Full Year 2019 Nedbank Group Ltd Earnings Call
Sandown Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Nedbank Group Ltd earnings conference call or presentation Tuesday, March 3, 2020 at 2:00:00pm GMT
TEXT version of Transcript
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Corporate Participants
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* Anél Bosman;Managing Executive of CIB
* Brian Kennedy
Nedbank Group Limited – Group Managing Executive of Nedbank Corporate & Investment Banking
* Ciko Thomas;Group Managing Executive of Retail and Business Banking
* Iolanda Ruggiero;Managing Executive of Nedbank Wealth
* Mfundo Clement Nkuhlu
Nedbank Group Limited – COO & Executive Director
* Michael Davis
Nedbank Corporate and Investment Banking – Group Executive of Balance Sheet Management
* Michael William Thomas Brown
Nedbank Group Limited – Chief Executive & Executive Director
* Raisibe Kgomaraga Morathi
Nedbank Group Limited – CFO & Executive Director
* Terence Sibiya;Managing Executive:Nedbank Africa Regions
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Conference Call Participants
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* Bankole Ubogu
BofA Merrill Lynch, Research Division – VP & Analyst
* Christopher Turner
Investec Bank Limited (SA), Research Division – Research Analyst
* Harry Botha
Avior Capital Markets (Pty) Ltd. – Banks Analyst
* James Starke
SBG Securities (Proprietary) Limited, Research Division – Analyst
* Mike Brown;Investment Analysts Society;Board Member
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Presentation
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Mike Brown;Investment Analysts Society;Board Member, [1]
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All right. Good evening, ladies and gentlemen. We’re having a bit of a countdown because with presentations these days, there’s webcasts, there’s linkages, there’s all those sorts of things. But on behalf of the Investment Analysts Society, I’d like to thank the Nedbank Group Limited for this presentation of the annual results. I see they have done it already to the president behind me, but it might have been on another occasion because they’re all very happy, So I’m not too sure. Okay. So this is the results for the year-end December 2019. This is a bank being listed now since for nearly — for more than 50 years, and it’s been in operation for 130-plus years. These conditions are probably as tough in many ways as the banks faced in its history. So we’d like to hear about that. And on behalf of the Society, then I’d like just to thank Nedbank for hosting us and to invite the CEO, Mike Brown, who I see is been on the Board, CFO since 2004 and the Chief Executive since March 2010. So we have the most experienced, and I think 1 of the most respected people in banking to come and host the presentation. Mike will introduce the rest of his team as they go through. Thanks very much.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [2]
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Right. I think you just said those nice things because his name is also Mike Brown. But just in case you’re wondering, that is actually the launch of Nedbank’s participation in the Youth Employment Scheme. So why those kids are looking so happy is it’s the first time they’ve had the opportunity to have a job and earn a real income.
Okay. So good afternoon to everybody here at The Boardman Auditorium in 135 Rivonia Road, also to those people who are watching over the web or on the phone lines. As usual, I’m going to start with a high-level overview of the environments progress on our strategy and our 2019 results. Our Chief Financial Officer, Raisibe Morathi will then stand up and take you through the detail of those results and the underlying drivers, and then each of our custom managing executives will report on their results and their outlook for their respective clusters. I think also particularly pleased this year to welcome here, Anél Bosman who’s is the new Managing Executive of our CIB business, who will be taking over from Brian Kennedy at the end of March, and she will do the prospects section for CIB as well as Terence Sabia, who currently runs our Nedbank Africa regions, and he’s also joining group ExCo from the 1st of March, and he will similarly do the prospects section for Nedbank Africa regions. I’ll then come back at the end to reflect on our current expectations for 2020 in a global and domestic environment that we expect to remain difficult and what this means for our medium- to long-term financial targets, and then there’ll be some time for questions at the end.
So looking at our performance for 2020, I think we made good strategic and operational progress and produced solid underlying growth in key aspects of the franchise, but our financial performance was below our expectations.
Starting on the strategic and operational front, we continued with our focus on technology investments and digital delivery. Collectively, we call those the managed evolution as a means of enhancing client experiences, growing and protecting revenues as well as improving efficiencies. We’re building a bank with the capability of leading in digital financial services with customer experience at the heart of our strategy. I’ll provide a little bit more color on that in the next few slides. Particularly on the delivery of our new retail digital onboarding platform, which was a huge operational focus for us, in particular, in the second half of this year as well as client satisfaction outcomes and progress on existing efficiency initiatives as well as some additional efficiency initiatives that we will be able to undertake as our technology platform rolls out.
Advances, assets under management and deposit growth was pleasing, showing the underlying strength of the franchise.
In this difficult environment for both revenue growth and impairments, costs, we believe, were well controlled at only 2% up. Pre-provisioning operating profit was up 3% and our optimization efforts on costs, together with a 25% reduction in variable pay, which we think is appropriate in the tough times that we are in, assisted us to have positive operating leverage or JAWS, and we continued as a result to improve our cost-to-income ratio now at 56.5%. Executive salary increases in 2020 have been agreed at 0%, again underpinning our ongoing focus on cost control in a tough economic environment. Our common equity Tier 1 or CET1 ratio, the regulatory capital ratio, ended the year at 11.5%, which was an improvement from the 11.3% in June and supported a total dividend for the year at ZAR 14.15 which was flat on the prior year.
Reflecting on our financial performance at a high level, headline earnings was down 7%. The impact of the more difficult macroeconomic environment was greater than we had expected it to be and was evident in muted client activity across all of our clusters with the slowdown increasing in the second half.
Impairments increased off a low base to slightly above the midpoint of our target range, showing cyclical increases in retail and business banking, and increased impairments on a few existing CIB watchlist clients in the fourth quarter as well as an increase in our central provision in the fourth quarter.
In addition to that, a few large items impacted the results, including accounting in December for hyperinflation and impairing legacy intercompany assets in Zimbabwe that are registered under the so-called RBZ legacy asset regime. We also had negative private equity revaluations as the impact of underlying deterioration in performance in investee companies coupled with lower multiples or higher discount rates resulted in a decline in private equity income, as well as the cost of accelerating an option to increase our share in Banco Unico from just over 50% to just over 87%.
Raisibe will unpack each 1 of those in detail a little bit more later, together with the exact headline earnings impact of them.
So turning now to the overall environments.
I think this is a slide you should be familiar with. Highlighting our view of the stages of the South African turnaround story.
Unfortunately, we’re still very much on the left-hand side of this story. Progress has been slow and we are at the early stages of an institutional turnaround. Progress on structural reform and policy certainty remains far too slow, and I’ll touch on this on the next slide. And as a result of that, confidence levels are low, investment levels are low, increase of growth is still elusive and unemployment levels continue to rise. So in this context, South African economic growth in 2019 was much lower than we had expected it to be. If you see on the slide here, when we started the year, our forecast for growth in 2019 was for it to improve off the low base of 2018. You may recall that was 0.8% to finish the year at 1.3%. During the year, we consistently revised those forecasts down, as you can see on the slide as frequent power outages and ongoing policy uncertainty impacted confidence, investment and therefore, GDP growth, which in this slide, we forecast to end the year at 0.3%, and I’m sure all of you saw this morning came out slightly lower than that at 0.2%. We are currently in the longest economic downswing in South Africa since economic records began in 1945, which is an economic and jobs crisis that requires urgent action.
The elephant in the room remains the unsustainable operational and financial position at Eskom that needs to be urgently resolved, failing which we will be stuck in a 1% economy. And as a result, unemployment levels will not improve. In addition, our unsustainable fiscal position and the increasing risk of a Moody’s downgrade, along with policy uncertainty, and in particular, the gap between policy pronouncements and policy in an underlying legislative enablement is likely to continue to impact negatively on GDP growth in South Africa, with our forecasts for 2020 at 0.7% and 2021 at 1.1%, respectively.
Looking at this from a client point of view. On the wholesale side, the key issues remain a lack of business confidence with the latest levels around 26, which is a 7-year low.
And as a result of that, we see muted investment activity with the generally difficult macroeconomic environments playing out in company earnings that are under pressure across most sectors in South Africa as well as insolvencies that are increasing. Most of our corporate clients are currently focused on conserving capital cost reduction and efficiencies in a very difficult environment.
Turning now to a retail client perspective. We’ve seen a slowdown in disposable income growth, as evidenced on this slide, which simply means less money to spend and increased pressure on loan repayments. The drivers of this slowdown include slow and nominal wage growth, the impact of the tax increases in 2019 as well as weaker spending and high levels of unemployment. On the more positive side, household debt levels have remained relatively stable at around 73%, and lower interest rates have been beneficial at the margin to some consumers, although not big enough to have any impact on the overall economy at large. On the strategy front, again this should be a familiar slide that we refer to as the spine of our strategy.
Our central focus is to create great client experiences, and as a result, grow our client base faster than the market in key value-creating areas with a key focus on our transactional and related deposit franchises. We aim to enable this through our investments in technology as well as the changes that we are making to our people practices and to our brand. And again, given its strategic importance, I’m going to touch a little bit more on our technology journey in some of the next few slides. A key benefit of this strategy is the efficiencies that we are able to achieve as the technology rollout accelerates. Investors will be familiar with our target operating model or TOM. We’ve got TOM 1.0 and that is currently delivering in excess of the expected efficiencies in the organization, at a run rate at the end of 2019 of some ZAR 1.1 billion, ahead of our target of ZAR 1 billion, and we’re on track to exceed our ZAR 1.2 billion target that we had set for the end of 2020.
As our IT rollout continues and as planned adoption of more digital interactions with us increases, we are currently in the process of strategizing around what we call on this slide, TOM 2.0 as we plan to revise and optimize our approach to branch infrastructure, to move to a more client-centric model in retail and business banking and optimize shared services across the group. The targets for this initiative that will replace TOM 1.0 that ends at the end of 2020 will be announced to the market alongside our 2020 year-end results presentation.
I think this focus on ongoing efficiencies will become increasingly important in a difficult macro environment. And together, these strategic enablers help us to deliver on our medium- to long-term financial targets.
So looking quickly at the progress on our take to Managed Evolution strategy that underpins our digital ambitions as well as our ability to harness the efficiencies of TOM 1.0 and TOM 2.0. Just a quick reminder here, we started out in 2010 when we embarked on a best-of-breed journey and strategy to digitize our IT landscape. And in so doing to rationalize, simplify and standardize our core systems from what was then around about 2 50 to somewhere between 60 and 75 overtime by 2020. We’ve made good progress on this, and we expect to be materially complete by the end of this year.
Again, this is the third time we show you exactly this same slide, which is tracking our progress on completion of the managed evolution strategy, and we’ll keep showing this until we are materially complete. In the bottom left-hand corner, you can see total spend to date is now ZAR 9.6 billion, up from ZAR 7.7 billion of — in December 2018, and that represents a 70% completion rate, up from 60% the year before. And we aim to be around about 80% complete by the end of this year with in excess of 90% completion of what we call the foundational systems. Annual cash flow spend on technology peaked in 2017 and is expected to reduce more strongly from 2021. We made good progress across all of these programs during 2019 with the implementation of our retail onboarding system that we call Eclipse a key highlight and more of this on the next few slides.
So in the first half, if you look at the top of this slide, we began to accelerate the rollout of Eclipse, a simplified end-to-end client onboarding system for retail customers, as part of our overall plan to digitize our top 10 products and top 180 services.
It really is a material way change to the way that we onboard and sell products to customers. Moving from an inefficient paper-based process to onboarding clients once for life, fully automated across front, middle and back offices, resulting in much quicker onboarding, much higher prospects of cross-sell, digital FICA as well as a significantly lower cost to onboard customers. This was a huge technology, operational and training focus for us in the second half of this year as we launched this capability to individuals, more than 3,400 individuals in our branches across 589 branches. And then in the second half, also on to the app and onto the web. At the same time, as we rolled out the onboarding capability, we rolled out the ability to digitally sell transactional account and a personal loan, and we supplemented that at the end of the year with pilots in cards, investments, and overdrafts.
After this rollout, we had some initial stability challenges, but managed to resolve those quite well and actually had a very good outcome over Black Friday and over the Christmas period across our new Eclipse systems.
Slightly further to the right, you’ll see juristic onboarding, which is rolling this out to small and large corporates. Currently, this is in pilot in our retail and business banking division, and we expect during 2020 to roll this out to our CIB business. The initial feedback on Eclipse in a relatively short time frame has been pleasing. Client feedback has been really good, and we’re seeing the benefits of significantly reduced account opening times at around 10 to 20 minutes now for a transactional account and a personal loan. And under half of that for somebody who is an existing customer, opening a transactional personal account, either on the app or on the web. The data on the right represents the progressive sales outcomes in the last 3 quarters of 2019 as we matured our processes and operationalized our digital channels.
Towards the end of the year, if you look at the very 2 far right-hand manhattans, you’ll see 75% of all personal loan sales across the bank were done on either Eclipse or the app and 79% of all transactional sales across the bank done on either Eclipse or the app.
From a financial point of view, this is our slide on delivering value to shareholders, the key drivers of value creation in a bank. Our performance across all of these in 2019 was below our expectations. Net asset value grew by 4%, and our return on equity declined on the back of the fall in headline earnings that we saw earlier, but remains above our cost of equity. Despite the reduction in earnings, our solid capital position enabled us to declare a final dividend of ZAR 6.95, bringing the full year dividend to ZAR 14.15, flat on the prior year.
Finally, for me, a slide on the important role that Nedbank plays in delivering holistically to stakeholders and evidencing our purpose statement. In the current South African environment, this view of purpose and sustainability is vital as the social license to operate. It’s also well aligned to the sustainable capital team that was disposed by global CEOs in Davos this year as well as the social compacting theme that was evident in the state of the nation addresses. Lots of data on this slide, but just a couple of aspects.
Starting in the top left-hand corner, on the staff front, we continue to invest in our staff as we prepare our business for a digital and technology journey. As a responsible employer, we worked very hard to minimize retrenchments in an environment where our overall headcount reduction of permanent staff in 2019 was 1,664. This was mostly achieved through natural attrition, with only 158 retrenchments. Pleasingly, our latest staff survey highlighted that our engagement scores were strong and the demographics of our workforce continues to transform.
On the client front, we did remain firmly open for business with ZAR 208 billion of new loan payouts, which were up 15% on the prior period, and we continue to support our customer base, in particular, in more digital and self-service ways as well as through various innovations, including launching South Africa’s first 0 fee monthly account. On the top right, after our share price outperformance in 2018, we were disappointed that our share price underperformed if any in 2019.
Dividends paid to shareholders remain attractive.
We proactively engaged with shareholders, and we’re pleased with our AGM voting outcomes and ongoing engagements with regulators. ESG matters certainly remain top of mind for shareholders, and we continue to play a leading role in environmental matters, and plan to proactively table resolutions on climate change at our upcoming AGM.
We remain focused on serving and supporting communities in which we operate and in addition, as you saw from the slide right in the beginning, have been a material contributor to the Youth Employment Service. And we’re also pleased to retain our Level 1 BBBEE status in 2019.
I’ll now hand over to Raisibe to take you through the drivers of the financial results.
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Raisibe Kgomaraga Morathi, Nedbank Group Limited – CFO & Executive Director [3]
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Good afternoon, ladies and gentlemen, and thank you, Mike. Our financial performance reflects the impact of higher impairments and various large items. A number of these items are declared at the end of the year impacting our pre-close guidance.
Our headline earnings decreased 7%, and most of the key financial metrics were softer, deriving from the earnings pressure. Diluted headline earnings per share was down 6%, benefiting from buying back approximately 7 million shares post the odd-lot offer on the back of managed separation. Our economic profit was impacted by the reduction in earnings, whilst ROE and ROE excluding goodwill declined to 15% and 16%, respectively. Pleasingly, our pre-provisional operating profit increased 3%, and our cost-to-income ratio improved to 56.5%. As expected, our net interest margin decreased, whilst our credit loss ratio was higher than expected, around the midpoint of our through the cycle target range.
I will unpack this in a bit more details later.
Pleasingly, our CET1 ratio improved from the H1 level to 11.5%, although down slightly on 2018.
This waterfall graph highlights the key drivers of headline earnings. Our revenue growth was muted, with NII increasing ahead of inflation, but NIR was impacted by inter-alia private equity. Cost growth was well contained.
Impairments increased 66% of a low base, including some lumpy contracts in CIB. Strong growth in associated income was underpinned by ETI’s base in 2018, although the quarter 3 in 2019 was lower than our expectation. Included for the first time in this result is the impact of hyperinflation accounting for operations in Zimbabwe. The impact was a net monetary loss of just under ZAR 300 million recorded as a new line item on the income statement similar to industry practice. The headline earnings loss was ZAR 142 million.
And again, I will unpack some of the key drivers later. Various large transactions impacted the group’s results.
In our first half, we noted the residual PRMA benefit, one-offs in Africa regions and the initial impact of the Youth Employment Service. In the second half, Youth Employment Service run rated for the full year, and we accounted for Zimbabwe hyperinflation and legacy debt at ZAR 186 million and accounting for exercising the Banco Unico pool option at a cost of ZAR 140 million. Private equity revaluations had a larger-than-expected impact from lower valuations as well as strong base in 2018.
And here, we show the decline from 2 largest negative private equity revaluations in CIB. Similarly, impairments were higher than expected, and we show the impact of 3 of our largest impairments in CIB, which occurred in the fourth quarter.
Our NII increased 5%, supported by average interest-earning banking assets growth of more than 8%, and this was driven by solid growth in advances and higher levels of high-quality liquid assets.
Our NIM decreased by 13 basis points to 3.52%. This decrease was primarily driven by a negative endowment impact, negative asset pricing from the personal loans pricing caps and competition for wholesale assets and the implementation of IFRS 16, which came into effect January 2019. The decrease was only partially offset by improved asset mix as average retail advances grew faster than wholesale. Our banking advances increased 7% taking a product lens, term loans increased strongly year-on-year as the CIB pipeline converts and will benefit from renewable energy drawdowns.
Commercial property grew at 8%, losing market share as we focus on quality assets at appropriate pricing in a difficult property market. Retail advances growth momentum continued as seen a solid increase in vehicle finance and personal loans, whilst home loans is reflective of slow industry growth. Other loans comprised of preferences and other short-term loans was down 14% due to reduced demand from clients.
Deposits grew 9%, ahead of advances, improving the group’s loan-to-deposit ratio to 88%.
Through active management, RBB and CIB deposits grew ahead of nominal GDP. Africa region deposits was impacted by the depreciation of the Zimbabwean currency versus the Rand. All liquidity ratios remain well ahead of the minimum regulation requirements.
Returning to the income statement, NIR was flat, reflecting solid underlying growth of the franchise, but offset by the impact of private equity. Growth was underpinned by commission and fees that grew 3%, supported by solid underlying retail transaction growth of 6%, while CIB was impacted by a high 2018 base and subdued client activity.
Trading income grew 2%, notwithstanding low market volumes and lower levels of volatility. Our insurance income is marginally down on the prior year, as good sales volume increases were offset by the higher weather-related claims in the first half. Private equity was impacted by revaluations in specific contest whilst 2018 had a strong year. Other NIR includes the impact of the option in Banco Unico.
Turning to credit loss ratio. The graph on the left provides an overview of the credit loss ratio increasing 29 basis points to now 82 basis points which is at the midpoint of our 60 to 100 basis points through the cycle target range. The cyclical effects are reflected in the upturn since 2017. The key drivers were CIB and RBB increasing off a low base to within the lower end of their respective — through the cycle target range. Impairments increased 66%, driven by increases across stages 1, 2 and 3 impairments, and we increased our central provision by ZAR 150 million in the second half to take account of risks that have been incurred but not yet emerged.
Turning to stage 3 advances. Over the past 12 months, defaults increased by 10% to almost ZAR 28 billion, representing an NPL ratio of 3.6%. As can be seen on the left, the increase was consistent over each 6-month period. CIB defaults reduced while stresses were most evident in our RBB portfolio. Stage 3 coverage increased to 38% compared to December 2018.
Expenses increased 2%, driven by reduced incentives, which decreased faster than earnings. IT investments in the business continued to drive cost growth, but were partially offset by ongoing efficiencies. Our headcount reduced by 6%, lastly in RBB, and this was mainly through natural attrition. Our participation in the Youth Employment Service from the end of April 2019 brought a new cost of ZAR 134 million. The final PRMA settlement resulted in the ZAR 354 million benefit for this period.
Coming to hyperinflation, in October 2019, the Zimbabwean Public Accountant and Auditors Board announced that Zimbabwe is in hyperinflation effective from the first of July 2019 as a result of CPI exceeding 200% in the month of July.
Consequently, Nedbank applied IAS 29 in accounting for operations in Zimbabwe, where we hold 66% of the company’s equity. The key drivers included adjusting opening equity with the closing CPI at 6.2x and similarly, reducing the income statement by ZAR 246 million, and this adjustment had no impact on NAV. Further adjustments were from indexing of nonmonetary assets, such as fixed assets and our income statement. The overall [’18] impact of this adjustments is ZAR 142 million after adjusting for minorities.
The headline earnings loss is driven by inflation as well as weaker ZIM Dollar versus the Rand. The NAV of Nedbank Zimbabwe as at 31 December, 2019, was ZAR 123 million, which is immaterial on the Nedbank Group’s balance sheet.
As reflected in my earlier slides, associate income continues to reflect progress at Ecobank, although their third quarter results were lower than the previous quarters. Our carrying value declined further by approximately ZAR 500 million as associate income was offset by FCTR and OCI changes. Given the carrying value of our investment in ETI being above the market value, we continue to monitor the valuation of this investment at each reporting period for inter-alia indicators of impairment. At this stage, our value news calculation slightly exceeds our carrying value, and therefore, supports the book value of our investment.
The group remains well-capitalized at levels significantly above the minimum regulation requirements. The CET1 ratio of 11.5% is at the midpoint of our Board approved target range. However, this was impacted by the implementation of IFRS 16, the ongoing investment in software development as part of the group’s managed evolution program, the adverse impact of changes in currency translation reserves and adverse migration in certain credit portfolios.
Our dividend was paid towards bottom of our target range, and we foresee continued to pay future dividends within our target range. And our final dividend, as stated by Mike, was ZAR 6.95 per share. Our dividend yield suggests that Nedbank should be attractive for investment.
A brief overview of our performance in the clusters show a decline in headline earnings across all our frontline businesses and each managing executive will unpack their performance shortly.
My last slide is just to unpack the center, the movement in the center reflects a ZAR 72 million post-tax impact from the increase in the central provision, the net PRMA benefit, the first time cost of Youth Employment Service as we offered first time job opportunities to over 3,000 youth, and as previously mentioned, the Banco Unico option.
I thank you, and would like to hand over to Brian Kennedy, to take you through some of the insights on CIB’s performance.
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Brian Kennedy, Nedbank Group Limited – Group Managing Executive of Nedbank Corporate & Investment Banking [4]
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Thanks, Raisibe, and good afternoon to everybody. CIB’s gross operating income was maintained at ZAR 15.7 billion, which was a fair result given the economic conditions and a solid 2018 base. Headline earnings, however, declined 8.1% to ZAR 6.2 billion as the credit environment deteriorated further in the second half of the year and corporate impairments increased accordingly. Property financing pigments remained resilient at minus 2 basis points.
NII grew 2% as a result of good advances growth in our term lending portfolio but was impacted by declining margins due to competition amongst the banks for high-quality assets. Expenses were very well contained with less than 1% growth. Total NRR fell 4.1% to ZAR 8.2 billion, mainly due to revaluations in the private equity income line as the economic environment impacted certain counties.
I’ll cover this in more detail in the next slide.
The credit loss ratio increased to 26 basis points normalizing to our through the cycle target range of 15 to 45 basis points. Our cost-to-income ratio of 42.1% remains highly competitive, and we continue to invest in talent, whilst capitalizing on digital opportunities to ensure and improve client experience. The ROE decreased to 17.7%, mainly due to the increase in impairments as well as a 4% increase in economic capital.
Total NIR was impacted by revaluations in our private equity income. The decline in private equity income line was a result of certain counters valuations decreasing due to the performance as well as the economic environment worsening over the second half of the year.
The private equity line includes the private equity business in investment banking, the private equity arm of the property finance business as well as our exposures to listed equity counters. Trading income grew 2.6% despite lower volatility and decreased volumes from a higher base in 2018 with some one-offs compensating for slow markets in 2019.
Focused investment in the market sales and trading franchise over the last 4 years as both the dominant SA markets business and it is emerging as a market-leading key areas such as flow and structured capabilities in both equities and fixed income, as evidenced in market share, awards and client feedback. We grew our primary bank clients with 32 new primary bank wins, which contributed to growing our transactional base, which forms part of the fee and commission line. This was offset by subdued client activity in other areas.
This slide sets out the continuous improvement journey over the last 4 years in terms of major league tables. In the left-hand column, you can see the 2015 column on the left, which shows our rankings in various categories and particularly low rank or no rankings indeed in some categories. If you move over to 2019, you can see that in most categories, we’ve moved to either #1 or very close to #1 position, and this is illustrated how we have invested in a franchise over time.
It’s also pleasing to note that in last dealmakers, we were ranked first by ideal volume for M&A advisers and also won big deal of the year the in recent awards. We also had a strong chain in the JSE Spire Awards and our dominance in the fixed income asset class and the continued growth of the markets platform were reaffirmed. We’ve continued to be a significant debt provider to corporate South Africa with growth of 9% in actual banking advances, including corporate bonds, as we closed significant deals during 2019 and maintain market share.
NIM decreased to 1.99% from 2.12% in December ’18, with asset margins coming under pressure as we continue to target high-quality assets. Investment banking and strong growth due to pipeline conversion as well as continued drawdown on existing deals. We also continue to focus on selective origination in property finance, with good growth in advances as a result of deals finalized in the latter part of the year. The power plant remains fairly robust across sectors with an expected uplift when the cycle tunes. It is pleasing to note that both the investment business and property finance teams are recognized with various awards in 2019. The credit loss ratio at 26 basis points has normalized through the cycle target range of 15 to 45 basis points. It continues to highlight the quality of new business, proactive risk management as well as the constructive involvement with clients to restructure and resolve distressed assets. The portfolio coverage ratio on the performing book increased from 28 to 36 basis points, as increased economic pressure resulted in the deterioration of risk ratings for counters in stressed industries, such as cement and construction.
Our early engagements and initiation of restructure of clients in 2018 as well as no new significant defaulted clients in 2019 resulted in a defaulted balance decreasing from ZAR 5.7 billion to ZAR 4.1 billion. However, the worst environment has resulted in increased corporate impairments and a higher specific coverage ratio against these remaining counters. We will continue to closely monitor stress sectors of the economy this year. Such as construction and cement, commercial property, clients with large office or government exposures and parts of the retail sector.
Focus will also continue on certain SOEs as we remain concerned about the constrained [fiscals] in funding and executing definitive turnaround plans proposed by the Board’s of the SOEs who continue to be impacted by liquidity and debt repayment concerns over the medium term. More information is included in the booklet slide.
Turning to prospects. I’m very proud to hand over to our new ME of CIB, Anél Bosman.
I’ve worked with Anél for over 20 years, and I have every confidence in her ability to take Nedbank CIB to even greater heights. I wish her and the team all the best for 2020 and beyond. And I’d also like to take this opportunity to thank Mike and the Nedbank Board for their continued support over the last many years in building the CIB franchise. Thank you very much. Anél.
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Anél Bosman;Managing Executive of CIB, [5]
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Good afternoon, and thank you, Brian. It has been a privilege to work with you, and it is indeed a great honor to stick into this position. You’d; leave us with a powerful business, and we will continue to build on our strengths to ensure that CIB remains a formidable competitor. I’m very proud of the markets team and our expansion. The quality of our people, our technology innovation and the financial performance over the last 5 years.
I thank each member for driving our strategy, your hard work and support. We will maintain the momentum of client acquisitions and our technology drive over the next year.
Looking at our other businesses in CIB, Property Finance has maintained its leading position in South Africa, and we will build on this through both our debt and equity capability. We have invested extensively in expertise to meet our growth ambitious northwards into Africa, and we expect to capitalize on this going forward. Investment banking has built deep expertise in many specialized sectors, which will be instrumental for expansion in SA and across the continent. Despite the headwinds in 2019, the underlying business is solid with an excellent pipeline. We will also continue to build on our advisory business, as it is a key enabler to NIR. Transactional banking remained focused on client solutions and product innovation, allowing our clients to manage the various products better and to interact with us in a more effective and digital-friendly manner. We have exciting projects that will deliver on this promise. Our strategic focus areas for the future of CIB is summarized in the 4 pillars show .
Client centricity and our strong client relationships are driven by client coverage, and we plan to intensify efforts through our sector aligned approach by providing innovative and value-adding solutions. We are committed to sustainability, and we believe that CIB is well-positioned to use our expertise to play a part in achieving a sustainable future.
In 2019, we concluded the first issue of a green renewable energy bond in South Africa, and we will maintain our lead in the renewable financing space. Our attention will also be on efficiencies and optimization, including costs, capital and ways of working together. We will continue to invest in key areas, such as technology and skills.
Lastly, we will further diversify revenue outside of South Africa by increasing our presence on the rest of the continent through our sector expertise and strategic partners. Our medium and long-term targets for ROE are set at bigger than 18% and 20% and cost-to-income at less than 42% and 40%, respectively. Thank you. I will now hand over to Ciko Thomas to deal with RBB.
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Ciko Thomas;Group Managing Executive of Retail and Business Banking, [6]
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Thank you very Anél. Congratulations once again in your appointment. Good afternoon, everyone. Retail and business banking headline earnings decreased by 2% in this period, with quality headline earnings adversely impacted by a higher impairment charge. Pleasingly, in this tough trading environment, pre-provisioning operating profit is up 11%, driven by NII growth of 6% and coming off the back of pleasing growth in both advances and deposits, NIR growth of 6% from both higher transactional volumes and lift from average pricing increases, expenses growing at a judicious 2%. This, after including for our continuing investment in physical and digital distribution, as we continue to drive a strong ongoing focus on active management of costs. The credit loss ratio increased to 138 basis points in this period. It does, however, still remain at the lower end of our target range of 130 to 180. Allocated capital is up 7% in line with growth in advances. The decreased earnings, however, due predominantly to impairments have translated into a lower ROE of 17.3%.
In consumer banking, headline earnings are down 3%, impacted by normalization in impairments from the low relative base of 2018. There was strong growth in pre-provisioning operating profit, up 13% year-on-year, supported by good growth in advances and deposits and also benefiting from the judicious management of expenses I referred to in an earlier slide. Growth in impairments of the low base of 2018 has been a big factor in the headline earnings decline in this segment. The continuing focus on clients and client experience has seen improved customer matrix. I will discuss this improved matrix later in this presentation.
Business banking delivered strong pre-provisioning operating profit growth of 14%. This growth number excludes the effects of internal client migrations to RRB. Headline earnings growth, however, remained flat due to higher impairments compounded as they were by the ones of impairment releases in the 2018 base. There was good growth momentum evidenced across assets and liabilities. It was also pleasing to see continuing client number growth especially off the back of refreshed value propositions in key sectors like franchising, agriculture and the public sector.
In retail relationship banking, we continue to see good growth momentum evidenced across all lines, transactional, assets and liabilities. Headline earnings grew by 29% for the segment. RRB has benefited from the migration of clients from BB during the second half of 2020. The matrix shown here, however, are normalized for this and excludes the impact of this transfer.
Encouragingly, we continue to see steadily improving customer matrix and market perception of our relationship client value proposition.
Let’s now focus on impairments. Impairments in retail and business banking increased by 40% in this period. This is attributed largely to a normalizing impairment cycle in a deteriorating macroeconomic environment as well as regulatory impacts primary amongst which is the ruling on the treatment of set of payments and credit agreements implemented at the back end of 2019. Consequently, the credit loss ratio increased by 32 basis points, albeit of a low base, and is now back to within the lower end of the target range as risk normalizes. Impairments in MFC increased due to higher repossessions and the subsequent write-offs. In business banking, the increased impairments are largely the consequence of a low business confidence environment, but also, there is included the impact of one-off releases in the 2018 basis. The overall credit loss ratio in retail and business banking at 128 basis points is, however, still within our target range of 150 and 180.
RBB has a well-managed asset book. However, we remain alive to downsize risk in a challenging macroeconomic environment.
Pleasingly, retail banking transactional NIR has grown by 6.3% despite the moderate reduction in main-banked clients and moderate sub inflation price increases. Total client numbers are flat as seen on the slide. This is due largely to the accelerated closure of dormant accounts.
In this slide, we unpacked our main-banked client number, down by 1% in this period by each of the segments. Middle market, professional and small business clients continued to increase strongly, which has contributed to the growth in NIR. The entry level banking — the entry level main-banked segment has shown a marginal reduction of 2%, after 5 consecutive years of 3% compounded annual growth. Gross operating income for this segment has also grown, however, by 5.5% in this period.
Concerningly, the youth main-banked clients have declined by 10%. We have, however, continued to release several new and disruptive value propositions to stem this decline. This includes Unlocked. Me for the youth, launched in January 2019. It’s a proposition that delivers banking value through a 0 monthly fee account. Uniquely also, Unlocked. Me also delivers lifestyle value relevant to the youth, through great deals on tech and fashion as well as assisting clients to unlock their career potential with job search, support, including access to up to 500 jobs online through our partnership with Move Up and Gradesmatch, a unique and powerful proposition that we back to stem and reverse the decline.
Following the early success of the Unlocked. Me account with students, we have now opened the proposition up to all young adults between the ages of 16 and 26. So that we can fast track acquisition and minimize attrition in the overall youth base. We also continue to work hard to migrate the youth customers on to the other products that are driving attrition.
Delivering delightful client experiences continues to receive major focus in RBB. To this end, it is pleasing to see that we continued to make significant improvements in our key client satisfaction measures, Net Promoter Score, SA-csi, as well as Social Media Sentiment. For the second year in a row, Nedbank posted the largest improvement on the Net Promoter Score survey. Nedbank’s SA-csi improvement was the largest of any the big 5 banks, rising to 80.2% in 2019 and moving to #2 overall. Nedbank was rated #1 on Social Media Net Sentiment with a score of 20.4%, the first time we have as a bank attained top position on this important measure. A further highlight from SA-csi was Nedbank Home Loans outperforming the industry, rising to #1 in customer satisfaction. Nedbank Home Loans also had the best performance improvement in NPS with the bank also placed in second across the home loan industry in NPS.
We have successfully launched several innovative products and solutions during the year, 4 of which I have highlighted on this slide. Reading from left to right is our digital onboarding on Eclipse across multiple channels, which Mike spoke to earlier; the digitized homebuying journey in our home loans business; the lending API, which is the first on the African continent in the personal loans business, which allows other e-commerce platforms to use our lending APIs to offer loans. And finally, we relaunched and revamped and improved Greenbacks loyalty and rewards program in H2 of 2019, launching with the Card Swiper package. We shall launch more packages over the course of 2020.
Digital sales have increased with digital active clients increasing by 15% in 2019. We have also seen a big uptick in Money app downloads as well as an increase in the number of active users now using our app. We continue to see cash migration from the physical branch environment to self-service devices. Cash through our self-service devices is up 20% in this period. Further, third-party payments coming through our app, our Money app are up 80% year-on-year. And finally, digital value-added service volumes are also pleasingly up by 29% as we continue to leverage digital to make it easier for our clients to transact.
This slide reflects how we continue to unlock digitization to drive further optimization in our process and operational environment. Headcount has been actively managed in this journey of digitizing our operations with reduction being absorbed through natural attrition, only 145 retrenchments were effected in business bank — in retail and business banking in 2019. Also, actual space reduction of over 42,000 square meters was achieved at the end of 2019, representing 23% of the Nedbank branch floor space we occupied in 2014 when we began this optimization through digitization journey. The total number of retail outlets has also reduced by 2.5% from the previous year to now a total of 589 retail outlets. The implementation of robotic process automation continues apace. In RBB, we have now implemented over 125 RPA processes cumulatively since 2017. We shall continue to drive this transformative digitization journey through the work we are driving in the TOM 2.0 program that Mike referred to earlier in his section.
And finally, on to prospects for the rest of 2020 and beyond. We remain committed to our client-centered growth strategy and on boldly executing our plans to deliver delightful client experiences through the digital transformation of RBB using the 5 strategic levers reflected on this slide. The targets we had set for 2020 will be delayed. We have reset them as expressed in the slides for the medium and long term. Our focus, however, remains on accelerating the adoption of our banking propositions to meet evolving client needs by commercializing existing CVPs and continuing to develop new and innovative value proposition, delivering competitively priced products, actively reducing transaction costs for our clients through digital banking services, investing in the front line people cadre that delivers excellent client experiences, and lastly, in tapping into platform-based propositions to offer beyond banking solutions for clients.
Thank you very much, and I’d like to hand over to Iolanda.
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Iolanda Ruggiero;Managing Executive of Nedbank Wealth, [7]
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Thank you, Ciko, and good afternoon, everyone. Nedbank Wealth’s headline earnings declined 8% to ZAR 1.042 billion with ROE at 24.8%. NII increased 3% as a result of steady balance sheet growth in the International Wealth Management business, offset by declining U.S. interest rates. NIR decreased 1.4% due to lower brokerage and portfolio management fees in Wealth Management local, margin pressure in asset management and an increase in non-life claims in insurance. Expense growth was well contained at 3%. The difficult environment locally contributed to an increase in impairments in Nedbank Private Wealth, resulting in a marginal increase in the credit loss ratio to 18 basis points.
Taking a look at our divisional performance. Overall, Wealth Management headline earnings declined 14% to ZAR 252 million on the back of a reduction in local market activity negatively impacting brokerage fees, with portfolio management fees and commission income declining due to clients derisking to lower margin products.
Nedbank Wealth Management International achieved good underlying growth in AUM and a steady growth in deposit balances. Whilst advances declined due to the continued Brexit uncertainty and increased competition from ring-fence banks. In the 2020, Euromoney Private Banking and Wealth Management Survey, the local Nedbank Private Wealth business was named Top Private Bank and Wealth Manager in South Africa for ESG Impact Social Investing and Philanthropic Advice. Internationally, Nedbank Private Wealth was named Best Boutique Private Bank at the 2019 WealthBriefing Mena Region Awards.
Moving on to Asset Management. Muted equity performance across the local asset management industry over the past 3 to 5 years has resulted in a change in the AUM mix to lower margin, lower risk products. Despite this, net group investments had net inflows of ZAR 15 billion, with overall AUM increasing 11% to ZAR 330 billion. The low-cost passive business remains the largest unit trust multi-asset passive provider, while cash and fixed income assets continue to grow, with strong net inflows. Headline earnings declined 5% to ZAR 319 million, mainly as a mainly as a result of margin pressure. At the 2020 Raging Bull Awards, Nedgroup Investments was recognized as the Top Offshore Manager for the fifth consecutive year and won the award for the Best Global Equity Fund at the 2020 Morningstar Awards.
Moving on to Insurance. Insurance headline earnings decreased 6% to ZAR 471 million due to higher non-life claims and a lower life reserve releases, partially offset by an improvement in investment returns. The life portfolio was impacted by Cyril assumption changes relating to an improvement in credit life mortality, worsening for funeral and an overall deteriorating lapse experience. Growth in life embedded value of 14% to ZAR 3.2 billion is as a result of a 11% increase in the value of new business on the back of good growth in credit life policy sales and higher average funeral premium. In the first half of the year, the non-life portfolio was impacted by catastrophic weather remains, resulting in a higher overall non-life claims ratio. Non-life gross written premium remained flat at ZAR 1.2 billion due to pressure on non-life volumes, offset by an increase in vehicle value-added product premiums. Looking forward, while we continue to face economic headwinds, we remain committed to creating value through our international high net worth offering and holistic advice in Wealth Management, delivering long-term performance through our best-of-breed philosophy in Asset Management and expanding our offering and leveraging data and digital capabilities in Insurance. We commit to achieving ROE of 28% in the medium and 30% in the long term and have revised our cost-to-income ratio to 65% due to structural changes, exerting pressure on revenue streams. As a result, we will continue to focus on creating internal efficiencies, delivering on client experiences and building new revenue streams.
It now gives me pleasure to hand over to Mfundo.
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Mfundo Clement Nkuhlu, Nedbank Group Limited – COO & Executive Director [8]
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Thank you, Iolanda.
Nedbank Africa regions had a tale of 2 halves in 2019. We started strongly and headline earnings were up 20% at half year. But we hit the perfect storm in the second half and headline earnings decreased by 35% to ZAR 457 million for the full year, resulting in an ROE of 7.7%. This performance was largely impacted by poor results from Zimbabwe, which more than offset the growth from ETI. The SADC business delivered a mixed performance in challenging macroeconomic conditions, resulting in a decline in headline earnings of 94%. The net monetary loss related to hyperinflation and the impairment of legacy debt in Zimbabwe, owing to lack of hard currency availability, gave rise to the negative impact on headline earnings of ZAR 142 million and ZAR 44 million, respectively. The once-off tax adjustment and nonoperational write-off reported in H1 of 2019 reduced headline earnings by ZAR 61 million, contributing to the negative results. Gross operating income was down 2%, while growth in expenses was managed below inflation. Excluding Zimbabwe in the once-off items. Earnings from our SADC operations would have been flat. The financial recovery in ETI has resulted in a sustained profitability, albeit at a slower rate of growth. Associate income from ETI grew 10% to ZAR 668 million, while headline earnings were up 17% to ZAR 437 million.
Following the review of our Malawi business for strategic fit, we concluded that will let the benefits of scale as the business was small in a small market and executed a sale of the franchise. Nedbank Malawi represented less than 0.1% of our group assets and earnings. In terms of IFRS 5 accounting rules, Nedbank Malawi is held in our books as a noncurrent asset available for sale. The transaction is at an advanced stage and on course to be completed during H1 of 2020.
We increased our stake in Banco Único from 50% plus 1 share to 87.5% to tap into growth opportunities in Mozambique. The transaction is awaiting regulatory approval and is expected to be completed in the first half of the year.
The Zimbabwe business was negatively affected by hyperinflation, resulting in a headline loss of ZAR 108 million, a swing of ZAR 250 million from the profit of ZAR 142 million in 2018. This has had a 2% negative impact on group headline earnings. We’ve begun to reconfigure the shape of the balance sheet and business operations to respond to new market realities.
In improving client experience, we rolled out the award-winning Nedbank Money app to our clients in Lesotho, Namibia and Eswatini. The app of our claims for the 9 new additional features. In Mozambique, in Zimbabwe, we enhanced our mobile banking solution. We have deployed these digital solutions for client convenience and to deliver at a lower cost to sales.
As part of our focus on simplicity and convenience, we launched in Namibia, the pay-as-you-go account with 0 maintenance fees, targeting the entry-level and middle segments. We also deployed a competitive corporate Internet banking solution in both Namibia and Eswatini. These new products have been well received in the market as they help to improve client experience.
The performance of our business in SADC was impacted by economic growth that was lower than focused. Zimbabwe and Namibia registered economic declines and both Lesotho and Eswatini grew GDP below 1.5%. Mozambique and Malawi registered relatively high economic growth of 3% and 4%, respectively, but were still below forecast. In this economic context, average advances were flat, average deposits grew 2% and NIM squeezed by 27 basis points, reflecting the competitive conditions in the market. The credit loss ratio increased by 50 basis points to 101 basis points, marginally bridging the upper limit of our through the cycle credit loss target range of 75 to 100 basis points. Factoring out the strong recoveries in the prior year, the credit loss ratio would have been flat.
Noninterest revenue increased by 1% in an environment of sluggish activity levels, and the cost-to-income ratio increased by 3% to 79%, highlighting the revenue headwinds. Excluding Zimbabwe, most of our financial metrics improved with average advances up 4%, average deposits up 11% and noninterest revenues up 5%, reflecting our focus on acquiring primary-banked clients.
Turning to non-financial metrics in SADC. The business had a marginal decline in client numbers, due mainly to new account closure rules introduced in mid-2019. Notwithstanding, our revenue per client rose 4.5%, reflecting the benefits of deepening client relationships. In line with transforming our business for digital age, we registered a 94% increase in our active app users and grow the number of point-of-sale devices by 27%, resulting in a 10% increase in merchant turnover to ZAR 9 billion for 2019.
We grew our branch footprint by 5% in high-growth and regulatory-designated micromarkets in Mozambique. ATMs and staff headcount declined 1%, respectively, as we contained costs in a slow growth environment.
On ETI, ETI’s performance was driven by sustained recovery from 3 regions, offset by poor performance from the Nigerian franchise. Strong performance in both earnings growth and returns was registered from the Anglophone West Africa and Francophone West Africa regions, reflecting the quality of the franchise in both regions. The recovery in the financial performance in Central, Eastern and Southern Africa region continued albeit at a slower rate. Nigeria’s performance deteriorated further due to persistently elevated nonperforming loans, adverse regulatory intervention and ongoing economic headwinds.
And I wish to congratulate and extend my very best wishes to Terence Sibiya on his appointment as Group Executive for Nedbank Africa, who will now cover prospects for the business.
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Terence Sibiya;Managing Executive:Nedbank Africa Regions, [9]
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Thank you, Mfundo, and I wish to thank you for your exemptive leadership of the Africa business over the years, and good afternoon, ladies and gentlemen. We expect the Africa regions to be a source of growth for Nedbank, and we’ll continue to leverage the enterprise capabilities to unlock the opportunities on the continent. In SADC, we’ll build on our strength of a strong wholesale client service model, our digital platforms and strong credit management. In ETI, we’ll also build on our strengths in having access to the widest Pan African network and market-specific insights through the local knowledge Africa solution.
Our focus in our own managed operations in SADC, we will adapt our businesses to the new economic normal and to drive stronger revenue growth, improved cost control and capital optimization. We will continue to invest in digital and automation to remain competitive and continue to focus on credit risk management and a much stronger control environment. As Mfundo has mentioned, we’ve begun the process of reconfiguring our balance sheet in our Zimbabwe operation and also with the increased shareholding in Banco Único to tap into the growth of the growth opportunities in Mozambique.
Turning to ETI, while it is pleasing to have reported further growth in both associate income and headline earnings from our investment for this reporting period, risks do persist, especially the drag effect on Ecobank Nigeria on the overall ETI performance. Anglophone West Africa and Francophone West Africa are expected to continue reporting strong results, sustainably generating economic uplift. The recovery in the Central, Eastern and Southern African region is also expected to continue, although it will be slowed down by the challenges we currently see in Zimbabwe.
Our focus will also remain to support the delivery of the ETI Board-driven strategic agenda to commercialize the collaboration initiatives, such as the cross-border remittances product, and increase our business flows between the 2 institutions. Through our alliance with ETI, for example, around 115 Nedbank wholesale clients now actively bank with Ecobank across various territories on the continent.
Turning to our financial outlook. For the next 2 years, we aim to deliver returns greater than 15% and a cost-to-income below 65%. Over the long term, which is greater than 5 years, we aim to deliver ROEs above 20% and the cost-to-income less than 60%.
I thank you, and I’d now hand you back to Mike Brown.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [10]
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All right. Thanks for your attention. We’re getting towards the end of the presentation. Just before I conclude, I think 2 things. Firstly, just to recognize Raisibe Morathi and our finance teams for the huge amount of work that goes into these presentations. And in particular, because during 2019, we won all 3 reporting awards in South Africa, the Ernst & Young award, the Chartered Secretaries award and the ward from the Investment Analyst Society not only for the banks, but also the overall award. So I hope you all enjoy reading that really thick booklet. And then I think also just personally to say a really big thank you to Brian Kennedy for 24 years of service at Nedbank. And in particular, the huge role he’s played on building an integrated investment banking franchise post the merger of the old Nedbank Capital and Nedbank Corporate that I think puts Nedbank in a very, very strong position today, and the massive contribution he’s made to Group Exco. So thank you, Brian.
Right. If I have a look at the period ahead now. So these are our latest forecast for the key macroeconomic data. And for all the reasons I outlined in my earlier presentation, we expect GDP growth to remain weak in 2020 at 0.7%, with higher than forecast load shedding and the currently evolving global economic and health conditions being the key downside risk to this number. Clearly, as well as the fact that the Q4 numbers that we’ve just seen were lower than expected.
We expect inflation to remain well within the SARB ranges. And as a result, interest rates, which cut 25 basis points in January, in our base case, are expected to remain stable, although there is a possibility of another 25 basis point cut further out, particularly if GDP growth remains weak. Credit growth, we expect to continue to improve slowly off the low base.
Looking now at targets. At the start of 2018, we communicated specific 2020 targets to the market. For ROE, excluding goodwill, being greater than or equal to 18%, and cost-to-income ratio being less than or equal to 53%. You can see those in the top right of the slide in the light gray. These will not be achieved in 2020, primarily as a result of the material changes we’ve seen to the macroeconomic environment from when we set these targets.
So just to have a look at those changes, starting in the top left-hand corner compared to our expectation at the start of 2018, which is when we set the targets, GDP growth in 2020 is now expected to be 2% lower than previously forecast. Credit growth in the bottom left-hand corner, 3% lower. Inflation, 1% lower and interest rates, and as a consequence, endowment, also 1% lower.
When we model our business, we model it from various stress and scenarios. And actually, we are currently in what we modeled in 2018 as the high-stress scenario relative to the base case against which we set our targets. So while we have made good progress, I think it would not be sensible or credible to retain the current time frames that we’ve set to achieve those targets in this environment. So what we’ve done now on the right-hand side is set out our revised targets in the boulder dark font. So starting with return on equity. Firstly, we’ve changed this metric now to be ROE inclusive of goodwill and not exclusive of goodwill. And we are now going to target greater than or equal to 17% in the medium term, which we define as the next 2 to 3 years. And greater than or equal to cost of equity plus 4% in the long term defined as 5 years plus.
For those of you who know our numbers well, you’ll know that this actually aligns very closely with our previous target as the historic gap between ROE and ROE excluding goodwill has been around about 1%. But the date of achieving that target has now been pushed out from 2020 to the medium term as defined.
Similarly, on the cost-to-income ratio, we had set a target of less than or equal to 53% in the medium term and less than 50% over the longer term as the benefits of rolling out and client adoption of our tech strategy emerge. Again, what we’ve done is that we can’t achieve the 53% in 2020, but we will now achieve that over the medium term as defined.
Lastly, then turning to the usual format of guidance that Nedbank provides for the full year ahead, based on our current forecast of the macro that you saw on the previous slide and clearly recognizing the increased forecast risk in global and domestic forecasts in the current environment.
For net interest income, we expect average interest-earning banking assets to grow just above mid-single digits, and we forecast the net interest margin to remain at similar levels to 2019. On the credit loss, we, again, expect that to remain at similar levels to 2019. Our noninterest revenue, we expect to grow at around mid-single digits. And finally, on expenses below mid-single digits.
So if you pull all of that together, and given the 2019 base, we currently expect the diluted headline earnings per share in 2020 will grow around nominal GDP growth, with headline earnings in the first half of 2020 likely to be lower than the first half of 2019 with stronger growth emerging off the base that played out in the second half of 2019.
So thanks. I hope that gave you a good tour of the underlying drivers behind what was a difficult year from a financial point of view and a difficult year for the South African economy.
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Questions and Answers
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [1]
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We’re going to start by taking questions, and I’m glad I’ve got so many of the Exco team in front raring to answer all of these questions. So let’s start here at the auditorium, and then we’ll go onto the phone and onto the web. So if you put your hand up, there should be a microphone coming somewhere in your direction. Always going to be at least 1 question, I’m sure. Charles, it’s usually you. Too many pages of detail. We’ve taken too long to present. Excellent. We’ve got a question there. Thank you. If you just say who you are and then answer — ask the question.
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Bankole Ubogu, BofA Merrill Lynch, Research Division – VP & Analyst [2]
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It’s Bankole Ubogu from BofA Securities here. Just 3 quick questions. The first is related to impairments. So you saw a strong increase in the second half of last year. They’re not a risk that that increase continues into the first half of this year, potentially putting risk to your credit loss ratio guidance. And number two is that if impairments do continue to increase, there’s not a risk that maybe credit growth does not accelerate even though you only have moderate credit growth in your numbers. And then the third is cost growth of 2% is a good result. I guess the question is how sustainable do you think that is because a large part of that was due to lower variable incentives, and I’m not sure how repeatable that is. And also you gave context in terms of your executive remuneration only being flat, what is your total level of salary increases for 2019 — 2020, sorry?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [3]
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All right. Raisibe, do you want to have a go at the total salary increases, et cetera, for 2020 and the cost piece?
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Raisibe Kgomaraga Morathi, Nedbank Group Limited – CFO & Executive Director [4]
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Thanks for the question, Bankole. The cost growth has been supported by headcount reduction at 6%, when in the prior year, we also had a headcount reduction of roughly about 4%. So that run rate effect has given us an opportunity to see costs somewhat being contained. We also had a number of efficiency programs, the target operating model that Mike referred to. And in addition, the — some of the early benefits of the digital journey. As an example, from the onboarding perspective that allowed us to be able to rationalize our infrastructure in retail, where we reduced the floor space in terms of the branch network and also continue to optimize that. And we’re also experiencing that in our office infrastructure where we are continuing to see some rationalization benefits. So how sustainable is that going forward, our average salary increase in 2020 is lower than what it was in 2019. Negotiating with the unions, we settled at 6.3%, whereas last year it was 7.3%. And with the executives at 0% this year. So our blend is 4.5% versus 5.4% last year. And how sustainable is that? We believe that augmented with a number of efficiency programs, our guidance for expenses still points to expenses growing below inflation in 2020.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [5]
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Okay. And then on the credit impairments environment, I think that is the key risk in anybody’s forecast in the current overall macro environment. But what we know is that in the second half of last year, you heard Raisibe say, we increased the Central provision by ZAR 150 million for things that have occurred somewhere out there, but have not yet emerged on to our radar screens. We also took impairments against 3 specific CIB counters. So while we expect that, that environment will still remain challenging. We hope that, that isn’t a continuation for the full year this year. And then finally, in the fourth quarter of last year, we did have a weaker-than-expected impairment experience, in particular, in our motor finance business in RBB, where our collection strategies over the December month in period were certainly not optimal, and we hope that, that doesn’t repeat on us to give us some ability to keep overall credit losses roughly stable year-on-year. But I agree with you, the risk for that number is to the upside and not to the downside.
All right. Can we see if any quest, okay, we’ll take one more here, and then we’ll go to the…
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Christopher Turner, Investec Bank Limited (SA), Research Division – Research Analyst [6]
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Chris Turner from Investec Securities. Based on your base case of SA GDP and inflation. You’ve got earnings growth between 5% and 6% over the next 2 to 3 years. How do you hit your ROE targets?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [7]
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You’re talking about ROE targets?
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Christopher Turner, Investec Bank Limited (SA), Research Division – Research Analyst [8]
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Yes.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [9]
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So (technical difficulty) line by line what we think is across all of the income statements. And you — over the next 2 to 3 years, we will get to the medium term target with the guidance that we’ve given. Obviously, we only give you our guidance for 1 year in terms of what we think is going to happen across the various income statement line items. But our current 3-year modeling across the organization does get us to that target at the end of year 3.
Okay. Can we go on to the — is it the web or the phone line first? Phone lines.
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Operator [10]
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We have a question from James Starke from SBG Securities.
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James Starke, SBG Securities (Proprietary) Limited, Research Division – Analyst [11]
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Mike and the team. I’ve got 3 questions. Firstly, on the private equity losses and specifically Slide 22, the ZAR 238 million. And if you could give some sense on what quantum relates to your traditional, call it, your commercial property finance, private equity business and what relates to investments perhaps sort of being converted from debt to equity? The second question is on your central provision, I need you to sort of touch on it, but if you could perhaps elaborate a bit more on what risks are apparent now that we go into plan 6 months ago. And specifically, if you have something in there for COVID-19?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [12]
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Okay. You said 3 questions. I’ve only got 2 so far.
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James Starke, SBG Securities (Proprietary) Limited, Research Division – Analyst [13]
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The last question is for Ciko. When can we expect the improvements in your digital delivery to start manifesting in some improvement in main-banked clients?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [14]
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Okay. So Brian, can I ask you to do the private equity one? I’ll do the central and then Ciko can come and do the digital.
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Brian Kennedy, Nedbank Group Limited – Group Managing Executive of Nedbank Corporate & Investment Banking [15]
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Thanks a lot. Thanks, James. In respect to your first question, there was a significant revaluation in one of our private equity counters in our private equity business in the investment banking book. But just to be clear, there was not a significant revaluation downwards in the property business, which was the second part of your question. And then the third part, there is a element of listed equities or from debt-to-equity conversion in that number as well, but it’s smaller.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [16]
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Okay. So I mean, the largest piece of it was a private equity investment in a South Africa consumer-facing business. The central provision is clearly an area of significant judgment. And as the economic environment got tougher, both in South Africa and in particular, if we look at what’s happening in the rest of Africa, we decided that it was appropriate to lift that. I don’t think there was anything particular around the coronavirus in our thinking at that stage at all.
Okay, Ciko?
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Ciko Thomas;Group Managing Executive of Retail and Business Banking, [17]
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Also James, in the figures that I presented on main-banked in the slide, what was encouraging for me was to start to see the growth on the main-banked, if you decompose it by subsegment, in the middle, professional segments. So for various reasons, list of which is not the investment in digitalization that we’re making. It’s encouraging to see the growth in those numbers. Where we really came back on main-banked client numbers was in the entry level banking space predominantly. Yes, was in the predominant, was in the entry level space where we came back by 2%. And numerically, that’s the largest space in our main-banked clients, obviously. It’s more than half of our main-banked client numbers, and we’ll continue to watch that. I think that will pick that up. I think we’ll come back on that number because to the point I made earlier, that’s a number in the entry level banking space specifically, that’s been increasing over a protracted period of more than 3, 4, 5 years. In fact, the compounded annual growth rate I’ve quoted was 3% over a 3% period. So hopefully, the 2% decline is a blip in this year. And I think the work that we’re doing in digitalization of the bank will start arresting that. Where I remain on high alert is the continued deceleration in the numbers of kids and youth. Again, that is why I started to unpack the narrative around the investments that we’re making, CVP’s client experience and digitization and marketing for the kids and youth proposition. But I think across the rest of the beta, I think we’re fine actually. And we’re starting to see the benefit of our digitalization efforts.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [18]
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Okay. Thanks, Ciko. I suppose just the other piece around that is, I always look at both the client numbers and the underlying revenue across that client base. And if you see in our RBB business, we grew commissions and fees 6%. So the more profitable higher fee segments grew stronger and the bottom end didn’t grow as fast as we would like. So that’s okay in the short term, but it’s not a good long-term outcome. We need to grow across all of those buckets over the longer term.
Okay. Still on the phones.
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Operator [19]
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Our next question is from Harry Botha from Avior Capital Markets.
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Harry Botha, Avior Capital Markets (Pty) Ltd. – Banks Analyst [20]
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Just a quick question on the noninterest revenue guidance for 2020. Can you give us a bit more color? I think CIB seemed quite depressed in H2 ’19. And how do you think things will fare out in 2020? Are you still concerned about CIB in 2020?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [21]
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Okay. We will get Brian to come and answer that one as his last input or maybe it should have been Anél, but it will hit Brian did.
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Brian Kennedy, Nedbank Group Limited – Group Managing Executive of Nedbank Corporate & Investment Banking [22]
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Thanks, Harry. I’ll just say, CIB is not the only place in Nedbank that makes NRR. There’s a big chunk that gets made, I’ll see. But since they asked about CIB, I mean, it’s — our business is quite a volatile income stream of trading, et cetera, private equity, we’ve spoken about. But we also budget to grow that low single digits in this year and the year beyond. So kind of in this environment, low single digits, 4%, 5%, 6% is what we’re aiming for.
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Operator [23]
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We have no further questions on the audio line.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [24]
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Okay. Is there web questions as well?
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Raisibe Kgomaraga Morathi, Nedbank Group Limited – CFO & Executive Director [25]
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Mike, yes, we have a question from Chris Turner from Investec.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [26]
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Yes.
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Raisibe Kgomaraga Morathi, Nedbank Group Limited – CFO & Executive Director [27]
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Please could you disclose the reduction, if any, of the holding value of ETI of ZAR 2.7 billion against regulatory capital? What would be the impact on CET1 ratio of marking ETI to current market value of ZAR 1.17 billion?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [28]
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Okay. So I don’t have the answer to the first one in my head around exactly what the rate cap implication is currently. Maybe Mike Davis can give you that. But I do know, and if you allow me a little bit of rounding, that if we impaired the ETI assets by ZAR 500 million that takes 5 basis points out of rate cap. So for every 500 basis points, you lose 5 basis points of rate cap. So I think the numbers, if I heard you correctly, if we went from ZAR 2.7 billion to ZAR 1.2 billion that’s ZAR 1.5 billion. It will be 15 basis points out of rate cap. So we’d kind of have a 11.3% and not a 11.5%. Mike, maybe if you just want to do the discussion as to how it’s currently treated? Because I know there’s a complication around deductions versus risk weights, et cetera.
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Michael Davis, Nedbank Corporate and Investment Banking – Group Executive of Balance Sheet Management [29]
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Thanks, Chris. So the way that we currently need to record the investment from a capital perspective is, first of all, you effectively, given the fact it’s an investment in a financial institution, it’s risk-weighted up to a particular threshold number. At the moment, we don’t exceed that threshold, and therefore, we risk weight the investment value, which currently is ZAR 2.7 billion at 250% risk weight, and that’s how it will come through effectively effecting the demand side of the CET1 ratio, capital ratios. And as Mike’s indicated, to the extent that you reduce the value of the investment through an impairment, essentially, what happens, you take out of the supply side, wherever that value is, whether it’d be ZAR 1.5 billion or ZAR 500 million, all write the thing off in terms of 2.7, you would reduce effectively the supply side. And effectively, you would reduce the demand side at that value times 250% risk weight. So there’s a scaling implication. But yes, 15 points would be, if you took ZAR 1.5 billion, which I think was the question.
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [30]
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Yes, I suppose another way of looking at it is, obviously, the ETI investment is an important strategic investment for us, but we’d never want the overall franchise of Nedbank to be put at risk. So if we write it off to 0, it would take around about 28 basis points out of rate cap.
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Raisibe Kgomaraga Morathi, Nedbank Group Limited – CFO & Executive Director [31]
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We also have a question from (inaudible) Management. Diluted HEPS growth guidance is nominal GDP. Is this an absolute rate of 5%. Should we be revising Nedbank’s earnings growth when nominal GDP outlook changes that’s if economic aspect deteriorates should we also expect much lower earnings growth and vice versa?
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Michael William Thomas Brown, Nedbank Group Limited – Chief Executive & Executive Director [32]
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I think in answer, the short answer is yes. It’s — the earnings growth is set as a building block from GDP growth. So GDP growth falls we’d expect nominal earnings growth to fall. And I think, generally speaking, in a banking environment, the relationship between GDP growth and earnings is not necessarily linear. So to the extent that earning — the GDP growth picks up significantly, you will see faster than that coming through in earnings growth, and the same would happen on the downside. And clearly, by the time we get to do our June results this year, we’ll, again, have an opportunity to see where do we think GDP growth is. And as a consequence, what do we think full year guidance is likely to be.
Okay. We’ve — any more questions, phone questions? Anybody else in the auditorium? Okay. So all that remains is me to say, really big thanks for joining us. I hope you found that an informative look into the key drivers of our numbers, and I’m sure there are some drinks and snacks outside. Thank you.