The bank says structural reforms need to be tackled more urgently to avoid a downgrade, which would result in lower growth and more job losses.
Nedbank says structural reforms aimed at stemming the current economic and fiscal deterioration in SA need to be implemented with greater urgency. Its call came as it reported muted growth in interim earnings and trimmed its full-year guidance due to weaker than expected economic growth this year.
“If we are unable to do this, all the hard work done on maintaining our last investment-grade rating from Moody’s will be in vain, at great cost to all South Africans as a result of higher inflation and higher interest rates, as well as lower growth and lower levels of employment than would otherwise have been the case,” chief executive Mike Brown said.
Moody’s is the only remaining large ratings agency to maintain an investment-grade rating on SA’s sovereign debt. A downgrade would result in government bonds being excluded from influential bond indices, which would result in investment outflows.
Nedbank said it produced a resilient first-half financial performance in a difficult macroeconomic environment. Revenue rose 5.5% to R27.7 billion in the six months to end-June, with growth in associate income rising by 6.3%. But higher bad debts and the impact of December’s odd-lot offer held back growth in headline earnings, which rose 2.6% to R6.87 billion. Basic earnings per share rose 2.9% to R14.19 and diluted headline earnings per share increased by 3.7% to R14.11. It raised its interim dividend by 3.6% to R7.20 per share.
Its credit loss ratio increased to 70 basis points from 53 basis points as impairments rose from the low prior-year base. However, it’s still within the bottom half of the bank’s target range. It bought back seven million shares at the end of last year after Old Mutual unbundled part of its Nedbank holding to its shareholders.
Within its divisions, Corporate and Investment Banking reported flat headline earnings of R3.3 billion as its credit loss ratio normalised to 16 basis points off a low prior-year base of 1 basis point. Retail and Business Banking grew headline earnings by 0.3% to R2.6 billion, also held back by higher impairments. Nedbank Wealth’s headline earnings fell 12.3% to R455 million as subdued investor confidence resulted in a decline in earnings across all business units. Its Rest of Africa operation grew headline earnings by 20% to R293 million as its share of associate income from its investment in Ecobank Transnational continued to increase.
While Nedbank expected the operating environment to remain difficult, it said the moderate upward trend in credit demand was forecast to continue in the second half of the year, supported by slightly easier monetary policy, some recovery in consumer spending and ongoing investment in the renewable energy sector.
The bank now expects economic growth of just 0.5% this year, down from its previous forecast of 1.3%, and said full-year growth in its diluted headline earnings per share would be in line with nominal GDP growth. Despite trimming its earnings forecast, it said it was on track to meet its 2020 target of achieving a return on equity (ROE), excluding goodwill, of greater than or equal to 18%. Its ROE was 17.9% at the end of June.