| Mon 14 Nov 2005, 8:00 | | Nedbank Group Limited - Trading Update |
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Nedbank Group Limited - Trading Update
NEDBANK GROUP LIMITED
(Formerly Nedcor Limited)
(Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06
JSE share code: NED
ISIN: ZAE000004875
("Nedbank Group" or "the group")
NEDBANK GROUP LIMITED - TRADING UPDATE
OVERVIEW
The directors are pleased to report that the unaudited trading results for the
nine months to 30 September 2005 ("the period") are slightly ahead of management
expectations, driven primarily by the continued positive banking and credit
environment, tight expense control and favourable property investment
revaluations.
Net interest income ("NII") increased by 17,1% to R6,2 billion over the
corresponding period in 2004. Non-interest revenue ("NIR") increased by 2,0% to
R5,8 billion and the efficiency ratio (excluding foreign currency translation
gains) improved by 7,2% to 68,3%.
Tom Boardman, chief executive, said "The headline earnings growth of 62,8% to
R2,3 billion is encouraging, with the structural and strategic actions taken in
2004 as well as the good economic environment continuing to impact performance
positively. Our black economic empowerment ("BEE") transaction announced earlier
this year has been largely completed and is already having a positive impact on
our business, with the group currently pursuing approximately fifteen potential
transactions introduced by our new partners."
"The operational platform has been established and the group remains confident
of meeting its targets of a return on equity ("ROE") of 20% and an efficiency
ratio of 55% for the 2007 financial year."
PROGRESS AGAINST THREE-YEAR PLAN
In the 2004 year-end results announced in February 2005, Nedbank Group outlined
five major action plans which form the foundation of the group"s three-year
plan. An update on the group"s progress against each of these actions is
detailed below:
Ensure that income growth is at least 9% higher than expense growth (on a three-
year compound annual growth rate (CAGR) basis with 2004 as the base)
Good progress has been made towards achieving this target, with income growth
exceeding expense growth by 10,5%. Total income (excluding foreign currency
translation gains) grew by 9,3% while total expenses (including the BEE share-
based payments expense) declined by 1,2% for the period. The group anticipates
that, although income is expected to continue to grow ahead of expenses, the
differential will reduce in future reporting periods.
Maintain market share from the second half of 2005
There continues to be a slowdown in the rate that the group has been losing
market share.
Grow non-interest revenue through a focus on transactional revenue
In order to grow transactional revenue, the group is implementing a range of
initiatives to improve client service, cross-selling, upselling, pricing and
bancassurance. This is a longer term goal and the benefits are only expected to
be realised from 2006 onwards.
Build Nedbank Retail
Nedbank Retail has historically generated returns significantly below those of
its retail banking peers. A key focus of the group is to deliver the financial
turnaround of Nedbank Retail while improving client service. Following the
restructuring of Nedbank Retail in 2004, good progress continues to be made in
growing revenue, containing expenses and improving ROE.
Transform the business beyond the Financial Sector Charter (FSC) targets
Nedbank Group"s BEE transaction, worth more than R3 billion, was approved by an
overwhelming majority of shareholders on 22 July 2005. The scheme shares were
issued to the respective BEE trusts on 8 August 2005. The group has been
focusing on implementing the schemes for employees, retail and corporate clients
and community groups, as well as developing its working relationship with the
strategic black business partners based on their performance agreements. This
transaction has resulted in a broad range of black stakeholders acquiring direct
ownership worth 11,5% of the value of Nedbank Group"s South African businesses.
Appropriate emphasis still remains on other areas of transformation such as
employment equity, skills development, procurement, access to financial
services, empowerment financing and social responsibility.
PERFORMANCE FOR THE PERIOD
2005 2004 %
change
Rm Q1 Q2 H1 Q3 YTD YTD
Net 1 793 2 231 4 024 2 130 6 155 5 257 17,1
interest
income
Non- 1 945 1 771 3 716 2 105 5 821 5 705 2,0
interest
revenue
Interest 3,10 3,74 3,45 3,49 3,45 3,18
margin (%)
Total 2 545 2 766 5 311 2 868 8 179 8 281 (1,2)
expenses
Efficiency 68,08 69,12 68,62 67,72 68,29 75,54
ratio (%)
Headline 561 837 1 398 879 2 277 1 399 62,8
earnings
NII performed in line with management expectations, with advances levels
benefiting from improved asset growth in Nedbank Retail. Margin (based on
average interest-earning banking assets) has improved from 3,18% for the nine
months ended September 2004 to 3,45% for the period. This increase reflects the
full impact of the May 2004 rights offer, coupled with the reduced funding drag
from the expensive funding that matured last year. The proceeds from the sale of
non-core assets, the repatriation of foreign capital and the settlement of
expensive empowerment funding for Peoples Bank in April 2005 also impacted
favourably on margin. This has more than offset industry margin pressure
resulting from the lower interest rate environment and the strong retail asset
growth primarily being funded by wholesale deposits.
NIR, after adjusting for the disposal of Nedbank Retail"s international
businesses in 2004 and the strong growth from BondChoice, increased by
approximately 4%. Growth in transactional banking remains challenging, but the
group has benefited from favourable property revaluations in Nedbank Corporate
and continued strong deal flow in Nedbank Capital.
Total impairments, which amounted to R686 million for the period, are better
than management expectations and continue to benefit from the good economic
environment, improved quality of new business as well as improved internal
processes and recoveries.
Total expenses for the period amounted to R8,2 billion and show a 1,2% decline
compared with the period to September last year, resulting in the efficiency
ratio improving by 7,2%. This improvement is driven by both the one-off merger
and recovery costs in the base and tight current year expense control. The
current period includes an IFRS2 share-based payments expense of R165 million,
of which R130 million relates to the group"s BEE deal. The outsourcing of all
data and voice networks in conjunction with Old Mutual (SA) announced in August
2005 is progressing well, and the entire service is now converted and fully
operational. The group remains on track to achieve savings of R60 million during
2005.
ROE improved from 13,96% in the corresponding period to 15,23% and is now
comfortably above the group"s cost of capital. ROE, excluding foreign currency
translation gains and the BEE expense described above, improved from 14,01% to
15,04%.
Continued good progress on the sale of non-core assets has resulted in a capital
profit of approximately R793 million (before any tax) from the sale of the major
portion of the group"s holding in Net1 UEPS Technologies, Inc. The sale of the
group"s stake in Internet Solutions has also been concluded.
Total assets at R350 billion are R14 billion higher than June 2005 and R22
billion (9% annualised) higher than December 2004. Advances increased by R21
billion (13% annualised) and average interest-earning banking assets increased
by R14 billion (8% annualised) from December 2004. Residential home loans have
increased by R11 billion (24% annualised) and leases and instalment debtors by
R5 billion (21% annualised).
During August 2005, 41,3 million new shares were issued relating to the group"s
BEE transaction, bringing the total number of shares in issue at 30 September
2005 to 442,2 million. Of the new shares, 39,8 million are treated as treasury
shares for accounting purposes in accordance with IFRS resulting in the weighted
average number of shares in issue for accounting purposes to September 2005
being 395,5 million.
The group continues to be well capitalised, with the Tier 1 group capital
adequacy ratio and the total group capital adequacy ratio benefiting from the
sale of non-core assets and the 2005 interim capitalisation award. These ratios
remain above the 8,5% and 12,2% reported at the half year.
In October 2005, Fitch Ratings upgraded the long-term foreign currency rating of
Nedbank Group Limited and Nedbank Limited to `BBB" from `BBB-" (BBB minus). At
the same time, the agency upgraded the Individual rating of the group and the
bank to `C" from `C/D".
DIVISIONAL HIGHLIGHTS
Nedbank Retail continues to benefit from the turnaround strategy implemented
during 2004 and the good economic environment. Advances growth has improved and
the rate of market share loss in the key home loan market has decreased.
Operating expenses continue to be tightly controlled. The Peoples Bank
integration has now been concluded, following the completion of the information
technology integration and branch rebranding. Strong growth in bancassurance has
continued, with new business premiums for the period increasing by 36% over the
corresponding period to R3 414 million. By Wednesday, 9 November 2005, in excess
of 20 000 applications (totalling approximately R350 million) had been received
for the Nedbank Eyethu Ownership Plan.
Growth in Nedbank Corporate in the third quarter of 2005 improved as the more
decentralised strategy in Business Banking started to yield results,
particularly in the Western Cape. Property Finance and Corporate Banking are
benefiting from lower impairment charges, although there are increasing
competitive pressures resulting in some margin compression and pressure on fees
in these sectors. Loan growth to large corporates remains muted. NIR in Property
Finance benefited from positive mark to market property investment revaluations.
The Corporate BEE Scheme is progressing well, with 21 corporate clients and 55
business banking clients having signed agreements. 2,06% of the 2,72% total
Corporate BEE Scheme shares have been allocated to specific clients.
Nedbank Capital is performing well, driven by robust deal flow. Expenses have
reduced, aided by the sale of Edward Nathan & Friedland and lower rental costs
following the relocation of the London offices to premises shared with Old
Mutual plc. The benefits of an integrated investment banking strategy are
becoming more evident and the deal pipeline remains strong.
REAFFIRMATION OF EARNINGS FORECASTS - YEAR TO 31 DECEMBER 2005
Assuming exchange rates remain at current levels, the directors reaffirm that
they expect headline earnings to be between 58% and 78% higher than the R1 742
million restated results under International Financial Reporting Standards
("IFRS") for 2004. Headline earnings per share is still estimated to be between
44% and 62% greater than the IFRS restated 483 cents per share reported for
December 2004.
Based on the forecast range of headline earnings per share above and the net
capital profits from non-core assets, basic earnings per share for the full year
to December 2005 is still estimated to be between 106% and 126% higher than the
IFRS restated 423 cents per share reported for December 2004.
Shareholders are advised that these forecasts have not been reviewed or reported
on by the group"s auditors.
ACCOUNTING POLICIES
Nedbank Group"s financial results for the period have been prepared in
accordance with IFRS as expected to be effective for the year ending 31 December
2005. These standards are subject to ongoing review and possible amendment by
interpretive guidance from the International Financial Reporting Interpretations
Committee (IFRIC). The results may therefore be subject to change at future
reporting dates.
The historical accounting and interpretation in South Africa of AC105/IAS17,
regarding operating lease costs, has not been in line with international
interpretation and application. Interpretive guidance by the Accounting
Practices Committee of the South African Institute of Chartered Accountants -
Circular 7/2005 issued on 2 August 2005 - required minimum lease payments, which
are subject to a fixed rate escalation, to be spread over the life of the lease
and the escalation not to be accounted for in the year of occurrence. The group
has assessed the materiality of any adjustment in terms of this requirement, and
does not expect this adjustment to materially affect the current reported
results. The impact on opening shareholder"s equity is presently being assessed
and, should this be material, the group will inform the market of any prior
period adjustment required.
Nedbank Group"s results for the year ending 31 December 2005 will be released on
SENS on Monday, 20 February 2006.
Sandton
14 November 2005
For further information kindly contact
Tier 1 Investor Relations
Tel: +27 (0)21 702 3102
Sponsors
Merrill Lynch South Africa (Pty) Limited
Nedbank Capital
Date: 14/11/2005 08:00:16 AM Produced by the JSE SENS Department
