Nedcor`s R3.7 billion write down on Dimension Data`s share price tail-spin caused the bank`s headline earnings to fall below the 25% growth rate for the first time in four years.
The absence of equity-accounted income from Dimension Data and the start-up costs of Nedcor`s strategic banking alliances resulted in about 6% being wiped off earnings per share growth.
In a well thought out interim report presented by management today, Nedcor showed headline earnings per share had climbed by the expected 20% to 619 cents for the period ended 30 June. Headline earnings increased by 21% to R1.485 billion, advances grew by 29% to R135.390 billion and total assets increased by 31% to R173 billion compared with the same period last year.
Market reaction to the results was muted as they were in-line with forecasts. News services Reuters and I-Net Bridge both reported analysts` as predicting 20% growth.
Nedcor chairman Chris Liebenberg opened proceedings with a list of reasons why growth had slowed. These included the soggy economy, which has resulted in a more conservative risk strategy by investors in large projects; the derating of the stock markets; the declining interest rate cycle; the rise in emerging market risk profiles and the increasing crime rate with bank robberies now said to be averaging one a day.
Furthermore, Nedcor had been hit by the downgrading of its Dimension Data stake, with the bank now facing a possible loss on its holding from when it first invested. The interim report gives a post-balance-sheet market value of R1.6 billion at 23 July for Nedcor`s Dimension Data holdings.
Today Dimension Data closed 50 cents down at R14.50 after touching a new low of R14.35 earlier.
The Dimension Data share price plunged after the release of its trading statement on 3 July warning of difficult trading conditions.
Nedcor has an 8% holding in Dimension Data, giving it a primary capital ratio of 11.5%, which the bank considered excessive. Plans were put in place to buy back some of the shares to reduce the capital ratio to around 9%. However, the fall in the Dimension data share price has put paid to these plans for the time being.
Liebenberg says: "We will sell that holding in Dimension Data some time in the future, but timing will be critical."
Nedcor today withdrew a cautionary notice it had issued on 22 June that related to its proposed sale of Dimension Data shares.
The investment incentive bonus provision of R195 million that was created in December and subsequently scrapped has been reversed and set off against the investment write-down.
Liebenberg says: "We regret the incident completely and have appointed consultants to help us with the possibility of structuring a new one. We now consider it to be a closed book."
On the operational side, Nedcor has managed to become the second-largest bank in the country from the third position place it held a year ago.
Reserve Bank figures for May show Nedcor grew its market shares by 2.8% in the six-month period to 18.6%.
Return on assets declined from 1.86% to 1.81% in the period to end June. Return on equity increased from 24.2% to 24.5%, excluding the effect on equity of the Dimension Data investment revaluation.
CEO Richard Laubscher says growth was achieved organically and by acquisition. "As a result of these acquisitions and organic growth, which on its own led to an increase in market share, the group achieved total asset growth of 31% over the last 12 months to become the second-largest group by banking assets in SA."
The thee main acquisitions were FBC Fidelity Bank, which merged with The Peoples Bank Division to become the renamed Peoples Bank; a 50.1% stake in Imperial Bank and a 74% stake in Fleming Offshore Banking on the Isle of Man, which has been renamed Gerrard Bank.
Laubscher says Nedcor has adopted a cautious approach to offshore ventures, preferring to go into a deal with partners.
He says Nedcor was finding a profitable and cheap entry route into non-banking financial markets through its joint ventures with grocery retailer Pick 'n Pay (the Go Banking brand) and with furniture retailer JD Group.
"A lot of financial activity takes place outside the traditional financial sector now and we are finding a way to tape the watering holes," he says.
Information technology remains a core pillar of Nedcor`s strategy with its partners Aplitec, Nihilent Technologies and IQ Business Group adding further value to the bank`s service and product delivery.
"We are confident that, through our investments in Dimension Data, Internet Solution and Miraculum, Nedcor is well-positioned to take advantage of unfolding e-commerce opportunities," Laubscher says.
Going forward, Nedcor expects trading conditions to be difficult and margins to remain under pressure.
"While lower interest rates are good for improving bad debt, they do negatively affect the endowment bottom line," Liebenberg says.
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