Legacy IT And Rising Regulatory Burdens Will Weigh On Prospects

Key Takeaways

• Weak digital transformation and legacy IT systems risk accelerating customer attrition and diminish Nedbank's relevance amid aggressive fintech competition.
  
• Heavy reliance on a challenging domestic market and rising regulatory costs threaten profitability and heighten exposure to demographic and economic headwinds.
  
• Digital transformation, sectoral leadership in sustainable finance, operational efficiencies, robust capital position, and franchise growth position Nedbank for sustained margin and earnings expansion.

Catalysts

Provides various wholesale and retail banking services in South Africa and internationally.

• Persistent digital disruption and the rapid rise of aggressive fintech competitors are eroding Nedbank's traditional market share, compressing both fee and lending margins while driving up the cost of retaining and acquiring customers over the long term. This will pressure revenue growth and net interest margins as digital-first banks capture younger and more mobile clients.
  
• The slow pace of genuine digital transformation relative to key competitors, coupled with outdated legacy IT systems and high operational complexity, risks driving higher customer attrition, diminished product relevance, and further stagnation in net margin advancement.
  
• Overexposure to a sluggish domestic economy with limited geographic diversification makes Nedbank acutely vulnerable to structural demographic headwinds such as persistent youth unemployment, modest real income growth, and a shrinking pool of creditworthy borrowers, which will constrain advances growth and raise earnings volatility.
  
• Regulatory and compliance burdens are set to climb meaningfully as capital, liquidity, and anti-money laundering requirements tighten and ESG frameworks become more onerous, translating to higher ongoing costs and suppressed profitability in both the medium and long term.
  
• Intensifying competition from non-traditional financial services (fintechs, digital banks, and telcos) and ongoing declines in demand for branch-based banking will leave Nedbank at risk of stranded asset costs while eroding returns on invested capital, particularly as physical infrastructure becomes costlier to justify and necessitates expensive modernization.

Nedbank Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nedbank Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nedbank Group's revenue will grow by 9.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.2% today to 22.0% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 19.5 billion (and earnings per share of ZAR 42.91) by about August 2028, up from ZAR 16.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 6.6x today. This future PE is greater than the current PE for the ZA Banks industry at 7.7x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.31%, as per the Simply Wall St company report.

Nedbank Group Future Earnings Per Share Growth

Risks

• Nedbank's digital transformation strategy is gaining traction, as evidenced by double-digit growth in digital usage, a seamless automated customer journey, and 70% of retail sales now taking place online, all of which signal greater operational efficiency and long-term improvements in both revenues and net margins.
  
• Sectoral leadership in green finance and sustainable development, including ZAR 189 billion in sustainable finance exposure (almost 20% of gross loans), strong growth in renewable energy lending, and innovative green property initiatives, position Nedbank well to benefit from increasing global and local demand for ESG products, potentially providing a stable and growing fee-based income stream.
  
• Successful restructuring of operating clusters, the integration of insurance and wealth management with retail, and continued cost containment measures such as reduced headcount and floor space have already resulted in productivity gains, with further improvements in the cost-to-income ratio and returns targeted over the medium to long term, thereby supporting margin expansion and earnings growth.
  
• Nedbank's strong capital (CET1 ratio at 13.1% above the board range) and liquidity buffers provide a platform for strategic M&A, business expansion (notably into SADC and East Africa), and the capacity for sustained high dividend payouts and share buybacks, all of which can be accretive to shareholder value and underpin long-term earnings resilience.
  
• Robust advances in core franchises (notably CIB with ROE above 20%, retail and commercial deposit market share gains, and strong client growth in digital products) as well as the redeployment of capital from the sale of the underperforming ETI stake into higher-growth businesses may drive higher revenues and return on equity over the next several years.

Valuation

• The assumed bearish price target for Nedbank Group is ZAR239.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nedbank Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR374.23, and the most bearish reporting a price target of just ZAR239.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR88.9 billion, earnings will come to ZAR19.5 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 19.3%.
  
• Given the current share price of ZAR229.43, the bearish analyst price target of ZAR239.0 is 4.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.