The bank is taking a cautious approach due to pandemic uncertainty but says payouts may resume as early as June.
Nedbank won’t be paying a final dividend for 2020 after rising credit impairments, fewer transactions and falling interest rates resulted in a big decline in full-year earnings. But it is confident that payouts will resume this year.
Growth opportunities in the market
Like Standard Bank and FirstRand, the bank reported a recovery over the six months to end-December.
Unlike them, but along with Absa, it chose to conserve capital rather than making a payout to shareholders.
While the Reserve Bank has relaxed guidance on banks’ dividends, it decided not to pay one due to growth opportunities in the market, its responsibility to support clients, and ongoing uncertainty around the pandemic and the vaccine rollout.
The bank said transactional volumes fell significantly in the second quarter of last year before recovering somewhat in the second half of the year. In response to the economic crisis the Reserve Bank cut interest rates by 300 basis points.
While that served Nedbank’s clients well, it resulted in lower endowment income for the bank itself as the interest received on loans didn’t fully compensate for the increased costs associated with deposits and longer-term funding.
“On the back of these economic pressures, job losses increased and many clients’ current and future ability to repay debt declined, resulting in higher levels of impairment charges. Despite these challenges, the SA banking sector and Nedbank demonstrated strong levels of resilience and was able to support clients while remaining well capitalised, liquid and profitable, albeit at levels lower than in the prior year.“
– Mike Brown, Chief Executive at Nedbank
For the year to end-December, the bank reported a 3.5% decline in revenue to R54.2-billion. Expenses were trimmed by 1.3% to R31.8-billion but its credit loss ratio swelled to 161 basis points from 79 basis points.
Impact of lower interest rates on endowment income
Headline earnings fell 56.5% to R5.4-billion, which it attributed to the higher impairments and lower revenues, mainly due to lower levels of client activity and the impact of lower interest rates on its endowment income. Diluted headline earnings per share came in 56.6% down at R11.13.
Nedbank’s return on equity (ROE), an important measure of financial performance, fell to 6.2% from 15% in 2019 but was up from the 4.8% reported at the end of June. It said improving the ROE from these levels back to above its cost of equity remained a key focus.
At the peak of the crisis last year, Nedbank said it supported clients with cashflow relief on more than R120-billion of loans. its clients reduced this level of support to R28-billion by the end of the year as economic conditions improved.
It said its capital and liquidity ratios remained strong and most finished the year at higher levels than those reported in June and all well above regulatory minimum requirements.
Nedbank said it expected earnings for the first half of its 2021 financial year to be more than 20% higher than last year. However it only expects to exceed 2019’s earnings by 2023.
Its shares fell 2.1% to R135.10 yesterday.