Nov. 5 (Bloomberg) -- Nedbank Group Ltd., the South African bank controlled by Old Mutual Plc, said annual profit may fall as much as 35 percent as job losses mount and consumers struggle to repay debts amid the country’s first recession in 17 years.

Earnings per share may drop 25 percent to 35 percent in the 12 months through December from the 15.58 rand reported a year earlier, the Johannesburg-based bank said in a statement today.

“The squeeze will continue because year-on-year the average interest rate is lower,” Mike Brown, chief executive officer-designate of Nedbank, said in a phone interview from Johannesburg today. “As interest rates decline you have pressure on endowments. There is no surprise.”

Bad retail debts at South African banks, including its biggest lender, Standard Bank Group Ltd., surged after 10 interest-rate increases in the two years through June 2008 hurt consumer spending. The central bank cut rates by five percentage points from December, narrowing the difference between the interest banks pay on deposits and earn on loans. This hurt lenders’ profit at the same time as consumers borrowed less.

Nedbank, the fourth-biggest South African bank, rose 62 cents, or 0.6 percent, to 114.17 rand as of 11:05 a.m. in Johannesburg. The stock is the best performer on the five-member FTSE/JSE Africa Banks Index, having risen 20 percent this year.

‘Better Than Expected’

Nedbank’s credit loss ratio, which measures impairments as a percentage of total loans, improved to 1.47 percent in the third quarter from 1.57 percent at the first half. Net interest income, the money it makes on loans after deducting interest paid to depositors, rose 1.1 percent while non-interest revenue, which includes fee and commission earnings, jumped 20 percent as Nedbank included ventures it runs with London-based Old Mutual.

Nedbank’s figures are “ slightly better than expected,” Chris Gilmour, an analyst with Absa Asset Management Private Clients, said in an e-mailed response to questions. “The two key drivers were the better-than-expected impairment figure compared with the better-than-expected non-interest revenue.”

The economic environment in South Africa, which accounts for 91 percent of Nedbank’s assets, is likely to remain weak for the rest of the year and consumers and companies will probably stay under pressure, the lender said. This may hurt transaction volumes, from which Nedbank reaps fees from cash withdrawals or card purchases, and asset growth from lending, it said.

Nedbank’s credit loss ratio is expected to “continue to improve slowly,” the lender said.

‘High Alert’

“There was a small improvement in consumer bad debts but the majority of the improvements were in wholesale banking,” Brown said. “Corporate bad debts were better than we expected them to be, but we’re still on high alert.”

After partnering with Ghana’s Ecobank Transnational Inc. in December last year to cooperate across 26 African countries, Brown said the lender is introducing clients to Ecobank and that “a number of them have used the facility” without there being a material impact on profit as yet.

Brown said while there were no immediate acquisitions planned, the bank remained “alert” to opportunities in South Africa and the rest of Africa, particularly in the Southern African Development Community.

Nedbank on Aug. 5 reported a 40 percent decline in first- half net income to 2.31 billion rand. It still has more money on hand than regulators require, the lender said today.

“It’s probably better to continue building up capital reserves, even though it is, like all South African banks, well capitalized,” Gilmour said. “But who knows what the South African Reserve Bank may require in future.”

Nedbank said it continues to be “cautious” about prospects and its forecasts for the rest of the year. “Uncertainty about potential job losses and property prices, as well as the effect of increases in the electricity price, continue to restrict consumer spending,” the lender said.

To contact the reporter on this story: Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net

Last Updated: November 5, 2009 04:40 EST