Nedbank’s share price outperformed its rivals and the JSE all share index after it said its financial performance in the first 10 months of 2022 had been robust as higher interest rates boosted earnings from credit extension.
The Johannesburg lender’s share price rose 2.77% to R219 on Tuesday after it also flagged healthy capital levels that should support continued dividend payments. In comparison, the banking index added 1.08% while the Alsi fell 0.18%.
The rally came the day after the group said during an investor update after the close of trade on Monday that net interest income grew by “low double digits” while noninterest revenue growth was in the “high single digits” in the 10 months to end-October.
Nedbank’s credit loss ratio remained within the top half of the group’s through-the-cycle target range of 80 to 100 basis points during the 10-month period.
The group also reported a common equity tier 1 capital adequacy ratio of 13.3% as at September 30, well above the upper end of its 11%-12% target range. It said these strong capital levels should support dividend payments at the lower end of the group’s dividend range of 1.75-2.25 times cover.
“On the pace of rate hikes they’ve certainly been higher than most of us expected,” Nedbank Group CFO Mike Davis said on a call with investors late on Monday. “We do think we’re pretty close to the top ... there’s possibly 50-75 basis points left. At these levels of prime interest rates and with possibly 50-75 basis points [of hikes] to go I think banks are on the positive side with regards to cost of risk and endowment. As Nedbank we are in a very good position in terms of endowment and interest rates.”
The Reserve Bank has raised interest rates 325 basis points (bps) so far in 2022, taking its repurchase rate to 7%. That has boosted the earnings that banks make from loans extended to clients, a phenomenon known in the industry as the endowment effect.
Average interest-earning banking assets increased year on year by mid-single digits, supported by loans and advances growth above mid-single digits in both the corporate and investment banking and retail and business banking units.
The group’s net interest margin increased further from the 385 bps reported in the first half of 2022, primarily driven by the endowment benefit from higher interest rates, which enable the bank to earn greater revenue from credit extended to clients.
The recovery in corporate and investment banking loans and advances growth was driven by stronger performances from the investment banking and transactional services businesses as demand for short- and long-term credit has increased.
In retail and business banking, loans and advances continue to be driven by strong growth in the commercial banking and small business segments, as well as solid growth in home loans, vehicle finance and overdrafts.
Fee and commission growth of around mid-single digits was driven by improvement in transactional activity, while insurance income growth continued as death and funeral claims waned. Preprovisioning operating profit growth for the 10 months was “above the midteens”, the group said.
Nedbank said it expects about R956m in associate income to flow onto its books for the full year, thanks to its 20% stake in Ecobank Transnational Incorporated (ETI). That would be a 37% increase on the R699m of ETI-related associate income it earned from the Togo-based lender in the 2021 financial year.
Expense growth for the 10-month period was above mid-single digits driven by higher incentive costs and the normalisation of some expenses such as marketing and travel as the pandemic continues to wane. Overall expense growth for the full year is expected to remain above mid-single digits, with some upside risk.
Nedbank said it expects economic growth to moderate from 4.9% in 2021 to 1.9% in 2022. It also raised its forecast for average consumer inflation in 2022 to 6.8%, up from its February estimate of 4.9%.
The group’s results for the 12 months to end-December are expected to be released on or near March 7 2023.
theunisseng@businesslive.co.za
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