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OVERVIEW
The group showed continued positive momentum into the third quarter in an environment where South African banks remained largely unaffected by the volatility and risk aversion that have characterised international financial markets since the start of the US sub-prime crisis. Growth in the group’s wholesale businesses remains good, with retail earnings growth slowing as this sector feels the impact of increasing interest rates, rising household indebtedness and ongoing pressure on margins, particularly in the home loan area. Nedbank Capital’s earnings improved in the third quarter after a disappointing first half.Headline earnings increased by 30,9% to R4 211 million (2006: R3 216 million) for the nine months ended 30 September 2007 (“the period”) with headline earnings per share increasing by 32,2% to 1 059 cents (2006: 801 cents) and diluted headline earnings per share increasing by 30,6% to 1 021 cents (2006: 782 cents). Attributable income grew by 25,2% from R3 394 million in the corresponding period to R4 248 million for the period.
The group achieved a return on average ordinary shareholders’ equity (“ROE”) of 21,2%, an improvement from the 18,6% reported for the nine months ended 30 September 2006, and ahead of the 2007 target of 20% set during 2004.
PERFORMANCE FOR THE NINE MONTH PERIOD ENDED 30 SEPTEMBER 2007
| Rm | 2007 | 2006 | % change |
| Net interest income (“NII”) | 10 288 | 7 928 | 29,8 |
| Interest margin (%) | 3,94 | 3,96 | |
| Impairments | 1 646 | 1 055 | 56,0 |
| Credit loss ratio (%) | 0,64 | 0,50 | |
| Non-interest revenue (“NIR”) | 7 518 | 6 660 | 12,9 |
| Total operating expenses | 9 714 | 8 369 | 16,1 |
| Efficiency ratio (%) | 54,6 | 57,4 | |
| Headline earnings | 4 211 | 3 216 | 30,9 |
| Attributable earnings | 4 248 | 3 394 | 25,2 |
| ROE (%) | 21,2 | 18,6 | |
| Total assets | 490 337 | 413 622 | 18,5 |
| Loans and advances | 365 131 | 303 607 | 20,3 |
NII grew 29,8% to R10 288 million (2006: R7 928 million), underpinned by a 30,7% growth in average interest-earning banking assets compared with the corresponding period.
The margin for the period was 3,94%, down from 3,96% for the period to September 2006, but up from the 3,90% reported in June 2007. Similar to trends reported at the half year, the margin reflects ongoing competition for assets and pressure on deposit pricing as the sector has had to source a higher proportion of funding from the wholesale deposit market, offset by the endowment benefits of interest rate increases.
The impairments charge rose by 56,0% to R1 646 million (2006: R1 055 million). In line with expectations, the credit loss ratio increased marginally from 0,63% in June 2007 to 0,64% for the period. This increase reflects higher impairment levels for Nedbank Retail and Imperial Bank while the credit loss ratios in Nedbank Capital and Nedbank Corporate are below normalised levels and continued to benefit from further recoveries, which are unlikely to be sustained into the future.
NIR grew by 12,9% to R7 518 million for the period (2006: R6 660 million) with commission and fee income 15,8% higher, benefiting from good transactional banking and bancassurance volumes. As reported at the interim stage NIR growth was adversely affected by disappointing trading income in Nedbank Capital in the first half. Group trading income for the period amounted to R878 million, down from the R1 111 million in 2006 (the group experienced record trading in the first quarter of 2006). Nedbank’s retail bancassurance grew strongly with new business premiums increasing by 15% from R4 101 million to R4 714 million and the annual premium equivalent of credit and single life products of Nedgroup Life, the joint venture with Old Mutual SA, grew by 41% increasing from R216 million in 2006 to R305 million for the current period.
Expenses increased by 16,1% to R9 714 million (2006: R8 369 million) driven mainly by a 17,8% growth in staff expenses as additional employees were appointed in the client facing and collections areas and an increase in marketing spend of 20,8%.
The 'jaws' ratio remained positive, with total revenue growth of 22,1% being 6,0% above expense growth of 16,1%, resulting in an improvement of the efficiency ratio from 57,4% to 54,6%.
With the majority of the group’s non-core asset disposal programme completed, income after taxation from non-trading and capital items declined from R178 million in the 2006 period to R37 million for the current period.
Total assets at R490 billion are an annualised 20,6% higher than December 2006. Advances increased by R56 billion (24,5% annualised) and average interest-earning banking assets increased by an annualised 30,7%.
As a result of the 300 basis points increase in interest rates prior to 30 September 2007, consumer asset growth has started to slow. Following the further 50 basis points increase in October 2007 the bank anticipates a continued slowing of asset growth and an increase in impairment charges, more specifically for Retail advances. While Business Banking conditions remain robust, it is anticipated that the interest rate increases will slow advances growth in the small and medium business sectors which are also likely to start seeing increases in impairments levels. However, on the back of substantial infrastructure spend by both the private and public sectors, conditions remain favourable for the corporate banking environment.
The group remains well positioned for the transition to Basel II on 1 January 2008.
Nedbank Retail's strategy to expand its retail footprint across South Africa remains a key focus and the group has invested a further R44 million since June 2007. This includes opening an additional 23 outlets and upgrading and increasing its ATM network from 1 361 in June to 1 465 ATMs in September 2007.
On 25 October 2007 Nedbank Group announced that Nedbank Limited (“Nedbank”) will acquire Old Mutual’s 50% interest in Old Mutual Bank, which operates as a division of Nedbank. The current joint venture arrangement will be replaced by a broader group strategy whereby Nedbank acquires Old Mutual’s share of the joint venture but continues to offer intermediary and broker-friendly products through its own branch network. This will enable some branch rationalisation and a broader distribution network for these products. Nedbank will pay Old Mutual R140 million to effect the transaction.
EARNINGS FORECASTS – YEAR TO 31 DECEMBER 2007
The earnings forecasts announced in the interim results on 6 August 2007 remain unchanged. The directors currently expect headline earnings for the year to 31 December 2007 to be between 23% and 33% higher than the R4 435 million reported for the year to 31 December 2006. Headline earnings per share are currently forecast to be between 24% and 34% greater than the 1 110 cents per share reported for December 2006.Based on the forecast range of headline earnings per share above, basic earnings per share for the year to 31 December 2007 are currently estimated to be between 23% and 33% higher than the 1 135 cents per share reported for December 2006.
Shareholders are advised that these forecasts have not been reviewed or reported on by the group's auditors.
8 November 2007
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