Ann Crotty
In financial 2012 Nedbank made a profit on its retail home loans for the first time since 2007. The profit of just R157 million helped to lift the retail unit’s return on equity and also made a marginal contribution to the impressive 21.4 percent hike in headline earnings to R7.5 billion.
Diluted headline earnings a share rose 19 percent to R15.95, from which a dividend of R7.52 would be paid, the bank said yesterday. The earnings were in line with analyst expectations, but the 24.3 percent hike in dividend was ahead of forecasts.
The share price firmed 0.8 percent to close at R189.50 yesterday. The JSE banks index added 0.63 percent.
Return on equity increased to 14.8 percent from 13.6 percent with the 12.1 percent return on equity achieved in the retail unit countering the 20 percent-plus returns in its business banking, corporate and capital units. The group’s overall cost of capital is 13 percent.
Nedbank chief operating officer Graham Dempster said the biggest challenge facing the group’s retail division was its home loans “back-book” and in particular the loans granted in the period 2006 to 2008.
“These loans are characterised by high loan-to-value [ratios], high risk and low pricing, which makes for poor economics,” Dempster said.
He added that it was a big book but that as it was reduced, the retail division’s return on equity was increasing. In 2011 return on equity for the retail division was 10.8 percent.
Advances written during the 2006 to 2008 period account for R47bn of Nedbank’s current stand-alone retail home loan book of R86bn. If these loans are stripped out, the retail division’s return on equity increases to 13.8 percent.
Management’s cautious approach to retail home loans is reflected in the fact that last year it only advanced R29bn.
Group chief financial officer Raisibe Morathi stressed that this business was being written on much better terms.
Dempster said the action on the home loan book was part of the group’s investment in repositioning its retail business. He said that management was focusing considerable effort on collection and recoveries and, “given that South African consumers are highly indebted”, was being selective in lending. The group’s total exposure to unsecured lending was R22bn out of its total loan book of about R600bn. The R22bn represented a 28 percent increase on the previous year.
Morathi said the increase at the halfway stage was 36 percent and that the group tightened up on credit granting in the second half of the year.
Dempster noted that after gaining 655 000 new clients during financial 2012 the group now had 6 million clients in South Africa.
Non-interest revenue at Nedbank’s retail division rose at a strong pace as a result of the additional volumes of business and the increased client base and not, Dempster said, because of increases in fees.
A notable factor is the increased reliance on deposit funding and the reduced reliance on funding from the capital market. Dempster said this shift in the funding mix would be increasingly valuable under the Basel 3 regime.