finance at that time. Additionally, both of these books have significantly lower default rates or defaulted books in this crisis compared to the global financial crisis. A final point then is just how we have benefited now for over 10 years following the implementations of Basel II and Basel III of comprehensive risk-adjusted performance measurement and management, which would apply in both of these books and generally across our balance sheet whereas in the global financial crisis, we followed a boom economic period under a non-risk-based Basel I. I'll now hand over to our CFO designate, Mike Davis.

Thank you, Trevor. First, I'd like to take this opportunity to thank the Nedbank Board on my appointment as CFO, and specifically thank the Chairman, Vassi Naidoo, together with Mike, Trevor, Mfundo and Raisibe, to whom I have reported for their guidance and support, including since being appointed to the group executive in 2015. I also wish Raisibe all the very best in her new venture, and I will certainly miss you and miss the challenges, the constructive challenges and debates we continue to have. But I'm excited and look forward to this particular opportunity. Turning to liquidity risk, key liquidity metrics, including the liquidity coverage ratio and net stable funding ratio have remained well above regulatory minima at 115% and 114%, respectively. The SARB revised the minimum LCR requirements from 100% to 80% on the first of April, but Nedbank remains well above previous minimum requirements. The SARB's early industry-wide liquidity interventions and our own internal actions returned liquidity risk to normality post April. After the initial market reactions to the COVID-19 process and high levels of NCD buybacks added to increasing liquidity risk early on. We continue to maintain healthy liquidity buffers to absorb seasonal, cyclical and systemic volatility. We have seen unprecedented levels of market price volatility and dislocations with rates in the short end of the curve reducing significantly 275 basis points to June, while, at the long end, increasing steeply and a dramatic opening in the spread between government bond and swap curves. Our key market risks include interest rate risk in the banking book, where we operated with an original board and risk appetite limits, but like most banks have endured the adverse impact of lower interest rates on endowment income, and which is currently not offset by lower impairments. In fact, quite the opposite. While, as Raisibe mentioned, that our sensitivity to a 1% change in interest rates over a 12-month period is approximately ZAR 1.3 billion and from an interest rate risk perspective, we also measure economic value of equity, or EVE, which is the present value of the entire book for that change for a 1% decline in interest rates, which remains low at ZAR 139 million. Secondly, equity or investment risk, which Raisibe touched on, and for which we have applied conservative valuations and stress tests, but not taken a fire sale approach to. And thirdly, trading market risk, which I will cover on the next slide. Good traders thrive on volatility. And so not surprisingly, in half 1, we have had an outperformance in our markets business. While also locking in significant value through hedging activities, including positive funding valuation adjustments, or FVA. There is no -- there has been no material increase in market risk-taking during the crisis, but rather unprecedented levels of market price volatility and dislocation, as mentioned, which required temporary limit increases to avert any potential limit breaches due to high VAR model inputs. Like liquidity risk, market trading risk has since reverted to business-as-usual, pre-crisis levels and is within original limits. Our 3 lines of defense governance model has provided the independent oversight and assurance on this trading outperformance. Finally, in this uncertain and volatile environment, we have also performed extensive stress testing and scenario analysis. The adverse scenario we run is a deep, long u-shaped recession with GDP declining 12% this year and a further 3.6% in 2021. Rates and inflation stay broadly similar, but credit growth reduces further. Our modeling of this adverse scenario indicates that the group's credit loss ratio will remain below 220 basis points versus the annualized 194 basis points reported at June and capital levels still well above SARB regulatory minimums. I will now hand back to Mike.

Thank you, in particular, to Raisibe, for those very kind words about your time at Nedbank, and to Trevor and Mike for the deeper dive than usual into risk management and credit, which is absolutely vital in the current environment. So after demonstrating how Nedbank remained resilient during the great lockdown crisis in the first half of the year, we're now going to turn our attention to a more forward-looking picture. I think it's important to start off by noting that the environment does remain challenging and uncertain. And because of that, the forecast risk, in particular on the health and economic front, remains very high and is likely to remain so until a vaccine is found and rolled out at scale. You'll have seen from the slide that Mike Davis used earlier that our scenario analysis for the current macro forecast have GDP declining around 7% this year and then only recovering slightly in '21 and '22 off a low base. Looking at these 2 data sets here, the change in macro forecasts between January and July is a stark reminder of the impact of the great lockdown crisis, an event likely to create the greatest decline in economic growth since World War II, and with the increase in equality and unemployment likely as a result of that. Turning now to guidance. Given the risks in forecasting, many banks haven't provided any guidance for the full year at the interim stage, but we felt it would be much better in this period to provide investors with our current best estimates of guidance based on our base case economic outlook for key ranges of metrics, and, at the same time, of course, highlight the risks and uncertainties in forecasting in this environment as these circumstances may well change from our base case. For NII, or net interest income, we expect the growth rate to reduce from H1 levels as loan growth for the full year is expected to remain positive, but slow from the growth that we saw in the first half. And the net interest margin is currently expected to contract further on the back of the run rate of the full impact on endowment of the interest rate cuts that we have seen to date. The credit loss ratio in this environment is certainly the most difficult to forecast. And our sense is that the provision build that we've made in H1 from overlays and the IFRS 9 macro factor model that you've heard us discuss in a lot of detail, will act as a buffer against real losses as they emerge. And as a result, we currently expect the credit loss ratio for the full year to be lower than at the half year. The key risks to this, of course, are if our macroeconomic outlook, and in particular, our outlook for GDP and unemployment deteriorates more from our current forecasts, always better than our current forecast, as well as the actual payment performance on accounts restructured under D3 as well as the risk of any large, unsecured corporate defaults. Noninterest revenue growth is probably the second hardest to forecast in the current environment, and we expect this growth rate to remain in negative territory for the full year as some of the benefits we experienced from fair value gains in H1 and from unusually strong trading activity in H1, we currently do not forecast to repeat in the second half. We do, however, expect transactional activity to increase in the second half off the low base of the second quarter, but still to remain relatively depressed in the overall weak economic environment. Expenses, as always, will remain tightly controlled. Capital and liquidity levels are expected to remain well above regulatory minima and our Board targets with buffers in place for us to use in need. Finally, on dividends, the Board will apply its mind again at year-end, but currently while Guidance Note 4 is applicable, we do not expect to pay ordinary dividends. So in closing, in a period of unprecedented health, economic and social challenges that have impacted our staff and our clients, the Nedbank Group remained open for business and profitable in the first half of 2020, with capital and liquidity metrics within Board-approved targets and well above prudential requirements. Our management and staff have done an excellent job of what I referred to as the resilience phase of this crisis, and, in particular, the extraordinary amount of work that was done to help our clients in good standing in difficult times. We expect that the environment is going to remain challenging and uncertain for some time to come, and we will continue to have a very strong focus on the health of our staff and supporting customers now as they emerge from the great lockdown crisis. So while we remain wary of further waves of the virus and their economic impact, at the same time, we lift our heads and reimagine a better future for our country, our clients and for Nedbank. Our strategic focus on delivering great client experiences, enabled by technology foundations in a manner that delivers value to all our stakeholders remains at the core of who we are as Nedbank, and as we continue to deliver on our purpose of using our financial expertise to do good, something that has never been more important to all of our stakeholders than in the current environment. Thank you. Great. Thank you. And I trust that you enjoyed a very different presentation with a significant emphasis on risk in general and credit risk, in particular. For those of you who have looked through our booklets, you will see, we've also significantly increased our disclosure on these items with full disclosure of all of our D3 exposures across stages as well as all of the movements between stages. [Operator Instructions]

[Operator Instructions] The first question comes from James Starke from SBG Securities.

Great detailed disclosure and for providing guidance against a very challenging backdrop. Just a question on your credit growth expectations, particularly into 2021. I note on Slide 84, you've got 5.7% for industry growth following 2.5% this year. If you could give us some color on where you see loan growth coming from, particularly given the 7% contraction of GDP this year?

Okay. So just looking at that -- sorry, I'm just taking this answer one by one, yes. So looking at that, obviously, any forecast has a significant amount of risk in it, but we would expect that as confidence returns in the economy, there will be increases in loan growth. And in particular, we look at areas like infrastructure and renewable energy. We still think that those are the sectors likely to generate most of the loan growth in that environment.

James, do you have any further questions?

No.

Thank you very much. [Operator Instructions] It seems there are no further questions on the audio line. Thank you.

Okay. So hopefully, that means we did a pretty good job with the level of disclosure in our presentations. Just looking at questions on the web, the first question -- or the only question at the moment is from Charles Russell from Citi. Thanks for the very detailed presentation. Can you comment on whether or not you anticipate returning to paying a dividend in 2021 assuming your base case plays out? So assuming our base case for the macro does play out and assuming that our current rolling forecasts are accurate, and importantly, assuming that the SARB does remove Guidance Note 4, we would anticipate paying an ordinary dividend in the first half of 2021 in respect of our H1 numbers somewhere within our guidance range. Any more questions on the web or the phones?

We have no further questions on the audio line.

Okay. So all that remains is for me to say, thank you very much for listening to us. I trust you found that both interesting and useful, and enjoy your evening.

Thank you.