Nedbank says its charge for bad debts and impairments should remain within the targeted band for the rest of the year despite a sharp increase for the six months ending June.
The country’s fourth-largest bank by assets revised GDP growth downwards from 1.3% to 0.5% at the same time as its saw its credit loss ratio rise sharply from 53 basis points (0.53%) in the prior corresponding period to 70 basis points (0.70%) for the six months to June 2019.
A credit loss ratio is the total impairment or bad debt charge expressed as a percentage of the institution’s total loans outstanding.
But CEO Mike Brown is unperturbed by the development because despite the sharp increase, the ratio is now only in the bottom half of the bank’s targeted range and had moved in a way the lender had anticipated.
“We have come from an unusually low credit loss environment — we have a through-the-cycle target for the credit loss ratio of between 60 and 100 basis points.
In June last year it was at 53 basis points, which was below the bottom end of this target range. In our forecast for 2019 we said we expected this to increase to within the bottom half of our target range, which it had done,” says Brown.
The country’s traditional banks are facing an unprecedented challenge from tech-savvy newcomers such as Discovery, TymeBank and Bank Zero, forcing them to restructure their businesses.
Nedbank said in July that it was spending R2bn a year on improving its products and technology platforms to its retail customers.
Very favourable expenses in relation to bad debts have been a common feature for the country’s largest banks, and analysts like Patrice Rassou at Sanlam Investment Management have stated they would be watching to see how the credit loss ratio progressed given the lower-than-expected economic growth and higher-than-expected unemployment that has played out over the last few months.
But Brown expects the ratio to remain at current levels for the foreseeable future.
“For the full year we would expect it remains between 60 and 80 basis points. Retail lending is seeing a cyclical upturn in bad debts, whereas corporate and investment bank bad debt charges are generally company-specific events and are therefore more lumpy and harder to forecast,” says Brown.
Despite the lower-than-expected economic growth, Brown thinks it is unlikely there will be much relief from more interest rate cuts following the Reserve Bank’s recent decision to reduce rates by 25 basis points in July.
“We think interest rates will remain flat from here, with some possibility of another small cut in September,” says Brown.
This view is complemented by the fact that should the country lose its investment-grade credit rating later this year, it will be unlikely that the Reserve Bank will have the room to continue lowering interest rates.
“We estimate that a Moody’s downgrade is now largely in the current price of financial assets in the market,” says Brown, indicating that investors are expecting the worst come November when the ratings agency is expected to signal which way it intends to move on SA's precarious credit rating.
Nedbank’s shares traded higher for most of the day before moving into the red as US markets opened, with the share price closing nearly 1% lower at R227.96.
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