Nedbank reports record results, but warns about 2023

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This interview originally aired on RSG Geldsake in Afrikaans and has been translated in this transcript.

RYK VAN NIEKERK: Nedbank reported financial results for its financial year to the end of December today, and on all counts the bank produced a very, very solid result. Headline earnings grew by 20% to R14 billion. Those are the highest headline earnings the group has ever reported, and significantly stronger than the growth of 15% FirstRand reported last week. Those were FirstRand’s interim results.

However, Nedbank declared a final dividend of R8.66/share, which means the total dividend for the year was R16.49/share, and it’s the highest dividend the bank has ever paid. Nedbank has also announced a share-buyback and odd-lot offer of R5 billion.

Mike Brown is Nedbank’s chief executive and is on the line. Mike, thank you so much for joining me. This seems to be a very, very good set of results that you’ve achieved in a very difficult year. I read through your financial announcement, and you made many warnings of headwinds and challenges facing South Africa. You mentioned load shedding, Transnet, poor municipal service delivery, crime and corruption. I think the list is long. What were the main drivers of this good performance?

MIKE BROWN: Certainly, we were very pleased and we think it is a strong set of numbers in what is a difficult environment. But if you look on the other side, our return on equity improved to 14% and that’s still below where we would like it to be. It’s below where we were before Covid.

So as good as these numbers are, there is still definitely work ahead.

What drove this was actually delivery of our strategy and good performance across all of our businesses. Every single business cluster improved its return on equity and was able to generate double-digit earnings growth with particularly strong growth in our businesses outside South Africa and in our Wealth business.

We also benefit from the rise in interest rates, which feeds through into our margins and we’ve been able to offset some of those impacts by not having the increase in bad debts that one would usually expect with such a strong rise in interest rates.

Read: Nedbank declares its highest dividend ever, launches R5bn share buyback

RYK VAN NIEKERK: The fact that you’ve actually mentioned the challenges facing South Africa is similar to many other big companies where they’ve also pointed the finger at government and said, listen, we need to sort this out because it’s harming economic activity. But do you think the private sector, and especially the banks – because the banks play such an important role in our economy – are vocal enough about the poor progress we are making in addressing those problems?

MIKE BROWN: We certainly think we are vocal enough. We point very strongly, as we have for a while, to the challenges in the state-owned monopolies in our key network industries. So think about the issues with energy and Eskom, logistics and Transnet, and water – as well as the unacceptably high levels of crime and poor service delivery in many municipalities.

But our job we think is to be critical but also to be partners in getting on top of these issues. It doesn’t help just to shout from the rooftop.

One needs to point out challenges and areas where we need to do better, act faster, be more decisive, but we do try to work with like-minded South Africans, with business organisations, with areas in government like Operation Vulindlela, to provide support wherever we can to try and create better outcomes for the benefit of all South Africans.

Read:
Nedbank says SA likely entered recession in Q4 of 2022
Transnet crisis and load shedding top FirstRand boss’s concerns
Operation Vulindlela’s progress in removing SA’s biggest economic growth hurdles

RYK VAN NIEKERK: Do you get the odd phone call from the president or senior cabinet ministers to ask for assistance?

MIKE BROWN: I haven’t had phone calls from the president lately, but certainly we do have discussions with key cabinet ministers. We do that regularly as part of our engagements through Business Leadership South Africa.

RYK VAN NIEKERK: We also face a big challenge at the moment, and that is that South Africa appears on the FATF grey list, and although the National Treasury is quite optimistic that we will be removed from the list within 18 months, other commentators believe it’ll take a lot longer. Do you think the longer we stay on the list the more negative the impact will be?

MIKE BROWN: Certainly, no good can come from being on the FATF grey list. I do believe that while it was largely in the price when it was announced, the longer we remain on it, the more the impact will rise as we’ve effectively tarnished our reputation as an investment destination.

The key challenge lies in getting off the grey list.

Interestingly, if you look at the reasons we’re on it, pleasingly there was nothing found wanting in respect of our financial services sector. So, we are pleased that the efforts that we’ve put in have been recognised.

But we know that during this state of the environment, particular areas like investigation and criminal prosecutions [have become] deliberately weakened.

And while we have started to make progress in fixing that – that is a big challenge to get done in 18 months – I think that will ultimately be the critical path to coming off that list.

Read: SA will be removed from grey list by mid-2024, says Godongwana

RYK VAN NIEKERK: Back to Nedbank, your Corporate and Investment Banking unit performed well. It showed a 14% rise in headline earnings, although it was supported by a decrease in impairments. We’ve just heard today that the economy shrank by 1.3% in the last quarter of last year, which is much worse than many people anticipated. How do you currently find the market environment – especially business activity levels – within our economy? Is that also following that trend?

MIKE BROWN: Definitely it is difficult out there. The shrink in the fourth quarter was larger than we thought. We have in our forecasts a reduction in the first quarter.

So, if we are correct, that will be two quarters in a row of negative GDP, and we all know that is the big ‘R’ word that no one wants to say [recession]. But certainly if we look at the activity base within our investment bank, there’s a huge amount of activity in anything to do with energy and energy generation.

And many other large corporate clients are waiting to see real delivery of the Necom [National Energy Crisis Committee] plan before pushing the button on other large projects that absolutely require much more security of access to power than is currently available.

RYK VAN NIEKERK: But that is a big opportunity – the renewable energy sector. I think it has developed into a sector. Many projects are already in the construction phase. There are many in the pipeline, and I believe there is a scramble from banks to finance these projects. Can you pick and choose? How long is the queue in front of Nedbank’s door?

MIKE BROWN: There certainly is a large scramble from our clients who want to institute these projects to enable them to achieve security of energy supply at prices that they believe are appropriate.

So certainly our energy teams are incredibly busy, and I think that that is a multi-year opportunity because, as much as we should never have got into this crisis from an energy point of view, the only way out of the crisis on a sustainable basis is to significantly increase energy generation.

That requires both equity and debt financing, and there is a key role for the banking sector and Nedbank to play in that.

RYK VAN NIEKERK: And then, just lastly, you’ve announced a record dividend, but you’ve also announced an odd-lot offer, and obviously it stems from the Old Mutual unbundling of its stake in Nedbank. Many shareholders would own fewer than a hundred shares, and of course that creates an administrative burden. Just how many shareholders do you have who own fewer than a hundred shares?

MIKE BROWN: Let’s just start with what we announced today.

In addition to record levels of profit, we actually have record levels of capital.

The measure that everybody looks at in the bank is something called ‘common equity tier one’, and that’s sitting at 14%. And our board target for that through cycles is somewhere between 11% and 12%.

So, even after looking at growth prospects going forward, ensuring we’ve got enough capital to support our clients and the economy, we have a structural surplus in capital that we know is effectively diluting our return on equity and will be value-accretive to shareholders.

What we have said is we are going to institute a R5 billion capital-optimisation programme to be instituted by both a share buyback – that’ll be a general share buyback in the market – and an odd-lot programme …

The buyback programme will be larger than the odd-lot programme.

But post the Old Mutual unbundling we did end up with several hundred thousand shareholders who own less than a hundred shares, which is generally not economic for them to hold or for us to administer. So we will again have an odd-lot offer.

We did this the first time [when] Old Mutual did an unbundling. They’ve done more than one, and every time we create these odd lots.

RYK VAN NIEKERK: Mike, thank you so much for your time today. That was Mike Brown, the Nedbank chief executive.