Nedbank suffering in weaker South African economy, says Old Mutual

Old Mutual issued an update on the performance of its South Africa banking unit Nedbank Group for the three months to 31 March on Thursday, saying the firm’s managed operations continued to produce a “solid performance” during the period.

The FTSE 100 firm said that, in a difficult socio political and macroeconomic environment, overall client activity and revenue growth at Nedbank was slower than expected, but that was partially offset by a better-than-expected credit loss experience.

Net interest income reportedly grew at mid-single digit levels on the back of annualised growth in average interest-earning banking assets at low single-digit levels.

The net interest margin for the period widened ahead of the full year 2016 level of 3.54%, the board said, as well as the Q1 2016 level of 3.51% - which included the transfer of the CIB liquid asset portfolio from AIEBA to the trading book.

Margin expansion was led by endowment income as a result of higher average interest rates and higher capital and transactional deposit levels as well as improved liability margins and advances mix benefits.

“Together, these more than offset the adverse implications of the narrowing of the prime interest rate against the Johannesburg Interbank Agreed Rate during the period,” Old Mutual’s board said in a statement.

“The benefit of our historic selective asset growth strategies with a wholesale bias continues to evidence itself in our credit loss ratio which decreased from the full year 2016 level of 68 basis points.

“The lower CLR was supported by a decrease in impairments in CIB and client collections in RBB remained effective.”

Non-interest revenue grew at low-to-mid single digit levels, the board said, and continued to be underpinned by mid-single digit increases in commission and fees and trading income whilst performance of other NIR components had been more volatile given the “challenging” economic environment.

Disciplined expense management resulted in expenses growing in line with the board’s expectations.

“As previously disclosed in the group's SENS announcement on 18 April, associate earnings from the group's share of Ecobank Transnational Incorporated's attributable income are equity-accounted one quarter in arrear, using ETI's publicly disclosed results.

“The group's share of ETI's attributable loss of $427m for the fourth-quarter in 2016 was approximately ZAR 1.2bn.”

On 27 April, ETI reported its first quarter results for 2017 with attributable income of $51m.

“The group's share is estimated at ZAR 144m - subject to exchange rate movements - which will be accounted for in our second quarter results.”

In April, both S&P Global and Fitch Ratings downgraded South Africa's sovereign credit rating to sub-investment grade, while Moody's placed the sovereign ratings under review for a potential downgrade.

“SA's long-term sovereign foreign currency rating was downgraded to BB+ from BBB- with a negative outlook by S&P and a stable outlook by Fitch,” Old Mutual noted.

“In addition, SA's long-term local currency issuer ratings were downgraded to BB+ from BBB- with a stable outlook by Fitch.”

It said the macroeconomic outlook for SA had deteriorated following the sovereign downgrades which would impact negatively on confidence, investment and growth.

As a result, the unit reduced its 2017 GDP growth forecast for SA from 1.1% to 0.7% with risk remaining to the downside, and the interest rate forecast had been revised to either remain flat or increase slightly, in comparison to its previous expectations of a cumulative decrease of 50 bps later in the year.

“In view of the volatile socio-political outlook and the weaker than expected macroeconomic environment, we anticipate reduced levels of business and consumer confidence and that it will now be more challenging to achieve the full 2017 year guidance provided at the time of the release of our 2016 annual results.

“We are monitoring the likely impact of this on credit demand, transactional activity and impairments, and will update our performance guidance for the full 2017 year in our 2017 interim results announcement on 2 August.”