Nedbank Group Limited (NED) Earnings Call Transcript & Summary

Got most attendees in, and it is just after 5:30, so we're going to kick off. So this announcement follows the group's voluntary trading update for the first 4 months of the year issued on 27 May 2021 prior to the holding of our AGM the following day, and includes subsequent trends to the end of May as well as expectations of the group's performance for the 6-month period ending June 2021. Real SAP GDP grew by 4.6% quarter-on-quarter, seasonally adjusted and annualized in Q1. In June, the Nedbank Group economic unit has revised its SA GDP growth forecast for the year from 4.4% to 5% and still expects the SA prime interest rate to remain flat in 2021 before increasing by 100 basis points in 2022. Well, 5 months to 31 May 2021 still reflect the ongoing impact of a difficult macroeconomic environment on client activity and revenue growth, the group recorded a material reduction in the impairment charge compared to the 5 months through to May 2020, resulting a hit on earnings to May 2021 that are materially higher than the ZAR 2.1 billion in our earnings reported for the full 6 months to 30 June 2020. Average interest-earning banking assets declined year-on-year, reflecting the impact of lower gross loans and advances in CIB as a result of clients using excess liquidity to repay committed facilities and a conscious focus on portfolio optimization by reducing lower-yielding assets. Current demand for new wholesale loans remains low with the timing of drawdowns uncertain, although recent developments are encouraging, including the increase in private renewable energy generation capacity to 100 megawatts and the increase in the RMB business confidence index to 50 in Q2 from 35 in Q1 2021. Gross loans and advances. Growth in RBB continued its momentum in 2020, benefiting from client demand for secured loans as a result of the 300 basis point constant interest rates in half 1 2020 as a result of an increase -- and as a result, sorry, of an increase in unsecured lending volumes originated through the group's expanded digital channels, notwithstanding lower loan approval rates due to tighter credit criteria. Net interest income growth momentum continued into May 2021. And we expect half 1 2021 NII growth to be at the top end or slightly above the guidance provided for the full year 2021 of 0% to 3%. Net interest margin is expected to increase from the 336 basis points reported for the full year 2020, driven by ongoing improved asset pricing, mix changes and high-quality liquid assets optimization. At the end of May 2021, the group's credit loss ratio remained below the bottom end of the 110 basis points to 130 basis points guidance we provided for the full year 2021, and we expect this performance to remain in place for the half 1. While this is very encouraging -- a very encouraging start to the year, it is too early to reduce our full year guidance for the credit loss ratio given the uncertain outcome of the third wave of the COVID-19 infections, the risk of the delay in the vaccine supply and the current slow rollout thereof. The reduction in impairments was driven by an improving macroeconomic outlook, excellent collection outcomes, the benefit of the 300 basis point lower interest rates on client's ability to service their debt, the tightening of credit criteria ahead of the COVID-19 crisis, the group's decision not to perpetually extend D3 loans and a better than expected performance on D7 loans exiting their monitoring period. The group remains well provided with no material change to the ZAR 3.9 billion judgmental overlays that were raised during 2020 as we remain cognizant of ongoing risks relating to COVID-19. The group's noninterest revenue declined up to the end of May 2021, reflecting the faster-than-expected unwind of a significant portion of the group's fair value gains recorded in the first half of last year and the impact of a high trading revenue base in the prior period. Although NIR growth is expected to remain negative for half 1 before turning positive for full year 2021, the extent of the NIR decline for the first 5 months reduced, in other words, improved when compared to the decline reported for the first 4 months of 2021. NIR, excluding fair value adjustments, increased by low to mid-single digits, which trend we expect to continue through to the half. Commission and fees increased to the end of May 2021, driven by improving transactional activity as evident in increased levels of client spend, cash withdrawals and the purchase of value-added services as well as an improved level of cross-sell. Insurance income is growing as we benefit from higher investment returns and higher premiums on life products. Credit life, loss of income and funeral claims remained elevated when compared to the prior period, although claims are showing a declining trend from recent hires. Trading income remains robust, tracking in line with the expectation, but is lower given the base -- the hard base as a result of volatile market conditions in the prior period. Private equity income reflects good growth compared to the negative reevaluations in the prior period. Expenses to the end of May increased by low to mid-single digits and continue to be well managed in response to a more challenging environment. Variable incentive-related costs are increasing, driven by the group's improved financial performance. Expenses' growth is expected to increase from these levels for both half 1 and full year 2021 as new additional costs such as deposit insurance and Twin Peaks are likely to be incurred as well as the return of some discretionary spend during the remainder of the financial year. The group JAWS ratio reflective of revenue growth, including associate income, less cost growth, remains negative as expected. Excluding fair value adjustments, however, the JAWS ratio was positive to the end of May 2021. As a result of the group's improved financial performance, ROE for the first 5 months has increased to early double digits. While this is still below the cost of equity, it is well above the prior period and the 6.2% reported for full year 2020. At March 2021, the group reported strong capital and liquidity ratios in our Pillar 3 disclosures. The CET1 capital ratio of 11.3% is above the midpoint of our board-approved target range of 10% to 12%. The liquidity coverage ratio was 128%, and the net stable funding ratio was 112%. The group's segment ratio is expected to increase further by 30 June 2021. We currently plan to resume dividend payments when reporting interim results in August 2021 with the payout ratio still to be determined by the Board. In our full year 2020 results announcement on the 17th of March 2021 and our 4 months 2021 voluntary trading update reported or released on the 27th of May 2021, we advised shareholders that headline earnings per share and basic EPS for the 6-month period to 30 June 2021 are expected to increase by more than 20%. We update this initial guidance and now expect HEPS and basic EPS for the 6-month period ending 30 June 2021 to increase by more than 100% when compared with those of the 6-month period to 30 June 2020. A further trading statement will be issued to provide a more specific guidance once there's reasonable certainty regarding the extent of the increase above 100% in earnings and the relevant HEPS and its ranges. Nedbank Group's results for the 6-month ended 30 June 2021 are currently expected to be released on the JSE Stock Exchange news service on or about the 11th of August. Shareholders are advised that the financial information contained in this preclose and the trading statement has not been reviewed or reported on Nedbank Group's joint auditors. I'll now take questions. And I think the best way to do that is to do that by way of using the Teams' facility of raising hands. So please raise your hand, and I'll take questions starting with Charles Russell.

I just have one question regarding impairments. I think your guidance has been pretty good up until June, but it seems that you're quite reticent to guide much further out than that. Are you expecting that the current third wave is going to be worse economically than the second wave? And what sort of items of caution are you cognizant of that you're not confident in saying that the credit loss ratio will be lower in the second half given that we're probably going to be further down the road with vaccinations and various other sort of progressions, herd immunity, et cetera?

Yes. I think, Charles, I think what's important is that now our original forecasting and expectations, we did expect a move towards lockdown level 3, which obviously has taken place. We clearly indicated that we didn't and are not expecting a migration towards a lockdown level 4 or 5. Having said that, obviously, the third wave, particularly in the [indiscernible] region, is a lot -- I would suggest, is a lot worse than initially anticipated. The other point to note is that the vaccine rollout program, we had hoped it would be further along than it currently is. And we've all seen the consequential impact of moving to potentially higher adjusted level 3 or level 4 in response to the COVID-19 current third wave. So all we're suggesting is that we've had a very good credit experience to date. We typically do not update or adjust our guidance at this particular point in time. We always do it again in August through to the full year. And we're simply suggesting that at this stage, it's too early to adjust guidance from the 110 to 130 basis points. So I mean maybe it's a little bit prudent or conservative. But we don't know what we don't know with regards to COVID-19. All right, we're going to move to Chris. Chris, I think your hand was up. Yes. Chris?

Just a quick one from my side. I think the guidance you gave at the end of last year and it doesn't seem to have changed was that noninterest revenue would find its way into the sort 5% to 9% positive range. And I guess were the first half noninterest revenue to be if negative growth rates marginally on the first half of the 2020 financial year, that would imply quite a decent recovery in NIR in the second half versus the first half in order to get to the sort of plus 5% to plus 9% guidance range for the year. Now clearly, at this stage, we're reasonably confident you can get there because there's no change, I guess, to that guidance in noninterest revenue growth. Perhaps you could sketch why you're relatively confident that you can have a better second half than the first or alternatively where the risks to that guidance may lie.

Yes. Chris, I would suggest that we had expected the macro fair value hedge accounting, fair value gains of last year to unwind this year, but we had expected them to unwind largely over the full period, not in the first 6 months. So that definitely puts shape in half 1 versus half 2. The other thing, obviously, in the base effects, the largest base effects relate to the significantly strong trading revenue we brought last year in the first 6 months as a result of the volatility introduced, particularly in March, April, May, due to moving into lockdown level 5 and 4. So -- and that trading revenue slowed in the second half of 2020. So you get, again, base effects impacting negative growth in the first half as a result of trading income. And effectively, you get a large part of that unwinding in the second half given the softer trading revenue booked in half 2 2020. So if I had to guide probably towards the lower end of guidance, but at this stage, not changing guidance. And if I had to stick back across the guidance we've given, I would suggest NII is probably surprised on the upside. Impairments have surprised positively on the downside. NIR, obviously, you've got base effects coming in. But given the unwind of the macro-favored hedge accounting credits of last year in the first half of this year, tough one to get to, albeit that is indicated positively in commission and fees is growing, which is obviously the talks to the core franchise of the organization. And expenses will be in -- we'll continue to manage diligently. But obviously base effects, as they relate to known regulatory costs, so they're going to come into the second half. And given the current guidance around performance and a double-digit ROE number at this particular stage, obviously, you've got a number of discretionary or variable costs that will come into the cost drivers. Yes, so there's some base effects in that 5% to 9% that are playing out between half 1 and half 2. All Right. Any other hands? Any other questions? Kevin? Kevin Harding?

Mike, I just want to get a sense in terms of the transactional levels that you're seeing in your fee and commission line. Is that being driven by clients drawing down at savings? Or are they actually accessing overdraft facilities? Is that what's driving the activity? And then just the second question, I mean, you would have had a couple of data points in terms of lockdowns and how sensitive various parts of your book are given that we potentially could have moved to a stronger adjusted level 3 or even level 4. Which parts of your book are most vulnerable that would perhaps slow down the good credit experience that you're seeing today?

Yes. So maybe just to clarify. From a credit experience perspective, we've obviously seen negative growth in our CIB business largely as a result, I believe, of corporate South Africa not yet convinced of the recovery, and therefore, not yet potentially pushing the button on a number of pipeline or translating the pipeline into balance sheet growth. So we've seen negative growth from a credit experience perspective on the CIB portfolio. The ongoing momentum we've seen in the RBB portfolio is actually quite broad-based. It's across both secured and unsecured lending. So we've seen ongoing growth in home loans and motor vehicle finance from a secured portfolio perspective. And we've seen an increase largely as a result of improved digital capabilities and digital downloads, digital sales and improvement across unsecured lending. So I mean just to get that shape right between CIB and RBB, with regards to -- at these levels, there is unlikely to be any material impact on slowing credit extension. But to the extent that we move to a level 4 or potentially something more severe, obviously, you're going to find that it's going to hit the segments that we previously raised, particularly around -- you're going to have an impact on hotels, lodging, airlines will continue. It's then going to start into the -- into anything associated with the shutdown in the distribution of sales of alcohol, which would include within that restaurants. So it would play out in that particular shape that we shared with you in terms of our high-frequency data. And then with regards to your reference to from an NIR or spend perspective, we're actually seeing it from a fees and commission perspective across basically high levels of client spend, high levels of cash withdrawals and clients looking to purchase things that are being value-added services. So you're seeing it from a commission and fees perspective translate through just a general increase in activity, whether it be on balance sheet or otherwise. And again, if we stay in a level 3 as adjusted, I think that, that momentum will continue. If we move into anything worse, then obviously it would translate into I would suggest lower client activities, which will translate into pressure on commission and fees. And it will result in lower on-balance sheet lending, both secured and unsecured portfolios. Chris, your hand's up again.

Yes, sorry, Mike, just a quick follow-up. Subsequent to Old Mutual's announcement this evening that they will be unbundling 12.2% of any advance issued share capital to shareholders, I mean, are there any operational -- potential operational impacts to the group and your relationship with Old Mutual? I suspect strongly the answer is no. But I think that I'd ask you anyway as a consequence of that. And is this, I guess, seem to be an end game. In other words, will they retain? And again, probably you should tell me to ask Old Mutual. Will they retain that remaining residual 7% stake? It seems -- I don't mind to hold unless that just sits as a portfolio holding with their shareholders' funds. It just seems to be an unusual stake to retain if they are retaining it within shareholders' funds unless, of course, they're required to do that from a capital and liquidity perspective. But over time, I guess they could diversify that holding into something else, not necessarily holding their ventures.

Yes. Chris, so I mean for those of you who haven't seen the announcement. Obviously, it went out, I think, 7-odd minutes ago and relates into effectively [ OEMs ] unbundling of effectively the 12-odd percent share in Nedbank, in other words, through a dividend in specie giving that back to shareholders. Just to answer your first question, Chris, obviously, it has absolutely no impact on effectively the day-to-day management of Nedbank, the operations, Nedbank's clients, Nedbank's staff, Nedbank's financial performance, et cetera. So as you know, any transaction, any dealings between Nedbank and Old Mutual even pre the original managed separation or unbundling effectively has been done on an ARMS-linked basis. So I see this just as a further step post the managed separation. They'll obviously consider and have considered the implications from a strategic perspective, the relationship between us and them. So no impact on the operations of Nedbank. And then with regards to whether or not they choose to retain the 7-odd percent within OMLACSA, that's obviously a decision that they will continue to monitor and effectively make a decision accordingly from a capital, liquidity, et cetera, perspective. Maybe just the last point from a Nedbank perspective, not only does it have no impact from an operations or management or client or staff perspective. But obviously, if we look at it from a positive perspective, it obviously increases the free float. And obviously, that has a favorable impact from a relevant indices perspective. Kevin, I think your hand's back up.

Yes. Mike, just a follow-up question. In your trading statement, you mentioned that automobile is driving the positive asset quality dynamics has been counters exit -- D7 counters exiting the monitoring period. Could you maybe elaborate on which sectors those are in particular?

So those were mostly in the RBB portfolio, motor vehicle finance, home loans, et cetera. And just to clarify that if you recall, under D7 to the extent that account is restructured, effectively, the account needs to effectively remain as a Stage 3 loan effectively a defaulted loan and the restructure until the client has met 6 consecutive payments under the new Ts and Cs of that restructure. And to the extent that they meet 6 consecutive payments that affected their deal then migrates back into performing. But a large piece of that is motor vehicle finance. [indiscernible]?

Just a quick question for me. Can you just give some insight as to what you're seeing in terms of the quality of credit applications coming through? I know you are quite resistant to change your guidance at this level. But from a retail perspective, can you just kind of point us towards whether the applications you're seeing are improving, stabilizing or potentially getting worse? And maybe if you have 1 or 2 comments on the corporate side as well, I appreciate that.

Yes. So I mean the quality of applications together with the tightening of credit criteria, and I would suggest we're seeing -- it's difficult for me to answer period-on-period on whether the trend is getting better or worse. But we obviously see broad-based applications across secured, unsecured. And to your point, some better, some worse on the same. What we have done in a particular environment across both secured and unsecured portfolios as we have tightened credit criteria that has resulted in a reduction in approval rates. Some of that reduction is going to be as a result of the quality of application, and some of it is certainly a result of us having tightened credit criteria across all portfolios. Having said that, I mean, some of the data we shared with you guys is that albeit the credit criteria have tightened. And as a result, application levels are -- or approval levels rather are lower, dispersal rates are, in fact, higher, which obviously translates into our balance sheet growth. But I mean, to answer it in a nutshell, approval rates are down due to, again, quality of application and tightened credit criteria. And then with regards to on the corporate side, I mean I would suggest that anything we are seeing is of a better quality across term loans, corporate property finance as well as in the short-dated side. It's just a lack of application we're seeing from a CIB perspective. And in fact, when we reflect from a pipeline perspective, we've got reasonably strong pipelines. So there's a lot of clients wanting to extend or rather than to borrow in order to institute or action balance sheet growth. But I think there's 2 important things. One, I think Corporate South Africa is waiting for more evidence of a recovery. And I would suggest, it's important to get through this third wave. And secondly, something that does concern Corporate South Africa is obviously energy certainty. And I think that certainly the recent developments around self generation of up to 100 megawatts is a big positive for South Africa, and it certainly positions us well, given the fact that we obviously have a strong renewable energy sector, team and/or business that we're certainly spending a lot of time on that development from an energy self-generation perspective. Any other questions? [indiscernible] let's hear it.

Yes. Mike, just quickly on the update, you've mentioned good collection outcomes. Could you perhaps give us some color as to where we are in relation to, say, pre-COVID collection levels? And then regarding specifically, I suppose, on your underlying CPF book, what the collections for them are looking like? So just firstly, your own collections and then just the underlying CPF collections. And then any other sort of collection trends in other sectors, if anything, is worth mentioning?

So as a general comment, we had a very good collections experience in December, and that continued through to the first 4 months of this particular financial period. So collection experiences, certainly in December were, in fact, better than the prior period. Some of that was as a result of obviously collection strategies and the fact that we didn't, for example, have a very good collections experience last year in -- when I say last year, the prior period in the motor vehicle finance business. So some of it was due to base effects. But certainly, collections experienced over December, which is typically a month in which you bring in seasonality, was better than the prior period. So you're prior to that. And then collections experience continued through the first 4 months of this particular financial period. And then with regards to the commercial property finance portfolio, that book is continuing to perform in line with expectations. I mean the last trend that I saw, the arrears on that book, which is ZAR 162 billion portfolio, the arrears on that book was effectively ZAR 22 million. So basically 0. A couple of other data points we shared with you at both the first 4 month voluntary trading update, we shared the update as it relates to the collections experienced by the 20 listed funds. And those collection levels are still tracking at, on average, 95%. At that stage, we shared with you the fact that vacancy rates were up somewhere between 1% and 2.5%. We indicated to you that obviously, those funds have stopped making distributions to shareholders, which obviously favors the bondholders or banks given the fact they retain additional cash to support effectively the repayment of bank debt. And then regarding our own portfolio, we updated you that we spent a lot of the second half of last year and the first 5 months of this year revaluing those portfolios or those properties. And on average, the data we looked at in the 6 months of 2020, property wells were down 5.5%. And that was in about 4,500 properties. We did a further 300 properties in the first 4 months of this year. And those were down on average 5.1%. So somewhere around about, call it, 5%, 5.5%. And as we shared with you, our expectations over the next 12 to 18 months, you're likely to see a bit more pressure in property valuations. You're likely to see a bit more pressure in vacancy rates. But going into the crisis with an LTV of 48% and currently tracking at around 50%, there's obviously a lot of collateral in the security associated with that portfolio. So certainly performing in line with expectations. All of that translates into what we shared with you during the voluntary trading update. We expect that the credit loss ratio on that portfolio will remain at around 50 basis points. Do you want to go, Neil?

Yes. Mike, just out of interest, I mean, given the spike that we're seeing in infections in the [indiscernible] region, I mean, are you seeing that translate into noticeably lower activity levels, be it on the card swaps or originations or applications relative to the rest of the country?

Not at this stage, Neil. I mean I think that one thing that we've noticed with regards to the spike in the [indiscernible] region is it's been very sudden and very rapid. So is it likely to translate into lower card swaps or pause activity? I think that potentially it can. It really depends on how quickly that spike recovers as we saw, for example, in the second wave. But a little bit to the question I was asked earlier around -- I think Charles asked it around, would we not look to revise our impairment guidance lower from the 110 to 130 basis points? It really depends on questions like you've just asked, what is the third wave likely to translate into from a client activity perspective and/or from an on or off-balance sheet lending perspective. So it's just too early to tell. And as a result, we're not revising guidance at this stage. Any other questions? All right. I think then I see no further hands. All that's left for me to do is to thank all of you for joining the call. We're always available to chat or talk or answer questions. Please reach out to Investor Relations if you've got anything further. But again, thank you very much for your time. Thanks, everyone.