Fin24

Footprint frustrates Nedbank

2009-08-25 07:34

Johannesburg - Incumbent Nedbank CEO Mike Brown has to grow the group's geographic footprint to keep pace with its rivals' earnings.

That's the view of analysts following the recent reporting of interim financial results from Nedbank, Absa and Standard Bank.

"It [Nedbank] seems viewed as the bank from which to lend, but not the bank through which to transact," wrote Citigroup analyst Henry Hall in a recent report.

"This cannot be fixed overnight and we think to successfully address this in retail banking will require investment in footprint, which would place strain on capital."

Emerging banking groups, like Capitec, are opening new branches aggressively - often in areas where Nedbank and the other "big four" banking groups operate.

Also, Nedbank is lagging its big four rivals when it comes to its presence outside South Africa. The bank is still very much focused on South Africa, while Standard Bank, for instance, is expanding at a rapid pace on the continent and abroad.

While Nedbank has recently entered into a joint venture with the Econet group in Africa, the project does not put Nedbank personnel or operations into the areas where Econet operates in the same way that Standard Bank has physical branches on the ground.

Net interest income (NII) at Nedbank for the six months ended June 2009 rose 2.5% to R8.1bn, while non-interest revenue (NIR) was up by 8% to R5.3bn.

Nedbank attributed its NIR increase to increased customer numbers and "modest pricing adjustments".

The results were negatively affected by a poor performance from its retail banking division, where headline earnings declined by 93.5% to R47m, driven by increased bad debt levels - particularly around its home loan portfolio, where it had been trying to grow market share.

In comparison, Standard Bank's NII was up 15% to 16.5bn and its NIR rose 6% to R15.2bn. Absa, too, posted a 2% increase in NII to R10.7bn, while NIR was up 5.4% to R10.2bn.

While the revenue split between Absa and Standard was closer to 50-50, Nedbank was generating about 60% of its revenue from interest and 40% from transactional banking. Should interest rates continue to fall, this gap will widen.

Retail footprint gains ground

Analysts at Deutsche Securities described Nedbank's performance as "unexciting", adding the group had already cut costs where it could and should bad debts continue to mount there would be "nowhere to turn".

Following the release of the bank's financial results at the start of August, Nedbank said it was looking to raise about R500m through the issuing of preference shares to buff up its capital position. Later in August this figure was raised to R1bn.

The preference shares are expected to be listed early in September.

Retail footprint is becoming increasingly important for the South African banking sector, with microlenders African Bank and Capitec recording strong growth and indicating they are looking to expand.

Throughout its presentation, Absa emphasised its strong retail base with in excess of 10m customers, while Standard Bank's strategy to move into emerging markets has been praised by analysts.

Capitec, which recently released a trading statement, said it expected headline earnings per share to be between 35% and 55% higher than the previous comparable six-month period.

The group, which now has about 1.8 million customers, has stated its intention to expand its branch network by adding about 40 branches this year.

During midday trade on Monday, Nedbank's shares were up 4.4% to R113.81, while the financial index was up 1.6%.

*The writer holds shares in Standard Bank, Absa, African Bank and Capitec.

- Fin24.com