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for the 9 months ended 30 September 2006
OVERVIEW
Following the acquisition of Skandia by Nedbank Group’s holding company, Old Mutual plc, and the resultant listing of Old Mutual plc shares on the Stockholm Stock Exchange, Old Mutual plc has adopted quarterly reporting from the period ended 30 September 2006. Nedbank Group has therefore also commenced quarterly reporting.The unaudited results for the nine months to 30 September 2006 (the period) reflect a continuation of the positive momentum shown at the interim stage. The overall environment for banks remains positive, despite increased levels of credit stress in parts of the retail environment, continued pressure on fees and greater market volatility.
Headline earnings per share for the period increased by 39,1% to 801 cents (2005: 576 cents). Basic earnings per share grew by 10,6% to 846 cents (2005: 765 cents).
The group’s return on average ordinary shareholders’ equity (ROE) continued to improve, increasing from 18,3% reported for the six months to 30 June 2006 to 18,6% for the period under review.
Tom Boardman, Chief Executive, said: 'We are pleased with the 39,1% increase in headline earnings per share and, in particular, the levels of income growth across all operating divisions. This growth, together with appropriate cost disciplines and our active capital management programme, has kept the group on track to meet its ROE target of 20% in 2007. The cost of additional retail outlets, ATMs and frontline staff, combined with price reductions across a range of products, will benefit the group and its clients in the long term, but makes the short-term efficiency ratio target of 55% in 2007 more challenging.'
FINANCIAL PERFORMANCE
The group’s headline earnings increased by 41,2%, from R2 277 million for the corresponding period in 2005, to R3 216 million for the period. Basic earnings increased by 12,2% to R3 394 million (2005: R3 025 million).Net interest income (NII)
NII grew by 28,8% to R7 928 million. The group’s margin increased from 3,88% for the six months ended June 2006 to 3,94% for the period. NII growth is mainly attributable to:
- an increase in average interest-earning banking assets of 16,1% (annualised) during the period;
- the endowment benefit from the increased endowment together with the rise in interest rates; and
- positive mix changes from the growth in higher-margin retail and business banking advances, as well as a change in the advances mix within Nedbank Retail resulting from higher growth in personal loans.
Impairment charge on loans and advances
The impairment charge to average advances ratio improved from 0,61% for the six months to 30 June 2006 to 0,50% for the period. This improvement is largely due to provisions raised in Nedbank Capital in the first half of the year not being repeated and recoveries on corporate advances in both Nedbank Corporate and Nedbank Capital during the third quarter.
The group anticipates that the impairment charge will increase in the medium term as a result of the recent interest rate increases combined with increasing levels of household debt. Nedbank Corporate’s impairment levels are also currently at unusually low levels and are expected to increase as the level of recoveries is expected to decrease.
Non-interest revenue (NIR)
NIR for the period increased by 14,1% to R6 786 million (excluding translation gains, NIR increased by 16,5%). This growth was driven by continued volume growth in Nedbank Corporate and Nedbank Retail, property revaluations and realisations in Nedbank Corporate amounting to R256 million (2005: R100 million), private equity revaluations and realisations in Nedbank Capital of R129 million (2005: R14 million), and strong growth in Bond Choice origination fees.
NIR growth has been offset by the price reduction strategy implemented in Nedbank Retail in July this year, together with a slowdown in trading income in Nedbank Capital.
Expenses
Expenses continue to be well-managed, increasing by 6,9% to R8 496 million. Staff expenses increased by 11,6%, reflecting the investment the group has made in client-facing staff and a relative increase in variable pay as a result of the continued improvement in operating performance. Marketing costs increased as planned by 37,5% off the low base set in 2005 as the group invested in the Nedbank brand.
The 'jaws' ratio continued to improve, with total revenue growth of 21,6% being 14,7% above expense growth of 6,9%, resulting in the efficiency ratio improving from 65,7% for 2005 to 57,7%. As expected, this ratio is above the level of 57,3% reported in June 2006 and is also forecast not to be sustained at this level for the full year.
Non-trading and capital items
Income after taxation from non-trading and capital items amounted to R178 million for the period. The main component was the profit on the sale of the remaining shares in Net 1 UEPS Technologies Inc (NUEPS) in the first half of the year, which amounted to R221 million, offset by net investment and computer software writedowns of R43 million. In the prior period the sale of the major portion of the investment in NUEPS (6,65 million shares) realised a R793 million profit when the company listed on NASDAQ.
Capital
The group is well-capitalised and, including profit appropriations, group capital adequacy remained above target levels with Tier 1 capital adequacy at 8,7% and total regulatory capital adequacy at 12,4%.
Advances
Net advances increased by R55,2 billion from December 2005 and average interest-earning banking assets grew by R29,0 billion or 16,1% (annualised). Details of advances growth by category are as follows:
| Rm | September 2006 |
December 2005 |
Annualised increase (%) |
| Home loans | 90 736 | 75 333 | 27,3 |
| Commercial mortgages | 43 561 | 37 993 | 19,6 |
| Properties in possession | 144 | 309 | (71,4) |
| Credit cards | 4 627 | 4 074 | 18,1 |
| Overdrafts | 12 931 | 11 604 | 15,3 |
| Leases and instalment debtors | 40 533 | 34 935 | 21,4 |
| Other loans | 116 476 | 89 374 | 40,5 |
| Impairment of advances | (5 401) | (5 214) | 4,8 |
| Total | 303 607 | 248 408 | 29,7 |
The increase in other loans of 40,5% is partly attributable to unusually high month-end balances of certain foreign correspondent accounts in September 2006.
Deposits
The group maintained a strong liquidity position throughout the period. Deposits increased by 25,7% (annualised) from December 2005. Growth in wholesale deposits continues to outpace growth in retail deposits.
Capital management
During the period the group:- concluded, in the first half of the year, a subordinated debt issue (NED 5) of R1,5 billion, which was priced at 70 basis points above the five-year benchmark R153 rate (issued at 7,845%);
- concluded, in the third quarter, a subordinated debt issue (NED 6) of R1,5 billion, which was priced at 105 basis points above the seven-year benchmark R201 rate (issued at 9,84%);
- redeemed the NED 1 R2,0 billion bond on 20 September 2006; and
- executed share buybacks amounting to 5,5 million shares at a cost of R616 million in the first half of the year and a further 8,2 million shares at a cost of R892 million during the third quarter.
These initiatives are part of the group’s ongoing long-term capital management programme that seeks to achieve an optimal and prudent capital structure. The group currently has a Basel I target minimum total capital adequacy ratio of 12% and a target minimum Tier 1 ratio of 8%.
Prospects
Performance in the last quarter of 2006 is likely to be influenced by:
- growth in retail advances remaining robust, but slowing from current high levels;
- ongoing growth in Business Banking and Corporate advances;
- continued market reliance on wholesale funding;
- an endowment benefit in the margin from the recent interest rate increases;
- signs of increased levels of credit stress in parts of the retail environment and an anticipated slowdown in wholesale recoveries;
- a slowdown in positive property and private equity revaluations;
- reduced growth in trading revenues;
- investment in distribution and branding; and
- ongoing capital management activities.
Consequently the group is currently expecting ROE and the efficiency ratio to show a slight decline in the last quarter from the levels reported for the period. ROE and the efficiency ratio are, however, anticipated to improve in 2007 as the group strives to meet its stated targets.
Earnings forecasts to December 2006
The directors have reaffirmed the earnings forecasts given at the interim reporting stage.
Accounting policies
The Nedbank Group interim results have been prepared in accordance with IAS 34: Interim Financial Reporting. The group's principal accounting policies, as stated in the 2005 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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