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In the first half of 2023, the operating environment in South Africa (SA) was much more challenging than we had forecast. In addition to a weak global economy and lower commodity prices, domestic economic activity continued to be negatively impacted by very high load-shedding, logistical constraints, higher-than-expected inflation levels, and, as a result, higher-than-expected interest rate rises. The slow progress made in improving outcomes on key issues of energy security, transport and logistics, and crime and corruption, coupled with the potentially severe economic consequences of the United States’ reaction to South Africa’s alleged compromising of its non-aligned stance concerning the Russia–Ukraine conflict, has added further to SA’s country risk premium, increasing bond yields and resulting in a deterioration in the value of the rand against foreign currencies.
In this difficult external context, Nedbank Group produced a solid financial performance in the first half of 2023, as headline earnings (HE) grew by 10% to R7,3bn and return on equity (ROE) increased to 14,2% (H1 2022: 13,6%), reflecting the diversification benefits of our portfolio of businesses, with higher levels of growth in Nedbank Africa Regions (NAR) and Nedbank Wealth. The increase in HE was underpinned by strong revenue growth, including associate income of 14% and good expense management, enabling pre-provisioning operating profit (PPOP) growth of 22%. This was partially offset by a 57% increase in the impairment charge due to the impact of higher interest rates, higher inflation levels and record levels of load-shedding on our clients, particularly in the retail Consumer Banking segment.
The group’s balance sheet metrics remained very strong, enabling the declaration of an interim dividend of 871 cents per share, up by 11%, at a payout ratio of 57%. The R5bn capital optimisation initiative announced in March 2023 was materially completed, with the share repurchase programme and odd-lot offer, executed at attractive levels, enhancing both ROE and growth per share.
We continued progressing on our strategic value drivers of growth, productivity, and risk and capital management. Growth trends across average interest-earning banking assets (AIEBA) (+9%), net interest income (NII) (+18%), non-interest revenue (NIR) (+7% or +10% on a like-for-like basis) and associate income (+53%) remained robust. Productivity levels improved, evident in our cost-to-income ratio declining to 52,9% from 56,1% in the first half of 2022. Capital and liquidity ratios remained high, with a common-equity tier 1 (CET1) ratio of 13,3%, an average second-quarter liquidity coverage ratio (LCR) of 143% and a net stable funding ratio (NSFR) of 119%, all well above board targets and regulatory minimums. The group’s expected credit loss (ECL) coverage increased to an all-time high of 3,67% (Dec 2022: 3,37%) as we remain conservatively provided in a difficult macroeconomic environment.
Our build-out of a modern, modular and agile technology platform (Managed Evolution or ME) has reached 93% completion, supporting the launch of three new transactional products off our new core banking system, continued double-digit growth in all digital-related metrics, client satisfaction scores remaining at the top end of the South African banking peer group, higher levels of cross-sell, main-banked client gains across all segments, market share gains in key product categories as well as improved efficiencies. We also continued to create positive impacts through R134bn of exposures that support sustainable-development finance (SDF) as aligned with the United Nations Sustainable Development Goals (UN SDGs); maintained high levels of employee engagement and satisfaction; supported clients during difficult times; retained our top-tier rankings on environmental, social and governance (ESG) scores; and maintained our level 1 broad-based black economic empowerment (BBBEE) status under the Amended Financial Sector Code for the fifth year in a row. In July, we signed a pledge along with 115 of SA’s leading corporations to work with the government to play our part in helping to address the economic challenges facing South Africa to achieve higher levels of sustainable and inclusive economic growth.
Looking forward, we currently expect the economic environment in SA to remain very challenging, particularly given the high levels of electricity shortages and increased pressure on consumers’ disposable income. The Nedbank Group Economic Unit currently forecasts SA’s gross domestic product (GDP) to increase by only 0,3% in 2023 and interest rates to remain at elevated levels, with the repo rate at 8,25% and the prime lending rate at 11,75% for the remainder of the year.
The solid financial performance in H1 2023 supports our ambition to achieve our published 2023 targets* of an ROE greater than the 2019 ROE level of 15% and a cost-to-income ratio of below 54%. Still, the deteriorating macroeconomic environment has made these and our medium-term targets for 2025 more difficult to achieve. Pleasingly, in 2022 we had already achieved our 2023 target of exceeding the group’s 2019 diluted headline earnings per share (DHEPS) of 2 565, and we aim to maintain our current #1 ranking on Net Promoter Score (NPS) among South African banks.
Thank you to our dedicated employees for their passion, commitment and discipline in the difficult environment – I appreciate the value they strive to deliver to our clients at every touchpoint and their hard work executing our strategy. I believe that we have the right strategy, leadership, and people to navigate these difficult economic conditions and identify and capitalise on possible opportunities.
I thank our more than seven million retail and wholesale clients for choosing to bank with Nedbank, and we appreciate the ongoing support of the investment community, regulators and our other stakeholders. As Nedbank, we will continue to play a constructive and positive role in society as we fulfil our purpose of using our financial expertise to do good for the benefit of all our stakeholders.
*Mike Brown, CEO, Nedbank
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