Nedbank Group Interim Financial Results

RNS Number : 8187M

Old Mutual PLC

02 August 2017

 

Old Mutual plc

Ref 152/17

2 August 2017

NEDBANK GROUP - CONDENSED CONSOLIDATED INTERIM FINANCIAL RESULTS 2017

Nedbank Group Limited ("Nedbank Group"), the majority-owned South African banking subsidiary of Old Mutual plc, released its interim results for the six months ended 30 June 2017 today, 2 August 2017.

The following is the commentary from Nedbank Group's announcement. The full announcement including detailed financial information is available from the Nedbank Group website http://www.nedbankgroup.co.za/financialInterimResults.asp.

"Condensed consolidated interim financial results for the six months ended 30 June 2017

·     Headline earnings decreased 2,9% to R5 271m, and excl ETI increased 6,7% to R6 433m

·     DHEPS declined 3,7% to 1 078 cents

·     CLR 47 bps (June 2016: 67 bps)

·     Return on equity, excluding goodwill 15,1%, and excl ETI increased to 18,9%

·     CET1 capital adequacy ratio increased to 12,3% (June 2016: 11,6%)

·     Interim dividend per share increased 7,0% to 610 cents

Nedbank Group continues to create value for all our stakeholders in a challenging political and economic environment and increased our interim dividend by 7,0% to 610 cents per share. Our headline earnings of R5,3bn, being 2,9% down on our 2016 first-half performance, is best understood through two lenses:

-     Our managed operations produced a solid result, with headline earnings growth of 6,7% and an improved ROE (excluding goodwill) of 18,9%, as slower revenue growth was offset by reduced impairments and good cost management.

-     The group's performance was negatively impacted by our share of the loss from our associate ETI (as announced on 18 April 2017), which decreased the 6,7% growth in headline earnings in managed operations to an overall 2,9% reduction in headline earnings. While risks remain, the outlook for ETI is improving. 

The strategies implemented over the past few years in preparation for a tougher economic environment have positioned the group well for the recessionary conditions and the sovereign-credit-ratings downgrade that followed President Zuma's cabinet reshuffle. Capital generation and liquidity levels are strong and we have a banking franchise underpinned by 7,9m clients, 2,7m of whom are main-banked clients. Our advances book is of a high quality and we have built excellent collection capabilities. In addition, in an environment of slower revenue growth, and as we accelerate the delivery of our digital products, we are intensifying our focus on cost-efficiencies to create investment capacity and to improve efficiency ratios. We aim to create a more agile, competitive and digital Nedbank.

In the context of a challenging political and economic environment, our guidance for growth in diluted headline earnings per share for 2017 is for this measure to be positive, but less than or equal to growth in nominal GDP. 

Mike Brown

Chief Executive

2017 interim results commentary

Banking and economic environment

Despite ongoing geopolitical tensions, economic growth in developed markets improved, supported by accommodative monetary policies as well as manufacturing and trade activity gaining momentum. Emerging and developing economies also improved as a consequence of growth in China, a recovery in global commodity prices and increased capital inflows as global investors search for higher yields.

Against previous expectations of an improved economic environment in 2017, SA entered a technical economic recession, with GDP contracting by 0,3% in the fourth quarter of 2016 and by 0,7% in the first quarter of 2017. The weakness in the economy was widespread, with the manufacturing, utilities and domestic trade sectors all declining sharply. Consumers were placed under increased financial pressure as unemployment rates rose to a historic high of 27,7%. This, combined with the contraction in real disposable income and household consumption expenditure, led to a slowdown in household credit demand as households reduced debt levels, reflected in the debt-to-disposable income shrinking to 73,2%. In addition, credit demand was impacted as government fiscal policy focused on stabilising the budget deficit.

Confidence levels declined to new lows following President Zuma's cabinet reshuffle on 31 March 2017, which triggered a sovereign-ratings downgrade by three international rating agencies. Standard & Poor's Global Ratings downgraded SA's foreign currency debt to subinvestment grade, but retained the local currency rating at investment grade. Fitch downgraded the country's foreign and local currency rating to subinvestment grade. Moody's also downgraded SA's sovereign risk ratings to one notch above subinvestment grade. Both Standard & Poor's and Moody's placed the country on a negative ratings outlook.  

While the current levels of political and economic uncertainty persist, there is heightened risk of further sovereign downgrades of the local currency debt to below investment grade and the resultant exclusion from the Citibank World Government Bond Index would have negative consequences for the SA economy.

Review of results

Nedbank produced a resilient performance in a macro environment that has proved to be more challenging than expected. Our managed operations produced headline earnings growth of 6,7% to R6 433m (June 2016: R6 030m), driven by slower revenue growth, reduced impairments and good cost management.

Headline earnings, including our share of the loss from ETI of R1 162m (June 2016: R603m loss), decreased by 2,9% to R5 271m (June 2016: R5 427m).

This translated into a decrease in DHEPS of 3,7% to 1 078 cents (June 2016: 1 119 cents) and a decrease in HEPS of 3,3% to 1 098 cents (June 2016: 1 135 cents). Excluding ETI, DHEPS increased by 5,9% to 1 316 cents (June 2016: 1 243 cents).

ROE (excluding goodwill) and ROE decreased to 15,1% (June 2016: 15,7%) and 14,0% (June 2016: 14,6%) respectively. ROE (excluding goodwill and ETI) improved from 18,4% to 18,9%. The ROA decreased to 1,10% (June 2016: 1,19%). Excluding ETI, ROA improved from 1,32% to 1,35%.

Our CET1 capital ratio of 12,3% (June 2016: 11,6%), average LCR for the second quarter of 104,6% (June 2016: 93,1%) and an NSFR of above 100% on a pro forma basis, are all Basel III-compliant and are a reflection of a strong balance sheet.

Delivering sustainably to all our stakeholders

Nedbank plays an important role in the economy and we remain committed to contributing to the societies in which we operate by delivering value to our staff, clients, shareholders, regulators and communities.

For staff 

We employ 32 349 staffmembers, invested R137m in training and paid salaries and benefits of R7,8bn. Successful engagements were held as part of our People 2020 groupwide programme aimed at transforming and aligning our leadership culture and talent to our strategic objectives. We refreshed our executive management programme to be more digitally focused and brought together 500 of our leaders across the group at the Leadership Accelerator to ensure the adoption of new insights that will drive accelerated levels of change. Transformation remains key to human capital development and we continued to focus on this fundamental change across all levels at Nedbank, from our board of directors to all our staffmembers. Currently, black representation at board level is 61,1%, at executive level 50,0% and our total staff at 77,1%. In addition, 62,4% of our total staff are female. 

For clients 

Our clients' access to banking was improved through our network of 843 Intelligent Depositors and we increased the total number of digitally focused new-image branches to 303. Digitally active and enabled clients grew strongly, increasing the value of Nedbank App Suite™ transactions by 68,0% to R18,6bn. Nedbank Contact Centre client service will shortly be enhanced by voice biometrics and multimedia functionality that have been successfully piloted. We increased our total RBB client numbers to 7,5m with main-banked clients decreasing 0,3%, driven by the youth client segment that declined by 6,4% as slower transactional activity caused existing clients to fall out of our main-banked definition, while middle-market main-banked clients increased slightly by 0,5% and Retail Relationship Banking clients increased by 5,1%. We supported our clients by advancing R76,0bn (June 2016: R74,8bn) of new loans in the first six months of the year, including R39,1bn to RBB clients and R12,4bn to small and medium enterprises and Business Banking clients, as well as R719m of funding for affordable-housing projects to CIB clients. Nedgroup Investments has grown to be the fifth-largest unit trust manager and fourth-largest offshore unit trust manager in SA, with overall assets under management growing by 15,2% to R295,3bn (June 2016: R256,3bn). It has maintained its top-three ranking among asset management companies over the past nine years, together with first position in the offshore category for the second consecutive year in the recent quarterly PlexCrown Unit Trust survey, as well as winning in the Offshore Management Company of the Year category for the third consecutive year, while Nedbank Private Wealth was ranked third overall in the Intellidex Top Private Banks and Wealth Managers survey.

For shareholders

Nedbank's net asset value per share increased to 16 200 cents (June 2016: 15 826 cents), with our share price up by 12,0% since June 2016. Our interim dividend is largely based on the performance of our managed operations and increased by 7,0%, ahead of growth in HEPS. We engaged constructively with shareholders in over 388 meetings in the past 12 months, and at our 50th annual general meeting all resolutions were passed, with more than 90% of votes in favour. We ensure transparent, relevant and timeous reporting and disclosure to shareholders, as acknowledged by Nedbank's Integrated Report having been ranked in the top tier of JSE-listed companies.

For regulators

We maintained Basel III requirements ahead of full compliance timelines, achieving a CET1 ratio of 12,3%, an average long-term funding ratio of 33,1% and an average LCR ratio of 104,6% in the second quarter of 2017. We have invested over R100bn in government and public sector bonds as part of our HQLA requirements and, in doing so, remain committed to making a meaningful contribution to the countries in which we operate, thereby supporting the funding needs of government. Cash taxation contributions of R5,5bn were made relating to direct, indirect, pay-as-you-earn and other taxation. We continued to work closely with all regulators to ensure efficient delivery of the various regulatory programmes, including our IFRS 9 parallel run, which is progressing well.

For communities

Nedbank contributes to society in multiple ways. We continued to participate in the CEO Initiative, working with government, business and labour towards a more inclusive SA society. At the parliamentary presentation on transformation in March 2017 Nedbank was recognised as a leader in transformation within the financial services industry. This was affirmed by the group maintaining our level 2 BBBEE contributor status for the eighth consecutive year. Since 2012 we have contributed over R700m to socioeconomic development, with more than 50% allocated to education. We supported local businesses and the SA economy by sourcing 75% of our procurement locally. Our Fair Share 2030 strategy has enabled more than R745m of new lending to support student accommodation and we have disbursed R14,9bn for renewable-energy deals to date. In line with our new brand payoff line 'see money differently' and our purpose to use our financial expertise to do good for individuals, families, businesses and society, we have supported consumer financial education for 135 815 individuals. This year we also proudly celebrated the 10th year as title sponsor of the Nedbank Cup, which is the only cup competition in SA that addresses football development through the inclusion of professional and amateur teams. 

Cluster financial performance

Nedbank's managed operations generated headline earnings growth of 6,7% to R6 433m (June 2016: R6 030m) and delivered an ROE of 17,6% with good earnings contributions from CIB and RBB.

		Change	Headline earnings		ROE (excluding goodwill)
		(%)	(Rm)		(%)
			Jun 2017	Jun 2016	Jun 2017	Jun 2016
CIB		6,9	3 211	3 004	20,8	21,3
RBB		7,3	2 544	2 371	18,7	18,3
Wealth		(15,5)	519	614	27,8	35,9
RoA subsidiaries		32,1	70	53	3,0	2,7
Centre		> 100,0	89	(12)
Nedbank managed operations		6,7	6 433	6 030	18,9	18,4
ETI		(92,7)	(1 162)	(603)
Nedbank Group¹		(2,9)	5 271	5 427	15,1	15,7
¹	ROE (including goodwill) 14,0% (June 2016: 14,6%).

CIB maintained an attractive ROE of above 20% and produced solid results, underpinned by improved credit losses. Although both revenue lines were affected by slowing economic activity, NIR growth was also impacted by a high base. Early repayments, coupled with slower drawdowns, resulted in weaker advances growth although the pipeline remained stable. 

RBB delivered an improved ROE and good headline earnings growth, underpinned by solid NIR growth and lower impairments and expense growth. As a result PPOP was up 3,1%, which is indicative of a growing franchise. NII benefited from improved volumes and mix changes in both advances and deposits, offset by margin compression largely due to the impact of the prime - JIBAR squeeze. NIR growth was supported by quality transactional income and card revenue.

Nedbank Wealth's decrease in headline earnings reflects a difficult first half, with good performances in Wealth Management and Asset Management, which were offset by a weaker performance in Insurance due to the impact of higher weather-related claims, an increase in lapses, as well as lower volumes. Nedbank Wealth's offshore businesses were also impacted by the strengthening of the rand.

RoA's earnings were negatively impacted by the loss from our associate ETI as a result of its fourth-quarter 2016 loss (previously announced on 18 April 2017) and its first-quarter 2017 profit (previously announced on 27 April 2017), in line with our policy of accounting for ETI earnings a quarter in arrear. The RoA subsidiaries grew headline earnings off a low base, benefiting from the first-time consolidation of Banco Único, while continued investment in the franchise and technology systems has led to strong client gains.

The increase in the Centre was largely due to fair-value gains on the underlying hedging portfolios.

Financial performance

Net interest income

NII increased by 4,0% to R13 548m (June 2016: R13 028m), ahead of average interest-earning banking asset growth of 2,4%.

NIM expansion of 6 bps to 3,58% (June 2016: 3,52% rebased) was largely driven by an endowment benefit of 9 bps and improved asset mix change of 6 bps, offset by asset pricing pressure of 5 bps and the narrowing of the prime-JIBAR spread costing 4 bps.

Impairments charge on loans and advances

Impairments decreased by 27,9% to R1 594m (June 2016: R2 211m), underpinned by a quality portfolio across all clusters. The lower CLR of 0,47% (June 2016: 0,67%) largely relates to the improvement in CIB's CLR. 

In CIB impairments are individually determined and 86% of impairments are concentrated in approximately 10 counters. During the period the positive resolution and rerating of some counters led to the release of specific and portfolio impairments. Overall the improvement in CIB's CLR was driven by recoveries from Commercial Property Finance and improved commodity prices. RBB's lower CLR represents the underlying mix effect of personal loans and home loans continuing to improve, and MFC and Card increasing in line with expectations. Furthermore, in RBB some of the additional overlays that were previously raised for event risks, such as drought in certain geographies and a possible deterioration in secured lending to higher-risk clients who also have a personal loan, were released as these risks have not materialised and the related portfolio provisions can no longer be justified. Continued prudence in provisioning and a proactive collections strategy contributed to higher levels of postwriteoff recoveries at R578m (June 2016: R564m).  

CLR (%)	Banking advances (%)	Jun 2017	Jun 2016	Dec 2016	TTC target ranges
CIB	48,7	(0,03)	0,31	0,34	0,15-0,45
RBB	44,2	1,14	1,23	1,12	1,30-1,80
Wealth	4,3	0,09	0,16	0,08	0,20-0,40
RoA	3,0	0,80	0,76	0,98	0,65-1,00
Nedbank Group		0,47	0,67	0,68	0,60-1,00

Total defaulted advances increased by 9,5% to R20 190m (June 2015: R18 437m), mostly driven by MFC and Card in RBB, partly offset by the improvement in CIB as well as the effect of SARB directive 7 and new curing definition, reported at 31 December 2016, resulting in loans previously shown as performing being reclassified as defaulted. Defaulted advances, excluding these 'performing defaulted advances' increased by 0,3% to R16 608m (June 2016: R16 556m).

The specific coverage ratio of 37,2% (June 2016: 36,2%) reflects the changing mix across all our portfolios and includes the increase in CIB's specific coverage to 24,6% (June 2016: 14,8%) along with RBB's lower specific coverage of 41,1% (June 2016: 44,6%). RBB's coverage ratio is in line with the 41,1% level reported at December 2016 and, excluding performing defaulted advances, RBB's specific coverage was maintained at 49,6% (June 2016: 49,7%).

The reduction in the portfolio coverage ratio to 0,65% (June 2016: 0,71%) mostly relates to RBB's additional overlays decreasing to R409m (June 2016: R701m). The central portfolio provision decreased from R500m at 31 December 2016 to R350m (June 2016: R350m). This provision is being maintained for, inter alia, the effect of the potential ratings downgrade of the local currency and stressed sectors such as resources, cement, construction and retailers remaining under pressure. We continue to monitor asset quality closely for any material evidence of the effect of the sovereign downgrades and the recession. 

Non-interest revenue

NIR growth of 3,3% to R11 730m (June 2016: R11 357m) reflects a resilient performance. The underlying movements relate to:

§ Commission and fee income growth of 3,1% to R8 436m (June 2016: R8 185m), as weak business and consumer confidence levels negatively affected transactional activity in CIB and led to lower volumes in RBB where an increasing number of clients also transacted within fixed-rate bundles.

§ Insurance income decreasing 15,7% to R776m (June 2016: R921m) as a result of significant weather-related claims, lower homeowner's cover and credit life volumes, and an increase in lapses.

§ Trading income increasing 13,3% to R2 006m (June 2016: R1 771m) from good performance in the markets business as volatility levels remain elevated.

§ Private-equity income reducing to R203m (June 2016: R432m) relative to the high base in the comparative period, which included positive realisations in the Commercial Property Finance portfolio.

·     

Expenses

Expense growth of 5,0% to R14 369m (June 2016: R13 686m) was below inflation and below the guidance we provided for the full 2017 year (being growth of mid-to-upper single digits), demonstrating disciplined and careful management of discretionary expenses in an environment of slowing revenue growth. Overall, growth was largely driven by our investments for transactional banking strategies of R265m and the consolidation of Banco Único of R147m, partly offset by efficiencies of R342m. The underlying movements included:

·     Staff-related costs increasing at a slower rate of 3,6%, following-

§ 8,4% growth in remuneration and other staff costs, including an average annual salary increase of 6,5% and a reduction in staff numbers since December 2016; and

§ a 7,6% decrease in short- and long-term incentives.

·     Computer-processing costs increasing 6,9% to R2 121m off a higher base in the prior year.

·     Fees and insurance costs being 12,7% higher at R1 557m, due mostly to additional regulatory-related costs.

The group's growth in expenses exceeded total revenue growth of 3,7%, resulting in a negative jaws ratio of 1,7% (June 2016: 1,7% positive) and an efficiency ratio of 56,5% (June 2016: 55,6%) for managed operations. Expense growth, excluding the RoA, was 3,4%.

Earnings from associates

The loss of R1 053m (June 2016: R431m loss) in earnings from associates was attributed largely to ETI's loss of R1 203m in the fourth quarter of 2016 (announced on 18 April 2017), partly offset by the profit of R142m reported by ETI for the first quarter of 2017 (announced on 27 April 2017), in line with our policy of accounting for ETI earnings a quarter in arrear. The effect of ETI's loss on the group's headline earnings was R1 162m, including the R101m impact of funding costs.

Accounting for this associate loss, together with Nedbank's share of ETI's other comprehensive income and Nedbank's foreign currency translation reserve, reduced the carrying value of the group's strategic investment in ETI from R4,0bn on 31 December 2016 to R3,1bn at 30 June 2017. Since the introduction of the new foreign exchange regime by the Central Bank of Nigeria on 21 April 2017, confidence has improved and the Nigerian equity market has increased by 31%. In line with this the market value of the group's investment in ETI, based on its quoted share price - albeit in illiquid markets, increased to R3,0bn on 30 June 2017 and R3,7bn on 28 July 2017. While risks remain, we believe the outlook for ETI is improving.

As required by IFRS, the R1bn impairment provision recognised at 31 December 2016 was reviewed at 30 June 2017 and it was determined that no change to the provision is required. A similar review will be performed at our 2017 financial year-end.

ETI remains a strategic investment for Nedbank, providing our clients with a pan-African transactional banking network across 39 countries and access to dealflow in Central and West Africa. We have made good progress in working with ETI's board and other institutional shareholders to strengthen their board and management. Institutional shareholder representation on ETI's board has increased and Nedbank has two appointees. Subject to regulatory approval, Brian Kennedy will join Mfundo Nkuhlu on ETI's board. Mfundo has recently been nominated to become Chair of the ETI Risk Committee. We remain supportive of ETI's endeavours of delivering an ROE in excess of its COE in due course.

Statement of financial position

Capital

The group continued to strengthen its capital position, with our CET1 ratio at 12,3% (June 2016: 11,6%) now close to the top end of our internal target range, following organic capital generation through earnings.

In the current environment of slower advances growth, capital generation has been stronger following low credit RWA growth, a decrease in trading market RWA due to foreign exchange movements and the decline in the threshold deduction given the decrease in the carrying value of ETI.

In addition to lower RWA growth, we continue to identify RWA optimisation initiatives that will support the industry implementation of the new Standardised Approach for counterparty credit risk that becomes effective later this year.

The group's tier 1 ratio improved to 13,2% (June 2016: 12,5%) and includes the issuance of R1,1bn of new-style additional tier 1 capital instruments during the last 12 months, offsetting the progressive grandfathering of perpetual preference shares as we transition towards end-state Basel III requirements. The group's total capital ratio improved to 15,7% (June 2016: 14,5%) and includes the issuance of R4,5bn of new-style tier 2 capital instruments that more than offsets the redemption of US$100m in old-style tier 2 capital instruments during the last 12 months. 

Basel III (%)	Jun    2017	Dec 2016	Jun 2016	Internal target range	Regulatory minimum2
CET1 ratio	12,3	12,1	11,6	10,5-12,5	7,25
Tier 1 ratio	13,2	13,0	12,5	> 12,0	8,75
Total capital ratio	15,7	15,3	14,5	> 14,0	10,75

(Ratios calculated include unappropriated profits.)

2	The Basel III regulatory requirements are being phased in between 2013 and 2019, and exclude any idiosyncratic or systemically important bank minimum requirements.

Funding and liquidity

Optimising our funding profile and maintaining a strong liquidity position remain priorities for the group in the current environment. 

The group's three-month average long-term funding ratio improved to 33,1% for the second quarter of 2017 (June 2016: 30,9%), supported by growth in Nedbank Retail Savings Bonds of R3,1bn to R22,3bn and the successful capital markets issuance of R3,5bn of senior unsecured debt, R2,5bn of tier 2 debt and R1,0bn of securitisation. Our funding profile benefited from our above-average market share in the medium-to-longer-term wholesale funding buckets, which reduced our LCR HQLA requirements, positively impacting the all-in cost of wholesale funding.

The group's quarterly average LCR of 104,6% (June 2016: 93,1%) exceeded the minimum regulatory requirement of 80% in 2017 and 90% from 1 January 2018. To absorb the seasonal and cyclical volatility in the LCR the group maintains appropriate operational buffers.

Nedbank Group LCR		Jun 2017	Dec 2016	Jun 2016
HQLA (Rm)		144 568	137 350	127 114
Net cash outflows (Rm)		138 260	125 692	136 469
Liquidity coverage ratio (%)3		104,6	109,3	93,1
Regulatory minimum (%)		80,0	70,0	70,0
3	Average for the quarter.

Further details on the LCR are available in the table section of the Securities Exchange News Service (SENS) announcement.

Nedbank's portfolio of LCR‑compliant HQLA increased to a quarterly average of R144,6bn (June 2016: R127,1bn). Together with our portfolio of other quick-liquidity sources, the total available sources of quick liquidity amounted to R190,0bn (June 2016: R167,7bn), representing 19,7% of total assets.

Nedbank has maintained the NSFR at above 100% on a pro forma basis and is already compliant with the minimum regulatory requirements that will be effective on 1 January 2018. The remaining key focus areas relating to the NSFR are finalising a number of minor interpretational matters and ensuring that compliance is achieved in the context of balance sheet optimisation.

Loans and advances

Loans and advances increased 2,4% to R709,9bn (June 2016: R693,3bn), driven by improved growth across the retail banking portfolios.

Loans and advances by cluster are as follows:

Rm	Change (%)	Jun 2017	Jun 2016
CIB	1,3	363 873	359 041
Banking activities	0,0	325 266	325 258
Trading activities	14,3	38 607	33 783
RBB	4,3	296 945	284 617
Wealth	(0,7)	29 464	29 677
RoA	12,0	20 382	18 199
Centre	< (100,0)	(800)	1 798
Group4	2,4	709 864	693 332

⁴ Intercompany eliminations

Advances growth in CIB was flat, with commercial-mortgage advances increasing 8,3%. Our leading market share in commercial mortgages continued to be underpinned by a strong client base and a large, secure asset pool. In contrast, term loans decreased 5,8% due to weak business confidence levels resulting in drawdowns being delayed, as well as early repayments of loans. Excluding the impact of the stronger USD/ZAR exchange rate on the foreign lending book, total CIB advances growth was 2,6%.

RBB grew advances across all key categories with MFC and Card increasing 6,6% and 6,7%, respectively, while Home Loans and Personal Loans grew at below-inflation levels. Business Banking advances growth remained flat, owing to slower drawdowns as many clients continue to manage their cashflows more carefully and delay investment decisions.

Growth in advances in the RoA Cluster was largely due to the inclusion of Banco Único, which contributed R2,5bn to the advances portfolio. On a like-for-like basis advances growth was flat due to muted economic growth in the rest of the SADC countries.

Deposits

Deposits grew 2,8% to R762,7bn (June 2016: R741,7bn), with total liabilities increasing 2,1% to R881,2bn (June 2016: R863,3bn). The loan-to-deposit ratio improved to 93,1% (June 2016: 93,5%).

Active management of our deposit and transactional banking franchise resulted in RBB deposits growing strongly by 8,8% to R279,3bn (June 2016: R256,7bn), contributing to market share gains in household deposits to 19,1% (June 2016: 18,6%) and current accounts to 19,4% (June 2016: 19,1%). Growth in current accounts of 8,3% and fixed deposits of 9,2% was driven by the success of investment products such as our Tax-free Savings Account, Green Savings Bond and 12-month Fixed Deposits, as part of our strategy to grow Basel III-friendly deposits.

Good growth was recorded in other key deposit categories, including call accounts and term deposits of 6,3% and cash management of 5,4%, while foreign currency liabilities decreased by 17,9%. This was predominantly driven by a reduction in expensive foreign currency funding used in the general rand funding pool. The balance of foreign funding is closely matched to foreign currency assets and the mismatch is negligible.

Group strategic focus

The group continued to focus on delivering on our five strategic focus areas designed to make Nedbank a more agile, competitive and digital bank.

·     Delivering innovative market-leading client experiences. Our personal loans digital sales application was rolled out during the period and we plan to launch our refreshed retail and wealth banking apps, and new Travel Card and Investments Online products, among others, in the second half of 2017. Digitally enabled and active retail clients grew strongly, driving up the value of Nedbank App Suite™ transactions 68% to R18,6bn. To date 48% of our outlets have been converted to new-image branches and our investment in distribution channels over the next four years (2017 to 2020) will result in 82% of our retail clients being exposed to the new-image branch format and self-service offerings. Nedbank's retail integrated channels won the Best Smart Branch Project in Africa award at The Asian Banker Technology Innovation Awards ceremony. Nedbank Private Wealth's mobile app has been rated Gold Standard in a McKinsey review that compared the client experience of SA bank's mobile applications for both visual presentation and functionality.

·    Growing our transactional banking franchise faster than the market. Nedbank's RBB franchise maintained a total client base of 7,5m, with 2,7m main-banked clients translating into retail transactional NIR growth of 5,2%. Our main-banked clients decreased by 0,3%, with the youth client segment declining by 6,4% as slower transactional activity caused existing clients to fall out of our main-banked definition, while the middle-market and Retail Relationship Banking client segments increased by 0,5% and 5,1%, respectively. Transactional banking progress was also reflected in market share gains in household and current-account deposit market share gains to 19,1% and 19,4% respectively. The CIB integrated model enabled deeper client penetration and increased cross-sell, generating 12 primary-bank client wins year to date and increased dealflow into the markets business, supporting 13,3% growth in trading income.

·    Being operationally excellent in all we do. Cost discipline in an environment of slower revenue growth remains an imperative, with ongoing initiatives such as reducing our core systems by 113 to 138 from 251 since inception and we are well on our way to reaching 60; and the reduction of floor space in RBB by 30 000 m² by 2020, of which 24 819 m² has been achieved since 2014. We continued to remain on track for the delivery of Old Mutual Group's target of R1,0bn pretax run rate synergies, of which approximately 30% should accrue to Nedbank by the end of 2017. Good progress was also made with our target operating model initiatives, which aims to generate R1,0bn pretax benefits for Nedbank by 2019. The majority of the cost initiatives have been identified in RBB, which will contribute approximately 40% of the benefits. RBB has established a transformation office to track and monitor the delivery of 221 initiatives across the five broad areas of credit, distribution, operational excellence, simplification and procurement. Approximately 30% of the synergies will be from cost optimisation in Shared Services through the removal of duplicative service functions, cost-efficiencies from marketing and improving the RoA operating model. The remaining 30% will be achieved through revenue opportunities from data-driven intelligence, new digital technologies and innovation integration that is being accelerated through our Digital Fast Lane initiative.

·    Managing scarce resources to optimise economic outcomes. We maintained our focus on growing activities that generate higher levels of EP, such as growing transactional deposits, with current accounts up 8,3%; increasing transactional banking activity, with commission and fees in RBB up 5,2%; and achieving earnings growth of 7,3% in RBB and 6,9% in CIB. Our selective origination of personal loans, home loans and commercial-property finance has proactively limited downside risk in this challenging operating climate, enabling a CLR of 47 bps, below the bottom end of our TTC target range. At the same time our balance sheet metrics remain strong and we continue to deliver dividend growth above the rate of HEPS growth.

·    Providing our clients with access to the best financial services network in Africa.

-     In Central and West Africa, ETI remains a strategic investment. Working together, Nedbank and ETI assisted a number of SA-based corporates with currency solutions in a challenging Nigerian market. We have strengthened our board representation and have increased our involvement in the group. In April 2017 ETI proposed a convertible-bond issue of up to US$400m at a conversion price of US$0,06, with an interest rate of 6,46% above LIBOR. US$200m of this issue was used to establish a resolution vehicle for the more effective management of capital and ringfencing of its legacy loans in Nigeria to improve transparency of the NPLs and turnaround the Nigerian business. The remaining US$200m was for the debt restructure of the maturity profile of the ETI holding company balance sheet. Nedbank did not participate in the issue as it did not meet our internal hurdle rates. However, the convertible bond is anticipated to be fully subscribed and underwritten. We are pleased that ETI reported a profit for the first quarter of 2017 and that the market value of Nedbank's investment in ETI at 30 June 2017, based on its quoted share price - albeit in illiquid markets, had increased by 24,9% since 31 December 2016 to R3,0bn, in line with our carrying value of R3,1bn. While risk remains, economic conditions in Nigeria and the outlook for ETI are improving.

-     In SADC and East Africa we are building scale and optimising costs. Our core banking system, Flexcube, has now been successfully rolled out in four countries, we launched a number of new digital products and we continue to grow our distribution footprint.

Old Mutual plc managed separation

OM plc announced on 25 May 2017 that it intends to list a new SA holding company on the JSE with a secondary listing on the LSE, which will be named Old Mutual Limited and will initially comprise Old Mutual Emerging Markets, the group's Nedbank shareholding, as well as OM plc, which will become a subsidiary of Old Mutual Limited. The managed separation is expected to be materially complete by the end of 2018 and the listing of Old Mutual Limited is anticipated to take place at the earliest opportunity in 2018, following OM plc's 2017 full-year results announcement.

The subsequent distribution of a significant proportion of the shareholding in Nedbank from Old Mutual Limited will follow in due course at an appropriate time, and in an orderly manner, as previously announced. Old Mutual Limited will retain an appropriate strategic minority shareholding in Nedbank to underpin the ongoing commercial relationship.

For Nedbank it is business as usual and OM plc's decision will have no impact on the strategy, the day-to-day management or operations, nor our staff and clients. Our engagements have been at arm's length, overseen by independent board structures. OM plc operates predominantly in the investment, savings and insurance industry, which has little overlap with banking, however we compete in the areas of wealth and asset management and personal loans. Our technology systems, brands and businesses have not been integrated.

Our collaboration with OM plc to unlock R1,0bn of synergies by the end of 2017 from the OM plc businesses in SA, remains on track and will continue to be underpinned by Old Mutual Limited's strategic shareholding of Nedbank Group. We are fully committed to working with Old Mutual Limited to deliver ongoing synergistic benefits on an arm's length basis.

Economic outlook

The International Monetary Fund currently expects global economic growth to improve to 3,5% in 2017, with advanced countries growing at 2,0% and emerging and developing economies by 4,5%. Growth in sub-Saharan Africa is expected to accelerate to 2,1% in 2017 from 1,4% in 2016.

Given SA's weaker-than-expected growth in the first half, Nedbank Group's current forecast for growth in 2017 is 0,6%, with risk to growth on the downside. Inflation is expected to be contained within SARB's inflation target range and, as a result, interest rates could decline by a further 25 bps in September, following the 25 bps rate cut in July 2017.

Much depends on how the political and policy landscapes unfold in the period to December 2017, and the implications thereof for the country's sovereign risk ratings. With sovereign risk ratings remaining unchanged, the end of the drought, a stronger world economy and marginally firmer commodity prices should support cyclical recoveries in export-orientated industries, particularly agriculture, mining and manufacturing. Corporate credit demand should benefit from recoveries in these sectors, but the risk remains that long-term investments could be delayed by continued political and policy uncertainty, low confidence and challenging operating conditions.

Households will remain vulnerable, with job losses more prevalent and lower prospects of wage growth. Household credit demand is anticipated to remain subdued as consumers postpone buying new homes and vehicles, and instead save and/or reduce debt levels.

Government spending should be kept in check by the need to reduce the budget deficit and contain the rise in government debt to avoid a further sovereign-ratings downgrade. In this regard improved management of state-owned enterprises is necessary.

Despite the many challenges faced by the SA economy, the SA banking system remains sound, liquid and well capitalised. This strength was once again acknowledged by the World Economic Forum, which ranked SA banks at second highest for soundness of banks, and by Standard & Poor's, which stated in its report published on 19 July 2017 that there are good governance and transparency across the SA financial system, that regulation is in line with international best practices, and that SA banks have top-tier banking stability and risk management. This creates low credit losses and strong profitability with low levels of external banking sector debt. The risk of short-term concentrated funding is mitigated by the closed SA rand system.

Prospects

In light of the weak economic outlook in SA we have revised our guidance on financial performance for the full year 2017 as follows:

·      Average interest-earning banking assets to grow below nominal GDP growth.

·      NIM to be slightly above the 2016 rebased level of 3,54%.

·      CLR to increase from the level of 47 bps in the first half of 2017 towards the bottom end of our target range of 60 to 100 bps.

·      NIR, excluding fair-value adjustments, to grow at mid-single digits.

·      Associate loss to be lower than the loss reported in the first half of 2017 (ETI associate income reported quarterly in arrear).

·      Expenses to increase by mid-single digit levels.

Our financial guidance is for growth in DHEPS for the full 2017 year to be positive, but less than or equal to growth in nominal GDP (consumer price index plus GDP growth). This has been revised from the guidance we provided at 28 February 2017 of growth in DHEPS for the full 2017 year to be greater than growth in nominal GDP.

The outlook for our medium-to-long-term targets in 2017 is as follows:

Metric		June 2017 performance	Full-year 2017 outlook	Medium-to-long-term targets
ROE (excluding goodwill)		15,1%	Below target	5% above COE5
Growth in DHEPS		(3,7%)	Below target	≥ consumer price index + GDP growth + 5%
CLR		0,47%	Increases towards the bottom end of target range	Between 0,6% and 1,0% of average banking advances
NIR-to-expense ratio		81,6%	Below target	> 85%
Efficiency ratio (including associate income)		59,3%	Above target	50,0-53,0%
CET1 capital adequacy ratio (Basel III)		12,3%	Within target	10,5-12,5%
Economic capital		Internal Capital Adequacy Assessment Process (ICAAP):
		A debt rating, including 10% capital buffer
Dividend cover		1,80 times	Within target range	1,75-2,25 times
5	The COE is forecast at 13,8% in 2017.

Shareholders are advised that these forecasts are based on organic earnings and our latest macroeconomic outlook, and have not been reviewed or reported on by the group's auditors.

Board and leadership changes during the period

Tom Boardman and David Adomakoh resigned from the board as independent non-executive directors with effect from the end of Nedbank Group's annual general meeting on Thursday, 18 May 2017.

Neo Dongwana and Linda Manzini were appointed as independent non-executive directors of the group with effect from 1 June 2017 and Hubert Brody with effect from 1 July 2017.

Thulani Sibeko, Group Executive of Group Marketing, Communications and Corporate Affairs, resigned with effect from 27 June 2017. We have a deep pool of talent in Nedbank and the process to identify Thulani's replacement is well underway.

Basis of preparation*

Nedbank Group Limited is a company domiciled in SA. The reviewed condensed consolidated interim financial results of the group at and for the period ended 30 June 2017 comprise the company and its subsidiaries (the 'group') and the group's interests in associates and joint arrangements.

The condensed consolidated interim financial statements comprise the condensed consolidated statement of financial position at 30 June 2017, condensed consolidated statement of comprehensive income, condensed consolidated statement of changes in equity and condensed consolidated statement of cashflows for the six months ended 30 June 2017 and selected explanatory notes, which are indicated by the symbol*.  The condensed consolidated interim financial statements have been prepared under the supervision of Raisibe Morathi CA (SA), the Chief Financial Officer.

The condensed consolidated interim financial statements are prepared in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act (Act No 71 of 2008) of South Africa. The accounting policies applied in the preparation of these condensed consolidated interim financial statements are in terms of International Financial Reporting Standards and are consistent with those of the previous annual financial statements.

IFRS 9 Financial Instruments

The group is required to adopt IFRS 9 from 1 January 2018. IFRS 9 replaces IAS 39, addressing the classification and measurement of financial assets and financial liabilities, the measurement of impairment provisions for amortised cost and fair value through other comprehensive income financial assets and introduces more of a risk-management focus to the hedge-accounting model. 

IFRS 9 is expected to impact the group's balance sheet provisions and classification of certain of the group's financial assets. The group does not expect the classification and measurement requirements to have a significant impact on the group's financial position; however, this is subject to the business models in existence at 1 January 2018. From 1 January 2018 the group will recognise fair-value gains or losses due to changes in the group's own credit risk for financial liabilities it designates as at fair value through profit or loss to be presented in other comprehensive income. However, the group does not expect to change the manner in which it calculates these fair-value gains or losses due to changes in the group's own credit risk, which it has previously disclosed in its financial statements.

The group's IFRS 9 parallel run is progressing well and we continue to expect that the transitional increase in balance sheet provisions on 1 January 2018 will not have a significant impact on our capital adequacy levels, because the increase in balance sheet provisions will be partially offset by a decrease in the excess of downturn expected loss over IAS 39 provisions regulatory deduction from CET1 capital. The group's excess of downturn expected loss over IAS 39 provisions regulatory deduction at 30 June 2017 was R1,9bn (December 2016: R1,5bn).

The group is considering its accounting policy choice as to whether to continue IAS 39 hedge accounting or to move to the new IFRS 9 hedge-accounting model. This accounting policy choice is not expected to have a significant impact on the group's existing fair-value hedges; however, the group may replace its current accounting practice to designate financial assets and financial liabilities as at fair value through profit or loss because of the accounting mismatch that arises from its economic hedging activities with IAS 39 or IFRS 9 hedge accounting.

In line with the requirements of IFRS 9, the group plans not to restate its comparative financial statements. Accordingly, the transitional increase in balance sheet provisions and classification and measurement changes will be recognised, net of related taxation, in equity at 1 January 2018. 

Events after the reporting period*

There are no material events after the reporting period to report on.

Reviewed condensed consolidated interim financial statements - independent auditors' conclusion

The condensed consolidated interim financial statements for the period ended 30 June 2017 have been reviewed by KPMG Inc and Deloitte & Touche, who expressed an unmodified review conclusion thereon.

The auditors' review report does not necessarily report on all of the information contained in this interim results announcement. Shareholders are therefore advised that, in order to obtain a full understanding of the nature of the auditors' engagement, they should obtain a copy of the auditors' report, together with the accompanying financial information, from Nedbank Group's registered office.

Forward-looking statements

This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Nedbank Group and its group companies that, by their nature, involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Factors that could cause actual results to differ materially from those in the forward-looking statements include global, national and regional political and economic conditions; levels of securities markets; interest rates; credit or other risks of lending and investment activities; as well as competitive and regulatory factors. By consequence, all forward-looking statements have not been reviewed or reported on by the group's auditors.

Interim dividend declaration

Notice is hereby given that an interim dividend of 610 cents per ordinary share has been declared, payable to shareholders for the six months ended 30 June 2017. The dividend has been declared out of income reserves.

The dividend will be subject to a dividend withholding tax rate of 20% (applicable in SA) or 122 cents per ordinary share, resulting in a net dividend of 488 cents per ordinary share, unless the shareholder is exempt from paying dividend tax or is entitled to a reduced rate in terms of an applicable double-tax agreement. The dividend withholding tax rate increased from 15% to 20% on 22 February 2017.

Nedbank Group's tax reference number is 9375/082/71/7 and the number of ordinary shares in issue at the date of declaration is 498 108 914.

In accordance with the provisions of Strate, the electronic settlement and custody system used by the JSE, the relevant dates for the dividend are as follows:

Event	Date
Last day to trade (cum dividend)	Tuesday, 5 September 2017
Shares commence trading (ex dividend)	Wednesday, 6 September 2017
Record date (date shareholders recorded in books)	Friday, 8 September 2017
Payment date	Monday, 11 September 2017

Share certificates may not be dematerialised or rematerialised between Wednesday, 6 September 2017, and Friday, 8 September 2017, both days inclusive.

On Monday, 11 September 2017, the dividend will be electronically transferred to the bank accounts of shareholders. Holders of dematerialised shares will have their accounts credited at their participant or broker on Monday, 11 September 2017.

The above dates are subject to change. Any changes will be published on SENS and in the press.

For and on behalf of the board

Vassi Naidoo	Mike Brown
Chairman	Chief Executive

2 August 2017

Registered office

Nedbank Group Limited, Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, 2196.

PO Box 1144, Johannesburg, 2000.

Transfer secretaries in SA

Computershare Investor Services Proprietary Limited 15 Biermann Avenue, Rosebank, Johannesburg, 2196, SA.

PO Box 61051, Marshalltown, 2107, SA.

Transfer secretaries in Namibia

Transfer Secretaries (Proprietary) Limited, Robert Mugabe Avenue No 4, Windhoek, Namibia.

PO Box 2401, Windhoek, Namibia.

Directors

V Naidoo (Chairman), MWT Brown** (Chief Executive), HR Brody, BA Dames, NP Dongwana, ID Gladman (British), JB Hemphill, EM Kruger, RAG Leith, PM Makwana, L Manzini, Dr MA Matooane, NP Mnxasana, RK Morathi** (Chief Financial Officer), JK Netshitenzhe, MC Nkuhlu** (Chief Operating Officer), S Subramoney, MI Wyman*** (British).

** Executive *** Lead independent director

Company Secretary:	TSB Jali
Reg no:	1966/010630/06
JSE share code:	NED
NSX share code:	NBK
ISIN:	ZAE000004875
Sponsors in SA:	Merrill Lynch SA Proprietary Limited
	Nedbank CIB
Sponsor in Namibia:	Old Mutual Investment Services (Namibia) (Proprietary) Limited

This announcement is available on the group's website at nedbankgroup.co.za, together with the following additional information:

●    Detailed financial information in PDF.

●    Financial results presentation to analysts.

●    Link to a webcast of the presentation to analysts.

For further information kindly contact Nedbank Group Investor Relations at [e-mail]."

ENDS

Enquiries

External communications

Patrick Bowes                                                                      [phone]

Investor relations

Dominic Lagan                                                                    [phone]

Deward Serfontein (Fluent Investor Relations)             [phone]

Media

William Baldwin-Charles                                                   [phone]

                                                                                                [phone]

Notes to Editors

Old Mutual

Old Mutual provides investment, savings, insurance and banking services to 19.4 million customers in Africa, the Americas, Asia and Europe. Originating in South Africa in 1845, Old Mutual has been listed on the London and Johannesburg Stock Exchanges, among others, since 1999.

Old Mutual is executing its strategy of managed separation, which will entail separating its four businesses into standalone entities. The four businesses are:

Old Mutual Emerging Markets: an attractive business with a dominant position in South Africa, well-placed to capitalise on sub-Saharan African growth as a diversified financial services provider with strong operations in key East and West African markets.

Nedbank: one of South Africa's four largest banks with very strong corporate, commercial and property finance franchises, and a growth opportunity in the retail market, as well as pan-African optionality through its stake in Ecobank Transnational Inc (ETI).

Old Mutual Wealth: a leading, integrated wealth management business, focused on the UK upper and middle market, with strong prospects in a rapidly growing £3 trillion market.

OM Asset Management: an institutionally focussed, multi-boutique asset management business, delivering strong, diversified growth in attractive asset classes through organic initiatives and acquisitions.

For the year ended 31 December 2016, Old Mutual reported an adjusted operating profit before tax of £1.7 billion and had £395 billion of funds under management. For further information on Old Mutual plc and the underlying businesses, please visit the corporate website at www.oldmutualplc.com 

 

END

 

 

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