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INVESTMENT CASE
NEDBANK GROUP’S OBJECTIVE OF BUILDING AN ORGANISATION THAT OPTIMISES RETURNS TO STAKEHOLDERS AND CREATES A SUSTAINABLE FUTURE IS ENABLED BY AN INTEGRATED APPROACH TO ECONOMICS OF THE BUSINESS, ENVIRONMENTAL PRESERVATION, INVOLVEMENT IN SOCIETY AND ORGANISATIONAL CULTURE.
LEVERS FOR GROWTH
RECOVERING ECONOMIC ENVIRONMENT POSITIVE FOR NEDBANK
+ Gross domestic product.
AN INTEGRATED APPROACH TO SUSTAINABLE GROWTH
Companies that have integrated sustainability have been proven to yield superior returns over the longer term. With this in mind, Nedbank Group’s activities over the past years were focused on entrenching its economic, environmental, social and cultural sustainability in order to enhance its appeal as a viable and attractive long-term investment opportunity.
The group has been acknowledged as a leader in sustainability by qualifying for the JSE Socially Responsible Investment (SRI) and the Dow Jones World Sustainability indices since 2004. This has assisted the group in obtaining preferential funding over the past six years.
Financial results for 2010 reflect good growth in headline earnings after periods of declining earnings during the peak of the economic crisis and recession. This performance is supported by the following:
• Selected growth in the market share of identified portfolios resulted in the group’s advances growth being higher than the industry average credit growth levels. The group’s portfolio tilt strategy, introduced in 2010, will continue to favour growth in businesses and products of strategic long-term importance, that are less capital consuming but provide sustainable economic profit returns.
• An improving trend in impairment levels is evident, particularly within secured retail lending. The wholesale book is of high quality, illustrating strong credit management.
• The opportunity exists to increase the group’s NIR-to-expense ratio from 79,6% to meet its medium- to long-term target of 85%. The results for 2010 have demonstrated strong growth in core NIR, supported by reasonable primary client growth across all clusters and increased levels of cross-sell. A combination of good client relationships, enhanced systems for electronic banking, growing the insurance and wealth offerings, leveraging price competitiveness and a focus on improving client service will enable the group to grow its transactional banking market share and revenue base in the future.
NON-INTEREST-REVENUE-TO-EXPENSE RATIO
• The ability to manage costs while investing for future revenue growth is demonstrated in the group’s expense growth rates of the past few years. The group’s efficiency ratio, at 55,7% in 2010, highlights prudent cost management during times of subdued income growth. Achieving a medium- to long-term efficiency target of 50% should provide a further upside to earnings growth.
• Capital adequacy ratios remain above both regulatory levels and internal targets, and the group’s relatively low leverage ratios, unlike those of major international banks, illustrate that it is well-positioned within the SA banking system, which remained structurally sound during the global credit crisis. This highlights that the group has a strong balance sheet in an uncertain environment, particularly in the light of Basel III proposals, and also provides a platform for growth as the economy recovers.
• Nedbank Group has built a resilient retail and wholesale deposit franchise.
• Nedbank Retail provides a significant turnaround opportunity as it implements its new differentiated client-centred strategy. As home loan impairment levels improve and cost synergies are extracted in the short to medium term, the aim of the strategy is to increase transactional business and the number of primary clients for long-term sustainable growth.
• The buyout in 2009 of the remaining shares in the former joint ventures with Old Mutual has enabled the Nedbank Wealth Cluster to grow significantly in areas of high-economic-profit business across its insurance and asset and wealth management offerings. In addition, the acquisition of 100% of Imperial Bank and in particular its strong Motor Finance Corporation business has bolstered Nedbank Group’s own motor finance business for strong future growth.
• The Nedbank Business Banking franchise is positioned well to leverage the high-growth, high-return and mainly sole-banked characteristics of its market segment by applying its unique decentralised and accountable decisionmaking business service model, which includes being involved in the business communities serviced by the bank. Business bankings alignment with Nedbank Retail will also benefit clients and future growth.
• Nedbank Corporate is a traditionally strong player in the domestic corporate banking market, is highly rated by clients, and leads in terms of market share in corporate lending and commercial property finance. The business will selectively grow advances while continuing to leverage its position to increase its transactional banking income through targeting primary-client growth.
• Nedbank Capital’s integrated full-service investment banking
model and ability to leverage client relationships, combined with
balance sheet strength across the group and expertise in major
domestic and African sectors, will provide growth opportunities
into the future.
• There is the opportunity to grow organically and through acquisitions in the Southern African Development Community region where gross domestic product growth over the medium to long term is likely to outpace that of South Africa.
• The landmark alliance with Ecobank enables Nedbank Group to offer clients access to banking services in 35 countries in Africa through an effective one-bank experience.
• Reducing the group’s impact on the environment and
demonstrating a leadership position in environmental
sustainability are becoming increasingly important. Nedbank
Group demonstrated its leadership commitment in this area
when it became the first financial services institution and major
corporation in Africa to achieve carbon neutrality.
• As climate change becomes more evident and the scarcity of natural resources increases, Nedbank Group is enhancing its social and environmental risk management tools to extend the philosophy of the Equator Principles beyond the project finance arena. These tools are also applied in a way that ensures that capital investments and shareholder value are protected.
• In 2010 the group celebrated its 20th year of partnership with the World Wide Fund for Nature and will continue to leverage and grow this relationship for mutual benefit into the future.
• Ongoing environmental impact reduction initiatives by the group continue to build its reputation as a green bank, while these also deliver economic benefits in the form of long-term cost savings.
• For the second consecutive year Nedbank Group was rated the third most transformed company listed on JSE Limited and the number one financial services group per the Empowerdex annual survey of JSE-listed top 200 companies.
• The group has again met the level 2 requirements of the
Department of Trade and Industry (dti) broad-based black
economic empowerment Codes. This has been achieved through
continued improvement in all elements of the scorecard, while
still delivering on a number of Financial Sector Charter elements, including access to financial services. Despite increases in
employment equity targets in 2012 and the maturity of the black
economic empowerment (BEE) Eyethu share schemes, the group
plans to remain a level 2 dti contributor.
• A number of the Eyethu schemes, including the broad-based
employee scheme, the non-executive directors’ scheme, the retail
and corporate client schemes have matured. These schemes were
among the first to have reached a broad base of participants,
including over 14 000 employees, 35 000 retail clients, and
clients of the Nedbank Corporate, Nedbank Business Banking and
Nedbank Capital Divisions. Nedbank Group shares to the value
of R1 billion were awarded to these participants (using the share
price at 31 December 2010).
• A strong commitment to social responsibility is embedded in the group, with R80 million contributed to social upliftment by staff and clients and communities in the period under review.
• Nedbank Group has a strong and experienced management team
in place and completed a smooth leadership transition in 2010 with
the appointment of new Chief Executive, Mike Brown, and changes
to the Group Executive Committee – which remains among the
most skilled and transformed in the SA banking sector.
• The group has demonstrated a proven organisational capability to
succeed in tough times. A culture of governance, compliance and
sustainability is evident in controls and processes, and integrated
in the business as illustrated by the early adoption of the
principles of King III.
• Risk and capital management is embedded in the group’s culture and is aimed at creating a strong, stable and economically sustainable group.
• Since 2004 a positive shift in staff morale and a strong positive
move in corporate culture as a high-performing organisation have
been evident.
• The results of the 2010 Hewitt Staff Engagement Survey showed
that the group remains above the global financial services average
and within the accepted high-performance range.
• Cultural entropy, which measures the amount of dissonance in
the group, remained static in 2010 at 13% after declining steadily
from a high of 25% in 2005.
• The top 10 cultural values in the group, as measured by the annual Barrett Survey, continue to be aligned to support the group’s strategy.
