UPDATE 2-Nedbank's profit drops as S.African economy worsens, pushing up defaults

* Nedbank shares fall over 2% on FY results

* Profits drop 7%, bank cuts mid-term ROE target

* Bank says worsening economy has pushed defaults up, credit demand down

* Lender increases stake in Mozambique’s Banco Unico (Adds shares, CEO quote, details, bullets)

JOHANNESBURG, March 3 (Reuters) - Nedbank Group Ltd on Tuesday reported a near 7% drop in full-year profit and revised a key profitability target as the worsening South African economy pushed up defaults and cut demand for credit.

Growth in Africa’s most advanced economy has floundered in recent years amid power cuts and falling business and consumer confidence, with unemployment at its highest in more than a decade and living costs also rising.

Nedbank, one of South Africa’s four largest lenders, said the tough conditions meant it had to lower its medium-term target for return on equity to greater than 17% within two to three years, from an earlier goal for a ratio greater than 18% by 2020.

South Africa’s growth figures for the final quarter of 2019 are due later on Tuesday and are expected to show the economy has tipped into recession.

“What is much more important ... is GDP growth in the year ahead,” said Nedbank CEO Mike Brown.

He said the bank was forecasting growth of 0.7% for 2020, but this could be revised if power cuts are worse than expected or if global conditions worsen as a result of the coronavirus.

The bank’s impairment charges surged by 66.2% to 6.1 billion rand ($396 million), with rising defaults in the retail bank as well as in corporate and investment banking, in a sign that the deteriorating economy is starting to hurt consumers and businesses.

Impairments in the retail bank had this time last year were below its target range.

Like its peers, Nedbank has been trying to offset lagging domestic growth by growing its operations elsewhere on the continent and owns a 21% stake in its West African associate Ecobank.

The lender earned 668 million rand in income from Ecobank for the year, slightly up from 2018. However, Nedbank’s headline earnings per share - the main profit measure in South Africa - stood at 2,605 cents ($1.69), down 6.7% from last year.

The bank also reported one-off charges from the increase of its stake in Mozambique’s Banco Unico, the revaluation of some private equity investments and hyperinflation in Zimbabwe.

The company said it exercised an option to increase its stake in Mozambique’s Banco Unico from 50% to around 87.5% for 140 million rand. Brown said Mozambique was one of the only promising markets in the region thanks to blockbuster gas projects being developed on its northern coast.

Nedbank shares initially fell more than 2%, but regained some ground and were 1.43% lower by 0715 GMT.

$1 = 15.3932 rand Reporting by Emma Rumney; Editing by Devika Syamnath and Louise Heavens