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Commentary

BANKING ENVIRONMENT

The South African banking environment is experiencing the effects of a slowing domestic economic cycle and the secondary effects of the global financial crisis. In this challenging economic environment public sector infrastructure spending is expected to continue to provide some support for economic growth in the year ahead. Improved inflation statistics allowed for a 50 basis point decrease in interest rates in December 2008, the first since April 2005. A second cut of 100 basis points followed in February 2009. These interest rate cuts will provide some relief for consumers,  but are unlikely to stimulate economic growth in the short term.

The local banking environment faced a number of challenges in 2008:

  • Pressure on margins as the overall cost of longer-term funding increased. It was pleasing to note that,  throughout the year,  rand liquidity remained stable,  with the interbank lending market continuing to operate efficiently. Local banks have been able to finance new assets in the normal course of business.
  • Reduced capacity and increased cost of funding in the domestic debt capital markets.
  • Rising non-performing loans and lower levels of recoveries,  especially in the retail environment as household finances remained strained and asset prices came under pressure. This trend intensified in the second half of 2008 and has been increasingly affecting small and medium-sized businesses, and will undoubtedly also impact some larger corporates going forward.
  • Sharply slower retail advances growth,  partly offset by reasonable wholesale advances growth.

The progress made during the recovery programme and over the recent past to build a sustainable business continues to benefit the group and has resulted in the following:

  • Ongoing growth in the retail mass and middle-income segments and corporate markets.
  • Solid growth in retail deposits.
  • Pleasing growth in transactional banking volumes.
  • Improved margins on new advances through risk-based pricing.
  • Increased client activity in foreign exchange and interest rate markets.
  • Intensified focus on improving client service levels.

The Competition Commission inquiry into bank charges resulted in a detailed report in December 2008. Industry stakeholders have been given an opportunity by National Treasury to comment on the recommendations contained in the report. This input will be discussed by National Treasury with the Department of Trade and Industry,  the South African Reserve Bank and the Competition Commission,  and it is anticipated that the final outcome of the banking inquiry process and the impact on the banking industry will be finalised during 2009. Nedbank remains committed to an outcome that provides real benefit to consumers and ensures the ongoing competitiveness and stability of the financial services industry.

Basel II was successfully implemented on 1 January 2008 and used as a catalyst to enhance the management of risk and capital across the industry.

REVIEW OF RESULTS

Given the turmoil in the global financial markets and the slower domestic economy,  Nedbank Group is currently adopting a more conservative approach across its operations. The group intensified its focus on the following:

  • Increasing capital levels.
  • Growing deposits and liquidity.
  • Proactive risk management.
  • Selectively growing assets in businesses that are well-positioned to increase economic profit.
  • Continuing to manage for value in those businesses that have lower economic-profit profiles.
  • Managing down positions in riskier lines of business.

At the same time the group continues to invest for the future and is not seeking to maximise short-term profitability at the expense of longer-term sustainability at this point in the cycle.

Headline earnings decreased by 2,6% from R5 921 million to R5 765 million. Basic earnings grew by 6,4% to R6 410 million (2007: R6 025 million). 1

Diluted headline earnings per share (EPS) decreased by 2,0% from 1 429 cents to 1 401 cents. Diluted EPS grew by 7,2% from 1 454 to 1 558 cents,  driven largely by the R622 million after-tax profit on the sale of Visa shares in the first half of the year. 1

The group’s return on average ordinary shareholders’ equity (ROE),  excluding goodwill,  decreased from 24,8% to 20,1%. ROE dropped from 21,4% to 17,7% for the year. These declines were caused by slightly lower headline earnings,  mainly as a result of increasing retail impairment levels that reduced the return on assets,  together with higher capital levels as capital adequacy ratios increased during 2008.

Credit quality deteriorated throughout 2008, with Nedbank Retail’s impairments worsening significantly, while the wholesale banking portfolios showed a moderate deterioration in the second half of 2008. Overall impairments have increased,  although the impact on earnings was partially offset by controlled cost growth. The momentum built from disciplined cost management over the past few years continued into 2008 and contributed towards the efficiency ratio improving from 54,9% in 2007 (54,3% excluding Bond Choice) to 51,1% in 2008 and the ‘jaws’ ratio growing to 7,5% (2007: 6,9%).

The bank continued to see a steady inflow of client deposits,  resulting in retail deposits growing in line with retail advances. Pressure on short-dated maturities has been partially alleviated by market expectations of decreasing interest rates and a strategy of increasing deposit duration,  particularly in the second half of the year. Given the group’s domestic focus and small foreign-funding requirements (foreign deposits are 1,3% of total group deposits),  the group’s funding and liquidity levels have remained sound with limited impact from the global financial crisis.

Nedbank Capital
In spite of a tough environment for investment banking Nedbank Capital grew headline earnings by 7,8% from R1 174 million to R1 266 million and achieved a return on risk-adjusted capital (RORAC) of 38,1%. The Treasury and Global Markets Divisions both experienced strong growth. Debt Capital Markets was adversely affected by fair-value losses on widening credit spreads and profits in Equity Capital Markets were negatively impacted by reduced volumes and sharply lower market levels. The adverse market conditions were mitigated by active management interventions,  which reduced risk as markets deteriorated. Investment Banking showed strong net interest income (NII) growth, but was impacted by delays in and some cancellations of client project spend as well as a slowing of term lending in transactions in Africa due to reduced availability of longer-term foreign funding.

Over the past few years Nedbank Capital has invested in people and the development of sound risk processes. Information technology and finance platforms have been improved. This investment, combined with a prudent risk appetite,  has contributed to the cluster’s results and the achievement of a more balanced earnings profile in extreme market conditions.

Nedbank Corporate
Nedbank Corporate grew headline earnings by 11,1% from R2 632 million to R2 924 million and achieved a RORAC of 28,7%. The banking operations showed robust growth with core banking headline earnings increasing by 20,1%. Corporate Banking performed strongly,  driven by advances growth,  widening credit margins and higher non-interest revenue (NIR) through gains in primary-banker clients. The property investment portfolio generated good earnings,  but these were down on the record earnings of 2007. The strong risk management culture enabled the cluster to manage its credit portfolios well and resulted in a credit loss ratio of 0,27%, still below expected through-the-cycle levels. Nedbank Corporate continued to invest in leadership and staff training,  resulting in further gains to the already high staff morale.

Late in the year the bank entered into a strategic business cooperation agreement with Ecobank,  the Pan-African banking group,  to provide a ‘one bank’ client experience across 30 countries in Africa,  which creates significant opportunities for our client base across the continent.

Nedbank Retail
Nedbank Retail’s headline earnings dropped from R1 876 million to R1 002 million, with a RORAC of 10,8%. 2008 has been an extremely challenging year in retail banking. While the group anticipated that consumers would come under increased pressure in 2008, the combination of higher interest rates, rising inflation, pressure on asset prices and lower consumer confidence has proved more severe than forecast. The unsecured portfolios (cards,  overdrafts and personal loans) have responded well and,  while default levels remain high,  credit metrics are stable.

The main pressure on impairments has been in the secured portfolios of home loans and vehicle finance. Defaults in these portfolios deteriorated significantly during the year and this, coupled with pressure on asset prices, caused a large rise in provisioning levels. This trend intensified through the year-end and, as a result, impairments on these portfolios are expected to continue to increase into 2009.

In this environment Nedbank Retail improved its efficiency ratio from 63,5% to 61,1%. This improvement arose from ongoing growth in NII,  robust NIR growth and tight cost control.

Nedbank Retail continued to build for the future and made significant progress in its client service,  distribution network and staff morale metrics. Primary clients grew at 10% and the Bancassurance and Wealth, Small Business Services and Private Banking Divisions recorded good earnings growth during 2008.

Imperial Bank
Imperial Bank recorded a profit after tax of R362 million, down 24,4% from the R479 million of the previous year. Nedbank Group’s share of Imperial Bank’s earnings dropped from R227 million to R166 million. Return on equity deteriorated to 13,2%,  while the efficiency ratio improved from 30,2% to 28,8%. Loans and advances grew by 26,7% from R35, 3 billion to R44, 7 billion as Imperial Bank continued to attract good-quality business. The overall credit loss ratio deteriorated from 1,28% to 1,71%, with the Motor Finance Division’s credit loss ratio moving from 1,93% to 2,47%.

NII
NII grew 14,3% to R16 170 million (2007: R14 146 million) on the back of growth in average interest-earning banking assets of 23,2%.

The group’s net interest margin for the year under review was 3,66%,  down from 3,94% in 2007. The positive endowment impact of interest rate increases on capital and current and savings accounts was offset by the following:

  • Liability margin compression reflecting the higher cost of term funding.
  • Asset margin compression from a changing asset mix. Asset pricing continues to be a key focus for improving margins,  with higher margins being generated on new assets.
  • The cost of holding additional liquidity buffers deemed prudent in the current environment.
  • Debits relating to the accounting for historic structured-finance transactions with related credits offset in taxation.

Impairments charge on loans and advances
The credit loss ratio increased from 0,62% in 2007 (1,02% when reported for the nine months to September 2008) to 1,17% for the full year. The growth in advances and the increase in the credit loss ratio are reflected in a 122,8% increase in the impairments charge from R2 164 million to R4 822 million. Retail credit loss ratios have deteriorated since June 2008 and remain above expected through-the-cycle levels, largely as a result of continuing increases in defaulted advances in the Nedbank Retail Home Loan and Vehicle and Asset Finance Divisions.

Wholesale banking credit loss ratios remain below expected through-the-cycle levels, although the credit loss ratio in Business Banking increased as expected. The credit quality in the Corporate and Investment Banking books remains good,  but is expected to be impacted by worsening credit quality in the year ahead resulting in increased credit loss ratios on these books. Notwithstanding seasonal effects,  the unsecured retail portfolio reflected encouraging signs of improvement in the latter part of 2008.

Credit loss ratio (%) 2008   2007
Nedbank Capital 0, 06   0, 05
Nedbank Corporate 0, 27   0, 11
Nedbank Retail 2, 47   1, 26
Imperial Bank 1, 71   1, 28
Nedbank Group 1, 17   0, 62

Defaulted advances increased by 74,6% from R9 909 million to R17 301 million and total impairment provisions increased by 29,3% from R6 078 million to R7 859 million.

NIR
NIR,  excluding Bond Choice’s commission and sundry income from the 2007 base,  grew by 8,7% on a like-for-like basis. Total NIR (including Bond Choice in the 2007 base) increased by 2,7% to R10 729 million (2007: R10 446 million).

Commission and fee income grew by 13,8% on a like-for-like basis (5,1% including Bond Choice),  mainly from volume growth and transactional price increases. Cheque processing fees continue to decrease with the NetBank electronic banking system now implemented for all Business Banking clients and a process of migration initiated for Corporate Banking clients. Cash handling fees and transactional banking volumes grew strongly due to the growth in client numbers,  reflecting the success of Nedbank’s strategy to increase delivery channels,  improve client service and strengthen brand positioning. The sale of Bond Choice reduced commission and fee income by R578 million.

Trading income increased by 16,4% from R1 334 million in 2007 to R1 553 million in 2008, reflecting good trading activity in the foreign exchange and global market businesses,  although equity and debt trading both had a disappointing year. Adjusting for the loss in the first six months of 2007 in respect of the Macquarie business alliance,  trading income would be at similar levels year-on-year.

The sharp fall in equity markets resulted in historic unrealised gains in mark-to-market private-equity positions reducing. In spite of these challenging markets the group managed to record a positive NIR of R303 million from its private-equity portfolios on the back of revaluations,  realisations and dividend income.

NIR from private equity (Rm) 2008   2007
Nedbank Capital private equity 127   608
Nedbank Corporate property private equity 176   307
Total NIR from private equity 303   915

Nedbank Retail’s Bancassurance and Wealth Division performed well,  considering the dramatic fall in equity markets,  with headline earnings – mainly derived from NIR – up 28,2% to R441 million for the year. In particular both BoE Private Clients and the short-term insurance businesses of Nedgroup Insurance Company and Nedgroup Insurance Brokers recorded strong volume and earnings growth.

Expenses
Nedbank Group continues to invest in its franchise while maintaining a disciplined approach to expenses. Despite high inflation and the increased distribution footprint,  expenses continued to be tightly controlled,  increasing by 1,9% to R13 741 million (2007: R13 489 million). On a like-for-like basis,  excluding Bond Choice,  expenses increased by 5,4%.

  • Staff expenses declined by 0,6%, notwithstanding a 4,0% increase in staff numbers. Key reasons for this decline were the sale of Bond Choice,  lower bonus provisions and an adjustment of R313 million to account for the growth in the Nedgroup Pension Fund asset and a change in the pension fund rules in 2007 in terms of surplus apportionment.
  • Marketing costs decreased by 1,1% and include the group’s successful investment in soccer through the sponsorship of the Nedbank Cup to increase Nedbank brand awareness.
  • Information technology costs grew by 10,0%,  largely attributable to investment in systems development for business-,  compliance-and risk-related projects as well as higher ATM network costs.
  • Other expenses include the share-based payments charge in respect of the group’s black economic empowerment (BEE) transaction,  which increased from R147 million to R181 million.
  • Cooperation with other Old Mutual Group companies continues to yield benefits.

Associate income
Associate income decreased from R239 million in 2007 to R154 million. This was primarily as a result of Nedbank Group’s R65 million share of the profit on the sale of JSE Limited shares by BoE Private Clients in the prior year as well as the sale of the group’s interests in Whirlprops and Kimberley Clark during 2007.

Taxation
The taxation charge (excluding taxation on non-trading and capital items) decreased by 24,8% from R2 336 million in 2007 to R1 757 million. The effective tax rate decreased from 26,3% in 2007 to 21,6% due largely to the following:

  • A reduction in the corporate taxation rate in South Africa from 29% to 28%.
  • Accounting for a change in tax legislation impacting investments held in the private-equity portfolios. The proceeds from disposal of qualifying investments held for longer than three years are now defined as capital in nature and the group now accounts for taxation on revaluations of such investments at 14%. In 2008 the taxation charge was reduced by an amount of R153 million (1,9% of the effective tax rate), reflecting the impact of this change in legislation on cumulative revaluations of qualifying investments held at 31 December 2007.
  • Accounting for historical structured-finance transactions, which reduced the effective taxation rate by 1,8% (the other side of this entry reduced margin with no overall effect on earnings).
  • An increase in dividend income due largely to higher yields from preference share investments linked to prime and higher levels of investment in preference shares issued by clients.

Non-trading and capital items
Income after taxation from non-trading and capital items increased from R104 million in 2007 to R645 million for the year. The main contributions were the R622 million after-tax profit on the sale of Visa shares and the R15 million profit on the sale of 33,5% in Bond Choice.

BALANCE SHEET

Capital

Nedbank Group has strengthened capital ratios significantly,  with a Tier 1 capital adequacy ratio of 9,6% (December 2007: 8,2% pro forma Basel II) and a total capital adequacy ratio of 12,4% (December 2007: 11,4% pro forma Basel II). These ratios are now above the group’s historic target ranges. The core Tier 1 capital adequacy ratio was 8,2% (December 2007: 7,2% pro forma Basel II). The group currently holds a surplus of R9, 6 billion against its calculated economic-capital requirements, calibrated to an A- debt rating (including a 10% buffer), and a surplus of R9, 5 billion against its regulatory-capital adequacy requirements.

Capital adequacy ratios include unappropriated profit at year-end.

Capital adequacy ratios increased due to the issue of the first hybrid Tier 1 capital instruments in South Africa amounting to R1, 75 billion,  the profits made on the disposal of Visa shares,  the retention of earnings and a strong focus on the optimisation of risk-weighted assets,  enabled by enhancing data quality and much more selective asset growth using our economic-profit-based ‘managing for value’ philosophy. This resulted in risk-weighted asset growth of 6% being below overall balance sheet growth of 16%.

The group’s leverage ratio (total assets to ordinary shareholders’ equity) at 16, 2 times is also conservative by international standards and in line with the local peer group.

In response to the global financial crisis the group increased its levels of surplus capital,  extended its target regulatory-capital ranges and introduced a target capital adequacy range for core Tier 1 capital. In the current environment the group’s objective is to be at or at about the top end of these new targets in the medium term.

  2008 Revised Previous Regulatory
  ratio range range minimum
Core Tier 1 ratio 8,2% 7,5% to 9,0% n/a 5,25%
Tier 1 ratio 9,6% 8,5% to 10,0% 8,0% to 9,0% 7,00%
Total capital ratio 12,4% 11,5% to 13,0% 11,0% to 12,0% 9,75%.

Shareholders are advised that the capital note above has not been reviewed or reported on by the group’s auditors.

Risk appetite
The appropriate level of capital for a bank is a function of its strategy,  individual risk appetite and risk profile. This aligns with one of the key objectives of Basel II,  which is to differentiate capital requirements and capital buffers above the regulatory minimum to reflect the unique risk profile on a bank-by-bank basis, rather than following the ‘one size fits all’ approach that Basel I engendered.

Nedbank has cultivated and embedded a prudent and conservative risk appetite,  primarily focused on the basics of banking in southern Africa. This is illustrated by reference to the following:

  • No direct exposure to US subprime credit assets nor associated credit derivative transactions.
  • Conservative credit underwriting practices,  which have culminated in a high-quality,  well-collateralised wholesale book and further tightening of credit criteria in our retail book since 2007 in anticipation of the economic downturn and resulting from the introduction of the National Credit Act.
  • Reasonable credit concentration risk levels in relation to the South African market.
  • Counterparty credit risk being restricted to non-complex,  vanilla banking transactions.
  • A strong,  well-diversified funding deposit base (including a strong retail deposit franchise) and limited offshore funding.
  • Low securitisation risk exposure compared with global banks.
  • Low leverage ratio compared with global banks.
  • Higher ratio of risk-weighted assets to total assets than that of peers,  indicative of our appropriately conservative measurement of risk.
  • Low level of assets and liabilities exposed to the volatility of International Financial Reporting Standards (IFRS) fair-value accounting.
  • Small market trading risk in relation to total bank operations.
  • Low interest rate risk in the banking book.
  • Low equity (investment) risk exposure.
  • Successful completion of the non-core asset disposal strategy in 2007.
  • Low foreign currency translation risk and an optimal offshore-capital structure.
  • Well-diversified earnings streams across our full commercial banking activities.
  • Well-diversified subordinated-debt profile,  with no maturities of existing Tier 2 regulatory capital until 2010.
  • Comprehensive stress and scenario testing to confirm the adequacy of our capital ratios and accompanying capital buffers.

Against this background,  the group believes that capital levels (both regulatory capital and internal capital assessment based on economic capital) and provisioning for credit impairments are appropriate and conservative,  and that the group and its subsidiaries are appropriately capitalised relative to our business activities, strategy, risk appetite,  risk profile and the external environment in which we operate. Additionally,  the group is currently not holding excess capital for acquisitions.

Total assets
Total assets increased by 16,0% to R567 billion (2007: R489 billion). Growth in average interest-earning banking assets slowed to 23,2% (2007 growth: 29,0%).

Advances
Advances increased by 16,1%,  reflecting ongoing growth in Nedbank Corporate but slower growth from Nedbank Retail and a drop in advances in Nedbank Capital. Nedbank Capital’s client loan book grew strongly, but this growth was more than offset by a reduction in advances in the trading portfolio. Imperial Bank showed strong growth through most of the year. Details of advances growth by division are as follows:

Rm 2008   2007 Increase (%)
Nedbank Corporate 191 543   153 718 24, 6
Nedbank Capital 47 686   51 233 (6, 9)
Nedbank Retail 150 107   133 492 12, 4
Imperial Bank 44 734   35 320 26, 7
Other 163   193 (15, 5)
Total 434 233   373 956 16, 1

Deposits
Overall deposits increased by 21,4% from R385 billion to R467 billion at December 2008, with higher interest rates increasing demand for savings and investment products.

Despite strong growth in retail funding,  deposit growth was still largely concentrated in the wholesale market. Management has remained focused on optimising the funding mix and profile of the group through utilising alternate funding sources,  concentrating especially on the retail and business banking deposit bases,  while pricing competitively for term deposits.

Nedbank’s liquidity remains sound. The impact of the global financial crisis on South African markets has,  to date,  been largely limited to an increased cost of international funding as a result of the reduction in international liquidity. This decreased the bank’s ability to access such funding and has led to an increase in the cost of – and decrease in appetite for – capital market debt. Given Nedbank’s domestic focus,  international funding has traditionally not been a large portion of the group’s funding base, while the increase in the pricing of capital market debt has increased the cost of rolling over conduit paper and new subordinated-debt issues,  with volumes issued in this market also being lower.

During 2008 Nedbank successfully issued hybrid debt,  raising R1, 75 billion. In addition,  the following programmes were undertaken to diversify the funding base,  raise further foreign funding and lengthen the bank’s existing funding profile:

  • Issuing of foreign syndicated club loans of $165 million and €165 million. 1
  • Registering of a $2 billion European medium-term note (EMTN) programme. 1
  • Obtaining a $100 million credit line from African Development Bank. 1
  • Focusing on the retail deposit base through competitive products and pricing. 1

RATINGS

In December 2008 Moody’s Investors Service affirmed Nedbank Limited’s national scale short-term deposit rating of Prime- 1. za and long-term deposit rating of Aa 1. za.

Nedbank Group received a rating upgrade from Fitch Ratings in November 2007,  which was reaffirmed in July 2008. In November 2008 Fitch maintained the ratings,  but changed the outlook for a number of the local banks on the back of a rating outlook adjustment for South Africa,  including changing the outlook for Nedbank Group for its international sovereign rating from stable to negative. No adjustment was made to Nedbank Group’s local ratings or outlooks and the Fitch Ratings national short-term rating remains F1+ (zaf).

Nedbank Limited also registered an EMTN programme during December 2008. This programme was separately rated by both Moody’s and Fitch. Moody’s has assigned an A2 foreign currency rating together with a positive outlook to both senior and subordinated notes. Fitch has assigned BBB+ and BBB foreign currency ratings to long-term senior and subordinated debt.

IMPERIAL BANK

A new shareholder agreement has been concluded by Nedbank and Imperial Holdings that will come into effect on 1 January 2011 when the current agreement ends.

TRANSFORMATION

During the year Nedbank Group exceeded its internal Financial Sector Charter (FSC) scorecard and Department of Trade and Industry (dti) codes of good practice targets. The bank submitted a score of 99, 07 for ratification by the FSC Council (2007: 97, 50) out of a potential 100 points as measured by the FSC,  and has now been verified as a level-three BEE contributor (2007: level four) against the dti codes scorecard. Transformation remains a key strategic differentiator and the group continues to seek opportunities to realise its vision of becoming a truly southern African group.

GROUP FOCUS

Nedbank Group strategy remains unchanged. However,  in the current financial environment the group has increased its focus on capital,  liquidity and risk management. The group is currently taking a more conservative stance rather than seeking to maximise short-term profitability, and continues to focus on maximising the longer-term profit potential of the group.

In line with the ongoing strategic focus the group continues to focus on the following:

  • Growing its share of economic profit and managing for value through
    • a continued focus on liability growth and our strong depositor franchise,
    • a focus on high-quality,  appropriately risk-priced loans,
    • selective asset growth,
    • retaining focus on operational capacity in southern Africa while leveraging the Ecobank alliance to provide geographical reach into the rest of Africa,
    • ongoing building of the Business Banking franchise,  which now forms a separate business cluster,
    • growing the group’s Transactional Banking franchise,  both wholesale and retail,
    • cross-selling into our existing client base,  and
    • remaining agile and alert to opportunities that will arise in the current environment.
  • Becoming more client-driven by delivering worldclass service on an ongoing basis. This includes using innovation to increase service capabilities and distribution network for clients.
  • Managing risk as an enabler by
    • proactively managing capital and liquidity,
    • pricing appropriately for risk,
    • continually monitoring and refining credit and risk parameters as appropriate,  and
    • an ongoing focus on collections.
  • Enhancing productivity and efficiency,  execution and ongoing smart cost management.
  • Maintaining a unique culture to retain staff and ensuring that we make appropriate and fair decisions,  treat clients fairly,  embrace the community,  take accountability for our actions and care for others in the way we do business.
  • Continuing to accelerate transformation and become a truly southern African group.
  • Continuing to lead as a corporate citizen in our efforts to ensure we are a green and caring bank, thereby building a sustainable business that is relevant in South Africa.

OUTLOOK, TARGETS AND PROSPECTS

The domestic economy is expected to continue slowing in 2009,  with gross domestic product (GDP) growth currently forecast by the group at 0,4%. The global financial crisis and resultant recessionary conditions will place more pressure on an already slowing domestic economy. Weaker international trade, lower commodity prices and continued volatility on major financial markets are expected to restrict corporate activity. Consumer finances are likely to remain strained as a result of continued pressure on disposable income,  falling asset prices,  increasing unemployment and the weaker rand. Lower economic activity is also placing increasing strain on corporates.

Further interest rate cuts are anticipated during the course of 2009. The benefits of these would be expected to impact positively on the South African banking environment only in 12 to 18 months’ time. In the short term the decrease in interest rates will have a negative endowment effect on banking interest margins,  while impairments are likely to continue to deteriorate. The reversal of the higher impairment trend typically takes longer to be reflected in earnings.

Nedbank Group’s performance in 2009 is likely to reflect the following:

  • Advances growth in the upper single digits. Retail advances growth is expected to continue slowing,  with reasonable growth in wholesale advances,  albeit at a slower rate than in 2008.
  • Margin compression, on the 2008 margin, of around 10 to 15 basis points. Improvements as the margin benefits from higher asset pricing will be offset by the endowment turning negative as interest rates decrease and by continued market pressure on retail funding volumes.
  • The group credit loss ratio is likely to increase,  although it is currently targeted to remain below 1, 30%.
  • NIR growth for the year in mid single digits, with
    • modest transactional banking fee increases,
    • a slowing of transactional volumes,  and
    • continuing market pressures,  which will not be conducive to private-equity gains.
  • Expense growth for the year in upper single digits.
  • A continued strengthening of capital adequacy ratios and an ongoing focus on funding and liquidity.
  • Further enhancements of the business in line with the manage-for-value strategy.

In the light of progress made by the group and taking into account the current economic environment and the group’s interest rate expectations,  the group has revised its medium- to long-term financial targets and set short-term objectives for the 2009 financial year. The economic environment remains uncertain and this,  together with heightened market volatility,  ongoing global uncertainty and the potential for an extended global recession,  increases forecast risk. This short-term outlook for 2009 is management’s current best estimates for the year ahead and assumes a reduction of 227 basis points in the average prime rate.

  2009 outlook Medium- to long-term targets
ROE (excl goodwill) > 15,0% 5% above monthly weighted average cost of ordinary shareholders’ equity
     
Efficiency ratio < 53,0% < 50,0%
     
Growth in diluted headline EPS Approximately 10% down At least CPIX + GDP growth + 5%
     
Impairment charge < 1,30% Between 0,55% and 0,85% of average advances
     
Basel II core Tier 1 capital adequacy ratio Towards the top end of the range 7,5% to 9,0%
     
Basel II Tier 1 capital adequacy ratio Towards the top end of the range 8,5% to 10,0%
     
Basel II total capital adequacy ratio Towards the top end of the range 11,5% to 13,0%
     
Economic capital A- (including 10% buffer) Capitalised to 99,9% confidence interval on economic-capital basis (target debt rating A- including 10% buffer)
     
Dividend cover policy 2, 25 to 2, 75 times 2, 25 to 2, 75 times

Based on the above, the current outlook for headline earnings in 2009 is approximately 10% lower than the headline earnings for the 2008 financial year and the outlook for basic earnings and diluted earnings per share is approximately 20% lower, as the group does not anticipate a capital profit dimilar to the profit on the sale of VIsa shares in 2008.

Shareholders are advised that these forecasts, objectives and targets have not been reviewed or reported on by the group’s auditors.

CHANGES TO THE GROUP EXECUTIVE COMMITTEE

Nedbank Group’s Head of Group Technology, Len de Villiers, resigned from the group with effect from 31 July 2008 and Fred Swanepoel was appointed to the Group Executive Committee (Group Exco) as Chief Information Officer and Head of Group Technology with effect from 1 November 2008. The Business Banking Division within Nedbank Corporate became a standalone business cluster on 1 January 2009 and the Managing Executive of Business Banking, Ingrid Johnson, joined the Group Exco. In addition, Mfundo Nkuhlu has been appointed Deputy Managing Executive of the Nedbank Corporate business cluster and a member of the Group Exco, while retaining his current responsibilities as Managing Executive of Corporate Banking.

CHIEF EXECUTIVE SUCCESSION

As previously communicated to stakeholders,  Chief Executive Tom Boardman will be retiring from the group in February 2010. The process of identifying a successor is continuing and the board expects to make an appointment within the first half of this year. This will allow sufficient time for a smooth transition in the office of the Chief Executive.

BOARD CHANGES

As previously reported,  Cedric Savage retired as an independent non-executive director on 14 May 2008 and Barry Davison resigned as an independent non-executive director on 2 August 2008. Jim Sutcliffe resigned as a non-executive director with effect from 9 September 2008 following his resignation as Chief Executive Officer of Old Mutual plc. On 1 October 2008 Nomavuso Patience Mnxasana was appointed as an independent non-executive director and Alan Knott-Craig was appointed as an independent non-executive director with effect from 1 January 2009.

ACCOUNTING POLICIES 1

Nedbank Group Limited is a company domiciled in South Africa. The condensed consolidated financial results of the company at and for the year ended 31 December 2008 comprised the company and its subsidiaries (together referred to as the ‘group’) and the group’s interests in associates and jointly controlled entities.

Nedbank Group’s principal accounting policies have been applied consistently over the current and prior financial years, except for the adoption of IFRIC 11: IFRS 2 – Group and Treasury Share Transactions in the current year and the early adoption of IFRS 8. The prior year’s comparative figures have been restated.

Nedbank Group’s consolidated financial results have been prepared in accordance with the recognition and measurement criteria of IFRS,  interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and the presentation and disclosure requirements of International Accounting Standard 34: Interim Financial Reporting.

In the preparation of these financial results the group has applied key assumptions concerning the future and other indeterminate sources in recording various assets and liabilities. These assumptions were applied consistently to both the company and group financial statements for the year ended 31 December 2008. These assumptions are subject to ongoing review and possible amendments.

SUBSEQUENT EVENTS

As of the date of this announcement there are no post-balance sheet events to report.

AUDITED RESULTS – AUDITORS’ OPINION

KPMG Inc and Deloitte & Touche,  Nedbank Group’s independent auditors,  have audited the consolidated annual financial statements of Nedbank Group Limited from which the condensed consolidated financial results have been derived,  and have expressed an unmodified audit opinion on the consolidated annual financial statements.

The condensed consolidated financial results comprise the consolidated balance sheet at 31 December 2008,  consolidated income statement,  condensed consolidated statement of changes in equity and condensed consolidated cashflow statement for the year then ended, and selected explanatory notes. The audit report is available for inspection at Nedbank Group’s registered office. The selected explanatory notes are marked with 1.

FORWARD-LOOKING STATEMENT

This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Nedbank Group and its group companies,  which 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 audited.

ANNUAL GENERAL MEETING

The Nedbank Group annual general meeting will be held on Thursday, 14 May 2009, in the auditorium, Retail Place West,  Nedbank Sandton,  135 Rivonia Road,  Sandown,  at 09:00.

CAPITALISATION AWARD WITH A CASH DIVIDEND ALTERNATIVE 1

Notice is hereby given that the directors of the company have resolved to issue fully paid ordinary shares in the company as a capitalisation award to ordinary shareholders. Ordinary shareholders will be entitled, in respect of all or part of their shareholding,  to elect to receive new fully paid ordinary shares,  which will be issued only to those ordinary shareholders who elect in respect of all or part of their shareholding,  on or before 12:00 on Thursday,  9 April 2009,  to receive the capitalisation award shares. Shareholders not electing to receive new fully paid ordinary shares in respect of all or part of their shareholding will be entitled to receive a cash dividend alternative of 310 cents per ordinary share (the cash dividend alternative).

In accordance with the provisions of STRATE,  the electronic settlement and custody system used by JSE Limited,  the relevant dates for the capitalisation award election and the cash dividend alternative are as follows:

    2009
Last day to trade to participate in the capitalisation award or the cash dividend alternative   Thursday,  2 April
Shares trade ex the capitalisation award election and the cash dividend alternative on   Friday,  3 April
Listing of the maximum number of new ordinary shares that may be taken up in terms of the capitalisation award on   Friday,  3 April
Last day to elect to receive capitalisation award shares (by 12:00),  failing which the cash dividend alternative will be received   Thursday,  9 April
Record date to participate in the capitalisation award or receive the cash dividend alternative   Thursday,  9 April
Payment of the cash dividend alternative to shareholders who have not elected to participate in the capitalisation award or have participated in the capitalisation award in respect of only part of their shareholding on   Tuesday,  14 April
New shares issued and posted or participant or broker accounts credited regarding the shares to be issued to shareholders participating in the capitalisation award in respect of all or part of their shareholding on   Tuesday,  14 April
The maximum number of new shares listed in terms of the capitalisation award,  adjusted to reflect the actual number of shares issued in terms of the capitalisation award on or about   Friday,  17 April
     

Shares may not be dematerialised or rematerialised between Friday, 3 April 2009, and Thursday, 9 April 2009, both days inclusive.

The above dates and times are subject to change. Any changes will be published on the Securities Exchange News Service (SENS) and in the press.

The number of capitalisation shares to which shareholders are entitled will be determined in the ratio that 310 cents per ordinary share bears to the 30-day volume-weighted average price for the company’s share,  to be determined no later than Wednesday, 25 March 2009. Details of the ratio will be published on SENS no later than Thursday, 26 March 2009, at 11:00 and in the financial press the following business day. Trading in the STRATE environment does not permit fractions and fractional entitlements. Accordingly, where a shareholder’s entitlement to new ordinary shares calculated in accordance with the above formula gives rise to a fraction of a new ordinary share,  such fraction will be rounded up to the nearest whole number,  where the fraction is greater than or equal to 0, 5,  and rounded down to the nearest whole number,  where the fraction is smaller than 0, 5.

A circular relating to the capitalisation award and the cash dividend alternative will be posted to shareholders on or about Monday,  16 March 2009.

Note:

Dematerialised shareholders are required to notify their duly appointed participant or broker of their election in terms of the capitalisation award in the manner and at the time stipulated in the agreement governing the relationship between shareholders and their participant or broker.

For and on behalf of the board

Dr RJ Khoza TA Boardman
Chairman Chief Executive
25 February 2009