It is pleasing to report to shareholders on the group’s 2012 performance across a broad front.
Nedbank Group’s strong franchise and growth orientation together with the momentum built in the first half of the year resulted in the group’s delivering headline earnings growth of 21% to R7,5bn and the return on equity (ROE) (excluding goodwill) increasing from 15,3% to 16,4%, underpinned by improvements in the return on assets. All key performance indicators improved and all business clusters showed growth in earnings. This performance was achieved through strong revenue growth, an improved credit loss ratio and responsible expense management while strengthening the balance sheet and investing for growth.
We have continued to deliver on the four key strategic focus areas that we announced at the time of my appointment as Chief Executive three years ago, which demonstrates that disciplined execution of our strategy is producing sustainable growth.
My report covers the key highlights for the year in the context of the macro environment as well as progress made against our key strategic focus areas and our medium-to-long-term financial targets.
The Chairman’s Report covers broader sociopolitical and sustainability issues, while the report of the Chief Financial Officer provides a detailed analysis of our financial performance in 2012 and provides guidance for 2013.
Banking and economic environment
The global economic slowdown continued for most of 2012, with recessionary conditions in many advanced economies negatively affecting growth in leading emerging economies such as China, India and Brazil. Signs of improvement in various geographies emerged in the fourth quarter of the year, giving rise to cautious optimism that global economic conditions may stabilise and potentially start to improve in 2013.
SA’s gross domestic product (GDP) is expected to have grown at around 2,5% in 2012 after expanding 3,5% in 2011. Concerns around the operating environment and infrastructure constraints, the widening current account deficit, rising national debt, higher inflation, high levels of unemployment, declining trends in competitiveness and wage settlements outpacing productivity were included in the rationale by international rating agencies Moody’s, Standard and Poor’s and Fitch Ratings for the downgrade of SA’s sovereign-debt rating, which in turn placed pressure on the rand. Domestic bond yields have, however, remained stable.
Households remained the primary driver of private sector credit demand, with the unexpected 50 basis points (bps) reduction in interest rates in July 2012 providing some relief for highly indebted consumers against rising electricity, food and fuel costs. Growth rates in unsecured lending are slowing as expected.
Corporate credit demand improved towards the end of the year as the recovery in public sector infrastructure spending supported industries producing capital goods and other inputs for local projects, although corporates on the whole remained cautious, constrained by a weak Eurozone and a relatively sluggish domestic economic environment.
Building Africa’s most admired bank by delivering sustainably to all our stakeholders
During the year we developed a strategic framework that will enable delivery of our vision of building Africa’s most admired bank by all our stakeholders and assist in creating a vibrant and flourishing SA through appropriate alignment of our activities with the National Development Plan. This is underpinned by a firm belief that our long-term success is inextricably linked to our ability to fulfil our social purpose.
In 2012 we continued to deliver to all our stakeholders and a few of our achievements are listed below to highlight our progress in realising our vision:
We created over 450 new permanent jobs in SA as we expanded our reach at a time that many businesses locally and internationally were looking at large-scale retrenchments. We invested R352m in the development of our staff and more than 1 300 managers attended our personal mastery and team effectiveness Leading for Deep Green Programme in the period under review. Our multiyear focus on values-based behaviour has led to higher levels of staff morale and an ongoing positive shift in corporate culture, which now are at worldclass levels as measured by our Barrett Survey. We continued to focus on diversity at all levels in the organisation and in the review period 8 500 staffmembers participated in our Batho Pele Diversity Programme.
More people in SA chose to bank with Nedbank as we gained new clients across Nedbank Retail, Nedbank Wealth and our wholesale businesses, taking overall client numbers above 6m for the first time. We paid out R144bn in new loans, an increase of 24,1% on the previous year. We launched a number of market-leading innovations such as the Nedbank App SuiteTM, MyFinancialLifeTM and Small Business FridayTM in association with the National Small Business Chamber. With pricing uppermost in the minds of our clients, we strive to provide great-value banking and have saved clients R163m through promoting the use of bundled products. We continued to increase our footprint and added 80 new staffed outlets and 476 new ATMs, making banking more convenient for our clients. Client satisfaction metrics measured by Net Promoter Scores across the group are at multiyear highs. It was therefore pleasing to see Nedbank being externally recognised by Euromoney as the best bank in SA in2012, following on from our winning the prestigious FT/The Banker award as Bank of the Year in SA for 2011.
In 2012 the Nedbank Group share was the second best performer among the shares of the big four banks, having generated a 34,3% total shareholder return and a total dividend of 752 cents, which is up 24,3%. We have the exciting opportunity for shareholders to participate in the Africa growth story through our rights to acquire 20% in Ecobank Transnational Incorporated (ETI), with our combined operations creating the largest Pan-African banking footprint.
We remain aware of the importance of all regulators to our industry, especially in view of the regulatory issues many global banks are still dealing with. To be admired by our regulators has now been part of our vision for nearly a decade, and we continue to work well with all of them. We are glad to report that our capital levels are robust and that we were well positioned for the implementation of Basel III on 1 January 2013, with a pro forma common equity Tier 1 (CET1) ratio of 11,6% under Basel III. We are also on track for the Solvency Assessment and Management regime on 1 January 2015. Cash taxation contributions of R6,2bn relating to direct, indirect and other taxation, including PAYE on behalf of staff, were made. The strength of our balance sheet and franchise was recognised, with Fitch upgrading our credit rating in July 2012, although the five largest SA banks were downgraded in January 2013 following the downgrade of the SA sovereign rating.
We continue to make banking more accessible and affordable for the entry-level market and rural communities, having identified numerous growth nodes in non-urban areas for expansion. We have invested R1,4bn to increase our staffed outlets and ATMs by over 44% and 75% respectively since 2009. From inception we have donated more than R200m to charities through our innovative card affinity programmes and in 2012 we contributed R116m to socioeconomic development. On the transformation side we achieved a Department of Trade and Industry (dti) code level 2 for the fourth consecutive year and were ranked first overall out of the top 50 JSE-listed companies in the Financial Mail/Empowerdex Top Empowered Companies survey. Our leadership role in environmental sustainability was demonstrated by initiatives such as the funding of a large percentage of SA’s renewable-energy programme and the introduction of the Nedbank Green Savings Bond. We maintained our carbon-neutral status and received the Financial Times 2012 Sustainable Bank of the Year for Africa and the Middle East as well as African Business Environmental Sustainability in Africa 2012 award.
Group strategic focus
Our strategic focus areas remain relevant and outward-looking, with a focus on growing the franchise and delivering on its key strategic initiatives of repositioning Nedbank Retail, growing non-interest revenue (NIR), implementing the portfolio tilt strategy and expanding into the rest of Africa.
Nedbank Retail is allocated 39,1% of the group’s capital and its strategic repositioning will contribute significantly to the ongoing improvements in the group’s performance. While endeavouring to leverage the early turnaround gains to achieve an ROE at or above the cost of equity (COE) of 13% by the end of 2013, a year ahead of the original 2014 target, the deteriorating credit health of consumers noted in the last quarter of 2012 could make this challenging to deliver. Continued excellent progress was made in positioning Nedbank Retail as a more client-centred and integrated business while maintaining growth momentum in the underlying businesses, growing the number and quality of clients, embedding effective risk management practices and strengthening balance sheet impairments.
Our NIR-to-expenses ratio target of > 85% is a key focus area as we continue to deliver good-quality annuity income through commission and fee growth from primary-client gains, volume growth, new innovative products and cross-sell. This should reduce the volatility of future earnings. We are also focused on disciplined expense management and resource optimisation, and in our Technology Division we enabled greater efficiencies, including the rationalisation of 20 banking systems and the reduction of our servers from 3 500 to 1 139 since 2009.
The portfolio tilt strategy continued to gain traction, enabling economic profit (EP) growth from R57m in 2009 to R1 511m in 2012. Excellent growth in commission and fee income of 13,7%, insurance income of 24,9%, assets under management of 34,1%, and deposits of 5,1%, while emphasising profitable secured lending, demonstrates the benefit of focusing on these strategically important EP-rich, lower-capital and liquidity-consuming activities.
In the short to medium term the group’s primary focus on SA and the Southern African Development Community (SADC) area continues to benefit the group, as this region has the largest EP pool for financial services in sub-Saharan Africa. The rights to acquire a shareholding of up to 20% in ETI in less than two years create a path to provide a significant benefit for Nedbank clients in the rest of Africa and the opportunity for shareholders to gain access to the higher economic growth in the rest of Africa in a prudent yet substantive manner.
The consolidation of the high-net-worth offerings of BoE Private Clients and Fairbairn Private Bank under the new brand of Nedbank Private Wealth was completed and the newly constituted Nedbank Private Wealth launched in 2012. This signifies a step change in strategic direction for the high-net-worth segment through the consolidation of the various value propositions and brands into a single distinctive international high-net-worth business. This move eliminates previous confusion linked to multiple brands and enables Nedbank Private Wealth to leverage Nedbank’s strong brand equity. Nedbank Private Wealth’s existing and prospective clients, both in SA and internationally, now have access to an integrated wealth management solution that includes investments, banking, fiduciary services, insurance and philanthropy.
In 2011 we highlighted that early warning signals indicated a decline in the health of consumer credit. Our observations revealed an increased consumer demand for larger and longer unsecured loans, a deterioration in the number of clients in good credit standing and a steady increase in debt counselling applications. Through our risk management practices and wish to see increased consumer financial fitness, we continue to monitor these macro and micro indicators. We are of the view that the high industry growth rates in personal loans are masking the underlying level of distress in this market, as clients close to default can be ‘cured’ through debt consolidation mechanisms provided by the many players offering larger loan sizes and longer tenors. For this reason we have not changed the loan size and tenor maxima since 2009 and have increased conservatism in our impairment policies. We remain vigilant in respect of our risk appetite, ensuring quality granting of credit in line with a client’s overall affordability and as part of a holistic value proposition that aims to improve overall financial fitness. The Nedbank Ke Yona banking offering is a good example of this.
In that spirit Nedbank launched the Ke Yona TV advert in mid-2011 that was broadcast in three languages and warned consumers ‘not to take expensive loans that take forever to pay back’. We have formulated and implemented various initiatives to improve our debt review processes and practices. This forms part of our commitment to working with all our regulators, including the National Credit Regulator (NCR), to ensure a stable and sustainable credit industry in SA. We continue to support debt review dispute resolution forums such as the National Debt Mediation Association (NDMA) and Credit Ombud. As referred to in the Chairman’s Report, Nedbank and other banks reached an agreement with various industry bodies to improve responsible lending and prevent households from being caught in a debt spiral. Together with members of The Banking Association SA (BASA), we are actively engaged in workstreams covering six key initiatives to refine lending practices and formulate appropriate debt relief measures for distressed borrowers.
Unlike delays experienced in Europe and the USA, Basel III has been successfully implemented in SA from 1 January 2013, and Nedbank is extremely well positioned, particularly with regard to the key capital, liquidity and leverage components. Our group CET1 capital adequacy ratio strengthened in 2012 under Basel II.5 from 10,5% to 11,4% and to 11,6% on a pro forma Basel III basis.
We reset our target capital adequacy ratio (CAR) range for CET1 under Basel III to 10,5% – 12,5% (Basel II: 7,5% – 9,0%) based on the final, fully phased-in 2019 Basel III set of minimum regulatory requirements, which constitutes a full through-the-cycle target range and includes a conservative management buffer and allowance for any potential Pillar 2B bank-specific South African Reserve Bank (SARB) add-on. Under Basel III we are already in the middle of our new target range, and approximately at the planned operating level, excluding any countercyclical capital buffer (CCB) add-on that may be introduced from 2016. The CCB is unlikely to be required in the foreseeable future, as we do not anticipate excess aggregate credit growth over the medium term.
In May 2012 the SARB announced that banks would be able to include cash reserves in the calculation of the liquidity coverage ratio (LCR) and that it would make available a committed liquidity facility (CLF) of up to 40% of the LCR requirements – on this basis we would be compliant with the Basel III LCR on a pro forma basis at 31 December 2012. Amendments to the LCR announced by the Basel Committee on Banking Supervision on 6 January 2013 are likely to be adopted by the SA regulator. The revisions to the LCR will be beneficial for banks, with associated cost savings and more time to implement the LCR.
The Basel Committee also announced that work to revise the net stable funding ratio (NSFR) will commence in 2013 and span 12 to 24 months. The impact of NSFR compliance by SA and most banking industries worldwide would be punitive if the NSFR is implemented as currently set out in the draft requirements, significantly impacting both global and domestic economic growth and job creation. Structural constraints within SA financial markets will add further challenges to domestic compliance with the NSFR. The SARB and National Treasury, in conjunction with the financial services industry, are engaging proactively during the observation period prior to implementation in order to address any unintended consequences for SA and we expect that a fundamental revision and a pragmatic approach will be applied to the NSFR well in advance of its proposed implementation in 2018.
SA’s banking system as a whole is less risky than many banking sectors elsewhere and has much lower leverage, and deleveraging is not a factor in SA.
Despite a more promising start to many financial markets in 2013, there appears to be downside risk in most developed and many emerging-market economies, and forward visibility is limited.
SA’s GDP is forecast to grow by 2,6% in 2013. Interest rates are likely to remain lower for longer and are expected to be unchanged through most of 2013.
Consumer indebtedness is anticipated to ease gradually, but still remains high in comparison with historical levels, particularly with 39-year-low interest rates and the changing mix, with the proportion of unsecured lending increasing. Combined with uncertainties around job security, this is expected to limit the growth in demand for housing and other secured loans. Industry growth rates in unsecured lending are unsustainable and are expected to continue to moderate. General uncertainty is likely to continue to affect the level of business confidence and contain capital expenditure and growth in wholesale assets in the private sector. Government and public corporations are forecast to escalate their infrastructure spending, which should contribute to improved wholesale advances growth.
Making progress towards our medium-to-long-term targets
The group’s medium-to-long-term targets remain unchanged as shown here, with the exception of revised targets relating to capital adequacy and dividend cover following finalisation of the SARB guidelines on Basel III capital levels and the new dividend tax regime in SA announced during the year.
We have strongly growing and diverse annuity income streams, a long-term record of disciplined expense management, a sound funding base, improving asset quality trends, strong capital levels and stable management teams. These attributes, together with a multiyear focus on the importance of culture and values, position us well to continue to deliver to all our stakeholders in 2013 and to adapt to a volatile and challenging economic environment.
In this challenging operating environment from both a macroeconomic and regulatory perspective the leadership and guidance afforded to me by our Chairman, Reuel Khoza, are highly valued. I would like to thank him and my board colleagues for the guidance, oversight and governance provided. Your commitment and active participation in the group are invaluable.
It is a privilege to work with a high-performing and talented executive team that is aligned behind the vision and values of Nedbank. Together we have achieved a significant amount in the past three years and I thank you for your support and commitment in ensuring that the group continues to deliver across the social, economic, environmental and cultural pillars of sustainability as we build Africa’s most admired bank.
Finally, thank you to all our clients for choosing to bank with Nedbank and to all our 28 000 people across the group in and outside SA for your hard work and loyalty. I look forward to your continued support in 2013 and beyond.