ETI's timely recovery boosts Nedbank’s earnings and dividend
Ecobank Transnational Incorporated’s turnaround, after a string of poor results, means Nedbank could soon reverse a R1bn impairment provision
Nedbank’s investment in pan-African banking group Ecobank Transnational Incorporated (ETI) has provided a timely recovery that has boosted Nedbank’s earnings and dividend for the six months to end-June.
ETI’s contribution to Nedbank reversed from a loss of nearly R1.1bn a year ago to a profit of R247m for the first six months of 2018. This almost single-handedly contributed to Nedbank lifting headline earnings a share by 26% to R13.61. Nedbank raised its dividend per share by 14% to R6.95.
Nedbank, which is headed by Mike Brown, bought a 20% stake in ETI in 2014. ETI has operations in 36 countries across the continent. Following a series of poor quarterly results, Nedbank raised an impairment provision of R1bn against the carrying value of ETI on its books in 2017.
Given ETI’s strong recent performance, which has seen six consecutive quarters of profitability, Nedbank could well reverse the provision at the end of the year, it said.
Nedbank’s chief operating officer, Mfundo Nkuhlu, told Business Day the reversal in ETI’s results was not down to luck. A number of management changes had been made at group level and new executives were also appointed at key subsidiaries such as Nigeria, Nkuhlu said.
Much of the focus of ETI’s turnaround had been on improving the quality of the bank’s credit book, leading to business process changes.
“The first defence from a risk perspective are the people on the front lines doing the originating,” said Nkuhlu.
“It’s important to understand the clients you are doing deals with, the robustness of cash flow projections and the quality of collateral to extend credit effectively, because if the quality of origination is poor, you are going to pick up problems later on.”
Nedbank had worked with ETI to assist with the derisking of its books, capital management and liquidity as it migrated from Basel 2 to the stricter Basel 3 capital requirements, he said.
Patrice Rassou, head of equities at Sanlam Investment Management, said Nedbank’s results were better than the guidance provided.
“They should easily deliver the highest earnings growth of their peers for this period due to ETI and despite the relatively low growth at its managed operations,” Rassou said. He believed Nedbank was attractive at these levels.
“Given where our market is trading, finding stocks on a single-digit price-earnings (PE) multiple is very attractive for the market we are in. Nedbank is also very well capitalised, so there is a strong underpin to the dividend,” he said.
The stock is currently trading on a PE ratio of 9.49, compared with a PE of 12.78 for the FTSE/JSE Africa bank index and the all share index’s 17.81. Nedbank closed 1.6% weaker at R260.14 a share on Tuesday.
“While growth won’t be spectacular over the medium term, it should be in the solid single digits, so from my point of view it looks attractive relative to the industry and the rest of the market,” Rassou said.
Correction: August 8 2018
An earlier version of this article described COO Mfundo Nkuhlu as Nedbank's head for the rest of Africa.