Headline earnings increase of 10% driven by strong revenue growth partially offset by increases in retail impairments

Nedbank wants to ensure that Ghost Mail readers have a proper understanding of the numbers. To assist with that, CFO Mike Davis also gave me some of his time to ask whatever questions I wanted. Here’s the summary:

GHOST: Are South African consumers eating into what little savings they have, or are they managing to tread water at this interest rate level? What is driving the narrative in the market that the next rate hike is the one that breaks the story?

MIKE DAVIS: The reality is that whether there’s another 25bps hike or not, the combined effect of rates currently sitting at 11.75%, high inflation, low growth and low levels of employment means that consumers are battling. It’s not just about the next hike. We are seeing this in the Retail and Business Banking franchise in particular. There’s pressure across the board in consumer banking, including home loans, vehicle finance, personal loans and card. The most sensitive vintage in the book was originated at the low point in the interest rate cycle and those borrowers are now struggling. Consumers are drawing down on savings to meet higher levels of debt. The corporate book is stronger than the retail book, as corporates have retained strong balance sheets and sat on cash. They’ve been particularly careful.

GHOST: Let’s talk commercial property. This seems to be a focus area on Twitter (X!) when I tapped into the hive mind there. How is that book looking? Rebosis?

MIKE DAVIS: There are a few counters in business rescue, as we’ve detailed in the results. There is obviously uncertainty around this. The Rebosis process should complete in August and we acknowledge that there is risk of an outcome that is worse than expected.

GHOST: What pockets of growth can you see for Nedbank? We understand the broader macroeconomic picture, but where can Nedbank do relatively better than competitors?

MIKE DAVIS: The Nedbank brand is stronger than market share might suggest. We over-index in vehicle finance in terms of market share with our MFC business. But our retail franchise is sub-scale when viewed through that lens. One of the things we can do better is cross-sell, like getting better at selling insurance to the banking client base.

GHOST: The vehicle sales environment in South Africa doesn’t make much sense in terms of affordability. What trends are you seeing there, particularly important as MFC has been a big part of Nedbank’s success?

MIKE DAVIS: We’ve definitely seen consumers trade down into cheaper vehicles. This still supports overall growth and churn. South African consumers are unusual in that they would rather default on their home loan than vehicle finance, in many ways a function of the state of public transport in our country. We’ve lost some market share in this space by being selective on origination. The most sensitive vintage is loans that were originated at the time when rates were lowest. This is a similar trend to home loans, but not as severe as we are seeing there. This is actually a great time to originate loans. If a consumer can afford the finance in this environment, that’s high quality credit.

GHOST: Finally, what are your thoughts on competitors like Discovery and Old Mutual still to come? What about the likes of Bank Zero?

MIKE DAVIS: The broader the competitive landscape, the better for consumers. All players in this space need to compete on quality or price. The Old Mutual push isn’t a surprise to us, as we suspected a bank entry when Old Mutual was selling down Nedbank. You also need to think of the telcos and retailers and their push into financial services. What about Amazon and Google? Everyone wants a piece of the financial services pie and the competitive landscape is broader than just the obvious banks, particularly in payments and in-store credit. The big banks like Nedbank have large balance sheets and strong cash profits almost regardless of the economy, which lets them defend their positions. We have invested heavily in our digital transformation and our clients are very digitally active. So yes, there are new players in this space all the time, but Nedbank has been evolving digitally to respond to this.

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