Nedbank’s headline earnings slump

Nedbank’s headline earnings slump

JOHANNESBURG-THE Covid-19 pandemic has hit Nedbank hard with the bank’s headline earnings declining by 69.2 percent to M2.1 billion from the end of March this year.

In a statement, Nedbank’s CEO Mike Brown said the decline was driven by a significant increase in impairments, including M2.9 billion related to IFRS-9 macro-model adjustments and judgmental overlays for estimated Covid-19 related impacts and expected future job losses.

Brown described the period as one which presented “unprecedented health, economic and social challenges that have had a material impact on individuals, families, businesses, societies and countries”.
“In particular our thoughts and prayers are with the families and friends of five Nedbankers who lost their lives as a result of Covid-19 related illnesses,” Brown said.

Nedbank’s primary focus, he said, was on remaining resilient and ensuring the health and safety of staff and clients.
Brown said while operating under lockdown they provided payment relief for over 375 000 clients amounting to M119 billion of loans and reduced various client fees amounting to M104 million.

“We launched digital innovations using foundations from our managed evolution technology roll-out to assist clients during the lockdown, including launching the Avo app and Tap on Phone payments functionality,” he said.

“Importantly, these capabilities enabled digital sales to increase from 18 percent to 53 percent.”
Avo is a one-stop super app enabling clients to buy essential products and services online and have them delivered to their home.

Since its launch in app stores on June 19, Avo is said to have signed up more than 750 businesses offering their products and services on this e-commerce platform.
The tap-on-phone functionality allows all merchants and business owners to convert their cellphones into payment acceptance devices in order to meet the needs of customers who are increasingly looking for contactless ways to pay.

This tap-on-phone functionality is a first for Africa, and Nedbank is currently the only bank to offer this facility.
Nedbank maintained a strong balance sheet, evident in a tier 1 capital ratio of 11.7 percent and CET1 ratio of 10.6 percent at June 30, as well as a strong liquidity profile.

Brown said while it is disappointing to report large reductions in ROE and headline earnings, “we consider this as a resilient outcome in extraordinarily difficult circumstances where there was less focus on profitability in its own right, other than as a buffer against capital”.

Impairments increased significantly, driven by the impact of Covid-19 on consumers and businesses, and the deteriorating macroeconomic environment in South Africa.
The group’s impairment charge increased 202 percent to M7.6 billion and the credit loss ratio was up from 70 bps to 194 bps.

The increase was driven by a M2.9 billion charge for Covid-19 related judgmental overlays and IFRS 9 forward-looking macro-model adjustments, as well as the 42 percent increase in stage 3 advances as clients increasingly came under pressure.

During the period, the group provided payment relief across the portfolio.
The support included M30.5 billion for clients in Corporate & Investment Banking, M78.4 billion in Retail & Business Banking, M7.1 billion in Wealth and M2.6 billion in Africa Regions.

In addition, Nedbank received applications from its clients for the SARB/NT loan guarantee scheme amounting to a total of M3 billion of which M1 billion has already been approved.
Expenses declined by 1.1 percent to M15.3 billion as discretionary spend was well managed, incentives declined, and optimisation initiatives continued, despite increased levels of Covid-19 related spend.

The outlook for the South African economy remains weak. Household finances are forecast to remain under pressure in the second half of the year.
Unemployment is expected to rise sharply over the next two quarters and is unlikely to recover quickly, the statement reads.

It says some improvement is expected later in the year, which, coupled with record low interest rates, is forecast to provide some support to consumers, reducing debt service costs and freeing up disposable income for discretionary spending.
However, the bank says, the recovery is expected to be weak and too late to prevent a sharp contraction in real GDP over the year as a whole with our forecasts being for GDP in 2020 to decline by seven percent with Q2 GDP declining over 40 percent.

Brown said “this time last year I said South Africa was fast running out of time and money”.
Brown says forecasting in the current environment is complex.
“Looking forward, the environment for our staff, clients and other stakeholders, as well as the world of financial services and banking, is likely to be materially different after the Covid-19 pandemic,” he said.

“While forecast risk in this environment is high, given the R2.9bn of forward-looking provision build in the first half, we hope that the credit loss ratio in the second half will be lower than the first half.”
He said they will seek to identify opportunities to create new streams of revenue, enhance operations and optimise the structure of the businesses as they continue their successful digital journey that has led to improvements in client satisfaction metrics.

“As Nedbank, we are committed to making a difference in this difficult environment and deliver on our purpose to use our financial expertise to do good for our clients and society.”

Staff Reporter

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