Analyst recommendation

                                                                                                           As at 14 April 2025

Executive Summary

On 4 March 2025, Nedbank released its FY24 results which were characterised by:
1. Headline earnings increased 8% driven by non-interest revenue growth and lower impairments.
2. Net interest income increased 1% driven by average interest-earning banking assets increasing 5%. The net interest margin decreased from 421 basis points to 405 basis points driven by competition for quality assets, squeeze in deposit spreads and a negative endowment mix impact.
3. Non-interest revenue increased by 10% driven by net commission and fee income increasing by 10% and the prior year containing a non-repeatable R1 billion net monetary loss relating to Zimbabwe operations.
4. Expenses increased by 8%, primarily due to staff costs increasing 7%, driven by an average annual increase of 6% and more expensive mix of employees.
5. Impairments decreased by 17%, driven by an improving macroeconomic environment, the resolution of large counters in the wholesale portfolio, credit policy intervention and collections and origination efforts.
6. 2025 financial year management guidance:
a. Net interest income to grow mid-single digits because of strong loan growth in CIB offsetting net interest margin compression relating to wholesale assets growing faster than retail, pricing impact from competition for quality assets and lower interest rates.
b. Non-interest revenue to grow upper single digits due to cross-sell, client gains and ongoing deal flow in CIB.
c. Credit loss ratio to be around the midpoint of the through-the-cycle range of 60 bps to 100 bps.
d. Expenses to grow upper single digits which should result in the cost-to-income ratio increasing.
e. Diluted headline earnings per share to grow mid-single digits.
We maintained our intrinsic value of R315. Our recommendation was changed from a hold to a buy due to a lower share price.

Analyst thesis

• The main investment case for Nedbank is its price trading at lower valuation multiples and the upside to our intrinsic value. We believe the SA banks catalysts (including Nedbank) to improve their price to earnings are South Africa macro related. Improved energy supply, infrastructure, a more accountable government through the Government of National Unity and an improved financial position of the consumer from lower interest rates.
However, we acknowledge this might play out slowly as lower interest rates have a lag effect, infrastructure requires planning and time to develop, business confidence needs to build momentum, and statistical metrics are reported in a delay while some strain in the GNU also places this view at risk.
• We expect Nedbank to have obtained most of the endowment benefit from rising interest rates because of not following an interest rate hedging approach. Interest income growth is expected due to loan growth but will be lower as interest rates decrease.
• Nedbank has historically shown lower growth and profitability compared to peers. Management aims to improve profitability with a medium-term target of >17% and long-term target of >18% return on equity. However, we don’t see what competitive edge it has to peers except coming from a lower base.

Valuation

Table 3: Valuation

 

Source: FactSet