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FINANCIAL INSTITUTIONS
CREDIT OPINION27 March 2019
Update
RATINGS
Nedbank LimitedDomicile Johannesburg, South
Africa
Long Term CRR Baa2
Type LT Counterparty RiskRating - Fgn Curr
Outlook Not Assigned
Long Term Debt (P)Baa3
Type Senior Unsecured MTN- Fgn Curr
Outlook Not Assigned
Long Term Deposit Baa3
Type LT Bank Deposits - FgnCurr
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Akin Majekodunmi,CFA
+44.20.7772.8614
VP-Sr Credit [email protected]
Elena Ioannou, CFA +44.20.7772.1716Associate [email protected]
ConstantinosKypreos
+357.2569.3009
Senior Vice [email protected]
Sean Marion +44.20.7772.1056MD-Financial [email protected]
Nedbank LimitedUpdate to credit analysis
SummaryNedbank Limited's Baa3 (stable) deposit and senior debt ratings are in line with its baa3Baseline Credit Assessment (BCA). The bank's ratings are at the same level as South Africa'sBaa3 government ratings, reflecting the interlinkage between Nedbank's creditworthinessand that of the government. As of December 2017, the bank's direct and indirect governmentexposure was equivalent to about 170% of its capital. The majority of this exposure is onaccount of statutory liquidity requirements.
Nedbank's ratings reflect our expectation that (1) the bank's profitability will remain robust,supported by its solid local franchise (Nedbank is one of South Africa's four-largest bankswith an 19% share of system deposits as of December 2018); (2) asset risks will continue tobe relatively low despite rising credit losses; and (3) capitalisation will be resilient (reportedCommon Equity Tier 1 capital ratio of 11.6% as of December 2018). These strengths aremoderated by the bank's high proportion of confidence-sensitive wholesale deposit fundingand credit concentrations — structural issues faced by all major South African banks. Also, weexpect the slow economic growth in South Africa to continue to exert negative pressure onthe bank's financial performance.
Exhibit 1
Rating Scorecard - Key financial ratios
3.0% 12.3%1.1%
13.8% 18.4%
0%
5%
10%
15%
20%
25%
30%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Asset Risk:Problem Loans/
Gross Loans
Capital:Tangible Common
Equity/Risk-WeightedAssets
Profitability:Net Income/
Tangible Assets
Funding Structure: MarketFunds/ Tangible
Banking Assets
Liquid Resources: LiquidBanking Assets/Tangible
Banking Assets
Solvency Factors (LHS) Liquidity Factors (RHS)
Bank: Nedbank Limited (BCA: baa3) Median baa3-rated banks
So
lve
ncy F
acto
rs
Liq
uid
ity F
acto
rs
These represent our Banks rating methodology scorecard ratios, whereby asset risk and profitability reflect the weaker of eitherthe three-year average and the latest annual figure. Capital is the latest reported figure, but includes our adjustments. Fundingstructure and liquid resources ratios reflect the latest fiscal year-end figures.Source: Moody's Financial Metrics
THIS REPORT WAS REPUBLISHED ON 28 MAR 2019 TO CORRECT THE NAME OF A STAKEHOLDER IN NEDBANK GROUPIN THE AFFILIATE SUPPORT SECTION.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengths
» Robust profitability, supported by a solid local franchise.
» The bank's loss-absorption capacity is supported by resilient capital metrics.
Credit challenges
» A challenging operating environment, which is characterized by low economic growth, will strain the bank's asset quality.
» A high reliance on confidence-sensitive wholesale deposit funding, which is a structural feature of the South African banks, ispartially moderated by liquidity improvements.
OutlookNedbank's long-term senior unsecured and deposit ratings have a stable outlook, partly reflecting South Africa's stable outlook. Thestable outlook also reflects our expectations that the credit metrics of the bank will remain within the thresholds assumed by thebank's ratings over the next 12 to 18 months despite the risks posed by the still weak macroeconomic environment in South Africa.
Factors that could lead to an upgradeIn view of the sovereign rating constraint at Baa3, there is limited upward rating momentum for Nedbank's ratings over the near term.Any upgrade of the bank's ratings needs to be preceded by a sovereign rating upgrade, combined with an improvement of the bank'scredit risk profile.
Factors that could lead to a downgradeNedbank's deposit ratings could be downgraded if (1) the South African sovereign rating is downgraded, and (2) the bank's credit profileweakens substantially from the levels assumed by its current ratings.
Key indicators
Exhibit 2
Nedbank Limited (Consolidated Financials) [1]6-182 12-172 12-162 12-152 12-142 CAGR/Avg.3
Total Assets (ZAR million) 942,595 903,961 900,061 860,733 753,444 6.64
Total Assets (USD million) 68,771 73,018 65,818 55,547 65,128 1.64
Tangible Common Equity (ZAR million) 58,050 58,351 54,288 49,560 46,040 6.84
Tangible Common Equity (USD million) 4,235 4,713 3,970 3,198 3,980 1.84
Problem Loans / Gross Loans (%) - 3.0 2.8 2.5 2.6 2.75
Tangible Common Equity / Risk Weighted Assets (%) - 12.3 11.7 11.0 11.5 11.66
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) - 29.0 28.9 27.2 27.6 28.25
Net Interest Margin (%) 2.8 2.9 2.8 2.8 3.0 2.95
PPI / Average RWA (%) - 3.8 3.8 3.6 4.0 3.86
Net Income / Tangible Assets (%) 1.1 1.3 1.0 0.9 1.1 1.15
Cost / Income Ratio (%) 58.9 60.3 60.2 61.2 60.1 60.15
Market Funds / Tangible Banking Assets (%) 8.3 13.8 12.1 15.9 13.4 12.75
Liquid Banking Assets / Tangible Banking Assets (%) 18.5 18.4 20.9 19.3 17.4 18.95
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 27 March 2019 Nedbank Limited: Update to credit analysis
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Gross Loans / Due to Customers (%) - 102.7 98.1 101.9 103.7 101.65
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics
ProfileNedbank Limited (Nedbank) is a South African bank which, along with its subsidiaries, provides a range of banking and financialservices. As of December 2018, the bank held a market share of 17% in South Africa in terms of total assets. As of December 2018, thebank reported a total consolidated asset base of ZAR972 billion (about $68 billion). The bank operates primarily in South Africa, whichaccounted for 96% of its loans and advances as of year-end 2017.
Nedbank was established in 1888 as Nederlandsche Bank en Credietvereeniging voor ZuidAfrika, but was renamed Nedbank Limited in1971. The bank is a wholly owned subsidiary of Nedbank Group Limited (Nedbank Group), a South Africa-based company listed on theJohannesburg Stock Exchange (ticker: NED).
For further information on the bank's profile, see Nedbank Limited: Key Facts and Statistics - H1 June 2017, October 2017.
Detailed credit considerationsChallenging operating conditions will exert asset-quality pressure, and credit losses will likely riseNedbank's asset-quality ratios deteriorated in 2018. South Africa's challenging operating conditions characterized by low economicgrowth will likely pose continued challenges to all South African banks' asset quality. We expect real GDP growth of 1.3% in 2019 and1.5% in 2020, from 0.8% in 2018, levels still below the government's targeted growth levels.
Nedbank's reported nonperforming loans (NPLs) at the group level stood at 3.4% of gross loans as of December 2018, increasing from2.7% in December 2017. The 28.9% increase in NPLs reflects both the transition to IFRS 9 from IAS 39 on 1 January 2018, and thechallenging operating environment in South Africa which exerts negative pressure in borrowers' repayment capacity, particularly forindebted households and smaller businesses whose balance sheet and cash flow strength tend to be modest. Based on South AfricanReserve Bank's (SARB) BA900 returns, Nedbank's unsecured household loans and credit cards accounted for 5% of total loans andresidential mortgages accounted for an additional 20%, as of December 2018. However, the bank's exposure is lower than the bankingsystem average where unsecured household loans and credit cards account for 8% and residential mortgages 25% of the bankingsystem's total loans. This relatively limited exposure to households has supported Nedbank's asset quality because South Africancorporates tend to perform better than households as they have more resilient cash flow and lower debt levels, though we note thatcorporate performance varies across sectors. Despite the increase, the NPL ratio remains within the group target of less than 3.5%(through the cycle).
Reported loan-loss provisions-to-average gross loans ratio increased marginally to 0.53% as of December 2018 from 0.49% as ofDecember 2017. Given the pressures highlighted above, we expect some upward pressure on the bank's cost of risk over the next 12 to18 months, however, we expect this pressure to be manageable.
Nedbank's specific coverage of NPLs (Stage 3) at the group level was 36.8% in December 2018, with total provisioning coverageamounting to 61%. The bank's low specific provisions are mainly a reflection of its high collateral-based lending, such as commercialmortgages and household installment lending. Commercial property and home loans contributed to 42% of the bank's total advancesas of December 2018, and their credit losses have been lower than the average credit losses for the bank as a whole.
We expect profitability to remain resilient, despite pressure on revenueIn 2019, we expect Nedbank to continue to face slow business and earnings growth and a pickup in loan-loss provisions, on the back ofsubdued economic growth and weakness in certain corporate sectors and the consumer credit market. However, we expect profitabilityto remain resilient, supported by the bank's strong earnings quality. The bank's pre-provision income historically displays a low volatility(standard deviation of less than 25%).
Nedbank's profitability metrics have remained resilient despite slow economic growth (see Exhibit 3) and an uptick in portfolioimpairments on account of IFRS 9. The bank's reported return on assets and return on equity slightly decreased to 1.2% and 16.6%respectively as of December 2018 from 1.3% and 17.8% respectively the prior year. The bank's profitability is supported by a solid net
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interest margin, which was 2.8% in 2018. The bank's cost-to-income ratio deteriorated marginally to 58.9% as of December 2018 from58.2%, as of December 2017.
Exhibit 3
Nedbank's profitability has remained broadly resilient, despite the deterioration in the operating environmentProfitability metrics
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Return on Assets Net Interest Margin Return on Equity
Source: Nedbank Limited
Loss-absorption capacity is supported by resilient capital metricsThe bank's reported Common Equity Tier 1 capital ratio stood at 11.6% as of December 2018, down from 12.6% in December 2017, butwithin management's target range of 10.5% - 12.5% and well above the regulatory minimum requirement. The decrease in the bank'scapitalisation ratios reflects the growth in risk-weighted assets during the period and the full impact of IFRS 9 implementation. Thebank's Tier 1 ratio stood at 12.7%, as of December 2018, and is comparable to similarly rated global peers. Nedbank's reported totalcapital adequacy ratio (including unappropriated profits) stood at 15.7%, as of December 2018.
We expect Nedbank's capital metrics to remain resilient over the next 12 to 18 months as the bank should generate enough pre-provision income to cover its cost of risk.
High reliance on confidence-sensitive wholesale funding is partially moderated by gradual liquidity improvementsSouth African banks, including Nedbank, heavily depend on wholesale deposits, primarily sourced from South African corporates andfinancial institutions, including asset managers, insurance and pension companies, and money-market funds. Financial institutions,corporates and local banks contributed about 50% of Nedbank's rand-denominated deposits, as of December 2018, while householddeposits contributed just 24% (see Exhibit 4). This wholesale funding (from financial institutions, local banks and corporates) isgenerally more expensive and confidence-sensitive than retail deposits.
We negatively adjust South Africa's Macro Profile for this systemic issue, and as a result, we do not make any further adjustment toNedbank's scorecard. We also note that the closed rand system, whereby all rand transactions (physical and derivatives) have to becleared and settled in South Africa through a registered bank and clearing institution domiciled in South Africa, mitigates the risks tosome extent and makes the institutional funding base fairly stable. Additionally, South African banks, including Nedbank, have lowreliance on foreign-currency funding.
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Exhibit 4
Nedbank relies heavily on wholesale funding, which is a structural feature for South African banksLocal-currency deposit structure (December 2018)
Banks3%
Private financial companies29%
Private non financial corporates18%
Households24%
Central and provincial government sector 5%
Other depositors21%
Source: SARB BA900
Notwithstanding the funding risks we highlighted above, Nedbank's funding profile has improved in the recent years, supported bymanagement's efforts to lengthen the bank's long-term funding ratio, as well as diversify its funding base. The bank has lengthenedits funding ratio by issuing senior unsecured bonds and Basel III-compliant subordinated debt, while retail and savings products haveattracted household depositors. The bank's net loans-to-deposits ratio decreased to 90%, as of December 2018, from 94%, as the endof December 2017.
Nedbank's liquidity buffers have also improved, with the quarterly daily average liquidity coverage ratio (LCR) improving to 109% as ofDecember 2018, which is above the 90% minimum for 20181.
Source of facts and figures cited in this reportUnless noted otherwise, we have sourced data relating to systemwide trends and market shares from the central bank. Bank-specific figures originate from banks' reports and Moody's Banking Financial Metrics. In some instances where data for Nedbank wasunavailable, Nedbank Group's numbers were used because they provide a good proxy to Nedbank. All figures are based on our ownchart of account and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in theAnalysis of Financial Institutions, published on 9 August 2018.
Support and structural considerationsAffiliate supportWe do not incorporate affiliate support uplift in Nedbank's ratings. In March 2016, Nedbank's strategic partner, Old Mutual Plc,announced a new strategy (which was completed in 2018) to separate its four key underlying businesses, including Nedbank Group(the holding company of Nedbank). As of year-end 2018, Old Mutual Ltd's stake in Nedbank Group was 19.9%. We believe that theimpact of this separation on Nedbank will be largely neutral in view of the bank's relative independence and direct access to capitalmarkets.
Government supportWe assign a global local-currency deposit rating of Baa3, stable to Nedbank, in line with its baa3 BCA. We do not incorporate anygovernment support rating uplift on Nedbank's ratings given that the BCA is already at the sovereign issuer level of Baa3, stable.Additionally, following the events relating to African Bank Limited, we believe that the inclusion of a bail-in of senior unsecuredbondholders and wholesale depositors by the SARB indicates the regulator's willingness to impose losses on creditors of troubled banks.
Counterparty Risk RatingsMoody’s Counterparty Risk Ratings (CRRs) are opinions of the ability of entities to honour the uncollateralized portion of non-debtcounterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are nothonoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralizedportion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
agreements. We believe that CRR liabilities have a lower probability of default than the bank's deposit and senior unsecured debt asthey will more likely be preserved in order to minimise banking system contagion, minimise losses and avoid disruption of criticalfunctions. For this reason, we assign CRR, prior to government support, one notch above the adjusted BCA.
Nedbank's CRRs are positioned at Baa2/Prime-2We consider South Africa a jurisdiction with a non-operational resolution (non-ORR) regime. For non-ORR countries, the startingpoint for the CRR is one notch above the bank's Adjusted BCA (of baa3). No government support uplift is incorporated in the ratingsas the government’s capacity to provide support is constrained at its Baa3 rating. Nedbank's Counterparty Risk (CR) Assessment is alsopositioned at Baa2(cr)/P-2(cr), as the approach to reaching this assessment is identical to that for the CRR.
National scale ratings (NSRs)Nedbank's national scale long-term deposit rating is Aa1.za, indicating that the bank is one of the strongest credits within SouthAfrica. NSRs are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling marketparticipants to better differentiate relative risks, and they are not comparable with our globally applicable ratings.
About Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read inconjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.
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Rating methodology and scorecard factors
Exhibit 5
Nedbank LimitedMacro FactorsWeighted Macro Profile Moderate 100%
Factor HistoricRatio
InitialScore
ExpectedTrend
Assigned Score Key driver #1 Key driver #2
SolvencyAsset RiskProblem Loans / Gross Loans 3.0% baa2 ← → baa2 Quality of assets
CapitalTCE / RWA 12.3% baa3 ← → baa3 Expected trend
ProfitabilityNet Income / Tangible Assets 1.1% baa3 ← → baa3 Earnings quality Expected trend
Combined Solvency Score baa3 baa3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 13.8% baa2 ← → baa2 Extent of market
funding relianceLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 18.4% ba2 ← → ba2 Access to
committed facilitiesCombined Liquidity Score baa3 baa3Financial Profile baa3
Business Diversification 0Opacity and Complexity 0Corporate Behavior 0
Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Baa3Scorecard Calculated BCA range baa2-ba1Assigned BCA baa3Affiliate Support notching 0Adjusted BCA baa3
Instrument class Loss GivenFailure notching
AdditionalNotching
Preliminary RatingAssessment
GovernmentSupport notching
Local CurrencyRating
ForeignCurrency
RatingCounterparty Risk Rating 1 0 baa2 0 Baa2 Baa2Counterparty Risk Assessment 1 0 baa2 (cr) 0 Baa2 (cr) --Deposits 0 0 baa3 0 Baa3 Baa3Senior unsecured bank debt 0 0 baa3 0 (P)Baa3 (P)Baa3Dated subordinated bank debt -1 0 ba1 0 (P)Ba1 Ba1[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody's Financial Metrics
7 27 March 2019 Nedbank Limited: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Ratings
Exhibit 6Category Moody's RatingNEDBANK LIMITED
Outlook StableCounterparty Risk Rating Baa2/P-2Bank Deposits Baa3/P-3NSR Bank Deposits Aa1.za/P-1.zaBaseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa3Counterparty Risk Assessment Baa2(cr)/P-2(cr)Senior Unsecured MTN (P)Baa3NSR Senior Unsecured MTN Aa1.zaSubordinate Ba1NSR Subordinate MTN Aa3.za
Source: Moody's Investors Service
8 27 March 2019 Nedbank Limited: Update to credit analysis
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Endnotes1 The LCR minimum increased to 80% on 1 January 2017 and incrementally increased to 100% by 1 January 2019.
9 27 March 2019 Nedbank Limited: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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10 27 March 2019 Nedbank Limited: Update to credit analysis
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11 27 March 2019 Nedbank Limited: Update to credit analysis
