Nedbank benefits from home loans division

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Mike Brown Nedbank CEO. Mike Brown Nedbank CEO.

Nedbank Group, one of South Africa's so-called "big four" banking groups. After shunning the retail sector several years ago, Nedbank is finally benefiting from a remarkable R700m turnaround in the home loans division, among others.

Its previous foray into home loans, as part of the changed retail strategy between 2005 and 2008, saddled the group with huge bad debts due to mortgages priced below prime, which pushed home- loan debts to R1,2bn. The group has finally turned the corner with a small profit for the financial year to December. 

The turnaround forms part of a renewed overall retail strategy driven by retail & business bank head Ingrid Johnson. The group aims to reposition Nedbank Retail and grow noninterest revenue through transaction fees and commissions. Johnson has been commended for the success but says there is still work ahead. “The increases in retail margins [from 5% to 5,34%] are testament to correct strategic choices made,” she says. 

Nedbank traditionally had the lowest noninterest revenue among the big four banks but, like Absa and FirstRand, it has found that tapping into the retail sector, particularly the unsecured lending and card market, can boost earnings. In the period under review, retail & business banking contributed 46% to total headline earnings, improving growth by 163% to R2bn. 

Nedbank benefited from re pricing and concentrating on specific sectors. But re pricing of retail products, whereby customers essentially pay more in fee and insurance charges, is only half the story. Interest income from cards and personal loans rose along with transactional income. 

Nedbank improved group noninterest revenue by 16,6% to R15,4bn, a notable turnaround on the R10,4bn in 2007.

CEO Mike Brown expects the trend to continue and says the group is only now beginning to benefit from its revised strategy. “We expect low double-digit growth in noninterest revenue for this year,” he says. 

Nedbank is feeling the competition from FNB and Capitec, whose customer numbers have been climbing sharply. But it has attracted 434000 new customers in the 2011 financial year to bring its customer base to 5,2m. 

Finance director Raisibe Morathi says Nedbank is following the volume approach through product offerings such as the Savvy account for middle-income customers, and Ke Yona for entry-level customers. 

The overall earnings growth of 26,2% was driven mainly by retail, but Nedbank Capital also performed creditably , showing a small earnings improvement of 1,9% to R1,225bn. Competitors Absa Capital and Rand Merchant Bank (RMB) delivered comparable losses. 

Nedbank wants to grow out of its bad-debt predicament, which is still higher than that of other banks. The market is watching its unfolding strategy towards West African banking group Ecobank with interest. 

Nedbank has much at stake , mainly the US$285m it lent Ecobank to buy Oceanic Bank in Nigeria. This could make Ecobank a significant player in that market with Nedbank perhaps also benefiting through its option to buy 20% of Ecobank within the next three years. 

Nedbank operations head Graham Dempster, in charge of African expansion, says Nedbank’s relationship with Ecobank has deepened. Whether it will lead to a merger he cannot say, but he emphasises this would benefit both parties. “We are taking it one step at a time.”

The market considers Nedbank a growth proposition with the share price rising 23% year on year to R162 before the results were released last week. The historical p:e of 11,7 is not demanding, especially considering the possibility that majority shareholder Old Mutual, which owns 52% of Nedbank, could still sell its majority stake. 

- Financial Mail

 


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