Nedbank results leave market cold

01 March 2015 - 02:00 By THEKISO ANTHONY LEFIFI
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Nedbank's Head Office on Rivonia Road in Sandton, Johannesburg, South Africa
Nedbank's Head Office on Rivonia Road in Sandton, Johannesburg, South Africa
Image: Russell Roberts

Mike Brown, the CEO of Nedbank, had more bounce in his step as he took to the podium this week to deliver what he called his Sona - the state of Nedbank's accounts.

It was Brown's fourth year-end results presentation since he took over from Tom Boardman, and he was evidently so pleased with his bank's results that he published them a week earlier than has been the norm.

On the face of it, the numbers did seem impressive: pretax profit climbed 14.4% to R13.7-billion, bad debts dropped and it pushed up its dividend 14.9% at a time when companies such as Sasol are considering cutting theirs.

And it now has 7.1million customers, a 7% improvement on the previous year.

On Tuesday, Barclays Africa CEO Maria Ramos will deliver her bank's results, which will show whether Nedbank's figures are a good barometer of the health of the banking sector.

Brown said, "2014 was a milestone year", and pointed out that every unit of the bank had reported strong profits.

Over the past year, Nedbank's share price has grown by 22%, which is far less than its rivals Standard Bank (up 25%), Barclays Africa (up 47%) and FirstRand (up 58%). Nedbank's share remains the cheapest in the bank sector, based on its price-to-earnings ratio of 12.

But some analysts weren't overly impressed by Brown's results, saying that Nedbank's earnings had only "marginally" beat expectations.

Ilan Stermer, an analyst at Renaissance Capital, said he still needed to see how Nedbank would replace the non-interest revenue (mainly commissions and fees on bank accounts) it was getting from personal loans - an area in which Nedbank has turned off the taps to some extent. Overall, Nedbank's non-interest income grew 4.9% to R20.3-billion.

Stermer said he didn't expect "fireworks" from Nedbank this year; instead, the bank would probably put in a "solid but uninspiring performance".

Part of the reason for analysts' scepticism is that Nedbank's earnings increase was driven more by the drop in bad debts than any surge in actual banking revenue.

Its credit-loss ratio, a measure of the bad debt charged, dropped sharply from 1.06% of its total advances to 0.79%. The amount it set aside for impairments was 19% lower than the previous year, at R4.5-billion - which meant its bottom-line profit looked healthier.

Vincent Anthonyrajah, an analyst at SBG Securities, said this raised questions as to how Nedbank would continue to grow its revenue in the current year.

Analysts will keenly watch Barclays Africa's results on Tuesday.

 

Ramos, who has received more than her fair share of negative media coverage since taking over the former Absa in 2009, is likely to reveal that her bank also achieved reasonable growth last year.

She might announce structural changes that Barclays Africa is quietly implementing already, according to people close the bank.

But the problem at Barclays Africa is that its prize asset is its retail bank, which is still underperforming compared to the rest of the organisation.

Earnings from the retail bank are expected to grow by only 0.8% compared to the previous period, while earnings from its business bank are expected to shoot up by 18% - but off a low base. Earnings from its commercial, investment banking and wealth division should be up about 16%.

Stermer predicted a "slightly tougher" next year for Barclays Africa. In a research note to clients, he said he expected Ramos's bank to announce that it would finally buy Barclays' Egyptian operations "soon".

"We do not expect particularly strong results from Africa operations - excluding South Africa. We believe the Barclays Africa story is long term in nature," he said.

For her part, JPMorgan analyst Nana Francois still considers Barclays Africa to be one of her top banking stocks - although Standard Bank remains her top pick, despite the fact that she has reduced her estimates of its earnings by 2% this year and 3% for 2016.

Standard Bank will also report its year-end results in the next few weeks, which will show an increase in earnings per share of between 8% and 12%

 

The bank, jointly run by CEOs Sim Tshabalala and Ben Kruger, is likely to report a bumper year thanks to good performances from its banks across the rest of Africa.

But analysts are worried about potential bad debts that may hit Standard Bank later, partly because the plunge in the oil price will hurt several African countries in which the bank does business.

In particular, the oil price drop is likely to hurt its banks in Nigeria, Angola, Uganda and Mozambique. So it seems likely that Standard Bank's "growth engine" for 2014 "may well prove to be a drag" for this fiscal year, analysts believe.

For 2014, one of the drags on its performance is likely to be the losses from its stake in the London-based Standard Bank plc. About 60% of the London-based arm has now been sold to the Industrial and Commercial Bank of China.

Francois said risks around write-offs and the recent New York class action concerning platinum and palladium trading, which dogged the bank's performance last year, could continue to do so in the first half of this year.

FirstRand, which has a different year-end from its peers, will publish its half-year results in two weeks.

FirstRand remains the darling of the banking sector.

CEO Sizwe Nxasana is expected to announce a small increase in the dividend payout while also reporting a 14% surge in normalised diluted headline earnings per share.

The market is also expecting its return-on-equity to increase to 24% - considerably higher than Nedbank's 17.2%

"FirstRand has an attractive record of profitability and good quality earnings, even during adverse macroconditions," Francois said.

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