Johannesburg - Bad debts were on the wane, according to Nedbank which today disappointed analysts with lower-than-expected interim earnings, but promised less impairments in its business units in the future.
This was after reporting a quarter-on-quarter marginal improvement in its credit loss ratio - the percentage of bad debt or impairments relative to its loans and advances.
Nedbank was the second of South Africa's big four banks to report this week, following Absa on Monday. Nedbank's headline earnings decreased by 32.4% from R2.9bn to R1.9bn for the six months to June 2009, with diluted headline earnings per share down 34.1% to 474c.
Analysts had been expecting nearer to 494c a share. The counter was trading down 26c (0.2%) to 10 977c in comparison to the broader financial services sector, which was up 1.2%.
The credit loss ratio has improved to 1.57% from 1.67% in the last quarter, a sign that perhaps bad debts were being reined in. Nedbank has a predominantly domestic focus and is regarded as a proxy for the South African consumer environment.
Having lost ground in the previous financial year, there had been some expectation that Nedbank had aggressively tried to grow its market share, particularly in the mortgages, private overdrafts and instalment finance segments of the market.
Nedbank Retail headline earnings declined by 93.5% to R47m for the six months ended June 2009.
Impairments in the retail business rose by 66.2% to R2.3bn and the credit loss ratio increased from 2.92% in the second half of 2008 to 3.00%. The company said that this was driven mainly by bad debts in the home loans and small business services divisions.
Patrice Rassou, an analyst at Sanlam Investment Managers (SIM), described the home loan losses as "very big". Declines in the business banking and small- to medium-sized enterprise book - which falls under the retail banking operations - were "finally hurting", he said.
Rassou said this would be further exacerbated by second or third wave retrenchments, should there not be an uptick in the economic environment.
Nedbank more conservative
Another analyst said Nedbank had been more conservative than its peers because it had not renegotiated loans as many of its peers had done. In fact, during 2008 Nedbank didn't have any renegotiations and the first quarter of 2009 it only renegotiated R6m in loans.
In renegotiating loans, banks are able to avoid impairments but have to settle for lower "cash flow" typically because defaulting homeowners are paying lower bond instalments.
In comparison, Standard Bank had renegotiated about R25bn worth of loans that would have been accounted for as "past due" or "impaired" in the previous year.
Outgoing Nedbank CEO Tom Boardman said this was an important factor when looking at the group's mortgage book.
Speaking on the Fin24.com podcast, Boardman said Nedbank clients had made consistent progress since the start of January in meeting monthly instalments. However, the bank still needed customers to catch up on missed payments, he said.
Investors may also take some guidance from Nedbank's lending activities. The average loan-to-value ratio for home loans has fallen from 89.9% in June 2008 to 84.4% in December 2008 and 79.9% in June 2009, reflecting a declining risk appetite on behalf of the bank.
The loan-to-value ratio is how much a bank will lend a property buyer when entering into a home loan agreement.
BoE Private Clients said in a note that Nedbank's bad debt ratio may improve further based on the bank's guidance, but not all analysts were convinced.
Vestact's Sasha Naryshkine said the results were "ropey".
Nedbank had a lower tier one capital rating than its peers. Nedbank reported a 10% capital ratio in comparison to Absa's 11.5%. A capital ratio is the amount banks have to keep in reserve and is an indication of its liquidity.
In June, FirstRand said its tier one capital ratio was 11.5% while in March when Standard Bank reported, its tier one capital ratio was 10.7% up from 8.7% in the previous year.
New faces
The impending retirement of Boardman and resignation of former retail banking boss Rob Shuter drew criticism that Nedbank had little management depth.
In its interim presentation, however, it unveiled executive management changes including the appointment of Raisibe Morathi from Sanlam.
Morathi will take the reins as chief financial officer from September 1. Morathi had been tipped for higher honours within the Sanlam group and his appointment is described as a "coup" by Rassou.
Graham Dempster, who heads up the Nedbank Corporate banking business, moved to become chief operating officer and is replaced by Mfundo Nkuhlu.
This is in addition to the appointment of current chief financial officer Mike Brown in February 2010 to Boardman's position, an appointment that has been in the market for several months.
BoE told its clients: "Given the massive loss of talent during the last 12 months, we believe that the market will react positively to today's announcement."
- Fin24.com