FINANCIAL REPORT

'IT IS PLEASING, AFTER A STRONG FOURTH QUATER, TO HAVE FINISHED THE YEAR WITH EARNINGS MARGINALLY AHEAD OF MANAGEMENT'S EXPECTATIONS SET OUT IN THE THIRD-QUARTER TRADING UPDATE. THIS ALSO SAW THE GROUP RECORDING DOUBLE-DIGIT EARNINGS GROWTH FOR THE FIRST TIME SINCE 2007. IMPORTANTLY, THIS EARNINGS GROWTH WAS ACHIEVED DESPITE CHALLENGING ECONOMIC CIRCUMSTANCES WHILE THE GROUP CONTINUED TO INCREASE TANGIBLE NET ASSET VALUE AND CONTINUED STRENGTHENING ITS PROVISIONING AND CAPITAL LEVELS'
Graham Dempster
Chief Operating Officer		 Raisibe Morathi
Chief Financial Officer

Note: Further details on the global and domestic banking and economic environment have been outlined in the Chairman’s Statement, Chief Executive’s Report and Economic Review.
 

FINANCIAL OVERVIEW OF 2010
Headline earnings increased by 14,6% to R4,9 billion. Diluted headline earnings per share increased by 8,7% to 1 069 cents – the lower increase caused by the dilution from the issue of shares for the joint ventures acquired from Old Mutual in 2009 and a higher-than-usual acceptance level of the scrip dividend for the 2009 final dividend. Diluted basic earnings per share decreased by 5,3% to 1 050 cents, as 2009 basic earnings were boosted by a once-off International Financial Reporting Standards (IFRS) revaluation gain of R547 million from the consolidation of the joint ventures. The higher average capital, from the issue of shares for the joint ventures and the higher script take-up, reduced gearing, resulting in return on ordinary shareholder’s equity (ROE) excluding goodwill and ROE remaining flat at 13,4% and 11,8% respectively.

A final cash dividend was declared at 268 cents, with the cover ratio of 2,3 times similar to the 2009 ratio. The total dividend for the year grew by 9,1% to 480 cents per share.

FINANCIAL REPORTING

Nedbank Group continues to strive for best-practice communication with stakeholders. This was acknowledged through a number of awards:
• The group was ranked first in the banks/financial services category in the Investment Analysts Society Awards for best reporting and communication.
• The Nedbank Group Annual Report was again, for the second year in succession, ranked third out of the top 100 companies listed on JSE Limited at Ernst & Young’s 2010 Excellence in  Corporate Reporting Awards. This ranking is adjudicated by the accounting department of the University of Cape Town in conjunction with Ernst & Young.
• Nedbank Group also won the JSE Top 40 Award for its 2009 Annual Report at the Annual Chartered Secretaries Southern Africa and JSE Limited Awards.

These awards are highly regarded and set the benchmark for measuring corporate governance and transparency in communication.

DETAILED REVIEW OF RESULTS

Headline earnings increased by 14,6% from R4 277 million to R4 900 million. Diluted headline earnings per share increased by 8,7% from 983 cents to 1 069 cents, slightly above the forecast range of 0% to 8% provided in the third-quarter trading update. Basic earnings decreased by 0,3% from R4 836 million to R4 811 million, with diluted earnings per share (DEPS) decreasing by 5,3% from 1 109 cents to 1 050 cents. As previously reported, 2009 basic earnings included a once-off IFRS revaluation gain of R547 million (after taxation) from the acquisition and consolidation of the Nedbank Wealth joint ventures.

The group recorded a ROE, excluding goodwill of 13,4% and a ROE of 11,8%. With the respective ROE metrics remaining flat and the cost of equity increasing from 13,25% to 14,15%, the group showed an economic loss of R289 million [2009: economic profit R57 million (restated)].

The group maintained its well-capitalised balance sheet with core Tier 1 capital at 10,1% (2009: 9,9%), while advances grew by 5,5%, with market share gains in most lending classes aside from home loans.

Net asset value per share grew by 8,0% from 9 100 cents in December 2009 to 9 831 cents in December 2010. This is a pleasing result, given the increase in the average number of shares in issue following the acquisition of the joint ventures from Old Mutual and scrip dividend payments last year.

KEY FINANCIAL INDICATORS

FOR THE YEAR ENDED 31 DECEMBER
% change
2010
2009
Headline earnings (Rm) 14,6 4 900 4 277
Diluted headline earnings per share (EPS) (cents) 8,7 1 069 983
Diluted basic EPS (cents) (5,3) 1 050 1 109
Core Tier 1 capital adequacy* (%)   10,1 9,9
Tier 1 capital adequacy* (%)   11,7 11,5
Total Basel II capital adequacy* (%)   15,0 14,9
ROE (%)***   11,8 11,8
ROE (excluding goodwill) (%)***   13,4 13,4
Return on assets (ROA ) (%)***   0,82 0,76
Net asset value (NAV ) per share (cents) 8,0 9 831 9 100
Tangible net asset value (NAV ) per share (cents) 10,3 8 160 7 398
Dividend per share (cents) 9,1 480 440
Margin (%)   3,35 3,39
Credit loss ratio – banking advances (%)   1,36 1,56
Pre provisioning operating profit** (Rm) 2,6 12 454 12 143
Non-interest revenue (NIR)/expenses ratio (%)   79,6 78,8
Efficiency ratio (%)   55,7 53,5
Assets under management (Rm)+ 17,6 102 570 87 204
Life assurance embedded value (Rm) 29,7 1 031 795
Life assurance value of new business (Rm) 57,8 295 187
Headline economic (loss)/profit***   (289) 57
* Including unappropriated profits.
** Profit before taxation and impairments.
*** Certain of the group’s reporting ratio calculations have been adjusted. The 2009 ratios for ROE and ROA have been restated with the denominator changing from simple average to daily average for equity and total assets values respectively. The calculation of the credit loss ratio has been changed from simple average advances to daily-average banking advances (thereby excluding trading advances from the calculation). Comparatives have been restated accordingly.
+ Restated

RETURN ON EQUITY DRIVERS

FOR THE YEAR ENDED 31 DECEMBER

Return eguity driver table image

Click To Enlarge

CLUSTER PERFORMANCE
The business clusters delivered strong NIR growth, improved impairments and contained costs below original forecasts given to the market, through continued cost discipline and optimisation, while expanding the group’s footprint.

The banking clusters’ results were impacted by increased allocation of central costs and negative endowment earnings from lower average interest rates, which were 198 basis points lower compared with 2009. The capital optimisation exercises in Nedbank Retail and Nedbank Business Banking continued and resulted in more efficient use of capital, while the lower levels of capital used resulted in a lower endowment of interest revenue in these clusters.

Nedbank Retail reported an encouraging improvement in impairments, particularly in home loans. Impairments improved in most other businesses, with Nedbank Corporate, Nedbank Wealth and Nedbank Business Banking again recording credit loss ratios within or below through-the-cycle target ranges. Nedbank Capital incurred a higher level of impairments in shareholders’ loans in its private equity portfolio.

The businesses generated strong growth in core fee and commission income, driven primarily by volume growth, primary client acquisition and a number of innovative products focused on growing NIR. Nedbank Capital recorded improved trading income, particularly in the equity businesses. Nedbank Wealth’s earnings benefited from the integration of the former joint ventures and strong growth in new business, particularly in the insurance and asset management businesses.

These factors are reflected in the strong ROEs in the wholesale businesses and Nedbank Wealth, and the much-improved earnings in Nedbank Retail.

STATEMENT OF COMPREHENSIVE INCOME
Rm – year ended %change 2010 2009
NII 1,9 16 608 16 306
Impairments (6,7) (6 188) (6 634)
Income from lending activities 7,7 10 420 9 672
NIR 11,0 13 215 11 906
Total expenses 9,9 (16 598) (15 100)
Indirect taxation 2,1 (447) (438)
Associate income <(100) 1 55
Headline profit before taxation 8,1 6 591 6 095
Direct taxation 10,9 (1 366) (1 232)
Minorities and preference shares (44,5) (325) (586)
Headline earnings 14,6 4 900 4 277
Basic earnings (0,3) 4 811 4 826

The key components of the moves on the statement of comprehensive income are reflected in the following tables.

NET INTEREST INCOME
NII increased by 1,9% to R16 608 million (2009: R16 306 million) and the group’s net interest margin held up well at 3,35% (2009: 3,39%), despite the impact of lower interest rates. Average interest-earning banking assets increased by 3,0% (2009 growth: 9,0%).

Margin compression was less than expected. Margin pressure primarily resulted from reduced endowment from lower average interest rates and the higher cost of lengthening the funding profile. Endowment included net capital endowment of 4 basis points arising from the 1,98% reduction in average interest rates and a drop of 14 basis points in margins on low-rate deposits. Lengthening of the funding profile cost the group 6 basis points. This was partially offset by:
• the widening of margins from asset pricing improvements and a change in asset mix, including strong growth in the group’s retail motor finance and personal loans businesses;
• a relative prime/Johannesburg Interbank Agreed Rate (JIBAR) reset benefit as a result of less aggressive interest rate cuts during 2010 compared with 2009; and
• a decline in the market cost of term liquidity during the last quarter of the year.

NET INTEREST INCOME-MARGIN ANALYSIS
% of daily average interest-earning banking assets % Rm
December 2009 3,39 16 306
Growth in banking assets   492
Net capital endowment (0,04) (222)
Prime/JIBAR reset risk 0,05 263
Liability mix and price movement (0,18) (876)
  Endowment on deposits (0,14) (703)
  Cost of lengthening funding profile (0,06) (273)
  Change in marginal cost of funds 0,02 100
Asset mix and margin improvement 0,12 586
Other 0,01 59
December 2010 3,35 16 608

IMPAIRMENTS CHARGE ON LOANS AND ADVANCES
The credit loss ratio on the banking book improved to 1,36% for the period [2009: 1,52% (restated)].

The reduction in the impairment charge was driven mostly by Nedbank Retail, particularly in the secured portfolios, which had lagged the recovery in the unsecured portfolios. Lower interest rates and the stabilising of job losses contributed to the retail credit loss ratio improving significantly from 3,17% in 2009 to 2,67%. From the table below it is clear the second half was better than the first.

The group further strengthened its provisioning by reducing certain security assumptions in specific impairments, increasing levels of portfolio provisioning on debt restructures of R97 million and lengthening the bad debt emergence period assumptions within Nedbank Retail home loans at an additional cost of R114 million within portfolio impairments.

The credit portfolios in Nedbank Corporate, Nedbank Business Banking and Nedbank Wealth are of high quality and credit loss ratios remained within or below the respective clusters’ through the- cycle levels. Nedbank Capital impairments increased in the risk private equity portfolio.

CREDIT LOSS RATIO Year to Second First Year to
December half half December
(%) 2010 2010 2010 2009*
Nedbank Capital 1,27 1,72 0,80 0,36
Nedbank Corporate 0,20 0,10 0,31 0,25
Nedbank        
Business Banking 0,40 0,48 0,32 0,52
Nedbank Retail 2,67 2,42 2,93 3,17
Nedbank Wealth 0,15 0,05 0,24 0,47
  1,36 1,27 1,46 1,52

* Restated for average interest-earning banking advances and integration of Imperial Bank.
Defaulted advances decreased by 1,04% to R26 765 million (2009: R27 045 million). Defaulted advances to total advances decreased from its peak in June 2010, of 6,01%, to 5,63%. Total impairment provisions increased by 14,6% to R11 226 million (2009: R9 798 million), resulting in strengthened coverage ratios.

NON-INTEREST REVENUE
The group’s focus on NIR generated growth across all the clusters. NIR increased 11,0% to R13 215 million (2009: R11 906 million). On a comparable basis NIR growth was 9,8% after adjusting for the acquisitions in 2009 of the Nedbank Wealth joint ventures and before fair-value adjustments to the group’s subordinated debt. The ratio of NIR to expenses improved to 79,6% (2009: 78,8%).

Core fee and commission income grew strongly by 13,7% (like-for-like growth of 11,2%, adjusting for the Nedbank Wealth joint ventures) through volume growth, new products and new client acquisitions.

Insurance income grew 39,8% (18,4% on a like-for-like basis, adjusting for the Nedbank Wealth joint ventures) primarily as a result of the provision of insurance on a fast-growing personal loans book as well as the introduction of new products and improved levels of cross-selling.

Trading income increased by 13,9% to R2 096 million (2009: R1 841 million). In 2009 interest rates decreased at a rapid pace and created favourable trading conditions. Low volatility in the first half of 2010 resulted in difficult conditions for global markets and continued pressure on foreign exchange volumes and margins. This was offset by improved equity trading in the second half of the year.

Private equity markets remained constrained throughout the year. Listed-property private equity investments showed some modest gains. Overall NIR from the private equity portfolios decreased by 25,0%.

NON INTEREST REVENUE
FROM PRIVATE EQUITY December December
Rm 2010
Nedbank Capital 149 269
Nedbank Corporate Property Finance 79 35
Total NIR from private equity 228 304

NIR was negatively impacted by R213 million (2009: R6 million profit) over the period as a result of the adverse fair-value adjustments from the narrowing of the credit spreads on the group’s subordinated debt. Nedbank Corporate also reflected a negative fair-value adjustment of R55 million (2009: R72 million profit) due to a downward movement in the yield curve and related convexity in the fixed-rate advances book and associated interest rate swaps.

NON INTEREST REVENUE
  % change      
Rm–year ended like-for-like* % change 2010 2009
Commission and fees 11,2 13,7 9 758 8 583
Insurance income 18,4 39,8 860 615
  11,6 15,4 10 618 9 198
Trading income   13,9 2 096 1 841
Private equity income   (25,0) 228 304
Non-banking subsidiary income   (9,3) 185 204
Other income   9,8 346 315
  10,5 13,6 13 473 11 862
Fair-value adjustments   >(100) (258) 44
Credit spread on bonds /swaps     (213) 6
Basis and other net IFRS adjustments     (45) 38
         
  8,0 11,0 13 215 11 906




NIR remains a core focus of the group, as it consumes less capital while providing a buffer to the interest rate cycles.

At the end of 2009 the group announced that it was setting a medium to long-term target for the NIR-to-expenses ratio of greater than 85%, which is used to monitor progress across the group.

Reporting 79,6% at December 2010, the group continues to close this gap gradually as a result of strong NIR generation, while still investing for growth in innovation, systems and footprint.

EXPENSES
The group has maintained a strong cost discipline over an extended period, resulting in the increase in expenses remaining below the market guidance given at the beginning of 2010.

Expenses grew by 9,9% to R16 598 million (2009: R15 100 million). The increase was partly due to the acquisition of the Nedbank Wealth joint ventures and the consolidation of Merchant Bank of Central Africa. Expenses increased by 8,5% on a comparable basis.

• Staff expenses increased by 11,3% (9,8% on a comparable basis), due to annual salary increases and an increase in staff numbers of 1,8%. Staff numbers increased mostly towards the end of 2010 in line with the group’s growth strategy, with most staff placements in the frontline sales force and credit areas. All staff from Imperial Bank were transferred to Nedbank without any retrenchments. Short-term incentives increased by 17,8%, slightly ahead of earnings growth as a result of out performance on non-financial measures included in the calculations. Long-term incentive costs include a reversal of prior periods’ costs where performance targets were not met. Further details on remuneration are included in the Remuneration Report.
•Fees and insurance increased by 13,1% (12,3% like-for-like) as NIR grew and following an increase in card, membership association and cash fees linked to the growth in cash handling and deployment of ATMs.
• Strategic marketing and public relations costs grew by 17,2%, mostly from the launch of products within Nedbank Wealth and Nedbank Retail, cross-selling initiatives and the increased visibility around the FIFA 2010 World Cup. These efforts are indicative of the group investing for growth.

EXPENSES
% change
Rm-year ended like-for-like* % change 2010 2009
Staff costs 9,8 11,3 8 794 7 898
  Remuneration and other staff costs 7,5 9,1 7 691 7 052
  Short-term incentive   17,8 981 833
  Long-term incentive   >100 122 13
Computer processing 6,3 7,1 2 135 1 993
Marketing and public relations 16,4 17,2 1 009 861
Fees and insurance 12,3 13,1 1 592 1 407
Other 2,1 4,3 3 068 2 941
  8,5 9,9 16 598 15 100

* Including BoE and Nedgroup Life in full for 2009.

EFFICIENCY RATIO

Pressure on NII from endowment-related margin compression was again, as in 2009, the main contributor, which led to the efficiency ratio deteriorating from 53,5% to 55,7%.

TAXATION

The taxation charge (excluding taxation on non-trading and capital items) increased by 10,9% to R1 366 million (2009: R1 232 million), arising from profit growth adjusted for:

• dividend income as a proportion of total income being lower than in 2009;


• lower provision for secondary tax on companies, owing to an increase of shareholders (81,5%) who  elected to take scrip for the 2009 final dividend distribution (2008 final dividend distribution: 32,0%); and
• reduced accounting effect from structured finance transactions that continued to unwind.

The effective tax rate increased marginally from 20,2% to 20,7%.

NON-TRADING AND CAPITAL ITEMS
Income after taxation from non-trading and capital items decreased to a R89 million loss from a R547 million profit in 2009. The main component of this was an anticipated R34 million writedown on Imperial Bank computer software following the acquisition. The 2009 accounting profit arose from the revaluation of BoE (Pty) Limited and Nedgroup Life on the acquisition of the remaining shares in the joint ventures.

CAPITAL
The group’s capital adequacy ratios remained well above the group’s internal targets and marginally ahead of December 2009. This resulted from ongoing capital and risk-weighted asset optimisation, a strategic focus on ‘managing for value’ and a 0,6% increase in capital from higher levels of scrip take up and other share issues for staff incentives and black economic empowerment structures. This growth was offset by the approximately 1,3% negative impact on the group’s capital adequacy ratios from the cash acquisition of 49,9% of Imperial Bank and the treatment of capitalised software as an intangible asset rather than as a fixed asset for capital adequacy purposes.

CAPITAL ADEQUACY
%		 Internal
target range		 Regulatory
minimum
2010 2009
Core Tier 1 ratio 10,1 9,9 7,5 to 9,0 5,25
Tier 1 ratio 11,7 11,5 8,5 to 10,0 7,00
Total capital ration 15,0 14,9 11,5 to 13,0 9,75

Ratios calculated including unappropriated profits.

A number of enhancements relating to the internal capital allocation to business clusters were implemented in 2010. A major effect of these enhancements has been to allocate most of the surplus capital held at a group level to the clusters, and the comparative results for the operational clusters have been restated accordingly. These enhancements aligning cluster and group have had no impact on the group’s overall capital levels and ROE, but have impacted the ROEs recorded by the clusters on a restated basis.

FUNDING AND LIQUIDITY
Nedbank Group’s liquidity position remains sound. The group continues to focus on diversifying its funding base, lengthening its funding profile and maintaining appropriate liquidity buffers.

Nedbank Group increased its long-term funding ratio partially from increased capital market issuances under the domestic medium-term note programme (R6,23 billion) and has increased the duration in the money market book.

The group’s liquidity position is further supported by a strong loan-to-deposit ratio of 97% and a low reliance on interbank and foreign currency funding. Nedbank Group is able to leverage off its favourable retail, commercial and wholesale deposit mix, which compares well with domestic industry averages.

BASE III DEVELOPMENTS
The majority of the Basel III proposals have recently been finalised, although some significant aspects remain to be completed in 2011. In South Africa the details of exactly how Basel III will be adopted will be determined by the South African Reserve Bank (SARB).

For Nedbank Group, the impact of the new capital requirements is expected to be manageable. On a pro forma basis for 2010 the group is in a position to absorb the Basel III capital implications, with all capital ratios still remaining above the top end of current internal target ranges. These should improve further by the end of 2013 from projected earnings, continuing capital and risk-weighted assets optimisation, and the impact of the group’s active portfolio management strategy.


STATEMENT OF FINANCIAL POSITION - BANKING/TRADING CATEGORISATION
AT 31 DECEMBER                
  2010 2009
        Elimi-       Elimi-
Rm Total Banking Trading nations Total Banking Trading nations

ASSETS

                
Cash and cash equivalents 8 650 8 621 29   7 867 7 860 7  
Other short-term securities 27 044 18 067 12 306 (3 329) 18 550 9 151 14 411 (5 012)
Derivative financial instruments 13 882 258 15 673 (2 049) 12 710 250 13 796 (1 336)
Government and other securities 31 824 31 571 4 313 (4 060) 35 983 35 448 4 594 (4 059)
Loans and advances 475 273 455 595 19 678   450 301 436 536 13 765  
Other assets 10 014 4 446 5 568   5 455 4 406 1 049  
Clients’ indebtedness for acceptances 1 953 1 953     2 031 2 031    
Current taxation receivable 483 483     602 602    
Investment securities 11 918 11 604 314   11 025 10 748 277  
Non-current assets held for sale 5 5     12 12    
Investments in associate companies and joint ventures 936 936     924 924    
Deferred taxation asset 284 15 269   282 82 200  
Property and equipment 5 811 5 799 12   5 178 5 163 15  
Long-term employee benefit assets 2 052 2 044 8   1 860 1 860    
Mandatory reserve deposits with central banks 11 095 11 095     10 508 10 508    
Intangible assets 7 494 7 492 2   7 415 7 415    
Inter divisional assets –   12 022 (12 022) –   10 087 (10 087)

Total assets

 608 718 559 984 70 194 (21 460) 570 703 532 996 58 201 (20 494)

EQUITY AND LIABILITIES

                
Total equity attributable to equity holders of the parent 44 101 41 543 2 558   39 649 37 298 2 351  
Non-controlling interest attributable to:                
– ordinary shareholders 153 153     1 849 1 849    
– preference shareholders 3 560 3 560     3 486 3 486    

Total equity

 47 814 45 256 2 558 – 44 984 42 633 2 351 –
Derivative financial instruments 12 052 2 168 11 933 (2 049) 11 551 1 502 11 385 (1 336)
Amounts owed to depositors 490 440 454 648 39 129 (3 337) 469 355 439 536 34 839 (5 020)
Provisions and other liabilities 18 245 5 887 16 410 (4 052) 11 252 5 735 9 568 (4 051)
Liabilities under acceptances 1 953 1 953     2 031 2 031    
Current taxation liabilities 191 191     315 315    
Deferred taxation liabilities 1 804 1 640 164   1 945 1 887 58  
Long-term employee benefit liabilities 1 414 1 414     1 304 1 304    
Investment contract liabilities 7 309 7 309     6 749 6 749    
Insurance contract liabilities 1 392 1 392     1 133 1 133    
Long-term debt instruments 26 104 26 104     20 084 20 084    
Inter divisional liabilities – 12 022   (12 022) – 10 087   (10 087)

Total liabilities

 560 904 514 728 67 636 (21 460) 525 719 490 363 55 850 (20 494)

Total equity and liabilities

   559 984 70 194 (21 460) 570 703 532 996 58 201 (20 494)


AVERAGE BANKING BALANCE SHEET AND RELATED INTEREST
FOR THE YEAR ENDED 31 DECEMBER
2010 2009
Average Margin statement Average Margin statement
Rm balance interest balance interest
    Assets Received % Assets Received %

Average prime rate

     9,90     11,88
Advances and clients’ indebtedness for acceptances:            
  – Home loans (including properties in    possession) 146 426 11 962 8,2 144 197 14 456 10,0
  – Commercial mortgages 81 936 7 686 9,4 76 648 8 330 10,9
  – Lease and instalment debtors 65 400 7 303 11,2 61 539 7 655 12,4
  – Credit card balances 7 733 1 106 14,3 7 347 1 188 16,2
  – Bills and acceptances* 1 955 20 1,0 2 598 41 1,6
  – Overdrafts 13 230 1 331 10,1 13 366 1 577 11,8
  – Term loans and other** 139 256 11 304 8,1 133 519 13 040 9,8
  – Impairment of loans and advances (10 628)     (8 917)    
Government and public sector securities 34 923 2 929 8,4 36 815 3 442 9,3
Short-term funds and trading securities 15 699 736 4,7 14 266 808 5,7

Interest-earning banking assets

 495 930 44 377 8,9 481 378 50 537 10,5
Net inter divisional assets – trading book (666)     762    
Revaluation of FVTPL***-designated assets 1 442     606    
Trading investments (12)     (129)    
Derivative Financial instruments 93     148    
Insurance assets 8 435     6 796    
Cash and banknotes 2 083     1 867    
Other assets 7 123     5 649    
Associates and Investments 2 984     2 842    
Property and equipment 5 399     4 689    
Intangible assets 7 387     6 571    
Mandatory reserve deposit with central banks 11 766     11 055    

Total banking assets

 541 964 44 377 8,2 522 234 50 537 9,7
  Liabilities Paid % Liabilities Paid %
             
Deposit and loan accounts 238 284 13 955 5,9 249 736 19 585 7,8
Current and savings accounts 56 878 788 1,4 55 623 1 188 2,1
Negotiable certificates of deposit 111 230 8 319 7,5 100 163 9 656 9,6
Other interest-bearing liabilities**** 42 264 2 420 5,7 40 623 2 161 5,3
Long-term debt instruments 25 696 2 287 8,9 16 478 1 641 10,0

Interest-bearing banking liabilities

 474 352 27 769 5,9 462 623 34 231 7,4
Other liabilities 11 317     10 340    
Revaluation of FVTPL***-designated liabilities 1 442     606    
Derivative and financial instruments 1 445     1 052    
Investment contract liabilities 8 257     6 702    
Ordinary shareholders’ equity 41 305     35 697    
Minority shareholders’ equity 3 846     5 214    

Total shareholders’ equity and banking liabilities

 541 964 27 769 5,1 522 234 34 231 6,6

Interest margin on average interest-earning banking assets

 495 930 16 608 3,35 481 378 16 306 3,39
Where possible, averages are calculated on daily balances.
* Includes clients’ indebtedness for acceptances.
**Includes term loans, preference shares, factoring debtors, other lending-related instruments and interest on derivatives.
***FVTPL fair value through profit and loss.
**** Includes foreign currency liabilities and liabilities under acceptances.

Once Basel III has been finalised, Nedbank Group will review its target capital ratios.

In respect of the two proposed liquidity ratios, the liquidity coverage ratio for implementation in 2015 and the net stable funding ratio (NSFR) for implementation in 2018, the impact of compliance by the SA banking industry would be punitive if implemented as they currently stand, particularly the NSFR in the light of structural constraints within the SA financial market. This is the case for many emerging-market jurisdictions around the world as the negative effect on economic growth and employment would be significant. The group anticipates that a pragmatic approach will be followed by the SARB on this issue.

ADVANCES
Nedbank Group continued to make good progress in improving asset quality and active management of the bank’s portfolios towards higher economic profit businesses resulted in slower asset growth in selected areas. The group grew advances ahead of the industry at 5,5% to R475 billion (2009: R450 billion). The advances by cluster are as follows:

Advances Rm) % change December 2010 December 2009
Nedbank Capital 12,7 62 328 55 315
  Banking activity 2,6 42 650 41 550
  Trading activity 43,0 19 678 13 765
Nedbank Corporate 8,0 157 703 146 035
Nedbank Business Banking 1,3 50 765 50 115
Nedbank Retail 4,1 187 334 179 885
Nedbank Wealth (11,6) 16 869 19 089
Other >100 274 (138)
Total advances 5,5 475 273 450 301

Core banking advances in Nedbank Capital grew by 2,6% from December 2009, with R10,8 billion of new advances largely offset by repayments. Nedbank Corporate advances grew by 8,0%. Nedbank Business Banking advances ended marginally up with R12 billion of new advances being offset to a large extent by repayments of other loans. The repositioning of Nedbank Retail and the focus on growing advances that potentially generate higher economic profits resulted in home loans decreasing, as planned, by 0,2%, with stronger growth in personal loans, cards and motor finance of 37,7%, 7,9% and 13,3% respectively. Properties in possession decreased by 25,4%. The strength of the rand and the investment in UK Treasury bills, compared with previous placements with other banks, led to a decrease in advances in Nedbank Wealth.

DEPOSITS
Deposits increased by 4,5% to R490 billion (2009: R469 billion). Optimising the mix of the deposit book remains a key focus in reducing the high cost of longer-term and professional funding. This is critical as banks compete more aggressively for lower-cost deposit pools with longer behavioural duration and as banks start to take cognisance of the possible Basel III liquidity ratios. Low interest rates coupled with low domestic savings levels and the de leveraging of consumers led to modest growth in retail deposits during 2010. Relatively higher deposit growth in the wholesale sector indicated increasing working capital and available capacity among corporates. Demand for higher-yielding negotiable certificates of deposit (NCDs) remained strong throughout the year within the professional funds and corporate markets.

Rm % change 2010 2009
Current accounts 7,0 47 672 44 539
Savings accounts (3,5) 14 756 15 294
Term deposits and other 3,4 293 467 283 829
      Call and term deposits (6,7) 166 386 178 424
      Fixed and other deposits 20,6 127 081 105 405
Foreign currency liabilities 39,2 9 781 7 027
NCDs and floating-rate notes 6,6 110 584 103 731
Deposit repurchase agreements (5,1) 14 180 14 935
Total deposits 4,5 490 440 469 355

PROSPECTS

The group’s medium-term targets remain unchanged and are included, with our current outlook for performance against these targets for the 2011 year, in the table below:

Medium- to long-term targets 2011 outlook
ROE (excluding goodwill) 5% above monthly weighted average cost of ordinary shareholders’ equity Improving, remaining below target.
Growth in diluted headline EPS At least consumer price index + gross domestic product growth + 5% Improving, forecast to exceed target.
Credit loss ratio                                Between 0,6% and 1,0% of average advances Improving, remaining above target.  
NIR/expenses ratio > 85% Improving, remaining below target.
Efficiency ratio < 50,0% Improving, remaining above target
Basel II core Tier 1 capital adequacy ratio 7,5% to 9,0% Improving, remaining above top end of target range.
Basel II Tier 1 capital adequacy ratio 8,5% to 10,0% Improving, remaining above top end of target range.
Basel II total capital adequacy ratio 11,5% to 13,0% Improving, remaining above top end of target range.
Economic capital                                Capitalised to 99,93% confidence interval on economic capital basis (target debt rating A including 10% buffer).
Dividend cover policy Range of 2,25 to 2,75 times Range of 2,25 to 2,75 times.
     

* Consumer price index excluding impact of mortgage interest costs.


REPORTING CHANGES

• In 2009 the group acquired the remaining shares in Nedgroup Life Assurance Company, BoE Private Clients and Fairbairn Private Bank (the previous joint ventures with Old Mutual). These assets, previously accounted for as associates, together with other insurance and wealth management businesses, led to the creation of Nedbank Wealth as a separate business cluster in August 2009. The new businesses were consolidated into Nedbank from June 2009. This cluster, which reported as part of Nedbank Retail in 2009, is now reporting separately and therefore the comparatives have been adjusted accordingly.
•The remaining 49,9% shareholding in Imperial Bank was acquired by the group and the transaction approved in February 2010. A further approval for business integration and cancellation of its banking licence was granted by the SARB in October 2010. This business, which was previously fully consolidated, has been fully integrated into Nedbank Retail and Nedbank Corporate respectively. Imperial Bank is therefore no longer shown as a separate segment.
•The ratios for ROE and ROA have been restated with the denominator changing from simple-average to daily-average for equity and total asset values respectively. The calculation of the credit loss ratio has been changed from simple-average advances to daily-average banking advances (thereby excluding trading advances from the calculation). Comparatives for ROE and ROA changes do not affect the segmental ratios, but do affect the group ratios, while credit loss ratio changes affect both.
•The comparative results for the cluster segment reporting at 31 December 2009 have been restated in line with the group’s implementation of a revised economic capital allocation methodology as well as the integration of Imperial Bank Limited within various operating segments. These restatements have no effect on the group results and ratios, and changes only segment cluster results and ratios.
• Economic profit for the group was restated as a result of changing the calculation of economic profit for cost of equity from simple-average equity to daily-average equity. The revised economic capital allocation and the effect of the integration of Imperial Bank Limited therefore change the clusters’ allocated capital and economic profit.

FORWARD-LOOKING STATEMENTS

This integrated report contains certain forward-looking statements with respect to the financial condition and results of operations of Nedbank Group and its group companies that, by their nature, involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, global, national and regional economic conditions; levels of securities markets; interest rates; credit or other risks of lending and investment activities; as well as competitive and regulatory factors. By consequence, all forward-looking statements have not been reviewed or reported on by the group’s auditors.

ACKNOWLDGEMENT

I would like to thank the finance teams within Nedbank Group who have, once again, shown tremendous commitment continually to enhancing disclosure and working tirelessly to complete the results for the year. I would also like to acknowledge the support of our shareholders, both locally and internationally, through what has been an extremely trying economic period.



Raisibe Morathi
Chief Financial Officer