Nedcor posts huge losses

Posted On Saturday, 28 February 2004 02:00 Published by
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Describing the last financial year as "extremely challenging", the country's biggest banking group Nedcor (NED) reported a R1.6 billion loss for the 12 months ended December.

By Ray Faure

Describing the last financial year as "extremely challenging", the country's biggest banking group Nedcor (NED) reported a R1.6 billion loss for the 12 months ended December.

Headline earnings shrunk from R2.5 billion the previous year to just R55 million - even worse than many had been expecting, despite warnings that the results would be a shocker.

Headline earnings per share plummeted from 1,364 cents to 542 cents, which was considerably worse than an I-Net Bridge consensus forecast of 646.5 cents per share.

The group's results were hard hit by the stronger rand which resulted in unrealised translation losses of 1.4 billion compared to R1.2 billion in 2002.

The group has held excessive capital in foreign currencies and to reduce this exposure, R1 billion of offshore capital was converted to Rand-denominated capital in November and December 2003, the group said.

What came as little surprise to the market, however, was the announcement of a R5 billion rights issue to recapitalise the ailing group, which analysts and the media had been speculating about for the past week or so.

The capital will be used to repay loans of 2.5 billion that qualify as secondary capital and the balance to further bolster the group's capital adequacy ratio to over 11%.

This places the group in a strong position and allows sufficient capital for growth. Parent company, Old Mutual, will take up its rights under the rights issue and the balance of the new shares to be issued has been fully underwritten.

Old Mutual said it was prepared through this rights issue to increase its stake in Nedcor beyond 52%, while being of the intention to maintain sufficient liquidity to attract additional high quality shareholders.

What did come as something of a surprise in some circles, however, was the announcement that Chris Liebenberg is to retire as chairman in May.

Liebenberg, who has been with the group for some 55 years, has reached the mandatory retirement age.

He will be succeeded by Warren Clewlow, who is currently deputy chairman.

Nedcor said it was not planning to appoint a new deputy chairman.

Nedcor chief executive Tom Boardman said the 2003 financial performance had been disappointing, but was in line with the trading updates provided to shareholders in November and December 2003.

The biggest factor impacting the group's headline earnings was the strengthening of the Rand, resulting in a foreign exchange translation loss of R1.4 billion.

Other influences were interest rate mismatches on fixed deposit funding raised post the acquisition of BoE, growth in expenses at a disproportionately higher rate than revenues, and the clean-up of the balance sheet which impacted both headline earnings and attributable earnings.

Boardman said the group has a new, younger executive management team, the balance sheet has been cleaned up and controls are being implemented to reduce volatility of earnings, while the capital base has been restored and strengthened.

"The recovery programme is gaining momentum, we have started to deliver on our promise of greater transparency, and the relationship with Old Mutual continues to strengthen.

These factors, together with the strong franchises and good people in the group, mean that we have started to turn the corner on the road to recovery."

Following the appointment of the new management team in November 2003, a recovery programme was launched to address the issues facing the group and to restore the business to a sustainable growth path.

As part of this programme, the balance sheet has been thoroughly analysed and the group is focused on the implementation of aggressive cost reduction measures and the central management of the group's interest rate risk and foreign exchange exposure.

Management is now being held accountable for performance delivery, and will be rewarded on a return on equity (ROE) based incentive system.

A key focus will be on improving client service, and further leveraging Nedcor's strong franchise and solid core businesses to grow revenues.

Management believes it will be able to improve profitability through aggressive cost cutting and revenue enhancing programmes.

Further recovery opportunities include enhanced cross-selling after the merger's implementation, strengthening the group's pricing discipline and improved margin potential.

Boardman said the group's core businesses are solid and attractive, with strong market shares in the business banking and corporate banking sectors in particular.

"Retail banking has a broad footprint for the implementation of its strategy, and the attractive growth rates of the local banking market also bode well for the group's prospects."

The Nedcor board is being reduced from 22 to 17 in line with the recommendations of the Myburgh Commission. Only the chief executive and the chief financial officer will in future be executive directors.

An analysis of the operating income shows that net interest income (NII) increased by R853 million, from R6 billion in 2002 to R6.8 billion in 2003.

The increase in NII was principally due to the inclusion of BoE for the full year, which was offset by a number of one-off items.

When the impact of BoE and one-off items in both 2002 and 2003 are excluded, net interest income declined marginally over the period, mainly due to a number of fixed cost funding items that increased the interest expense in a falling interest rate environment.

Non-interest revenue (NIR) increased from R6.8 billion in 2002 to R8 billion in 2003. The principal reason for the increase in NIR in 2003 is the consolidation of BoE for the full year, as well as the R553 million positive impact of the group-wide AC133 fair value adjustments.

The group will be rationalising its offshore operations and intends to dispose of Chiswell Associates and various other international wealth management subsidiaries in 2004 and to repatriate the proceeds during 2005.

The repatriation of offshore capital is expected to enhance net interest income and to reduce future volatility in the balance sheet and capital position of the group.

Operating expenses, excluding merger and reorganisation (M & R) costs of

R394 million but including synergies of R341 million grew by 35%, from R7.4 billion in 2002 to R9.9 billion in 2003.

The cost-to-income ratio (excluding translation losses) increased from 59% in 2002 to 70% in 2003. A significant portion of this increase was due to the inclusion of BoE for the full year.

The major increases in expenses were staff costs which grew by R1.1 billion to R4.9 billion, fees and insurances (up R521 million) and computer processing fees (increased by R360 million).

Costs will be aggressively reduced through the delivery of synergies from the mergers, the integration of Peoples Bank into Nedbank Retail and the introduction of an activity justified transfer pricing process between the central functions and the business divisions.

The group's effective taxation rate, excluding the impact of foreign currency translation losses, increased from 10% in 2002 to 32% in 2003.

Management believes that real progress has been made in addressing the strategic, financial, risk and structural issues confronting the group.

When Tom Boardman was appointed chief executive in October 2003, he announced a five-point recovery programme.

This included the appointment of a new executive team, a strategic review of the business, the successful completion of the M&R programme, improved transparency, and a clear focus on client service.

The immediate priority was to align the structure of the group with its strategy and reconstitute the group executive committee.

Accordingly, the group now comprises three principal business clusters, Nedbank Corporate, Nedbank Capital and Retail & Wealth Management.

In addition, the former technology and operation functions of the group have been split into GBI and Group Operations.

The retail banking interests are being aligned, and Nedcor is in the process of integrating Peoples Bank under the Nedbank Retail banner.

The group is at an advanced stage of negotiations with the BEE consortia of Peoples Bank in this regard. The group finance function is being reviewed to improve financial management and management information systems.

This includes the introduction of appropriate allocation policies around funds transfer pricing, cost transfer pricing and ensuring that capital is consistently applied within divisions.

This will help to ensure appropriate measurement of division's profitability and is expected to lead to greater accuracy and accountability of divisional management.

The relationship between Nedcor and Old Mutual plc has strengthened over the past year.

This is evidenced by the parent company's support forthe recovery programme, the granting of a R2 billion loan in December 2003, the secondment of interim chief financial officer Bob Head, and the commitment to take up rights in the forthcoming rights issue.

The relationship has now been formalised through an agreement which outlines the manner in which the two companies will conduct their relationship.

I-Net Bridge 23 February 2004

Publisher: Business Day
Source: Inet Bridge

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