- South Africa's Macro Risks and Zimbabwe's Growth Potential
- Nedbank Group's Q1 2023 shows double-digit growth but risks are rising.
- Balancing opportunity with risks in high-growth markets is crucial for Nedbank's success.
South Africa’s Nedbank Group released a positive trading update for the first four months of 2023, showing double-digit growth in headline earnings and net interest income. However, the bank warned that risks are rising from a deteriorating macroeconomic environment, with higher inflation and interest rates squeezing consumers.
Nedbank, which has operations across South Africa and the rest of Africa, said headline earnings grew by mid-teens percent in the four months to April, driven by strong net interest income and non-interest revenue growth. Net interest income was up over 15% as the bank benefited from higher interest rates and balance sheet growth.
However, the bank’s credit loss ratio rose above its target range, reflecting “the impact of higher-than-expected interest rate increases, higher levels of inflation and higher levels of loadshedding on consumers.” The bad debt charges were most notable in Nedbank’s retail and business banking division, where impairments rose and stage 3 loans increased across the portfolio.
Nedbank warned that risks to its full-year outlook are rising from South Africa’s weakening economy, where growth has been hit by power cuts, weak global demand, and rising rates. The bank’s economic unit cut its GDP forecast for 2023 to 0.2% from 0.7% and raised its inflation view to 6% from 5.5%. In response, the South African Reserve Bank has hiked rates, with more increases possible.
For Nedbank, the higher rates boosted net interest income but are also squeezing consumers, driving up impairments. While endowment income benefits currently exceed the rise in bad debts, “this benefit is narrowing and is likely to reverse with further interest rate increases,” the bank said.
The update suggests Nedbank remains on track to deliver on its guidance for mid-single-digit revenue and cost growth this year. However, downside risks are rising, especially on the credit loss and consumer banking sides. For investors, the update highlights the sensitivity of Nedbank and South African banks to the domestic economy and rates. Macro risks are looming, even as Nedbank benefits in the short term from higher rates. Overall, the trading update points to a solid start for Nedbank this year but a potentially bumpier road ahead.
Zimbabwe’s Nedbank After Tax profit ($m)
source: Equity Axis/ Nedbank Zim Results
Nedbank’s Zimbabwean operations also showed strong growth, though results were distorted by hyperinflation and currency depreciation. For the 12 months to December 2022, Nedbank Zimbabwe’s total inflation-adjusted income grew 163% to ZWL$48 billion, aided by interest and non-interest income gains. However, 57% of revenue came from unrealized foreign exchange gains due to an 85% drop in the Zimbabwean dollar.
Interest income rose 36% to ZWL$6.1 billion, driven mainly by income from government securities. Loan income was focused on large companies and businesses, though demand for both local and foreign loans has been rising with lower interest rates spurring uptake of Zimbabwean dollar loans.
While the results point to resilience, Zimbabwe’s challenging environment and currency volatility pose risks. For Nedbank Group, its Zimbabwe unit highlights both the opportunity for growth in the rest of Africa as well as the risks from macroeconomic troubles, currency swings, and inflation. The Zimbabwe results, like the South African update, show Nedbank benefitting currently from higher rates and balance sheet growth but facing potential headwinds from a difficult operating environment.
The outlook for Zimbabwe points to both opportunities and risks for Nedbank Group. In Zimbabwe, the banking sector is becoming more digital, nimble, and customer-focused. Nedbank Zimbabwe is enhancing its digital offering, with growing use of its digital platforms. However, competition in non-funded businesses is rising, and AI could disrupt the sector.
For Nedbank Group, Zimbabwe highlights the potential for growth in the rest of Africa. Leveraging its parent, Nedbank Zimbabwe can gain an edge, though solutions need to suit local conditions. After raising capital and retaining earnings, Nedbank Zimbabwe has gained strength, enabling it to underwrite more business, utilize assets fully, and achieve higher returns versus peers.
However, risks remain from Zimbabwe’s volatile environment. While Nedbank Zimbabwe posted strong results, hyperinflation and currency swings pose challenges to growth. For the broader group, macro troubles in Zimbabwe threaten to offset gains from higher rates and digital progress.
Overall, Zimbabwe gives Nedbank Group exposure to Africa’s growth potential but also its macro vulnerabilities. With nimble digital moves and parent support, Nedbank’s Zimbabwe unit is poised to gain share in a fast-changing market. Yet wider economic woes could curb progress and weigh on the group. The outlook highlights the promise and perils for banks in volatile yet compelling high-growth markets like Zimbabwe. For Nedbank, success in Zimbabwe may rest on balancing opportunity with risks in respective frontier economies.
-Equity Axis News