Despite a challenging macroeconomic environment with higher levels of rolling blackouts than anticipated, higher interest rates have driven Nedbank’s interest income up, pushing headline earnings growth into double-digit territory.

In a trading update on Friday, the big green bank revealed that the first four months of the year were characterised by strong net interest income and non-interest revenue growth, a credit loss ratio that was above the 100bps top end of the group’s through-the-cycle target range, strong associate income growth and focused expense management.

Management, however, lamented that in addition to a weaker global economy and lower international commodity prices, domestic economic activity continues to be negatively impacted by acute electricity shortages, logistical constraints, higher-than-expected inflation and the continued rise in domestic interest rates.

“In addition to relatively weak growth prospects, slow progress in tackling corruption, coupled with the potentially severe economic consequences of the US reaction to SA’s alleged compromising of its non-aligned stance in relation to the Russia/Ukraine conflict, has added further to South Africa’s country risk premium,” the trading update says. As a result, bond yields have increased sharply and the rand has declined to record lows against the US dollar.

Reflecting on the recently released Financial Stability Review from the South African Reserve Bank (Sarb), Nedbank economist Liandra da Silva noted that one of the newer, but more critical risks identified by the Sarb is that of possible direct or indirect sanctions against South Africa. In the past month, the US, a key trade partner, has accused South Africa of selling arms to Russia in support of the war against Ukraine. To put the trade relationship in perspective, the US accounts for about 9.7% of South Africa’s total export revenue, while Russia accounts for just 0.3%.

The allegations and the South African government’s ensuing defensive stance have raised concerns about whether the country is genuinely neutral in its position, fuelling tensions with the US. “The financial stability impact will be significant should this risk materialise. The Sarb states that, at worst, it could trigger a systemic event,” Da Silva says.

The potential consequences attached to this risk include:

• A significant disruption to SA’s financial system, given that it will not be able to make international payments in US dollars;
• Loss of correspondent banking relationships and more intensive scrutiny of South African financial institutions by foreign counterparties, even in the absence of formal secondary sanctions; and
• A sudden stop to capital inflows and increased outflows.

Nedbank’s credit loss ratio for the period from January to end April has also been higher than expected, on the back of bad debts, with the effects of a more-difficult-than-expected macroeconomic environment and the resultant impact on debt collections. However, the bank pointed out that at this point in the cycle, the incremental accounting benefit of higher interest rates on endowment income for the period continued to exceed the incremental increase in impairments (bad debts).

“The higher impairments and increased credit loss ratio reflect the impact of higher-than-expected interest rate increases, higher levels of inflation and higher levels of load shedding on consumers,” Nedbank said. Although expenses growth was not quite in double-digit territory, it was fairly close to it and slightly ahead of management expectations as a result of higher non-salary related staff costs, higher levels of communication and travel costs and higher fees linked to revenue growth. DM