Nedbank Outpaces Retail Credit Growth in Tough Economic Conditions
Nedbank is a wholly owned subsidiary of Nedbank Group Limited, which is in turn ultimately owned by Old Mutual Plc. Old Mutual recently announced that it intends to unbundle four of its businesses by 2018, including Nedbank Group, aiming to reduce its shareholding to a strategic minority stake. The forthcoming change in ownership structure and subsequent impact on the bank’s support environment is yet to be seen and thus does not affect Nedbank’s current ratings.
Omega Collocott, Head of Financial Institution Ratings at GCR, says Nedbank’s ratings, which are unsolicited and accorded based on publicly available information, reflect its solid franchise and significant market share as the fourth largest bank in South Africa.
“The ratings also factor in the bank’s healthy capitalisation, sound asset quality, satisfactory profitability and conservative liquidity buffers. However, these strengths are weighed against the increasingly challenging operating environment, characterised by an economic slowdown and consequential weakening credit environment,” Collocott says.
Nedbank remains comfortably capitalised, although its Tier 1 and total capital ratios declined to 11.5% and 14.1% respectively at FYE15 (FYE14: 12.1% and 14.7%) as risk weighted assets rose and certain non-Basel III compliant Tier 2 capital was phased out, but remained above regulatory minima, and within internal targets. “Nedbank’s wholesale credit growth continued to outpace retail loan growth as a consequence of South Africa’s high indebtedness levels, poor employment prospects, increased interest rates and weak confidence level,” she says.
Nedbank continues to sustain a healthy loan portfolio, displaying a relatively low gross non-performing loan (NPL) ratio (FYE15: 2.5%), which has trended downwards since 2009 following the bank’s implementation of its portfolio tilt strategy. In F15, lower retail loan arrears were offset by increased arrears in the wholesale portfolio.
Operating income grew 5.2% in F15, driven by higher trading income and transactional revenue, offsetting slightly narrower net interest margins. The cost ratio increased to 59.1% in F15 from 58.3% in F14, largely due to lower net interest income growth.
Although the bank’s net interest margin widened marginally in Q1 F16 (benefiting from endowment income following interest rate increases), the negative effects of ongoing asset mix changes and higher funding costs relating to Basel III regulatory requirements are expected to put pressure on returns and increase costs of compliance across the sector. The bank’s balance sheet remains well funded by a diversified deposit base. Liquidity risk is mitigated by a stable deposit base and surplus liquidity buffers, evidenced by the group’s liquidity coverage ratio of 88.5% at FYE15, which exceeded the 2015 minimum regulatory minimum of 60%.
Collocott says South Africa’s prevailing economic challenges – which could exert pressure on asset quality indicators, earnings and capital generation – could impact on Nedbank’s aforementioned resilient performance. Furthermore, given the challenging operating conditions in South Africa, together with the sovereign linked risk, there is currently limited upside potential for Nedbank’s ratings.
Collocott concludes: “The bank’s ratings could benefit from its ability to significantly gain market share and further diversify its revenue sources. Downward pressure on Nedbank’s ratings could stem from a further deterioration in macroeconomic conditions which could adversely affect its asset quality, capital base and earnings power.”