Nedbank Group Limited (NED) Earnings Call Transcript & Summary

Good afternoon, and welcome to everybody. In my overview section today, I will cover the operating environment in the first half of the year, which, while still being difficult, was materially better than the first half of last year. Developments around the recent unrest in parts of KwaZulu Natal and Gauteng and their likely impact on our country, the economy, our clients and Nedbank. Financial highlights of our first half performance and an update on the strategic progress we continue to make in key areas. I believe these interim results demonstrate that the Nedbank teams have done an outstanding job of navigating the COVID environment into 2020 and into the first half of 2021. And the highlight is that all key balance sheet metrics on capital and liquidity are now back above pre-COVID levels. Our results also demonstrate good strategic delivery and an income statement performance that shows we are on track to meet the targets we have set ourselves for the end of 2023. I would like to thank all our committed Nedbank employees for remaining resilient and serving our clients so well during a difficult period through both the second and third waves of COVID-19 infections and more recently, the civil unrest we experienced in parts of South Africa. I also extend our deepest condolences to the families, friends and communities of employees and clients who have been impacted during this time. After my overview, Mike Davis, our CFO, will follow me with a more detailed analysis of the group's financial performance in the first half, and he will also cover the financial performance of our business clusters. In this reporting period, it will only be Mike and myself presenting. Our cluster managing executives and risk teams will be part of the usual individual investor meetings over the next few weeks and will again be part of our year-end results presentations to provide a more in-depth cluster feedback over the full year. As usual, after Mike is finished, I'll come back at the close of the presentation to review the outlook for the rest of the year as well as provide reflections on the progress we have made towards our medium-term targets through to 2023 that we announced earlier this year. You will also notice that some slides are marked booklet slide in the top right-hand corner. These are slides of additional information for investors, and I will not speak directly to these slides in the presentation today. The first half of 2021 was a more supportive environment for our banks and our clients than in the first half of 2020. And in particular, the second quarter of 2020, which was one of the most challenging periods across multiple fronts that I have experienced in over 30 years in banking. GDP growth expectations for 2021 of 4.2% have improved off the very low 2020 base that declined by 7%. While lockdown levels in 2021 were in general more supportive of economic activity than during the first wave of infections in 2020. The third wave of COVID-19 infections in South Africa were more severe than we had expected. And the introduction of adjusted Level 4 lockdown was more stringent than our base case expectation of a Level 3 lockdown in the third wave. Demand for corporate credit was muted and excess cash generated by clients was generally used to repay debt, in particular from clients in the commodity sector. On the retail side, demand for credit was more robust as clients benefited from lower interest rates. Transactional activity improved off a low base, and growth in digital transactions continued to be strong as COVID accelerated a trend already well underway. The unrest in the second week of July has been a big setback for our country, given the improved economic momentum during the first half of the year. And this unrest, along with the adjusted Level 4 lockdown, is estimated to have shaved off 0.8% of GDP growth in 2021, with our GDP estimates now at 4.2% compared to 5% in late May. From a Nedbank perspective, I think the standout feature of our results is the excellent outcome achieved on our closing out of the resilience phase of the strategic pivot we introduced in March last year. With all measures of balance sheet strength that we have referred to as resilience metrics, not only above 2020 levels but also back above precrisis levels, enabling the resumption of dividend payments. I will unpack these in more detail later. Headline earnings growth was very strong off the low base. And while headline earnings is still 24% lower than in the first half of 2019, it was up 148% on the first half of 2020 to ZAR 5.3 billion, driven by a significant decline in impairments, widening net interest margin and good expense discipline. From a strategic perspective, we've gained market share in a number of key areas, continued to grow main bank clients, improved productivity metrics and achieved excellent outcomes on risk and capital management. Reflecting on the operating environment and in particular, infection rates and lockdown levels in a little more detail. After the passing of the second wave of infections from around December last year to February this year, South Africa is currently at the tail end of a third wave of infections that started in June. And as new daily infections continue to trend downwards, this has recently enabled a return to lockdown Level 3. Lockdown restrictions during the second and third wave in South Africa have been more targeted than in the first wave, allowing larger parts of the economy to remain open. This is evident in the graph on the right, being the Oxford Stringency Index. As a result of this and helped by improved commodity prices, we've seen consistent upgrades to our 2021 economic growth forecasts. And in June, our economic unit had their 2021 GDP forecast as high as 5% before the civil unrest in July and the introduction of adjusted lockdown Level 4 together reduced this GDP forecast by 0.8% to 4.2%. After a slow start, impacted by administration challenges and supply constraints, we've made good progress in recent weeks in accelerating vaccination levels. And as at the start of the second week of August, almost 9 million South Africans have received at least 1 vaccination, with 9% of the total population being fully vaccinated. I would like to specifically recognize the key role played here by the B4SA teams under Martin Kingston working alongside government to achieve this progress. Turning our focus to insights from our own high-frequency data on how the COVID-19 pandemic played out in client activity levels over the last 12 to 15 months. In the graph on the left, we've shown client turnover data from our POS devices and digital channels. With the gray bars representing months in 2019, the dark green bars months in 2020 and the bright green bars months in 2021. The large decline in April 2020 is clearly visible, and we are pleased that overall turnover levels have now consistently returned to precrisis levels, with the first half of 2021 being 19% above 2019 and 27% above the 2020 level for this metric. However, the recovery has not been even across industries. And on the right-hand side, we show the progress in key sectors with hotels and airlines still below March 2020 levels as at June this year. Latest data shows that July turnover levels in total remained similar to June, although we have seen a slight reduction in Gauteng and KwaZulu-Natal. As expected, restaurants, entertainment and hotels were again adversely impacted by the Level 4 lockdowns. From a corporate perspective, activity remains constrained, but we have seen some green shoots in the first half. In Q1, business confidence improved off a multiyear low in 2020 and reached the 50-point mark in the second quarter, indicating a neutral position, but a sharp decline could well be expected following the events in July. Supporting this improving sentiment was positive developments on key South Africa reforms such as energy generation and the announcement of a sale of a majority stake in SAA that will, hopefully, when finalized, remove any future funding burden from the fiscus. However, we've not yet seen any material change in corporate investment appetite and new loan origination in the first half remained slow. Again, the recent events in July will not be helpful here. In the context of renewable energy, Nedbank as the Green Bank continues to lead in this regard, participating and co-leading 4 of the emergency energy projects that have just closed with REIPPP Round 5 likely to close in the first half of 2022. Almost all our large clients are exploring some form of self-generation led by the mining sector. Against this backdrop, while there are green shoots evident, we remain cautious given the potential impact of the recent civil unrest on country risk premiums and investor confidence in the longer term. From a retail or household perspective, the operating environment was more supportive. As you can see on the left, compared to the global financial crisis, households have delevered, allowing them to take advantage of the 300 basis points lower interest rates over the past 12 months. This is evident in robust demand for prime linked credit products, and Mike Davis will provide some more color on this later. The lower interest rates have also been beneficial to clients as debt servicing costs reduced. And this improvement in cash flows for those who have remained employed is evident in lower credit loss ratios across all our businesses. Lastly, national data shows that households were net savers in 2020, and this has continued into 2021. The benefit for banks can be seen in strong growth in short-term deposits. Against these generally more positive trends, the civil unrest and looting that incurred during the second week of July in KwaZulu-Natal and parts of Gauteng has been devastating. As we did during the COVID-19 pandemic, Nedbank's primary focus was on our staff and clients, and we are pleased to report that due to early action and branch closures on our part, no staff were injured. Given the disruption to shops and supply chains, we have to date supported staff and communities with 106 tons of food and supplies. Our business continuity plans that were well tested by COVID during 2020 worked very well, and our digital channels again proved highly beneficial. At the height of the unrest, 226 branches and 60 Boxer stores were closed, being around 50% of our physical outlets. And 55 of these were vandalized. As of the 1st week of August, 52 outlets remain closed. In addition, 325 ATMs being around 8% of our total ATMs, were vandalized. All damage to our own physical infrastructure currently estimated at between ZAR 250 million and ZAR 300 million is covered by Sasria Insurance the government insurance agency, where we have ZAR 1.5 billion of cover in place, and we estimate our cash losses to be around ZAR 32 million. Our teams have worked really hard to support clients and to estimate the impact of the unrest on our clients' businesses and assets. And to date, it looks like the vast majority of our clients are also covered by Sasria Insurance. Importantly, in our commercial property finance portfolio, 105 properties have been damaged, impacting 55 clients. And while the extent of the damage to a number of these properties is still being assessed, all of these clients have confirmed Sasria Insurance is in place. And in his recent speech, the President affirmed that the state will stand behind Sasria's obligations if their own assets and reinsurance programs are insufficient to meet all valid claims. We expect loan application volumes to drop in the month of July. And as you saw earlier, early high-frequency transactional data does not highlight any material impact at a country level. Law and order and the protection of citizens and their assets are the foundation for democracy and investment and economic growth and business needs to urgently understand what happened, why it happened and very importantly, why it will not happen again, failing which many businesses may not rebuild and certainly not in the same areas or indeed in South Africa. Turning to progress on our strategy to 2023. After our deliberate shift in focus to resilience in 2020, at the start of the year, we updated investors regarding our reimagine strategy, and the medium-term targets we have set ourselves that support shareholder value creation. I will provide some thoughts on our initial progress on these in my closing remarks. But as a reminder, we have set ourselves key targets that we want to achieve by the end of 2023. Getting back to the 2019 levels for diluted headline earnings per share and return on equity, reducing our cost-to-income ratio to below 54%, and to rank #1 on Net Promoter Score after having improved to #2 in 2020. We have identified 3 key value drivers, the combination of which will enable us to meet these targets: growth, productivity and risk and capital management. Underpinning these are 5 strategic value unlocks, delivering market-leading client solutions, ongoing disruptive market activities, strategic portfolio tilt or SPT, target operating model or TOM and creating positive impacts. The next few slides track our progress on these 3 value drivers and 5 unlocks. Starting with a reflection on the first 2 of our 3 key value drivers. On growth, we've made good progress in gaining year-on-year market share in key retail products, such as personal loans, vehicle finance, card and household overdrafts. While our focus on household deposits, including the price-sensitive investment category has increased. We initiated certain actions in May 2021 and we look forward to see the impact of these in the second half of the year. In wholesale lending, we've lost some market share. In some places, deliberately, as we have been selective in origination and optimized our portfolio in CIB, and this is already evident in higher net interest margins and risk-adjusted returns and some from strong client paydowns in cash-flush commodity sectors where we are very active participants. From a client perspective, we're pleased with the ongoing CIB primary client gains, a 2% growth in retail main-banked clients, 14% growth in clients in Nedbank Africa regions and 9% growth in assets under management to hit the ZAR 400 billion mark. On the productivity side, our cost-to-income ratio increased slightly and pre-provisioning operating profit declined year-over-year, although up on the second half of 2020. However, Adjusting for the impact of fair value movements, which normalized to 0 over time, both underlying operational cost to income and pre-provisioning operating profit would have shown positive improvements. On the third key value driver, risk and capital management, this is best represented in delivery of our resilience metrics to close out this phase in our post-COVID strategy. And these are, to my mind, the highlight of our interim results. Starting at the bottom left of this slide, liquidity metrics, such as the LCR and NSFR, are now higher than precrisis levels. And based on Q1 Pillar 3 reporting, we now have one of the strongest liquidity positions as measured by the LCR among the large South African banks. On the bottom right, from a credit perspective, our credit loss ratio declined faster than we had expected to be within the through-the-cycle target range. And our ECL coverage is now at a multiyear high of 3.4%, highlighting ongoing prudency in provisioning as notwithstanding this reduction in our credit loss ratio, we have increased our COVID-19 and other related overlays to ZAR 4.5 billion at the end of June, up from ZAR 3.9 billion in December last year. Mike Davis will highlight the breakdown of this in his later slides. Given the group's strong financial performance and successful focus on risk-weighted asset optimization, particularly in CIB, our CET1 ratio at 12.2% ended the period above the top end of our 10% to 12% target range and is now also higher than precrisis levels. These metrics have enabled us to resume dividend payments, declaring an interim dividend of ZAR 4.33 a share at 2.5x cover, slightly outside our 1.75 to 2.25 target cover range given risks in the current environment. Turning to the value unlocks. On the technology front, we continue to make solid progress on our managed evolution technology strategy to build a modern and modular IT stack. Investors will be familiar with this from previous reporting. We reached 81% completion in June with our foundation programs materially complete. We've also completed an independent external benchmarking review of our Managed Evolution program and its associated business case in the first half of this year with very pleasing outcomes. On our new client onboarding platform, individual digital onboarding is fully in place, and we have completed the rollout of juristic onboarding in our wholesale businesses and more than 88% of juristic onboarding is now done via the new platform called the Nedbank Business Hub. We have digitized 6 products or client journeys, being transactional accounts, personal loans, card, investments, overdrafts and home loans. And during the first half, we started work with ForEx. Digital sales as a percentage of total sales increased from 21% in 2019 to 53% in the first half of 2020 and 54% in the first half of 2021. Digitally active clients accelerated, reaching 61% of total main bank clients, up from 55% the year before. The volume and value of digital transactions continued to increase strongly, up 33% and 27%, respectively, as COVID accelerates trends in client behavior that were already well underway. Lastly, it's always good to get independent acknowledgment and we were pleased to have won various awards for our digital journey and its impact on client experiences. The benefits of our digital investments are also evident in improvements in key operational metrics from our target operating model, or TOM programs, highlighted by savings achieved in our TOM 1 and good progress on the start of our TOM 2 programs. As more products and processes are digitized, we've been able to reduce head count and branches by 6% and 7%, respectively, over the past 2 years, leading to savings in floor space, in our branches and in our corporate real estate. A reminder here, after achieving nearly ZAR 2 billion of benefits under TOM 1, we are aiming for a minimum of ZAR 2.5 billion of benefits from TOM 2 by the end of 2023. Building on the achievements from our -- from 2020 where various client experience metrics independently measured by Consulta, such as client satisfaction and Net Promoter Score, showed how Nedbank had improved its rank to #2 among the big 5 South African banks, more frequently measured metrics such as brand sentiment and brand value continue to highlight progress in 2021. Brand sentiment, as measured on social media channels, continues to measure Nedbank consistently as the #1 or #2 South African bank. Importantly, Nedbank sentiment improved strongly after the excellent job our staff did in providing COVID support to clients in 2020. From a brand ranking perspective, Nedbank retained its rank as a top 10 brand in South Africa, with the #4 ranked bank brand with an estimated brand value as calculated by Brand Finance at ZAR 15 billion. Over the past 18 months, we have highlighted to investors some of our platform and beyond banking initiatives built off the Managed Evolution IT foundations. Two of these that we showcase here include our Super App Avo and our API_Marketplace. The number of merchants and partners on the Avo app, selling products and services continues to increase, making Avo an attractive digital store with more than 17,500 partners. Registered clients increased to more than 260,000, and product orders increased by 45% over the last 2 quarters. With respect to our API_Marketplace has 7 active products in use. And a key success to date is the quick ramp up to around 10,000 personal loans distributed through this new channel in the second quarter. Turning to our focus of growing in attractive areas for value creation or Strategic Portfolio Tilt 2.0. We've seen a strong increase in client take-up rates across most products. Notwithstanding tighter credit criteria and lower approval rates, this has resulted in increases in market share, enabled by our digital innovations and channels. The key success to showcase here is in personal loans, where our market share has increased to 11.6%. Banks play a central role in driving the sustainable socioeconomic development of our continent. And at Nedbank, our purpose is to use our financial expertise to do good for all our stakeholders. One aspect of our purpose is demonstrated through our recently released energy policy that seeks to guide a transition away from fossil fuels, while deliberately accelerating efforts to finance non-fossil energy solutions that are needed to support socioeconomic development and build resilience to climate change. Our energy policy regarded by a number of external stakeholders as one of the most progressive amongst global banks of our size, is aimed to ensure that Nedbank has 0 exposure to fossil fuel-related activities that is thermal coal, upstream oil and gas and fossil fuel-related power generation by 2045. And with 100% of lending and investment activity supporting a net 0 carbon economy by 2050. While at the same time, accelerating funding to key sectors such as renewable energy and embedded energy generation over this period. To achieve our ambitious targets for climate risk, we'll require a significant amount of investment in energy-related innovation in South Africa. And this is a large opportunity for us into the future. Early evidence of this was Nedbank's launch of Africa's first Green AT1 instrument earlier this year. A total of ZAR 910 million was raised through this issuance with the equivalent amount of funding to be directed to support the financing of new green infrastructure projects in South Africa. We estimate the pricing of this green instrument to have been around 20 basis points lower than vanilla AT1. On the lending side, at 30th of June 2021, our renewable energy financing portfolio was ZAR 29 billion, and we have increased our Board limits to accommodate future client lending support up to ZAR 50 billion, with an additional ZAR 2 billion specifically earmarked for financing embedded energy generation by 2022. The progress we have made on environmental matters along with our track record in governance and societal matters has assisted Nedbank to stay within the top tier of all the major ESG ratings. In acknowledgment of Nedbank's leadership and progress made on ESG disclosure-related issues, Nedbank was recently announced the winner of Best climate-related reporting, best sustainability reporting in financials and banking in particular, and the overall winner in ESG Investing's Global 2021 ESG Reporting Awards. The adoption of the United Nations' Sustainable Development Goals as a framework for measuring delivery on our purpose has proven very important. Key highlights in the first half include the following: 106 tons of food delivered to staff, families and communities impacted by the recent rioting; allocating 65% of our CSI spend to education; reducing our own water consumption by 11% off an already low 2020 base; participating in the youth employment service by providing more than 1,900 1-year job opportunities to unemployed youth in 2021; maintaining our Level 1 BBBEE status; paying 94% of our suppliers in 30 days in support of the #PayIn30 initiatives; providing ZAR 5 billion in funding for the construction of buildings that conform with green building standards and improving transformation statistics across the group and at Board level. Lastly, before I hand over to Mike Davis, on the 23rd of June this year, Old Mutual announced the unbundling of 12.2% of its shareholding in Nedbank, subject to regulatory approvals, to take place on the 8th of November 2021, while maintaining their remaining 7.2% shareholding. Importantly, this unbundling will have no impact on the strategy, day-to-day management or operations of Nedbank, our staff or our clients, very similar to the previous unbundling that was seamlessly executed in October 2018. And we would anticipate continued benefits for shareholders, such as enhanced levels of liquidity in the Nedbank share and increases in our weighting in relevant indices. And with that, I'll now hand over to Mike Davis, our CFO, to take us through a more detailed review of the group's financial performance in the first half.

Thank you, Mike, and good afternoon, everyone. After a tough 2020, I'm pleased to report a stronger financial performance for the group in Half 1 2021, driven by significantly lower impairments, widening net interest margin and good expense discipline. Half 1 2021 was much better -- a much better period for banks and our shareholders. Looking at the key drivers of value creation in our bank, net asset value per share increased by 8% year-on-year to around ZAR 194 per share, implying a price-to-book ratio of around 0.9x. The group's ROE improved to 11.7%, but is still below the group's cost of equity of around 15%. And as Mike mentioned earlier, we resumed with dividend payments. The group's profitability metrics improved as seen in very strong growth in HE, DHEPS and EPS, albeit off a low base. This growth is in line with the ranges provided in the trading statement that we released on 4 August 2021. Our balance sheet remained resilient with strong capital and liquidity positions well above regulatory requirements. And our credit loss ratio decreased to 85 basis points, with total coverage increasing to 3.41%, a multiyear high. Turning to our usual waterfall graph where we show the key drivers of headline earnings increase, NII increased by 6%, but NIR was down 3% on the prior period. Impairments decreased by 57% and was the key driver of higher AG as seen in the large bright green bar. Associate income increased off a low base and expenses were well managed at 6%. Looking at our results over a 2-year period, which includes 2019 in the gray bars being the first period precrisis, NII is up strongly, and impairments have returned broadly to similar levels. NIR, however, still remains below 2019 levels, in part impacted by fair value adjustments, including the effect of the group's macro fair value hedge accounting solution that normalizes to 0 over time, but declined in 2021 after increasing in 2020. Excluding these fair value changes, NIR growth would have been positive at 8% year-on-year. Two additional insights on this slide, the volatility and impairments highlights the impact of IFRS on both the Half 1 2020 and Half 1 2021 impairment charge, while expense growth for the 6 months includes a strong increase in incentive costs as profitability improved. Excluding this, expenses were very well managed and up only 2%. Turning to the balance sheet. Gross banking advances declined by 7% year-on-year impacted by a 19% decline in CIB banking advances, as our corporate clients used excess cash to reduce their facilities, while new loan growth remained muted. This was offset by ongoing momentum in RBB as banking advances grew by 7%. I will unpack the underlying dynamics on the following slides. Within CIB in the graph on the left, we show how the level of loan repayments remain high, illustrated in the 2 green bars below the line. This was driven by a reduced need for liquidity as corporates remain cash flush. The second driver is the muted demand for new loans, although slightly up in Half 1 2021 when compared to the second half of 2020. In addition, a key focus of CIB was on the optimization of the portfolio, which is evident in a higher net interest margin and also higher risk-adjusted returns. The advances pipeline remains resilient with encouraging activity seen in energy, telecoms and the infrastructure sectors. Providing a little more insight on RBB lending developments and starting with the 2 top graphs, home loans and motor vehicle loans continued to show relatively strong growth on the back of lower interest rates and lower asset prices. Application volumes in general remained higher than the 2019 levels shown in the gray bars. In the bottom graphs, personal loan application volumes grew strongly from half 2, 2020, driven mainly by our digital sales capabilities and higher take-up rates, while card also recovered nicely in the second half of 2020 and has continued into 2021. On the other side of the balance sheet, deposits declined by 1% on a year-on-year basis, better than the decline in loans and advances of 7%, resulting in an improvement in the group's loan-to-deposit ratio to 87%. The key dynamic within the deposit book remains the shift from term to short-term deposits evident in CASA and call and term deposits growing by 23% and 8%, respectively, compared to fixed deposits and NCDs that declined by 17% and 27%, respectively. Turning to the income statement. NII increased by 6%, driven by a 35 basis point increase in the net interest margin. The increase in NII was better than expected coming in ahead of the full year guidance of growth of between 0% and 3% we provided at the start of the year. The key drivers of the NIM increase included a 16 basis point endowment benefit from higher CASA and capital levels, partially offsetting the impact of interest rate decreases from 2020. The benefit of asset pricing continued and along with asset mix benefits as higher margin RBB loans grew faster than lower-margin CIB loans contributed to a 34 basis point increase. Active balance sheet management added a further 8 basis points. Turning to NIR. Growth declined by 3%. The key drivers include: commission and fees, increasing by 5%, primarily as client transactional activity recovered; trading income decreased by 27% off a very high 2020 base; trading performance, however, was solid and normalized to around 2019 levels; insurance income increased by 21%, driven by an enhanced asset liability management strategy and improved investment performance in our insurance business. Equity revaluations reflect the nonrecurrence of negative revaluations in 2020 and fair value income declined by more than 10% given the unwind of the half 1 2020 gains as a result of the group's fair value hedge accounting solution ahead of expectation. Having a brief look at transactional volumes in RBB, we continue to see the impact of client behavioral shifts away from physical channels to digital channels. This is evident in branch teller transactions that have not recovered post the initial COVID-19-related lockdowns in April and May 2020, and volumes for the 6-month period are down 18% on the prior year. In contrast, POS and digital volumes have increased by more than 30% each since last year. In our insurance business, our retrenchment or loss of income claims have improved year-on-year, trending towards 2019 levels. Funeral claims, however, remained high as we continue to feel the impact of the third wave of COVID-19 infections. On a positive note, markets have rallied over the past few months, positively impacting all of our Nedbank Wealth businesses and in particular, Nedbank Insurance, who benefited from increased investment performance. In Asset Management, our assets under management increased by 9% to ZAR 400 billion, supported by positive net flows of ZAR 9 billion, particularly in lower risk cash and fixed income funds. As you can see from the graph on the right, we have maintained steady market share in our local best-of-breed funds over the past decade. Internationally, we have shown growth with the obvious fluctuation during challenging times. And lastly, our cash franchise has seen substantial growth as clients have moved from equities to low-risk products. Turning to impairments. The group's balance sheet ECL strengthened to ZAR 26.6 billion, driven by the half 1 2020, ZAR 3.3 billion impairment charge and ZAR 650 million post write-off recoveries. Write-offs remained conservative and increased from around ZAR 3.1 billion in the prior 6-month period to ZAR 3.9 billion. The increase in ECL is notwithstanding a ZAR 16 billion decline in gross loans and advances since December 2020, supporting an increase in our total coverage for the group to a multiyear high of 3.41%. The 57% decline in the impairment charge to ZAR 3.3 billion in the first half of 2021 was driven by a few factors. These include a 7% decline in gross loans and advances, a significantly better collections experience as clients benefited from the 300 basis point rate cuts in 2020, macroeconomic benefits coming through in the IFRS models as GDP growth forecasts improved during the period; and the decline in D3 and D7 loans. Despite the decline, we increased the level of judgmental and macroeconomic overlays to ZAR 4.5 billion, which I will unpack shortly. Our credit loss ratio decreased from both the half 1 2020 level of 187 basis points and the half 2 2020 level of 134 basis points to 85 basis points, which is now within our through-the-cycle target range of 60 to 100 basis points. The decline was supported by a reduction in credit loss ratios across all clusters. As noted earlier, D3 and D7 loans declined. D3 loans, which are loans provided to clients that were in good standing ahead of the COVID-19 crisis and were temporarily impacted reduced further from the peak of ZAR 121 billion in July 2020 and the ZAR 28 billion at 2020 year-end. At just over ZAR 9 billion, the remaining D3 loans are in CIB, and these are expected to mature in the second half of the year. D7 loans, or restructured loans outside of D3, reduced from ZAR 13 billion at December 2020 to ZAR 9 billion as client loans cured and exited their monitoring period, resulting in a release in related provisions. As mentioned earlier, we increased our COVID-19 and macro-related overlays from ZAR 3.9 billion at December 2020 to ZAR 4.5 billion. The key changes include: an increase in the central provision to account for risks not yet reflected in the data and impairment models, including the adjusted Level 4 lockdown as a result of the third wave of COVID-19 infections, CIB increased overlays to absorb the negative GDP impact of adjusted Level 4 lockdowns; and the recent unrest of 0.4% each to provide for D3 and D7 migration risk in the portfolio and for additional risk in the commercial property portfolio. In RBB, overlays were released, primarily those raised against D3 loans in 2020, while overlays using stressed, forward-looking information remain broadly intact. From a coverage perspective, the Stage 1 coverage ratio increased marginally to 0.69%, driven by stage migration. Our Stage 2 coverage ratio increased to just over 7%, driven by the additional ZAR 250 million central provision and CIB overlays as well as migration of specific watch list clients with high coverage. And our Stage 3 coverage ratio increased to 36.3%, driven by D7 loans curing and CIB Stage 3 clients with low coverage migrating back into the performing book. Turning to our usual deep dive in commercial property. The commercial property sector continues to perform ahead of expectations. Collections remained healthy, liquidity better than expected, and increases in vacancies in our client portfolio is manageable, having increased by between 1% and 3%. We have worked closely with our clients during the recent unrest and Sasria cover is in place for all damaged properties and we do not expect any material adverse impact on our portfolio. The recovery in the commercial property sector is best illustrated in the SA Listed Property Index, as shown in the graph on the right. The index declined by 39% in 2020 and then recovered year-to-date by 13% of multiyear lows. The recovery continues to be supported by our strong balance sheet, robust interest cover ratios and clients benefiting from the 300 basis point rate cuts. Reflecting on our own portfolio, we get comfort from having a high-quality, well-diversified and very well collateralized portfolio. After revaluing more than 5,200 properties representing 79% of our portfolio that started in the higher LTV buckets, our average portfolio LTV increased to 52%. After taking an additional ZAR 294 million overlay, our credit loss ratio ended the period at 46 basis points, slightly below the full year 2020 credit loss ratio of 54 basis points. The levels of arrears in this portfolio remain extremely low at just ZAR 11 million. Turning our focus to costs. Expenses increased by 6%, impacted by an increase in incentives that are aligned to the improved profitability metrics. Excluding incentives, expenses increased by just 2% as a result of good cost management, focus on efficiencies and discretionary spend. Staff costs, excluding incentives, declined by 1%, reflecting the impacts of an average annual salary increase of 3.5% and a decline in head count of 4%, largely through natural attrition. Computer processing costs increased by 13%. But importantly, the rate of growth in the amortization charge is slowing as our ME journey matures. In the first 6 months, we realized the first benefits of our target operating Model 2 program savings of ZAR 106 million as we target ZAR 2.5 billion by 2023. Associate income from our investment in ETI increased by 255% to ZAR 270 million, and our carrying value remained relatively stable at ZAR 2.1 billion. ETI's most recent performance reflects good strategic and financial progress, and we are encouraged by further improvements as evident in ETI's half 1 results that were released on July 26, 2021. The ETI group continues to benefit from its strong position in West and Central Africa, where ROEs in the 3 regions are all above 19%. From a risk perspective, NPLs are declining, and capital ratios improved materially with no need for CET1 capital for the foreseeable future. ETI Nigeria, however, remains a drag on performance, and we continue to work together with the ETI Board to improve this position. With respect to capital, our CET1 ratio increased from the 10.9% reported at December 2020 to 12.2%, driven by higher levels of profitability, slower wholesale balance sheet growth and ongoing RWA optimization. Our CET1 ratio is now above the top end of the group's Board-approved target range of 10% to 12% and above precrisis levels of 11.5%. On the back of the strong capital position, but taking note of the ongoing risks in the environment, the group declared a dividend at 2.5x cover or at a payment ratio of 40%. We would expect to reduce our cover to within our target range for future dividend payments. Turning to the performance of our business clusters. CIB grew earnings by more than 100% and increased its ROE back to above cost of equity. NII increased by 2%, underpinned by a healthy net interest margin increase, but offset by lower levels of loans and advances. Impairments declined by 72%, driven by an improvement in macroeconomic factors, notwithstanding additional overlays. NIR was up 8%, despite the high 2020 trading revenue base, as equity revaluations normalized. All the business clusters, including CIB, reflect higher expense growth that has been driven by higher incentive costs. RBB also increased AG by more than 100% and its ROE improved to double digits at 13%. The performance was driven by good advances growth and a higher net interest margin, materially lower impairments and a recovery in NIR on the back of improved levels of client transactional activity. Expense growth was also impacted by higher incentive costs, but partially offset by ongoing cost optimization. Nedbank Wealth increased HE by 31%, and its ROE remained well above the group's cost of equity. Insurance results were favorably impacted by improved investment returns, as mentioned earlier, and the implementation of an enhanced asset and liability matching strategy, offset by significantly higher life claims. Asset management experienced a good overall performance on the back of positive net flows and strong growth in assets under management. And wealth management reported a strong recovery in earnings as a result of credit impairment recoveries while the impact of record low international interest rates continue to negatively impact international earnings. A turnaround in the performance in our Nedbank Africa regions was driven primarily by a more than 100% increase in associate income from our investment in ETI. In SADC, HE remained slightly negative, as NIR declined by 14% on the back of reduced client transactional activity and lower levels of FX gains versus the prior year. NII decreased as muted loan growth was offset by lower NIM and impairments declined. Thank you. I hand back to Mike as he covers the outlook and make some closing remarks.

Thank you, Mike. I will, in my last few slides provide an updated outlook for the rest of the year and high-level progress towards meeting our medium-term targets to 2023. Importantly, as we look forward, we are building off a strong base with the resilience phase of our post-COVID strategy now delivered. The external environment, although more supportive than last year, remains risky, volatile and uncertain. And after a bounce back in 2021, longer-term SA GDP growth rates are expected to remain weak. As a result, and as I've said in the last few reporting cycles, forecast risk remains high as we have not yet reached herd immunity, as new waves of the virus and new variants thereof are likely to recur and a civil unrest could reignite, particularly if the root causes are not properly understood and addressed, and those responsible are not speedily held to account. The current economic forecasts from our group economic unit shown on the right-hand side for 2021 GDP growth are nearly 1% better than what we expected at the start of the year and much better than the low base in 2020. As I said earlier, our latest forecasts do include estimates for the negative GDP impacts from the recent civil unrest and from the move to adjusted lockdown Level 4. Interest rates are forecast to remain flat in 2021 before increasing 100 basis points in 2022. And inflation is expected to remain moderate at around 4.5% or the middle of the SARB target range over this period. Credit growth was slow in the first half of this year, but is expected to recover slightly in the second half of the year to just below 3% before increasing to higher, but still modest levels in 2022 to 2024. South Africa's fiscal position remains challenging, but has been better than expected over the past 12 months as the country has benefited from a strong commodity cycle. Care will be needed to ensure this cyclical outperformance in tax revenue is not used to structurally shift the already high government expense base. Turning now to our usual format of shorter-term guidance for the full year 2021, updated now at the half year from the initial guidance we gave earlier in the year. For net interest income, after growing 6% in H1, we now expect full year NII growth to improve from the initial guidance of 0% to 3% and to be above mid-single-digit growth being around 5% to 7%. The key risk to this is advances growth, particularly in wholesale into the second half of the year. We expect our net interest margin to contract slightly from the higher-than-expected H1 levels. Our credit loss ratio, which was 85 basis points in H1, is now expected to be around the top end of our through-the-cycle target range, somewhere between 80 and 110 basis points for the full year. This guidance is lower than the 110 to 130 basis points initial guidance we provided at the start of this year. While we seek to retain conservatism into the second half of 2021, risks from further macroeconomic deterioration, civil unrest or a large unexpected corporate default remain. Noninterest revenue growth is expected to move from a decline of 3% in the first half or an increase of 8%, excluding our macro fair value hedge accounting movements to growth below mid-single digits, say, 2% to 5% for the full year. Key risks include transactional volumes that may fail to recover further after the events of July, higher insurance claims and any significant slowdown in trading revenue. Importantly, fair value movements are likely to be less volatile from now on as we have enhanced our hedge accounting methodologies. Expenses, as always, will remain tightly under control, but are expected to grow above mid-single digits, primarily as variable incentive-related costs increase off a low base in line with the group's improved financial performance. Capital and liquidity levels are expected to remain strong and around the top end of our targets and well above regulatory minimum. After having declared a dividend in the first half of 2021 at 2.5x cover, we expect the final or H2 dividend to be declared within our target range of 1.75 to 2.25x cover. At our results presentation in March, I shared with investors our medium-term targets for the end of 2023 that you can see here for DHEPS, ROE, cost-to-income ratio and Net Promoter Score. All these targets remain in place, and meeting them should provide ongoing support for shareholder value creation. While it is early days, as we reflect on our progress in the first 6 months of this year, on our journey to these 2023 targets, as shown at the bottom of this slide. Achieving the DHEPS target of above ZAR 25.65 has become slightly easier given the faster-than-expected H1 DHEPS growth and in particular, the faster-than-expected reduction in the credit loss ratio. Achieving the ROE target of above 15% could become more challenging, if a faster headline earnings recovery builds equity faster than planned, and therefore, absent any capital management actions dilutes ROE. While the cost to income and Net Promoter Score targets remain appropriately stretched and ambitious. In closing, while we remain vigilant in a difficult environment, I am pleased that we can close off the resilience phase of our post-COVID strategy with key balance sheet ratios on capital liquidity and coverage all at or above the top end of targets and above precrisis levels, enabling the resumption of dividend payments to our shareholders. Our reimagine strategy remains firmly in place, and we continue to focus on digital innovation, client satisfaction metrics, unlocking benefits from TOM 2.0, leveraging our balance sheet to grow clients, transactional income and deposits through SPT 2.0 and creating positive impacts as we use our financial expertise to do good for all our stakeholders. For the full year in 2021, after a strong H1 DHEPS growth performance, we already have reasonable certainty that full year DHEPS growth will be greater than 20%. And our trading statement today highlights the same expectations for HEPS and EPS. As usual, once we have more certainty around the extent of these increases and ranges, we will provide an update to shareholders via SENS. Lastly, after our share price underperformed peers in the first half of 2020, we have outperformed so far in 2021. And we will continue to focus on value creation for shareholders through ongoing dividend payments and delivery on our 2023 targets. Thank you. And may you and your loved ones stay healthy and stay safe. We will now open for questions. And just a reminder, we have 2 methods by which investors can ask questions. Firstly, on the telephone lines, and we will go there first. And secondly, on the webcast where people can type in their questions, and we will answer those questions once we finished on the telephone line. So I think for the sake of experience of people, do want to ask questions on the webcast, please can you start typing your questions in right now. And if we can go firstly to the telephone lines to see if there are any questions.

[Operator Instructions] The first question comes from James Starke from RMB Morgan Stanley.

Thanks for the opportunity and the presentation. Two questions from my side. Firstly, just on your credit loss guidance, the 80 to 110 basis point range, can you perhaps give us some color of the conditions you would need to see playing out during the rest of the year to achieve a credit loss ratio towards the bottom end of that 80 to 110 range? And perhaps if you can follow it into how we should think about your base case mild stress and positive outcome scenarios? I mean does that set the bookend of the range to feasible scenario. And then the second one is on your ROE target of 15% by 2023. If you can give us some context around the shape of the path from your 11.3% now to 15% over the next 2 years? I mean is it linear, concave, convex? And also, what kind of loan growth underpins achieving that 15% target?

Okay. Thank you. If I can start with James' questions. So firstly, on the credit loss ratio, where our outlook is between 80 to 110 basis points, if I heard you correctly, you wanted to know what conditions would enable us to achieve towards the bottom end of that? I guess, in short, more of the same, as we've seen in the first half of this year could enable us to come in towards the bottom end of that target range. Although forecasting in this environment is difficult, it is an environment where we feel wherever possible, we want to err on the top end of being conservative in respect of provisioning and impairments. And obviously, from an impairment point of view, I would say, less than the macro outlook in the current environment, given that we're already halfway through the year, I would think it's any large single corporate impairment that is currently not on our radar screen that may cause us not to come in at the bottom end. In respect of the return on equity trajectory through to 2023, again, it is early days. We're only 6 months into that forecast. But what we have done is earnings in the first 6 months have certainly been stronger than we thought they would be. As a consequence of that, earnings for the full year are likely to be stronger than we thought they would be. And that means that equity will build up faster than we thought it would be all other things being equal so that we'll put some pressure into that ROE trajectory. And certainly, we would expect in our current forecasts that it is more hockey sticked or back ended towards the back end of the period late 2022, early 2023 rather than material uplift in the balance of this year from the June position.

Just clarify on the loan growth required for that 15%, I can see your macro forecast. I mean, do you -- would you be required to grow faster than overall market to deliver that?

We would expect to grow some market share to be able to deliver that, that's correct.

At the moment, we do not have any other questions on the audio line. Can we perhaps go to questions from the webcast?

We can. And I will read those off the webcast. We have 3 questions. The first one is from Chris Stewart at 91. Overlays of ZAR 4.5 billion are arguably unsustainably high and will need to be utilized as the cycle matures further? Simultaneously, the credit loss ratio in home loans, business banking and wealth are unsustainably low. How do you see these conflicting forces evolve in the group credit loss ratio in the second half of this year and then into 2022 and 2023? So perhaps just to touch a little bit on what I said earlier, we absolutely wanted to be at the top end of conservatism on provisioning and impairments in this current environment. So the ZAR 4.5 billion of overlays and central adjustments will absolutely need to either come through our underlying models over time, enabling us to release the associated central provisions will be utilized over time. So clearly, with that as a background, what have we done? If you look at our forecast, we are saying that our current expectations are that the credit losses in the second half could be slightly higher than the first half, but still well within our through-the-cycle target ranges. And certainly, again, while it is early days, looking further out to '22 and 2023, we would expect credit losses to move towards the middle of our target range, bearing in mind that we are in an environment where retail loans are growing slightly faster than corporate loans. And within retail loans, personal loans are growing slightly faster than other loan categories. So notwithstanding those giving you negative mix in the credit loss ratio and positive mix in the margin, we would expect to trend towards the center of our through-the-cycle target range. The next 2 questions, I'm going to ask Mike Davis to answer. The first one is from Charles Russell at Citi. Thanks for the detailed and informative presentation. Firstly, with the early repayment of corporate loans and facilities, why have you not seen an increase in corporate deposits? Secondly, how confident are you about achieving the less than 54% cost-to-income ratio? And could we elaborate on the key assumptions? And then alongside that, there is a question from Mthombeni at Intellidex saying, can you provide more color on the nature of the deposits that sit at the center, especially as they have declined by 29%? And there is a link between those 2 questions. So Mike, can I ask you to deal with both of them.

All right. So first of all, Charles, thanks for the questions. So in terms of the first question, just to note that you actually have seen growth on a relative basis in terms of the corporate book as it relates to deposits. When you consider the fact that -- when you look at the segmentals, you'll see that corporate advances are down significantly higher than corporate deposits. Obviously, when we retain cash from corporates or at the margin, we would do so dependent on the requirements or need for such liquidity. So to the extent that we don't need expensive or marginal cash, we certainly wouldn't simply hold it on balance sheet. But certainly, when you look at the correlation between the advances in deposit side of the corporate business, you do see exactly that playing out. The second part of the question as it relates to confident about achieving the cost-to-income ratio of 54%, I think in certainly communicating the medium-term targets and setting the 54%, we recognized right upfront that it was probably one of the more difficult targets to meet in the medium term. And the assumptions that we have in our business planning to get to that sort of level is that we need reasonably strong growth in both top line revenue growth, both NII and NIR. A little bit to James' question around advances growth and assumptions around growth in terms of the book over the next 3 years or 2.5 years, and we need to contain costs at just below mid-single digits. So those need to play out over the next 2.5 years to achieve that metric. And then in terms of the reference to what deposits are held in the center, so in terms of funding that's held in the center, it includes the NCD portfolio. Why? Because it's -- effectively, it's a marginal source of funding. In other words, we make no positive funding spread on the NCD portfolio. So none of our business clusters want it, so we retain that in the center. We do allocate the cost thereof on a AJTP type basis into all of our businesses. It makes its way through our FTP process into the cost of money that we internally transfer across the organization. And the reason the books fallen is when you reflect on Note 12, which gives you the detail of our deposit base, you'll see there's been a significant decrease in the NCD portfolio really as clients have had appetite to move into more structured-type products as opposed to bare documents. And as a result, that's been driven by market appetite. Just to note that also in the center, we retain the senior unsecured debt, the subordinated debt in the AT1 capital. You'll see that in the center in the segmentals. And again, just to remind everyone that we certainly do TP the cost of senior unsecured debt, Tier 2 capital and AT1 capital through, again, either our TP process or our capital allocation process into our frontline business units. So the costs associated thereof doesn't simply sit in the center.

Okay. Thanks, Mike. Just moving on to further questions. There's a question from John Storey at JPMorgan. When would Nedbank start to see the real cost benefit of TOM 2 coming through, especially in the context of the FY '23 cost-to-income targets and outline cost savings? So John, as you saw in H1, we had just over ZAR 100 million of benefits from Tom 2. Some of the big restructurings in our retail business that are the main drivers of the run rate in TOM 2 benefits going forward are already underway, effectively as we take our retail business from what was historically a product-led business supported by segments and channels to become a segment-led business supported by products and channels. And certainly, you will start to see continued benefits into the second half of this year, but then a meaningful acceleration as we get into 2022 and into 2023. There's a question here from Chris Stewart again from 91 on do we believe the South African banking sector can sustainably grow noninterest revenue at or in excess of nominal GDP? And if so, how? Mike, do you want to pick up that one?

Yes. So thanks for the question, Chris. So I mean, if you unpack the component pieces of NIR, I've said you think that it would need to be supported by growth in, for example, trading income, insurance income, revaluations in terms of moving NIR to growth levels sustainably above nominal GDP. I think when it moves to the commission and fees line, I think there is going to -- there's always going to be pressure on that particular line, particularly as more of our clients self-service through digitization. And I think commission and fees is going to be tough to certainly grow at nominal GDP.

Thanks, Mike. And then the last question currently on the web is from anonymous. And it's in -- under what circumstances would you consider a top-up in the dividend given the solid CET1 ratio? So certainly, I don't think currently we would consider in this terminology a top-up. But clearly, going forward to the extent that our capital is in a very solid position. As you said, we do have the 1.75 to 2.25x target range within which to declare dividends. So we've said that the second -- in the second half, we expect to be declaring within that range and clearly going forward to the extent that we continue to be capital generative in an environment of strong earnings growth and muted risk-weighted asset growth, we would have the opportunity to boost dividends by paying at the lower end of that target cover range. I think we've dealt with all questions on the web. I'm just refreshing here to make sure that there aren't any more. Can we just check? Any other questions then on the telephone lines?

At the moment, we have no further questions. [Operator Instructions] We now have a question from Mark Du Toit from OysterCatcher Investments.

Can you give us an insight to the corporate loan growth post results period? I mean, I'm guessing that the writing probably is still muted. But I mean, are you seeing any kind of pickup in activity there?