CHAIRMAN’S REPORT

NEDBANK GROUP STRIVES TO BE A LEADER IN SUSTAINABILITY, NOT ONLY FOR THE STRATEGIC POSITIONING OF THE GROUP BUT, MOST IMPORTANTLY, BECAUSE IT MAKES SOUND BUSINESS AND MORAL SENSE.   Governance and King III One of the most dominant themes on the corporate agenda in the past year has been the King Report on corporate governance (King III) that has introduced profound changes to reporting through a heightened focus on organisational sustainability. We welcomed the introduction last year of King III, as we believe this will be a catalyst to enhance governance and reporting standards of local companies further. Our governance standards are already highly rated internationally, as evidenced by South Africa being ranked first for auditing and reporting standards out of 139 countries in the World Economic Forum Global Competitiveness Report 2010 – 2011. Since the inception of King III, Nedbank Group has endeavoured to apply the principles of the code and reviewed governance practices against these principles. The board is satisfied with the group’s compliance with King III and that alternate governance controls are in place and are appropriately explained in cases where the principles have not been applied.

 

Integrated sustainability reporting

Sustainability is a function of the balance of economic, environmental and social forces and should create value for staff, clients, investors, the communities in which we operate and the environment. King II introduces behaviours and governance practices that require reporting across these areas. Nedbank Group has a fourth dimension of cultural sustainability, as we believe employees have a critical role to play in building a sustainable group and supporting our efforts in the other three areas.

An example of how the imbalance of these forces can have disastrous consequences was the collapse of many international companies during the global financial crisis of the past few years, which can be ascribed to a lack of social sustainability. In certain instances executives engaged in self-enrichment and high-risk practices, and lost sight of their responsibility to their clients and the society in which they operate.

An integrated approach balances the interests of all stakeholder groups, demonstrating that all are as important as shareholders, and company reporting and disclosure now need to reflect this. It is therefore with pleasure that Nedbank Group presents this first integrated report to its stakeholders.

Leadership in sustainability

By creating an equitable balance between the four pillars of sustainability we can make a valuable contribution not only to the economic wellbeing of our country, but also to the future of the country, uplifting and empowering people and preserving our natural resources. Companies operate in an economic ecosystem and, unless there is balance, they cannot generate returns on a sustainable, long-term basis.

Nedbank Group has been widely acknowledged for its progress in sustainability, from being the first SA bank to be included in the Dow Jones World Sustainability Index and the first local bank to commit itself to the Equator Principles to being recognised as a leading performer in the South African Carbon Disclosure Leadership Index.

In July 2010 Nedbank Group became the first financial services group in Africa to achieve carbon neutrality, highlighting the group’s commitment to playing a leading role in sustainability.

Carbon neutrality provides a powerful platform for Nedbank Group to support national government in its efforts to drive the sustainable development of the country through the green economy. Our sustainability progress is addressed throughout the report, but group details may be found in the Chief Executive’s Report and in the Sustainability Development Performance section.

Economic and banking environment

The local economy had a strong start to the year primarily driven by improved global demand for commodities and a rebound in manufacturing production off the depressed levels of 2009. Economic activity was also boosted by strong infrastructural spending ahead of the FIFA 2010 World Cup and by the event itself, with consumer spending rising steadily for most of the year. However, fixed investment by the private sector contracted for the second year off the elevated levels seen in 2008.

Growth in both the emerging and some parts of the developed world surprised on the upside, supported by China’s economic strength and continued demand for commodities and capital goods. Massive liquidity injections by major central banks and historically low interest rates helped to stimulate economic growth further, particularly in emerging economies. In contrast, the underlying economic and financial environment remained fragile in the developed world, with fiscal difficulties in parts of Europe and America, continued weakness in credit markets, limited employment growth and inflationary concerns returning in emerging economies.

Household finances improved in South Africa as debt started to decrease and interest rates eased to the lowest levels in 36 years. The recovery in the credit cycle has proved to be more modest compared with previous cycles. Household demand for credit was contained by the consumer debt burden remaining relatively high, increased regulatory requirements, policy uncertainty and employment growth only resuming late in the year. Against this background the ratio of household debt to disposable income declined marginally to 78,2% from just over 80,0% at the end of 2009. At the same time debt service costs decreased to 7,5%, the lowest level since June 2006, and are now at a level that is more conducive to improving economic growth in the consumer sector.

In the corporate sector excess capacity and uncertainty over the sustainability of the local and global recovery limited spending. Government fixed-investment spending, although continuing to contract, emerged as the main foundation for growth.

Real gross domestic product (GDP) in South Africa grew by 2,8% in 2010, compared with a decline of 1,7% in 2009.

Our political economy

South Africa’s political economy is predicated on a few key pillars. At a political level we adhere to the rule of law, while freedom of speech and association are largely respected, and this makes our political environment commendable.

Our fiscal policies and practices are firmly entrenched and operate at a world class level. The Finance Ministry has been resolute in managing inflation and respecting the sound economic mechanisms that are in place, rather than artificially intervening to manipulate the relative strength and weakness of the rand. This approach augurs well for the economy.

In mid-year South Africa hosted the most successful football World Cup in history. The event showcased the country and its people to the world and boosted our image as a destination for direct investment and for the hospitality industry. More importantly, it showed that serious issues such as crime, in particular violent crime, can be contained and demonstrated that we have the capacity to manage these issues.

The World Cup taught our country numerous lessons and showed just what can be achieved when we apply our collective minds.

As outlined to shareholders in last year’s annual report, our political leadership faces the challenge of creating jobs and restoring the country to a sustainable growth path. The government’s recent focus on job creation is commendable and in a country where almost a quarter of our potentially economically active population is unemployed our priority must be to find employment for as many people as we can. This conflicts with the views of organised labour who are campaigning for the creation of ‘decent’ jobs.

In recent times there have been signs that some leaders are intent on eroding the credibility of our political system. Government appointments have been made that could not be justified in a mature democracy and restrictions have been placed on freedom of expression and association, while a concerning trend is the monetisation of politics in our country where access to and influence of the governing party can be turned into instant wealth. Politics becomes powerful currency by allowing access to political largesse, and this can only undermine the essence and soundness of our political economy.

Board of directors

Our board was strengthened with the appointment of Joel Netshitenzhe as an independent non-executive director. We are fortunate to have attracted a director with his strategic ability and experience of social policy, economics and politics.

Tom Boardman became a non-executive director following his retirement as Chief Executive and we are delighted to have retained his extensive knowledge and experience, together with his true passion for and commitment to the group.

During the year we said farewell to Bob Head from Old Mutual plc and Jabu Moleketi, who resigned after a brief tenure on the board following his appointment as Deputy Chairman of the Development Bank of Southern Africa and Chairman of Brait.

One of our longest-serving board members and senior independent director, Chris Ball, steps down at the annual general meeting in May after reaching the mandatory retirement age for directors. We are pleased to advise shareholders that Malcolm Wyman will succeed Chris as Chairman of the Group Audit Committee.

The board currently comprises 17 directors, with 14 being non-executive and eight of these being classified as independent in terms of King II. We are currently canvassing potential candidates to appoint two further independent non-executive directors to the board.

There are two areas of board governance where the group does not adhere to the recommendations of King II and we have therefore applied alternate governance processes. As Chairman of the board, I am not classified as independent owing to my directorship of the group’s parent company, Old Mutual plc, and through my relationship with Aka Capital, one of the shareholding partners in the group’s black economic empowerment transaction. In response to this situation the position of lead independent director was created in 2007.

The board has also deliberated over the King II requirement that non-executive remuneration should comprise a base fee and an attendance-per-meeting fee. Our collective view is that this requirement is less relevant to our non-executive directors owing to the responsibilities of being a director of a bank and the need for boardmembers to provide input on an ongoing basis outside of board meetings.

Shareholding

The group has established a credible strategy for growth with the key thrusts being the repositioning of Nedbank Retail, growing the group’s non-interest revenue, focusing on areas that yield higher economic profit and a greater focus on the rest of Africa. We recognise that having a strong global bank as a controlling shareholder could accelerate delivery of this strategy and therefore welcomed HSBC Holdings plc approaching Old Mutual plc to acquire a controlling stake in the bank.

Our bank is robust and adaptable, and following HSBC’s decision to end the negotiations our people have acquitted themselves admirably in continuing to focus on our strategy and vision of building Africa’s most admired bank. The group’s results, ending the year slightly above our expectations at the time of the HSBC approach, are further testament to this.

Old Mutual plc has indicated that it would reduce its stake in Nedbank Group if it was in the best interests of all stakeholders.

Macro-outlook

The lower domestic interest rates and rising levels of income should boost consumer spending. Together with improving global demand, this is expected to increase confidence levels and lead to better consumer demand and capital formation in 2011 and further momentum in 2012.

Retail banking credit growth should fare better as household credit demand improves, house prices edge higher and impairments moderate. Corporate markets are expected to show modest improvement, while the small and medium enterprise market is likely to remain under pressure until fixed-investment activity improves.

Government spending should continue to underpin growth, although this is expected to be limited by the reduction in fiscal deficits over the medium term. Government’s stronger focus on job creation is also positive and much will depend on the ability to create a more enabling environment for business growth. Key to this will be improvements in the building of infrastructure and a more conducive and certain regulatory and policy environment to reduce the medium-term constraints on economic growth.

The group’s prospects across economic, environmental, social and cultural sustainability are covered in the Financial Report and the Sustainable Development Perfomance section.

Appreciation

In closing, I thank my board colleagues for their insight and counsel over the past year as well as their commitment to the affairs of the group in an increasingly demanding governance, regulatory and
legislative environment.

Thank you to Mike Brown and his Group Executive Committee for their leadership of the group. Mike is a most worthy successor to Tom Boardman and has demonstrated his leadership authority in the face of serious challenges. He has the wisdom and understanding of one many years older and has ensured that the members of the executive team are aligned and focused on a common goal.

Leadership can only succeed over the longer term by sharing the values and aspirations of the followers, and this means being able to distinguish between that which is expedient and populist, and that which is serviceable and honest. It takes insight, empathy and discipline to achieve resonance with followers – and these are the personal and group qualities that we seek to promote.

On behalf of the board we thank the Banking Regulator for the constructive manner in which he engages with the bank, and for his oversight of the complex banking sector.

My gratitude knows no bounds for our staffmembers who have again demonstrated their commitment, and it is most pleasing to see the benefits of their hard work reflecting in the group’s improving performance.