NEDBANK GROUP LIMITED - Pre-close investor call, confirmation of previous market guidance and trading statement

Pre-close investor call, confirmation of previous market guidance and trading statement

Nedbank Group Limited                                   Nedbank Limited
(Incorporated in the Republic of South Africa)          (Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06                     Registration No. 1951/000009/06
JSE share code: NED                                     JSE share code: NBKP
NSX share code: NBK                                     ISIN: ZAE000043667
ISIN: ZAE000004875                                      JSE alpha code: BINBK
JSE alpha code: NEDI
(Nedbank Group)
(collectively the group)


On 29 October 2020 Nedbank Group released a detailed voluntary trading update for the nine months
ended 30 September 2020, wherein we noted that both the economic environment and the performance
of the group had improved in the third quarter of 2020 (Q3 2020) when compared to the second quarter
of 2020 (Q2 2020). While the negative impacts of the Covid-19 pandemic and subsequent lockdowns
were still evident in parts of the groups client base, high frequency data from our transactional banking
channels, our point of sale devices and card-related digital channels reflected positive growth in total
industry turnover data from August 2020 onwards. These trends have continued post Q3 2020 and into
October 2020. The ongoing economic recovery from the low point in Q2 2020, initiated by the gradual
easing of lockdown levels from level five to the current level one, is encouraging and is expected to
continue. Our Nedbank Group Economic Units SA GDP growth forecast for 2020 has recently been
revised from -9,2% to -8,1% and our 2021 forecast has been revised upwards from 2,5% to 3,0%. Our
current forecast is for interest rates to remain flat in 2021 and then increase by 50 bps in H1 2022.

On 20 November 2020, Fitch downgraded SAs long-term foreign currency debt to BB- (from BB) with a
negative outlook citing rising government debt and the economic shock from Covid-19 as the main
reasons for the downgrade. Similarly Moodys downgraded the SA sovereign credit ratings from Ba1 to
Ba2 maintaining a negative outlook with the key driver behind the rating downgrade being the further
expected weakening in SAs fiscal strength over the medium term. Following the Moodys SA sovereign
downgrade, SA banks including Nedbank were downgraded on 24 November 2020 to Ba2 (from Ba1)
as the rating of domestic banks cannot be above that of the sovereign. Positively, Moodys noted that:
the rating agency expects the South African banks to continue to maintain solid capital buffers, along
with sound funding and liquidity. The Moodys downgrade, taken in isolation of any other matters, is
expected to have an immaterial impact on Nedbank Groups risk weighted assets (RWA) and regulatory
capital. In addition, the downgrade is not expected to have any significant impact on the groups cost of
funds over time, as a result of the group being largely domiciled in SA and raising most of our deposits
and funding within the closed rand system, with very little mismatch between foreign denominated
funding and foreign denominated assets.

As we have consistently communicated to investors over the past seven months, our primary focus at
this time remains on the health and safety of our staff and clients and serving and supporting clients in
good standing in managing their finances through this difficult period and in so doing providing support
to the economy. We thank our Nedbank staff for tirelessly supporting and delivering products and
services to our clients and all our stakeholders throughout the crisis. While it is still too early to draw
final conclusions given evidence of a resurgence in infection rates globally and in some parts of SA,
Covid-19 infection rates in staff peaked in mid-July. We remain on a high alert for a possible second
round of infections and continue to observe the Covid-19 health protocols, while closely tracking the
recent news of the progress in development of potential vaccines.

From a technology perspective, our IT systems have remained stable and the Managed Evolution
technology programme is still on track to be materially complete (above 80%) by the end of 2020. We
continue to see an upward trend in digital usage and digitally active clients, driven by our market-leading
digital solutions. At 31 October 2020 digitally active clients increased by more than 10% yoy to almost
2m (and to 70% of total main-banked clients, from 60% in 2019), while active Money App users
increased 44% yoy.

Financial performance and confirmation of outlook for market guidance
Commentary on the groups financial performance in this pre-close update reflects the performance of
the group to 31 October 2020 (10M 2020) and trends into Q4 2020. We also confirm that currently the
group remains on track to meet the full year guidance we provided as part of our H1 2020 results and
affirmed as part of the Q3 2020 voluntary trading update.

Average interest earning banking assets growth in 10M 2020 has slowed to around mid-single digits,
down from the 8,2% reported in H1 2020 and we expect this trend of slower advances growth to continue
towards the 2020 year-end. This slowdown in advances growth is driven primarily by reduced wholesale
advances growth due to selective loan participation, active portfolio management and as corporate
clients continued to repay loans drawn during the height of the crisis. The impact of this has only been
partially offset by slightly increased advances growth in Retail and Business Banking (RBB) with growth
at 10M 2020 improving to around 3%, up from the 1% reported in H1 2020. This increase in RBB is
driven by a recovery in loan application volumes across all major retail products, notwithstanding lower
approval rates as we tightened our lending criteria. Home loans, vehicle finance, personal loan and card
applications have now fully recovered to above pre-lockdown levels, in part driven by pent up demand
given the impact of lockdown on home loans and vehicle finance, and in part supported by the 300 bps
reduction in interest rates. The end-to-end digital client onboarding and product sales capabilities we
have launched in 2019 as part of our Managed Evolution technology programme are enabling
significantly quicker loan approval times and better client experiences, and in the nine months to 30
September 2020, despite lower approval rates this has led to a 0,5% increase in personal loans market
share to 10,7% as per the Prudential Authority BA 900 returns (personal loans was one of the first
products to be fully digitised). The trend of slowing wholesale advances growth and improving retail
advances growth is expected to continue throughout Q4 2020.

Deposit growth remains robust and still well ahead of advances growth.

Net interest income (NII) growth for 10M 2020 decreased from the 1% growth reported for the six months
to 30 June 2020 as overall advances growth slowed and the groups net interest margin (NIM) contracted
to just below the 333 bps reported in H1 2020 on the back of the run rate impact of lower interest rates
on endowment income. The decline in NII to date is less than we expected but remains in line with our
full year 2020 guidance range of between 0% and a decrease of 5%, which remains unchanged.
Pleasingly, asset pricing has improved, particularly in the secured lending (home loans, vehicle finance
and commercial property) and corporate lending portfolios.

Impairment growth for 10M 2020 was lower than the 202% reported in H1 2020, and as a result the
groups credit loss ratio (CLR) decreased in line with our expectations from 194 bps in H1 2020 to within
our 2020 full year guidance range of between 150 bps to 185 bps, which remains unchanged.

Year to date at 10M 2020, we have approved and concluded more than 400 thousand loan restructures
qualifying under SARB Directive 3/2020 (D3) amounting to more than R121bn and paid out R1,4bn
under the SA Governments SME Loan Guarantee scheme and in so doing have helped our clients to
better manage their cashflows through the crisis. New requests from our clients for Covid-19 related
payment relief, restructures and support have declined materially since 30 June 2020 and this trend
continued into October 2020.

-   In CIB, monthly impairments post H1 2020 decreased compared to monthly impairment levels in Q2
    2020 as the R1bn forward looking IFRS 9 macro-economic overlay in Q2 2020 did not repeat. More
    clients migrated to Stage 3 loans and appropriate impairments were raised, and D3 loans in CIB
    increased from the R30,5bn reported in H1 2020 to R32bn in September 2020 and has since
    declined in October 2020 to around R31bn. Our focus on high risk sectors such as construction,
    aviation and hospitality remain top of mind.
-   The groups commercial property advances portfolio continues to perform ahead of our expectations
    as the underlying rental collections by listed clients improved to 94% in October 2020, up from the
    low of 67% in April 2020, and as our clients cashflows benefited from the significant reduction in
    interest rates. In addition, reduced shareholder distributions by REITs have been beneficial for
    bondholders and lenders. While cashflows are key to the ability of clients to perform under their loan
    obligations, property values are also important in this environment and although we entered this
    crisis with low average LTVs (48%) and good-quality collateralised assets which act as a significant
    buffer against potential losses, we have accelerated revaluation processes ahead of the groups
    2020 year end. While we currently expect the overall trend in commercial property values to be
    downwards over the next few years, we perform our own valuations on each property and generally
    our own Nedbank valuations are below those of client valuations. Pleasingly the level of arrears (0
    to 90 days) in our CPF portfolio remains very low at R40m at the end of October 2020, highlighting
    the strength of underlying client cashflows and their ability to service debt obligations.
-   In RBB, monthly impairments post H1 2020 reduced when compared to monthly impairment levels
    in Q2 2020, but remain elevated as some D3 loans migrated to Stage 2 due to payment holiday
    renewals. There has also been an increase in Stage 3 loans. At the end of October 2020, 95% of
    the total of R79bn D3 loans extended in RBB have matured (lapsed), with 83% of these having
    resumed their monthly payment, 7% being one or more payments in arrears, 5% having been
    extended/renewed and 5% having not yet matured. Of the 90% of loans that have matured and
    were not renewed, 93% were paying their instalments, similar to payment levels in the prior months.
    As at 31 October 2020 R9bn (approximately 2% of RBB loans and advances) were still classified
    as D3 loans compared to R73bn in June 2020 and R23bn in September 2020. Non-D3 loan
    repayments continue to perform ahead of our expectations given the positive impact of the 300 bps
    reduction in interest rates ytd.
-   The groups total coverage ratio increased from the 2,95% reported at H1 2020 to 3,2% at 10M
    2020, driven by an increase in Stage 2 coverage from 4,7% in H1 2020 to 6,5% at 10M 2020 as a
    result of the D3 extension-related overlays in RBB and a reduction in a number of Stage 2 CIB
    clients with lower coverage that have repaid and/or cured, and therefore moved to Stage 1.
-   While impairment trends are encouraging, risks associated with D3 and D7 restructured loans in
    RBB, as well as watchlist clients in CIB remain elevated and are closely monitored. These, along
    with the risk of an unexpected large unsecured corporate default remain the largest risks to our
    guidance for FY 2020.

Non-interest revenue (NIR) growth for 10M 2020 was in line with our expectations and decreased when
compared to the decline of 5% reported in H1 2020, but remains in line with our full year 2020 guidance
range of a decline of between 7% and a decline of 11%, which guidance remains unchanged.

-   Commission and fees in 10M 2020 reduced by less than the 9% decline reported in H1 2020 as the
    easing of lockdown restrictions to level one has been beneficial for transactional activity. In October
    2020, digital payment volumes, point of sale volumes and ATM volumes were at 100% or more
    when compared to March 2020 levels, although branch volumes remained lower. Compared to June
    2020 levels, digital payment volumes increased 49%, point of sale volumes increased 34%, ATM
    volumes increased 20% and branch volumes increased 27%. Cross-sell on new retail consumer
    sales increased to 1,9x from 1,2x in 2019. Retail main-banked clients at the end of October 2020
    increased by more than 5% from the 2,65m reported in H1 2020 as transactional activity levels
    improved, while CIB recorded 31 primary-banked client wins up to 10M 2020 (H1 2020: 19).
-   Insurance income continued to decline, given higher levels of credit life loss of income related claims
    but volumes of these appear to have peaked in September/October 2020.
-   Trading income growth remains strong but has slowed, as expected, with declining levels of volatility
    and volumes when compared to the first half of the year.
-   After recording a loss of R765m in H1 2020, largely from unrealised losses in marking down private
    equity investments to reflect reductions in public market values, full year 2020 unrealised private
    equity losses are expected to be only slightly higher than H1 2020.
-   A portion of the macro fair value gains reported in H1 2020 continue to unwind in line with our

Key risks for NIR growth include materially better or worse transactional activity over the December
holiday period, which traditionally generates significantly higher levels of NIR than in other months and
volatility in trading income.

Expenses continued to be well managed in response to the more challenging environment through lower
variable costs and diligent cost management and the decline in expenses for 10M 2020 was in line with
our full year 2020 guidance range of between -1% and -4%, and lower than the 1% decline reported in
H1 2020. We expect our guidance to remain appropriate for the full year. In the ten months to 31 October
2020 total staff numbers declined by more than 750 and SA retail branches declined by almost 40.

Associate income of R222m, relating to Nedbank Groups 21% shareholding in ETI for 9M 2020 (9M
2019: R561m), has been recognised. This includes accounting for associate income from our share of
ETIs Q4 2019 and H1 2020 attributable profits (a quarter in arrear) of R458m, as well as our share of
the ETIs 2019 restatement of R236m which was reflected in our half year results. ETI is expected to
announce its Q3 2020 results in due course, and this will inform Nedbanks Q4 2020 associate income
from ETI.

The groups effective tax rate for FY 2020 is expected to be between 23% and 24%.

From a balance sheet perspective, the group remains liquid and well capitalised at levels above board-
approved minimum targets and well above the minimum regulatory requirements. We noted in our Pillar
3 disclosures at 30 September 2020 that our CET1 ratio increased slightly from 30 June 2020 levels
(10,6%) and remained strong at 10,7% reflective of organic capital generation after accounting for the
impact of growth in RWA during the period. Our LCR and NSFR ratios were 125,6% and 113,2%
respectively. In line with SARB Guidance Note 4/2020 (G4/2020) and in support of capital preservation,
it is unlikely the board will declare a final ordinary dividend for 2020 so long as G4/2020 is in place.

The group will host a pre-close investor call based on this release at 14:00 on 2 December 2020. Details
available at

Trading statement
As noted in our H1 2020 disclosures, full-year HEPS and EPS are expected to decline by more than
20% when compared to the 12-month period ended 31 December 2019 (HEPS: 2 605 cents, EPS: 2
500 cents). This guidance remains unchanged and all the key 2020 performance metrics, as outlined in
our 2020 interim results announcement on 26 August 2020 and Q3 2020 Voluntary Trading update,
remain intact. A further trading statement will be issued in Q1 2021 to provide more specific guidance
ranges, once there is reasonable certainty regarding the extent of the decline and the relevant HEPS
and EPS ranges.

We will enter our closed period on 1 January 2021 and release our group results for the year ended 31
December 2020 on the JSE Stock Exchange News Service around the third week of March 2021.

Shareholders are advised that the financial information contained in the pre-close announcement and
investor call have not been reviewed or reported on by the Nedbank Group's auditors.

2 December 2020

Sponsors to Nedbank Group in South Africa:
Nedbank CIB
Merrill Lynch South Africa (Pty) Limited

Sponsor to Nedbank Group in Namibia:
Old Mutual Investment Services (Namibia) (Pty) Ltd

Sponsors to Nedbank Limited in South Africa:
Nedbank CIB
Investec Bank Limited

Date: 02-12-2020 01:55:00
Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.
Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Yes, and I've gotten it.
21% - 1024 votes
No, I did not.
52% - 2560 votes
My landlord refused
28% - 1376 votes