ECONOMIC SUSTAINABILITY

RISK MANAGEMENT

 

THE EVOLUTION OF RISK MANAGEMENT

The recent global financial crisis has seen risk management become more important than before as an enabler of business sustainability. Nedbank Group is acutely aware of the challenging global conditions facing the banking industry, and remains committed to risk management as an integral component of its business.

A proactive, timeous and effective response to the impact of changes on operational needs is essential if we are to sustain and build on the solid fundamentals of risk management already entrenched throughout the organisation.

Lessons learned from the global financial crisis

In the wake of the global financial crisis – which saw shareholder value around the world severely eroded and many large financial institutions become insolvent – considerable blame has been directed at poor risk and capital management, inferior corporate governance within the financial services industry, and inadequate regulation and supervision by regulatory bodies and governments.

With all this in mind, history has shown that the key risks that could result in the failure of any bank include the following:

• Poor quality of a bank's board and/or executive management, and/or its failure to endorse sound risk management.
• Badly managed liquidity risks.
• Insufficient capital.
• Concentration risk(s) – especially credit risk and associated poor-quality lending.
• Poor governance, risk management and/or internal controls.
• Lack of transparency (and undue complexity).
• Reputational risk (and any erosion of a bank's franchise value).

South Africa's banking industry managed to remain structurally sound in the face of the global crisis, and Nedbank Group's stringent risk and capital management practices contributed to such structural soundness. This resilience was enhanced by a number of external factors, which include, but are not limited to, a strong regulator, early adoption of Basel II principles, conservative credit and monetary policies, and the successful implementation of the National Credit Act (NCA), which minimised irresponsible lending practices, overgearing and excessive consumer debt.

AN INTEGRATED APPROACH TO RISK MANAGEMENT

Nedbank Group's approach to risk is not one of avoidance. Rather the group embraces risk management as a core competency that allows for optimised risk-taking, is objective and transparent, and ensures that the business prices for risk appropriately, and links such risk to relevant return. A Group Deep Green aspiration is to be 'worldclass at managing risk' and a primary catalyst in achieving this aspiration is the successful implementation of Basel II, which prescribes minimum international standards for capital adequacy. By implementing Basel II in business processes, Nedbank Group has enhanced the level of sophistication of its risk and capital measurement and management, and aligns its regulatory and economic capital more closely with the risks it faces.

The group's risk philosophy emphasises the importance of risk as a business component. For this reason Nedbank Group strives to understand risk, manage it effectively, and evaluate it in the context of its potential for reward. Emphasis is placed on producing high-quality, sustainable earnings that will attract a premium rating for the group and protect the interests of shareholders, depositors and other stakeholders. This focus is supported by a number of industry policies and regulations, including regulation 40 of the Banks Act, King II and Basel II, as described above.

The board acknowledges that it is accountable and responsible for the entire process of risk management and for evaluating the effectiveness thereof. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it with day-to-day business operations. The Group RCMC is responsible for assisting the board in reviewing the risk management process and any significant risks facing the group.

Nedbank Group Limited has again strengthened its regulatory capital ratios in 2009, with a Tier 1 capital adequacy ratio of 11,5% (2008: 9,6%) and a total capital adequacy ratio of 14,9% (2008: 12,4%). The core Tier 1 capital adequacy ratio was 9,9% (2008: 8,2%).

Nedbank Limited has also strengthened regulatory capital ratios, with a Tier 1 capital adequacy ratio of 11,7% (2008: 9,8%) and a total capital adequacy ratio of 15,6% (2008: 13,1%). The core Tier 1 capital adequacy ratio was 9,6% (2008: 8,0%).  All capital adequacy ratios are now well above the group's target ranges, including core Tier 1. They include unappropriated profits at the year-end to the extent that these are not expected to reverse and are expected to be appropriated subsequent to the year-end. Nedbank Group's capital adequacy ratios increased significantly over the past two years due to a strong focus on the optimisation of risk-weighted assets (capital), enabled by enhancing data quality and more selective asset growth using our economic-profit-based philosophy of managing for value, the retention of earnings, the profits made on the disposal of Visa shares in 2008 and the issuing of some non-core Tier 1 capital instruments.  Additional Basel II information is included in the 2009 Annual Report.

Through its proactive approach to risk management, Nedbank Group has cultivated and embedded a conservative risk appetite focused on enhancing the basics and core activities of its banking processes.

ENTERPRISEWIDE RISK MANAGEMENT

Enterprisewide risk management (ERM) is the approach to effectively ensure and align strategy, policies, charters, people, processes, technology and knowledge with the purpose of evaluating and managing all opportunities, threats and uncertainties the group may face as it creates shareholder value. ERM sees the integration of risk and capital management across the bank's entire risk universe, business units and operating divisions, geographical locations and legal entities.

The ERM approach is based on a 'three lines of defence' concept, which is the backbone of the group's Enterprisewide Risk Management Framework (ERMF) and incorporates an emphasis on accountability, responsibility, independence, reporting, communications and transparency.

The first line of defence is responsible for the management of risk (ie identification, measurement, control, monitoring and reporting). It comprises focused and informed involvement by the board and Nedbank Group Executive Committee (Exco), and accountability and responsibility of business management – all supported by appropriate internal control, risk management and governance structures, policies and processes. The second line of defence comprises Group Risk and EGC and is responsible for independent risk monitoring at a group level. The third line of defence provides independent objective assurance on the management of risk across the group. This is undertaken by Internal Audit and external auditors.

The group's values, its risk management approach and its business processes underpin its overall strategic approach to sustainability, and reflect the desire of the business to preserve the future for all its stakeholders.

The table below demonstrates this alignment between sustainability focus areas and objectives, the group's ERMF, stated Deep Green aspirations, the various risk management policies and the responsible board and executive governance structures in place across Nedbank Group:

Sustainability  focus areas	Sustainability  objectives	Nedbank Group  strategic focus  and Deep Green  aspirations	ERMF – risks	Board and  Exco risk  management  committees *	Policies *
Economic	Strictly adhere to  competitive governance  and compliance practices.  Effectively manage social,  environmental and ethical  risks.  Commit to responsible  lending.  Build a sound reputation  that translates into sound  business benefits (ie lower  cost of funding, enhanced  client loyalty and client  acquisition).  Ensure a profitable  business.	Strategic focus  Grow our share of economic  profit.  Become client-driven.  Manage risk as an enabler.  Enhance productivity and  business execution.  Deep Green aspirations  Most respected bank.  Great place to invest.  Great place to bank.  Worldclass at managing risk.  Most respectable and  aspirational brand.  Unleashing synergies.	Compliance risk.  Social and  environmental risk.  Investment risk.  Strategic risk.  New-business risk.  Credit risk.	Directors’ Affairs  Committee  BRMF  Group RCMC	Credit policy  Compliance policy  Investment risk  Strategic risk  principles  Reputational-risk  policy
Cultural	Build corporate culture,  values, ethics and  leadership.  Encourage diversity and  transformation.  Engage staff through staff  volunteerism.	Strategic focus  Evaluate people practices.  Build a unique culture.  Accelerate transformation.  Deep Green aspirations  Living our values.  Leading transformation.	People risk.  Transformation risk.	TRANSCO  Transformation and  Human Resources  Committee	Strategic learning  and growth policy  Remuneration,  rewards and  recognition policy  People  transformation  policy Code of  Ethics  Nedbank  Employment Equity  Forum (NEEF)
Social	Address topics that affect  SA society, such as  education, health, human  rights, socioeconomic  development, etc, in a  systematic manner.  Address our societal role  in shaping South Africa’s  future (Dinokeng ‘walk  together’ scenario).  Partner with communities  and NGOs in addressing  social needs sustainability.  Assist in creating truly SA  bank – a bank for all.	Strategic focus  Lead as a corporate citizen.  Deep Green aspirations  Community of leaders.  Highly involved in  the community  and environment.	Reputational risk.  Strategic risk.  Environmental  and social risk.	Bee Forum  Procurement  Council Committee	Corporate  responsibility  policy
Environmental	Minimise the direct  impact of our business  on the environment.  Shift the environmental  sustainability paradigm  through:  – awareness and     communication; and  – creating a circle of     green leaders.  Partner with  environmental NGOs  and the government  to develop the  environmental policy  framework proactively.	Strategic focus  Lead as a corporate citizen.  Deep Green aspirations  Highly involved in  the community  and environment.	Reputational risk.  Social and  environmental risk.  Strategic risk.	Environmental  forum	Environmental  policy

TACKLING FINANCIAL CRIME

Nedbank Group operates in a geographic area where a legacy of socioeconomic disbalance has led to heightened levels of crime. Financial crime encompasses various, disparate phenomena united by the same insidious consequences of weakening the fabric of society, eroding shareholder value and entrenching the very social conditions that trigger it, thereby creating a vicious circle that undermines the goals of sustainable development. Nedbank has realised the threats posed by financial crime to our society and plays an active role in assisting the criminal justice system to ensure that perpetrators are brought to book.

 

Management approach

• The group maintains a policy of 'zero tolerance' in respect of the commission or concealment of fraudulent or illegal acts and does not tolerate any form of dishonesty, fraud, theft, corruption or unethical behaviour in its activities and operations.
• The group will investigate allegations of fraudulent or illegal acts and take appropriate action against any person in its employ that is involved in, or assists with, such acts and will, furthermore, actively seek legal recourse against all parties involved.
• The group maintains a centralised inhouse investigation capacity, namely Group Forensic Services, as well as several specialised investigative units in critical business areas such as Card Fraud.
• Group Security and Safety Services is responsible for ensuring the physical safety of the clients, staff and assets of the bank.
• A level 3 policy, the Fraud and Corrupt Activities Policy, defines the acts of fraud and corruption and outlines the measures undertaken by the group to counter such activity.
• Employees are encouraged to report any suspicion of wrongdoing to the bank. The Whistleblowing Policy (level 3) guarantees protection of any individual reporting suspicions of serious malpractice in the group.
• Staffmembers and the public who wish to remain anonymous when reporting suspicions of wrongdoing may do so by means of an independently administrated anonymous reporting line, Tip-offs Anonymous.
• All new applicants, whether permanent, contractors or temporary staff, undergo preemployment screening to minimise the risk of infiltration of the bank by criminal elements.
• Nedbank participates in various crime-prevention initiatives with other financial institutions, government services such as the South African Police Service (SAPS), the National Prosecuting Authority (NPA) and the Department of Home Affairs and non-government organisations (NGOs), both directly and under the auspices of the South African Banking Risk Information Centre (SABRIC), a section 21 company formed by South African banks to support the banking industry in the combating of crime.

Key performance indicators

• In the course of 2009 Group Forensic Services investigated a total of 12 976 cases, which is an increase of 0,16% over the number of cases investigated in 2008.
• At the same time gross financial-crime losses decreased by 43,71% compared with 2008.
• Bank robberies targeting Nedbank increased by 11% from 2008, burglaries decreased by 29% and ATM attacks were down by 68%.
• By the end of 2009 90% of staffmembers had undergone screening for past misdemeanours, a decrease of 3,12% over 2008.
• A total of 246 staffmembers were dismissed for dishonesty in 2009.
• During 2009 a total of 1 114 anonymous tip-offs were received, a minimal increase on the 1 089 whistleblowing reports received in 2008.
• A total of 71 individuals were arrested in 2009, which represents a decrease of 13,41%.
• A total of 694 suspicions of corruption and/or fraud were reported to the SAPS in terms of the Prevention and Combating of Corrupt Activities Act of 2004, compared with the 897 reports made in 2008.

Impact

• Nedbank's efforts to combat financial crime are supported on all levels within the group.
• Nedbank continued to enjoy a healthy relationship with the SAPS, the NPA, the Financial Intelligence Centre (FIC), the SARB, the Financial Services Board (FSB), the Department of Home Affairs and other relevant players in the financial-crime-prevention landscape.

Initiatives

• Nedbank is exploring various biometric solutions as a means of preventing identity theft in the twenty-first century as well as to serve as a deterrent against bank robberies.
• Fraud risk assessments were conducted in all clusters in the bank in terms of ISA 240.
• An increase in home loans fraud led to the creation of a multidisciplinary team to focus exclusively on the detection and investigation of fraud in the home loans space.
• Proactive detection of financial crime was expanded through the introduction of several new data-mining measures for the early identification of potential fraud.

COMBATING MONEY LAUNDERING

Management approach

• Nedbank Group will not be associated with money laundering or terrorist financing and maintains policies and procedures to ensure statutory duties and regulatory obligations or, in their absence, agreed standards are met.
• The Business Risk Management Forum (BRMF), a Group Exco subcommittee, provides strategic direction and monitors the effective implementation of anti-money-laundering (AML) and combating the financing of terrorist and related activities (CFT) initiatives throughout the group. The Executive Steering Committee of the Money-laundering Control Programme (MLCP), a subcommittee of the BRMF, ensures the internalisation and operationalisation of AML/CFT initiatives. The status of AML/CFT is communicated through the MLCP governance forums and structures and tracked through MIS and minutes of meetings.
• The policies related to AML/CFT have been developed on four levels. Levels 1 and 2 are the risk framework principles and Old Mutual plc group-level policies applicable to all principle subsidiaries (including Nedbank). Level 3 refers to the group-level policies of Nedbank, fully complete and aligned with Old Mutual plc levels 1 and 2. Level 4 consists of the business unit policies of Nedbank, complete and fully aligned with Nedbank's group-level policies (level 3).

Key performance indicators

• A total of 4 015 616 client information system (CIS) client records reflect as verified and 1 081 492 client records reflect as exempted at 23 December 2009. The total number of not-verified client records (121 975) is comprised of:
• 110 982 records that have been restricted.
• 10 993 records that are currently in the restriction process. This equates to 0,21% not-verified, not-restricted records against a risk threshold of 1% (maximum threshold percentage).
• Clients whose records reflect as 'not verified' after a specified period following account opening form part of the ongoing process to restrict clients.
• Training for AML and CFT remains a high priority. Training statistics at 31 December 2009 were as follows:
• 21 575 of the selected 27 037 employees completed the Awareness Training for AML/CFT within the past 24 months and are compliant. The ongoing training requirement was operationalised during 2009 and Nedbank is currently 79,05% compliant against a recently agreed risk threshold of 80% (minimum compliance percentage), which should be achieved shortly.
• 15 298 of the 17 076 Retail employees completed the Money-laundering Control Basic Training.
• 1 353 of the 3 483 Nedbank Corporate employees completed the Money-laundering Control Specialised Training for Corporate and Merchant Banking. The assessment for this training intervention has been deactivated until the training intervention has been updated.
• 1 730 of the 2 278 Business Banking employees completed the Money-laundering Control Specialised Training for Corporate and Merchant Banking. The assessment for this training intervention has been deactivated until the training intervention has been updated.
• 1 971 employees completed the Training for the Combating of the Financing of Terrorist and Related Activities.
• Nedbank has not been subjected to any regulatory penalties or negative reviews during 2009.
• Altogether 471 suspicious-transaction reports were submitted to the FIC in 2009, compared with the 809 reports made in 2008.

Impact

• The Nedbank Group MLCP continues to be supported by group and business line executives. Decisionmakers are active members and participants of the MLCP Executive Steering Committee and related governance forums and structures.
• There have been positive interactions with the regulator and the supervisors, contributing to sustainable and trusting relationships beneficial to all parties.
• The current focus is on innovative implementation of initiatives, considering the economic climate and pressures on scarce knowledgeable resources.

Initiatives

• The Training for the Combating of the Financing of Terrorist and Related Activities (an eLearning intervention) was developed and implemented in mid-October 2009.
• Annual directors' training programmes for money-laundering, terrorist-financing and sanctions risk management have been developed and presented at the Group RCMC to meet SARB and FIC obligations and international requirements.
• The group-level Policy for Anti-money-laundering and the Combating of the Financing of Terrorist and Related Activities and the Policy for Client Acceptance, Maintenance and Monitoring were updated at the end of 2009 as part of the annual review.
• The Guidelines for non-profit organisations (NPOs), politically exposed persons (PEPs) and non-government organisations (NGOs) were updated.
• A Crossborder Monitoring Project has been completed from a technical perspective to address regulatory compliance for all crossborder transactions.  Operational implementation is in progress.
• An enterprise data warehouse (EDW) sanctions and PEP-monitoring process has been implemented for client relationship monitoring, where client records are screened against the Nedbank-ratified sanctions and PEP-monitoring lists.

 

ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT

Environmental and social risk management is incorporated into Nedbank Group’s strategic objectives and the way the group conducts business, shapes its risk management disciplines and processes, develops policies to govern behaviour and conduct, and assesses employee performance.

 

THE ROLE OF THE EQUATOR PRINCIPLES IN FINANCING DECISIONS

Nedbank Group, as the first African adopter, has applied the Equator Principles for almost five years, resulting in increased awareness, knowledge and experience in managing environmental and social risk.

The Equator Principles afford financial institutions an enhanced risk management framework to assess the potential environmental and social impacts of projects for which project finance is sought. Consideration of these risks is included in Nedbank Group’s policies and risk management frameworks and Nedbank Capital takes a collaborative approach with clients in addressing social and environmental concerns.

The assessment of social and environmental risks in terms of the Equator Principles determines the environmental and social risk management requirements and ensures that a relevant project is assigned a specific risk category based on the criteria developed by the International Finance Corporation (IFC). This categorisation differentiates projects based on the severity of their potential social and environmental impacts.

Deals are only approved subject to the condition that the specific Equator Principles are met. Once approved, Nedbank Capital continues to monitor the project for the duration of the loan. Compliance with social and environmental management plans is monitored and regular reports of independent environmental experts are received in respect of specific projects.

Nedbank has drafted sector guidelines in respect of certain industry sectors to support business by serving as an additional risk management tool. They incorporate principles aligned to the Equator Principles and extend beyond the Equator Principles by also providing guidance in respect of additional local and international benchmarks, legislative considerations and best-practice risk management considerations. The sector guidelines were drafted in consultation with the Worldwide Fund for Nature South Africa (WWF-SA).

Nedbank’s level of implementation of the Equator Principles is assessed by Group Internal Audit and as part of an annual due diligence review conducted by the International Finance Corporation (IFC) and the African Development Bank (ADB).

Nedbank decided in 2008 to report Equator Principles- impacted transactions that have had initial drawdown during the year under review. According to such internal reporting criteria, Nedbank only reports in respect of a single mining and resources transaction for 2009. This is also a reflection of the prevailing market conditions.

 

2009	Infrastructure finance			Mining and resources			Energy
	# of  deals	Amount	Geographic  location	# of  deals	Amount	Geographic  location	# of  deals	Amount	Geographic  location	Total
Total number  of deals	–			1			–			1
Category A	–			1	US$53m	Malawi	–			1
Category B	–						–			–
Category C	–						–			–

Category A:	Projects with significant adverse impacts that may affect an area broader than the project site.
Category B:	Projects with fewer adverse impacts on human populations or environmentally important areas.
Category C:	Projects with little or no environmental impact.

 

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