Nedbank Increases Dividend by 11% Amid Interest Rate Uplift

Nedbank, South Africa’s fifth most valuable bank listed on the JSE, has revealed a robust double-digit increase in interim profits, fueled by a favourable interest rate environment. However, the bank has faced difficulties as its bad debt provisions have increased significantly.

As interest rates rose, Nedbank, the country’s fifth-largest bank by market value, capitalised on its expanded customer base and the augmented interest rate scenario. Nonetheless, the bank expects the Reserve Bank to keep interest rates at their current levels for the rest of the year.

In the six months leading up to June, headline earnings increased by 10% to R7.7 billion. In light of this strong performance, Nedbank decided to increase its dividend by 11%, resulting in a payout of R8.71 billion (R4.25 billion). Nedbank’s retail and business banking segment reported an 11% increase in its primary customer base, which now totals 3.36 million customers.

Banks have traditionally benefited from the positive impact of higher interest rates on loan repayments, which boosts net interest margins. Additionally, their large cash reserves generate higher interest income. Nedbank also acknowledged that its customers took advantage of the higher rates by depositing larger sums of money.

During this time, the bank, which is valued at approximately R111 billion on the JSE, saw a notable 18% increase in net interest income, reaching R20 billion. This expansion was supported by a 9% increase in average interest-earning assets such as loans, amounting to R978 billion. The amount of deposits received increased by 8% to R1.1 trillion. Due to the favourable rate environment, many clients chose to convert short-term deposits into longer-term ones.

After ten consecutive rate hikes, the Reserve Bank decided to halt its interest rate hike cycle in July. According to Nedbank, the repo rate will remain stable at 8.25% for the rest of the year. The bank forecasts 0.3% growth in South Africa’s economy in 2023, which is slightly lower than the central bank’s forecast of 0.4%. In the meantime, non-interest revenue increased by 7% to R13.4 billion. This uptick was fueled by strong increases in commission and fees, as well as insurance income.

Despite these encouraging developments, the bank faced challenges from its customers. The impairment charge increased by 57%, reaching R5.3 billion. Correspondingly, the credit-loss ratio rose to 121 basis points from its previous 85, surpassing the through-the-cycle target range of 60 to 100.

As the second half of the year approaches, Nedbank anticipates a “very challenging” environment. The bank intends to assist its clients by providing customised repayment plans to help them navigate financial difficulties. CEO Mike Brown acknowledged that the operating environment in the first half of the year proved more difficult than anticipated.

“In addition to a weak global economy and lower commodity prices, domestic economic activity has continued to be negatively impacted by very high levels of load-shedding, logistical constraints, higher-than-expected levels of inflation, and, as a result, higher-than-expected interest rate increases,” he said.

While acknowledging progress in addressing energy security, transportation, logistics, and societal issues, Brown emphasised that progress has been slow. Furthermore, external factors such as the potential economic ramifications of the United States’ response to South Africa’s stance in the Russia-Ukraine conflict have contributed to higher country risk premiums, bond yields, and rand depreciation against foreign currencies.

In early trading on Tuesday, Nedbank’s shares increased by slightly more than 1%. This increase comes after a year-to-date gain of more than 6%.