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for the three months ended 31 March 2007
OVERVIEW
Nedbank Group remains on track to meet its 2007 performance targets with the positive momentum of 2006 continuing into the first quarter (Q1) of 2007. Headline earnings per share for the period increased by 26,3% to 322 cents (Q1 2006: 255 cents). Fully diluted headline earnings per share increased by 25,0% to 310 cents (Q1 2006: 248 cents). Basic earnings per share grew by 2,5% to 324 cents (Q1 2006: 316 cents).The group's annualised return on average ordinary shareholders' equity (ROE) improved to 20,4%, up from 18,6% for the year to 31 December 2006 (Q1 2006: 18,3%). ROE (excluding goodwill) improved to 23,9%, up from 22,1% for the year to 31 December 2006 (Q1 2006: 21,8%).
The overall economic environment for banks remains positive, despite the 200 basis points rise in interest rates during 2006. While the endowment effect of this increase has benefited the net interest margin, an increased level of credit stress is being felt in Nedbank Retail and the motor vehicle finance book in Imperial Bank. Advances growth remains robust, although it is anticipated that retail advances growth will slow as a result of the environment of higher interest rates. This slowing growth in the retail environment is expected to be compensated for by increasing corporate advances growth.
The industry faces continued pressure on fees, through both intensified industry competition and increased consumerism. Banks also face increased regulatory requirements with the associated costs of compliance, including preparation for the June 2007 introduction of the National Credit Act (NCA), ongoing activity relating to the Financial Intelligence Centre Act (FICA), the ongoing responsibilities under the Financial Advisory and Intermediary Services Act (FAIS) and finalisation of systems ahead of the implementation of Basel II in South Africa in January 2008.
Tom Boardman, Chief Executive, said: 'It is pleasing to report first-quarter results that show an ROE of 20,4% (23,9% excluding goodwill) and an efficiency ratio of 53,3% both of these are ahead of our full-year 2007 targets of 20% and 55% respectively. The 25,0% increase in fully diluted headline earnings per share highlights a continuation of the momentum that was built during 2006 and was underpinned by market share gains in key advances categories. This ongoing growth, appropriate cost discipline, prudent risk management and the active capital management programme have kept the group on track to meet its ROE target of 20% for the 2007 financial year. Our challenge is to maintain this momentum and further close the gap between our ROE (excluding goodwill) and the ROE levels of our peer group.'
'While we have attained an efficiency ratio of less than 55% for the period, the cost of additional retail outlets, ATMs, marketing and frontline staff, combined with price reductions instituted in 2006 across a range of products to benefit the group and its clients in the long term, still makes the short-term efficiency ratio target of 55% in 2007 challenging.'
FINANCIAL PERFORMANCE
The group's headline earnings increased by 24,0% to R1 272 million (Q1 2006: R1 026 million), with basic earnings increasing by 0,9% to R1 281 million (Q1 2006: R1 270 million). Basic earnings in the prior period included a non-headline profit of R244 million relating primarily to the finalisation of the non-core asset disposal programme.Net interest income (NII)
NII grew by 31,2% to R3 176 million. Nedbank Group's net interest margin dropped slightly from 3,92% for the 2006 year to 3,89% for the quarter (Q1 2006: 3,83%). The main factors influencing the NII growth were: - average interest earning banking assets growth of 29,1% (Q1 2007 compared to Q1 2006); - an endowment benefit from interest rate increases in the latter half of 2006; and - margin compression mainly from pressure on deposit pricing as the sector sources a higher proportion of its funding from the wholesale deposit market, together with increased competition.
Impairment charge on loans and advances
The impairment charge on loans and advances ratio at 0,59% was in line with the experience in the first quarter of 2006. As expected this is slightly higher than the 0,52% reported for the year to 31 December 2006. Impairments continued to benefit from recoveries in both Nedbank Corporate and Nedbank Capital. The Nedbank Retail impairments charge on loans and advances ratio deteriorated to 1,31% from 1,10% in December 2006, but is in line with the corresponding period ratio in 2006 of 1,36%. Retail impairments historically follow a seasonal trend with an increase in the first quarter. Impairments in Imperial Bank worsened to 1,19% from 0,87% in December 2006 and 0,89% in March 2006.
The group anticipates that the impairment charge will increase in the medium term as a result of higher interest rates and increasing levels of household debt. Nedbank Corporate and Nedbank Capital's impairment levels are also currently at unusually low levels and are expected to increase as the level of recoveries decreases.
Non-interest revenue (NIR)
NIR for the period increased by 0,9% to R2 273 million (Q1 2006: R2 252 million). Commission and fee income grew by a pleasing 14,2% in spite of the fee reductions instituted by Nedbank Retail in July 2006, the low level of wholesale fee increases implemented last year and the continued migration from cheque payments to electronic transfers in the Business Banking environment. Overall NIR growth has been affected by lower trading income for the period of R191 million, compared with the high base of R509 million in the first quarter of 2006 (a record trading quarter for Nedbank Group). In line with expectations communicated to the market in the 2006 annual results presentation, Nedbank Corporate recorded lower property private equity gains of R83 million for the period to 31 March 2007, compared with R117 million in the first quarter of 2006. Nedbank Capital had private equity gains of R99 million, compared with R31 million for the same period last year, and good fee income. However, Nedbank Capital's NIR was adversely affected by the lower trading income referred to above, mostly due to changes in the equity markets that impacted the business alliance with Macquarie negatively during the period. All other trading areas performed in line with expectations.
Expenses
Expenses continue to be well-managed, and increased by 9,6% to R2 903 million (Q1 2006: R2 648 million).
Staff expenses grew by 14,5%, reflecting the investment the group continues to make in client-facing staff and an increase in bonus provisions as a result of improved financial performance.
Marketing costs increased as planned by 25,9% as the group continued to invest in the Nedbank brand. A media tracking study conducted by Millward Brown indicates that spontaneous awareness levels of the Nedbank brand have increased from 69% (December 2005) to 82% (February 2007).
Efficiency ratio
The 'jaws' ratio remained positive, with total revenue growth of 16,6% being 7,0% above expense growth of 9,6%, resulting in the efficiency ratio improving from 56,7% for the 2006 period to 53,3%. This ratio is not forecast to be sustained at this level for the full year as the group invests in its distribution network, ongoing marketing, systems optimisation, staff training and new appointments, predominantly in frontline positions.
Associate income
Associate income increased from R31 million to R98 million mainly as a result of the profit on the sale of JSE Limited shares during the period by the BoE Private Clients joint venture.
Non-trading and capital items
As the group has largely completed its non-core asset disposal programme, income after taxation from non-trading and capital items only amounted to R9 million for the period, compared with R244 million in 2006. The main component in 2006 was the profit on the sale of shares in Net 1 UEPS Technologies Inc (NUEPS), which amounted to R221 million.
Direct taxation
The group's taxation charge increased from 25,6% in the period last year to 30,0% in Q1 of 2007. This increase was mainly due to additional secondary taxation on companies (STC) on the final 2006 dividend accounted for in Q1 2007. This STC increase was the result of the reduction in dividend cover in the final 2006 dividend and a lower election of the capitalisation award alternative. The prior-year rate also included credits arising from accounting for past structured finance transactions that had a more marginal impact in the current year.
Balance sheet
Capital and capital management
Nedbank Group continues to be well-capitalised with a Tier 1 capital adequacy ratio of 8,2% (31 December 2006: 8,3%) and a total capital adequacy ratio of 12,4% (31 December 2006: 11,8%). During the quarter Nedbank Group issued R2,35 billion of NED7 and NED8 Tier 2 subordinated debt. Shortly after the quarter end, perpetual preference shares were issued totalling R364,4 million. These initiatives, together with the planned redemption of the NED2 R4 billion bond on its call date in July 2007 (subject to regulatory approval), a number of asset securitisations and further Tier 2 capital raisings, are part of the group's ongoing long-term capital management programme, which seeks to achieve an optimal and prudent capital structure.
Advances
Advances grew by 22,3% (annualised), with good growth being reflected across most categories of advances.
Details of advances growth by major categories follow:
| March | December | Annualised | |
| 2007 | 2006 | increase | |
| Rm | Rm | (%) | |
| Home loans | 106 763 | 98 944 | 32,0 |
| Commercial mortgages | 47 785 | 46 213 | 13,8 |
| Properties in possession | 132 | 131 | 3,1 |
| Term loans | 37 566 | 33 948 | 43,2 |
| Credit cards | 5 974 | 5 283 | 53,0 |
| Overdrafts | 15 315 | 13 761 | 45,8 |
| Leases and instalment debtors | 45 120 | 43 358 | 16,5 |
| Preference shares and debentures | 7 366 | 6 840 | 31,2 |
| Trade and other bills | 1 887 | 1 752 | 31,3 |
| Reverse repurchase agreements | 8 947 | 6 703 | 135,8 |
| Other loans to clients | 54 036 | 56 814 | (19,8) |
| Impairments of advances | (5 362) | (5 184) | 13,9 |
| Total | 325 529 | 308 563 | 22,3 |
Deposits
The group maintained a strong liquidity position throughout the period. Deposits increased by 14,0% (annualised) from December 2006.
Divisional performance
Nedbank Corporate increased headline earnings by 22,1% to R735 million (Q1 2006: R602 million) and maintained its ROE above 20% at 21,9%. Core banking headline earnings, excluding the specialised Bond Choice and property investment activities, grew by 39,0%. This result included: - average advances growth of 29,6% (Q1 2007, compared with Q1 2006) and a small improvement in the margin driving an NII increase of 34,7%; - a higher impairment charge to average advances ratio of 0,20% (Q1 2006: 0,08%), in line with expectations as the 2006 charge was abnormally low; and - lower overall NIR mainly resulting from the anticipated lower property private equity gains, clients switching from cheque payments to electronic transfers and lower price increases. Core transactional banking NIR was up 7,7% with good volume growth in electronic banking and cash handling.
Gaining new primary banking clients continues to be a focus area. It is pleasing to note that further gains have been made in the public sector, including the Uthungulu and Mossel Bay Municipalities, in addition to other key corporate client acquisitions. Both Business Banking and Corporate Banking have continued their strong momentum in advances growth through effective marketing and more efficient decisionmaking processes.
Nedbank Capital increased its ROE from 34,9% to 37,2% through more efficient capital utilisation, but headline earnings were impacted by lower trading revenue and decreased by 15,9% to R285 million (Q1 2006: R339 million).
With the exception of the Macquarie business alliance (referred to under NIR above), the division's trading businesses performed well. Nedbank Capital benefited from the strong deal pipeline built up in 2006 and from some impairment recoveries. A number of significant transactions were concluded during the period. The pipeline for fees remains strong.
Nedbank Capital recently launched two new products: Contracts For Difference, which is an over-the-counter derivative contract that allows investors exposure to JSE-listed securities on a leveraged basis; and the Geared Investment Plan in conjunction with Old Mutual, which offers clients the opportunity to lock in the current value of their shares, borrow against existing shareholdings and invest within the Fairbairn Capital range.
Nedbank Retail increased headline earnings by 88,1% to R523 million (Q1 2006: R278 million) and ROE from 19,5% to 28,2%. This result was achieved through:
- average advances growth of 34,9% (Q1 2007, compared with Q1 2006) and stable margins driving NII growth of 30,2%. Nedbank Retail's margin widened as a result of the endowment impact from higher interest rates, but this was offset by a reduction in home loan and personal loan margins;
- impairments charge ratios at similar levels to the first quarter of 2006;
- strong transactional volume growth, particularly from card merchant commissions and bancassurance volumes, driving NIR growth of 21,6%; and
- higher associate income from our share of the sale of the JSE shares mentioned above.
Nedbank Retail has continued to gain market share for the first two months of the year in the home loans, card receivables and personal loans categories. The rollout of our distribution plan, including 650 new ATMs and over 400 new staffed outlets over the next three years, is on track both in terms of projected expenses and revenue. An initiative to achieve a step change in the overall sales efficiency and service levels of the Nedbank branch network has been launched. We have invested significant time and resources preparing for the implementation of the NCA in June 2007. Clients will be provided with a preagreement statement and quotation, as well as enhanced affordability assessments.
The main focus in 2007 will be the continued implementation of the growth stage of the Nedbank Retail strategy.
Imperial Bank generated an ROE of 24,5% and grew its headline earnings by 15,3% to R109 million. Nedbank's share of these earnings after accounting for profits attributable to minority interests of ordinary and preference shareholders (including payment of a R13 million preference dividend) increased by 2,1% to R48 million (Q1 2006: R47 million). Good growth in NII was offset by a higher impairments charge to average advances of 1,19% (Q1 2006: 0,89%) and the first-time impact of the preference dividend.
Sustainability
Nedbank Group has been selected as a finalist in the 2007 Financial Times Sustainable Banking Awards in the emerging markets category. Finalists were selected from 151 entries in 51 countries. The diverse nominees reflect the increasing importance of sustainable banking around the world, especially in emerging markets.
Prospects
As outlined in the group's year-end results for 2006, management believes performance to June 2007 is likely to be influenced by:
- growth in retail advances remaining robust but slowing, and accelerating growth in wholesale advances;
- continued increases in wholesale funding volumes as retail asset growth is increasing at a higher rate than retail deposit growth;
- an endowment benefit in the margin from last year's interest rate increases, partially offset by margin compression in certain categories of advances;
- a slight deterioration of the impairment charge following signs of increased levels of credit stress in Nedbank Retail and Imperial Bank, together with fewer impairment recoveries from Nedbank Capital and Nedbank Corporate;
- the ongoing effects of the Nedbank Retail price reductions and industry fee pressure;
- increased pressure on revenues and costs associated with the introduction of the NCA;
- the momentum from transactional banking mandates received by Nedbank Corporate and a strong pipeline built up by Nedbank Capital;
- lower positive property private equity revaluations;
- additional operating efficiencies;
- investment in retail distribution and continued marketing spend on the new brand positioning;
- finalisation of Basel II on 1 January 2008; and
- asset securitisation and ongoing capital management activities.
Consequently the group is currently expecting to achieve its target ROE of 20,0% for 2007. The efficiency ratio for the six months to 30 June 2007 is anticipated to show a slight decline from the levels reported for the first quarter.
Earnings forecasts to June 2007
Assuming economic conditions remain constant, the directors forecast headline earnings for the six months to 30 June 2007 to be between 23% and 33% higher than the R2 104 million reported for the six months to 30 June 2006. Headline earnings per share are forecast to be between 25% and 35% greater than the 522 cents per share reported for June 2006.
Based on the forecast range of headline earnings per share above and the net capital profits from non-core asset sales in 2006/7, basic earnings per share for the six months to June 2007 are forecast to be between 15% and 25% higher than the 577 cents per share reported for June 2006.
Shareholders are advised that these forecasts have not been reviewed or reported on by the group's auditors.
Accounting policies
These results have been prepared in accordance with IAS 34: Interim Financial Reporting. The group's principal accounting policies, as stated in the 2006 annual financial statements, have been applied consistently in preparing these results.
Forward-looking statements
This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Nedbank Group and its group companies, which by their nature involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, global, national and regional economic conditions, levels of securities markets, interest rates, credit or other risks of lending and investment activities, and competitive and regulatory factors.
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