Mike Brown: Battling perceptions of elitism. Picture: Hetty Zantman
Mike Brown: Battling perceptions of elitism. Picture: Hetty Zantman

If the regulator would allow it, many are arguing for three and not four big banks in SA.

And Nedbank, soon to be liberated from Old Mutual’s control, could end up as prey.

Within the managed separation process at Old Mutual, Nedbank has been below the radar. Its results for the six months to June also passed with little fanfare.

Headline earnings growth of 2% in SA was in line with the single-digit growth the rest of the sector is expected to show. The bank took an extra hit from the introduction of the IFRS 9 accounting standard.

CEO Mike Brown says the treatment of loans is tougher, and based on a forward-looking approach. All loans are treated as stage 1, 2 or 3 — with stage 3 being similar to the old nonperforming loans.

Without the new IFRS change earnings would have been up 3.2%.

Nedbank has scope to be more aggressive in its advances. The credit loss ratio was up, from 0.47% to 0.53% but this is well within guidelines.

Brown says there have been green shoots. Nedbank has increased market share in vehicle finance (where, with 28.1%, it is not far behind leader WesBank), as well as in personal loans and cards, where it is still number four.

Nedbank remains primarily a corporate bank, though without its huge commercial property book, it is closer to 50:50 wholesale and retail.

Corporate & investment banking, which is under Brian Kennedy, increased headline earnings by 3% to R3.3bn — it was unable to recognise some of the income from renewable energy projects until after the half-year. Less than 10% of its book is in the sensitive state-owned enterprise, mining and construction sectors.

Retail & business banking had an increase of 70,000 in main-banked clients to 2.77 million, which is still behind the other big banks and even lagging Capitec.

Nedbank has had to battle perceptions that it is a stuffy elitist brand, but right now it is growing fastest in the middle market with its Savvy product, as well as in small business services.

That elitist image, of course, helps when it comes to Nedbank Wealth, which swallowed up powerful wealth brands such as Syfrets and BOE. Its return on equity fell a couple of percentage points but was still 25.4%.

Its pillars — wealth management (or bowing and scraping to the wealthy), asset management, a solid range of unit trusts, and insurance, such as credit life — are good diversifiers for the bank.

For now, Nedbank’s results keep swinging because of factors outside its control.

Pan-African lender Ecobank, in which it has a 20% holding, made a modest R134m contribution. But this was a substantial turnaround from the R1.2bn lost in the first half of 2017.

Nedbank COO Mfundo Nkuhlu says the portfolio is better balanced now, with Nigeria’s share of assets down from 40% to 25%.

But the oil price continues to be a key factor because of its pivotal effect on Nigerian bad debts. Since the fourth quarter of 2016, Ecobank has crept back into profit. But Nkuhlu. who is also a director of Ecobank’s holding company ETI, says there has also been an improvement in credit granting. "Ecobank grew fast into 33 African countries. Basic banking practices, such as effective collateral documentation, were ignored. And though it had strong and powerful loan origination [sales] teams, risk officers had little input. Fortunately, they are now equally important."

Nedbank is starting to see some direct benefits from its alliance with Ecobank.

The alliance has set up a crossborder money transfer system, allowing Nedbank Money app clients to transfer into all 33 Ecobank territories. And Nedbank Wealth financial planners are hanging a shingle in Nigeria to service the megawealthy.

Ghana, Ivory Coast and Senegal will follow.

Nkuhlu says building up a Nedbank network country by country would have taken decades. It has its branches in Southern Africa, however, and recently renamed its MBCA operation in Harare as Nedbank Zimbabwe, which can now compete more openly with Old Mutual’s Cabs.

In Southern Africa Nedbank enjoys an interest margin of 7.6%, double that in the more competitive SA market. Yet even after the recovery at Ecobank, the rest of Africa accounts for just 4% of earnings.

Nedbank has often been the quiet man of the four banks. It may prefer it that way after flirting with collapse twice over the past 35 years.

Many investors do not buy Nedbank separately as it makes up a large part of the Old Mutual share.

That will change when Old Mutual unbundles approximately three Nedbank shares for every 100 Old Mutual held. This should happen before the end of 2018.

Brown points out that this will immediately lead to an increased weighting in index funds, as the free float will increase from 45% to 80%.

Brown won’t say if he thinks Nedbank is undervalued but he points to a slide in his presentation pack, which indicates an earnings multiple of 9.4, well below Standard Bank and FirstRand.

It is scant consolation that it is rated fractionally higher than Absa, given that the red devils have far slower growth prospects.

In price-to-book and dividend yield, it is closer to Absa than to the two largest banks.

The Nedbank share should enjoy a rerating over the next six months. But life will remain precarious for banks in the current economy.