ETI continues to drag on Old Mutual's Nedbank

Nedbank Group - the majority-owned South African banking subsidiary of FTSE 100 firm Old Mutual - saw headline earnings decrease 2.9% to ZAR 5.27bn in its first half, it said on Wednesday, although they improved 6.7% to ZAR 6.43bn when excluding the performance of its loss-making associate ETI.

The bank said diluted headline earnings per share were off 3.7% to 1,078 cents in the six months to 30 June, while its credit-to-loss ratio was 47 basis points, compared to 67 basis points in the first half of 2016.

Its return on equity excluding goodwill stood at 15.1%, and excluding ETI’s performance it improved to 18.9%.

Nedbank’s CET1 capital adequacy ratio improved to 12.3%, from 11.6% a year earlier, and its board lifted the interim dividend by 7% to 610 cents.

“Nedbank Group continues to create value for all our stakeholders in a challenging political and economic environment and increased our interim dividend by 7.0% to 610 cents per share,” said chief executive Mike Brown.

“Our headline earnings of ZAR 5.3bn, being 2.9% down on our 2016 first-half performance, is best understood through two lenses.”

Brown said the first “lens” was looking at Nedbank’s managed operations, which produced a “solid result”, with headline earnings growth of 6.7% and an improved return on equity, excluding goodwill, of 18.9% as slower revenue growth was offset by reduced impairments and good cost management.

He added that the second “lens” was the fact that the group's performance was negatively impacted by Nedbank’s share of the loss from associate ETI, as announced on 18 April, which decreased the 6.7% growth in headline earnings in managed operations to an overall 2.9% reduction in headline earnings.

While risks remained, Brown said the outlook for ETI was “improving”.

“The strategies implemented over the past few years in preparation for a tougher economic environment have positioned the group well for the recessionary conditions and the sovereign-credit-ratings downgrade that followed President Zuma's cabinet reshuffle.

“Capital generation and liquidity levels are strong and we have a banking franchise underpinned by 7.9 million clients, 2.7 million of whom are main-banked clients.”

Brown said the firm’s advances book was of a “high quality”, and it had built “excellent” collection capabilities.

In addition, in an environment of slower revenue growth, and as Nedbank accelerated the delivery of its digital products, Brown said the board was “intensifying” its focus on cost efficiencies to create investment capacity and to improve efficiency ratios.

“We aim to create a more agile, competitive and digital Nedbank.

“In the context of a challenging political and economic environment, our guidance for growth in diluted headline earnings per share for 2017 is for this measure to be positive, but less than or equal to growth in nominal GDP.”