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South Africa’s economy held up relatively well when global economic conditions deteriorated significantly in the first half of 2022. Russia’s invasion of Ukraine, tight Chinese blockades and supply chain restrictions have led to a surge in global inflationary pressures, particularly in energy and food prices, and a faster-than-expected tightening of monetary policy. These conditions have weakened global demand and raised fears of a recession in both developed and developing countries.
At the start of the year, South Africa’s (SA) economy continued to gain momentum thanks to favorable terms of trade, leading to strong seasonally adjusted gross domestic product (GDP) growth of 1.9% quarter-on-quarter in the first quarter of 2022. However, the second quarter was much more challenging as local economic activity was disrupted by floods in KwaZulu-Natal, severe load-shedding, lower global demand, escalating domestic inflation and faster-than-expected interest rate rises. We currently expect South Africa’s real GDP to contract by 1.2% qoq in Q2 2022. Electricity is a must-constraint for economic growth and job creation, and the Energy Action Plan is urgently needed.
Nedbank Group’s financial performance for the first half of 2022 reflects excellent performance across all key metrics in a challenging and challenging external environment. We delivered strong revenue growth of 11%, a credit loss ratio (CLR) that remained flat year-on-year (y/y) at 85 baht per second, and good cost management. As a result, total profit (HE) increased by 27% to 6.7 billion rand. The group’s return on equity (ROE) increased to 13.6% (June 2021: 11.7%), and all our business clusters achieved an ROE above the group’s cost of equity (COE). Group ROE was diluted by an average of 11 billion rand of excess Tier 1 capital held centrally as we remain appropriately conservative in an uncertain external environment. We retain excess capital primarily for higher levels of future growth and dividend payments. Capital and liquidity ratios continued to strengthen, reflected in our Common Equity Tier 1 (CET1) ratio of 13.5% (Dec 2021: 12.8%), Tier 1 capital ratio of 15.1% (Dec 2021: 14.3%). %), an average liquidity coverage ratio (LCR) in the second quarter of 144% (December 2021: 128%) and a net stable funding ratio (NSFR) of 120% (December 2021: 116%). These capital and liquidity results support a strong interim dividend of 783 cents per share, an 81% increase over 2019’s pre-COVID-19 interim dividend.
Over the past six months, we have continued to make significant progress on our strategic drivers of growth, performance and risk and capital management. Growth trends in net interest income (NII) (+9%), non-interest income (NIR) (+13%) and gross advances (+7%) improved from the lows of the Covid-19 pandemic, supported by major bank client success in our business – clusters and strong growth of digital activity. The level of performance has improved, as reflected by a reduction in our cost/income ratio to 56.2% (from 58.5% in 1H21) and a 17% increase in pre-provision operating profit (PPOP). Key risk and capital management metrics remain solid and all improved to levels higher than 2019.
Our Managed Evolution (ME) technology strategy has reached 89% completion of the IT build, enabling continued double-digit digital growth. Customer satisfaction scores are around the highest in the South African banking peer group, cross-selling levels are growing and cumulative TOM 2.0 cost savings of R1.2 billion are ahead of target. Finally, as we continue to generate positive impact, we remain committed to our market-leading energy policy, as evidenced by our 28 billion rand of renewable energy credits, strong credit pipelines linked to the Sustainable Development Goals (SDGs) and maintaining our top level of environmental protection, social ratings and governance ratings (ESG).
Looking ahead, we now expect SA GDP to grow by 1.8% in 2022; interest rates will increase by another 75 bps, bringing the repo rate to 6.25%; and the prime lending rate to 9.75% by the end of the year. Inflation is expected to peak in Q3 at around 7.8% and average 6.8% in 2022. Continued strong strategic and operational performance, as evidenced by the first half of 2022, should support strong earnings growth for the full year 2022 and an increase in return on capital compared to last year. We remain on track to achieve our medium-term goals*, exceeding 2019 diluted earnings per share (DHEPS) of 2,565 cents by the end of 2022 (a year earlier than planned) and achieving return on equity in excess of 2019 ROE . level of 15%, a cost-to-income ratio below 54% and a No. 1 Net Promoter Score (NPS) ranking among South African banks by the end of 2023.
We thank all of our employees for their commitment to serving our customers and the economies in which we operate in line with our goal of using our financial expertise for good. As we continue to gradually reintegrate an increasing number of staff into the office, we look forward to building on our strong Nedbank culture and re-establishing a secure connection as one Nedbank.
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