'2009 will be a very tough year, with margins coming under pressure from falling interest rates and impairments continuing to rise.  The environment remains volatile and risks to assumptions underpinning any forecasts currently appear increasingly on the downside.  Our priority is to maintain our solid capital ratios and strong liquidity levels. '

Mike Brown
Chief Financial Officer

CHIEF FINANCIAL OFFICER’S REPORT

INTRODUCTION

It is pleasing to report that in this challenging environment for the banking sector Nedbank Group remained solidly profitable, increased capital levels and achieved four of its seven medium- to long-term financial targets, notably the efficiency ratio, capital adequacy ratio, economic capital and dividend cover levels. 

The return on ordinary shareholders’ equity (ROE) target was not achieved owing to the group reporting slightly lower headline earnings – mainly as a result of increasing retail impairment levels and lower private-equity earnings that reduced the return on assets – together with higher capital levels and lower leverage as capital adequacy ratios increased during 2008.  The credit loss ratio increased owing to the credit stress being experienced in the domestic banking sector and remained outside the target range of 55 to 85 basis points. While this stress was primarily in the retail portfolios as a result of affordability challenges from higher interest rates, the rapid slowdown in the domestic economy is increasingly affecting the wholesale portfolios off a low base. 

After having invested significantly into a worldclass Basel II risk and capital management environment, we embarked on a programme to extract significant value for the group from this investment, while ensuring that we continue to improve the underlying data that drives financial and non-financial information.  This initiative has further been supported by the implementation of an enhanced financial-reporting architecture, which has improved our target-setting processes, capital management activities and external-reporting capabilities.  The focus on enhancing external reporting has resulted in consistently improved reporting timelines and the group reported audited preliminary results for the first time for the 2008 financial year. 

The Nedbank Group Annual Report was ranked fourth out of the top 100 JSE-listed companies in Ernst & Young’s annual Excellence in Corporate Reporting Awards in 2008. This ranking is adjudicated by the accounting department at the University of Cape Town in conjunction with Ernst & Young and is an external endorsement of our ongoing commitment to increasing disclosure and enhancing our levels of reporting to the investment community.

The process of reducing the complexity of the group, following the legacy mergers and business combinations, is nearing completion.  The significant reduction of legal entities has, in itself, generated operating efficiencies and reduced risk. 

RETURN ON EQUITY DRIVERS

for the year ended 31 December

Rm	2008		2007
Net interest income (NII)	16 170		14 146		NII/Average interest-earning banking assets
Impairment of loans and advances	(4 822)		(2 164)		Impairments/Average interest-earning banking assets
Non-interest revenue (NIR)	10 729		10 446		NIR/Average interest-earning banking assets
Income from normal operations	22 077		22 428
Total operating expenses	(13 741)		(13 489)		Total expenses/Average interest-earning banking assets
Share of profits of associates and joint ventures	154		239		Associate income/Average interest-earning banking assets
Net profit before taxation	8 490		9 178
Indirect taxation	(374)		(305)
Direct taxation	(1 757)		(2 336)		1 effective taxation rate
Net profit after taxation	6 359		6 537
Minority interest	(594)		(616)		Income attributable to minorities
Headline earnings	5 765		5 921		Headline earnings
Daily average interest-earning banking assets*	441 713		358 824		Interest-earning banking assets/Daily average total assets
Daily average total assets*	483 419		399 049		Interest-earning banking assets/Simple average total assets
Simple average total assets	527 940		456 884		Return on total assets
Simple average shareholders’ funds	32 553		27 655		Gearing
					Return on ordinary shareholders’ equity
* Averages calculated on a 365/366-day basis.

CHALLENGES FACING THE BANKING SECTOR

Before reviewing the group’s financial performance, it is useful to outline the challenges faced by the local banking sector over the past year (refer to the Economic review for a summary of the broader economic conditions prevailing in South Africa in 2008 and the Risk and Capital Management Report for an indepth analysis of the causes of the international banking crisis as well as the reasons we believe South African banks have to date been relatively insulated, but not completely immune, from this). 

• Pressure on margins as the overall cost of longer-term funding increased.  Rand liquidity remained stable throughout the year, 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 in the year ahead.
• Sharply slower retail advances growth, partly offset by reasonable wholesale-advances growth.
• The implementation of the Basel II accord in January 2008.

RESPONSE TO ECONOMIC SLOWDOWN

In response to the turmoil in the global financial markets and the slower domestic economy, Nedbank Group adopted a more conservative approach and intensified its focus on the following:

• Increasing capital adequacy 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.

FINANCIAL PERFORMANCE

This review provides a detailed summary of the group’s performance over the past year and should be read in conjunction with the annual financial statements. 

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). 

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 cents 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. 

The group’s return on average ordinary shareholders’ equity, excluding goodwill, decreased from 24,8% to 20,1%.  ROE dropped from 21,4% to 17,7% for the year. 

The tangible net asset value (NAV) per share grew strongly, increasing 15,7% to 7 179 cents. The accompanying graph highlights that, although ROE is declining owing to difficult market conditions, the underlying net asset value of the group has continued its steady upward trend, although at slower growth rates. 

Credit quality deteriorated throughout 2008, with Nedbank Retail and Imperial Bank’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.  The segmental performance of the group’s operating units is covered in the respective operational reviews.

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.

NII margin analysis

% of daily average interest-earning banking assets		%		Rm
December 2007		3,94		14 146
Asset growth				3 268
Endowment movement		0,06		278
	Positive net endowment effect	0,13		587
	Increased cost of funding properties in possession	(0,02)		(79)
	Cost of reducing interest rate sensitivity (benefits in 2009/10)	(0,05)		(230)
Liability price movement		0,02		79
	Current and savings accounts	0,20		894
	Increased cost of funds	(0,18)		(815)
Asset price movement		(0,25)		(1 104)
	Personal loans (move to lower risk assets and National Credit Act caps)	(0,04)		(165)
	Secured products margin	(0,10)		(445)
	Other loans	(0,07)		(305)
	Structured deals	(0,04)		(189)
Cost of carrying additional liquidity buffers in government bonds		(0,04)		(165)
Other		(0,07)		(332)
December 2008		3,66		16 170

Average banking balance sheet and related interest at 31 December
			2008				2007
Rm			Average balance	Margin statement interest			Average balance	Margin statement interest
			Assets	Received	%		Assets	Received	%
AVERAGE PRIME RATE					15,1				13,1
Loans and advances and customers’
indebtedness for acceptances
		Home loans (including properties in possession)	134 703	17 798	13,2		112 132	12 798	11,4
		Commercial mortgages	64 954	8 857	13,6		51 900	6 230	12,0
		Lease and instalment debtors	57 122	8 301	14,5		47 101	6 130	13,0
		Credit cards	7 459	1 332	17,9		6 502	1 003	15,4
		Bills and acceptances*	3 666	67	1,8		3 244	99	3,1
		Overdrafts	15 882	2 271	14,3		13 416	1 727	12,9
		Term loans and other**	113 769	14 592	12,8		89 830	10 613	11,8
		Impairment of loans and advances	(6 881)				(5 722)
Government and other securities			31 211	3 210	10,3		20 455	1 926	9,4
Short-term funds and trading securities			19 828	1 558	7,9		19 966	1 475	7,4
Interest-earning banking assets			441 713	57 986	13,1		358 824	42 001	11,7
Net interdivisional assets trading book			5 436				6 765
Revaluation of FVTPL-designated assets***			(588)				(21)
Derivative financial instruments			271				282
Insurance assets			6 118				5 670
Cash and banknotes			1 921				1 662
Other assets			6 288				6 628
Associates and investments			2 883				3 063
Property and equipment			4 122				3 562
Intangible assets			5 416				4 861
Mandatory reserve deposit with
central banks			9 839				7 753
Total assets			483 419	57 986	12,0		399 049	42 001	10,5
			Liabilities	Paid	%		Liabilities	Paid	%
Deposit and loan accounts			245 060	25 941	10,6		197 326	17 161	8,7
Current and savings accounts			57 981	2 027	3,5		55 966	1 708	3,1
Negotiable certificates of deposit			72 513	8 413	11,6		54 729	5 177	9,5
Other interest-bearing liabilities****			41 784	3 906	9,3		33 740	2 746	8,1
Long-term debt instruments			13 750	1 529	11,1		10 244	1 063	10,4
Interest-bearing banking liabilities			431 088	41 816	9,7		352 005	27 855	7,9
Other liabilities			9 721				9 313
Revaluation of FVTPL-designated liabilities***			(588)				(21)
Derivative financial instruments			815				1 084
Investment contract liabilities			6 118				5 669
Ordinary shareholders’ equity			31 165				26 233
Minority shareholders’ equity			5 100				4 766
Total equity and liabilities			483 419	41 816	8,7		399 049	27 855	7,0
Interest margin on average interest-earning banking assets			441 713	16 170	3,66		358 824	14 146	3,94

Where possible, averages are calculated on daily balances.
*	Includes clients’ indebtedness for acceptances.
**	Includes term loans, preference shares, factoring debtors and other lending-related instruments and interest on derivatives.
***	FVTPL – fair value through profit or loss.
****	Includes foreign currency liabilities and liabilities under acceptances.

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. 

Impairment charge

Rm year ended		% of average advances		2008		2007
Impairment charge				4 822		2 164
As % of NII (%)				29,8		15,3
Credit loss ratio (%)				1,17		0,62
	Nedbank Capital	13,7		0,06		0,05
	Nedbank Corporate	41,6		0,27		0,11
	Nedbank Retail	35,0		2,47		1,26
	Imperial Bank	9,7		1,71		1,28

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. 

Fair-value adjustments included an amount of R207 million from the widening of credit spreads on the hedged portfolios of our subordinated debt and related interest rate swaps. This is not high-quality income and will reverse over the life of the underlying hedges, and has not been attributed to capital. 

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. 

Non-interest revenue

Rm year ended		% change		2008		2007 excl Bond Choice		Bond Choice		2007
Commission and fees		13,8		7 911		6 950		578		7 528
Trading income		16,4		1 553		1 334				1 334
Private-equity income		(66,9)		303		915				915
	Nedbank Capital private equity			127		608				608
	Nedbank Corporate property private equity			176		307				307
Fair-value adjustment on bonds/swap		>100		291		(24)				(24)
	Credit spread			207		47				47
	Basis			84		(71)				(71)
Other fair-value adjustments		>100		76		29				29
Other investment income		(13,8)		69		80				80
Rental income				51		51				51
Sundry income		(10,9)		475		533				533
	Non-banking subsidiaries	(16,6)		226		271				271
	Other	(5,0)		249		262				262
Total NIR		8,7		10 729		9 868		578		10 446

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.

Expenses

Rm year ended	% change		Dec 2008		Dec 2007 excl Bond Choice		Bond Choice		Dec 2007
Staff costs	0,1		7 040		7 034		45		7 079
Computer processing	10,5		1 841		1 666		7		1 673
Communication and travel	16,9		636		544		15		558
Accommodation	6,1		1 122		1 057		11		1 068
Marketing and public relations	1,6		877		863		24		887
Fees and insurance	15,3		1 326		1 150		348		1 498
Other	23,9		705		569		8		578
Operating expenses	5,2		13 547		12 883		458		13 341
BEE	31,1		194		148				148
Total expenses	5,4		13 741		13 031		458		13 489

Associate income

Associate income decreased from R239 million in 2007 toR154 million.This was primarily as a result of NedbankGroup’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 in2007 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 the group’s 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 ratio	Revised range	Previous range	Regulatory 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%

Further detail on the group’s capital management is included in the Risk and Capital Management Report. 

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, specifically in motor vehicle finance.  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

BALANCE SHEET BANKING/TRADING CATEGORISATION

at 31 December

			2008					2007
Rm			Banking	Trading	Elim- inations	Total		Banking	Trading	Elim- inations	Total
ASSETS
Cash and cash equivalents			8 598	11		8 609		10 712	(368)		10 344
Other short-term securities			11 867	14 549	(7 827)	18 589		11 509	15 946	(1 662)	25 793
Derivative financial instruments			363	23 650	(1 692)	22 321		166	9 192	(311)	9 047
Government and other securities			40 977	4 603	(3 442)	42 138		24 646	5 693	(702)	29 637
Loans and advances			423 822	10 411		434 233		347 979	25 977		373 956
Other assets			4 826	1 258		6 084		5 167	4 146		9 313
Customers’ indebtedness for acceptances			3 024			3 024		2 251			2 251
Current taxation receivable			346			346		59			59
Investment securities			8 167	288		8 455		7 926	392		8 318
Non-current assets held for sale			10			10		31			31
Investments in associate companies and joint ventures			1 167			1 167		978			978
Deferred taxation asset			47	153		200		44	(19)		25
Property and equipment			4 526	14		4 540		4 085	15		4 100
Long-term employee benefit assets			1 741			1 741		1 393			1 393
Mandatory reserve deposits with central banks			10 065			10 065		8 364			8 364
Intangible assets			5 501			5 501		5 246	1		5 247
Interdivisional assets				5 596	(5 596)			1 044		(1 044)
Total assets			525 047	60 533	(18 557)	567 023		431 600	60 975	(3 719)	488 856
EQUITY AND LIABILITIES
Total equity attributable to equityholders of the parent			33 015	1 898		34 913		27 654	2 539		30 193
Minority shareholders’ equity attributable to:
		ordinary shareholders	1 881			1 881		1 511			1 511
		preference shareholders	3 279			3 279		3 421			3 421
Total equity			38 175	1 898		40 073		32 586	2 539		35 125
Derivative financial instruments			1 960	23 469	(1 692)	23 737		804	10 939	(311)	11 432
Amounts owed to depositors			447 287	27 430	(7 827)	466 890		368 491	17 712	(1 662)	384 541
Provisional and other liabilities			5 602	7 669	(3 442)	9 829		6 175	28 752	(702)	34 225
Liabilities under acceptances			3 024			3 024		2 251			2 251
Current taxation liabilities			226	9		235		345	(8)		337
Deferred taxation liabilities			2 042	58		2 100		1 619	(3)		1 616
Long-term employee benefit liabilities			1 231			1 231		1 157			1 157
Investment contract liabilities			5 843			5 843		5 846			5 846
Long-term debt instruments			14 061			14 061		12 326			12 326
Interdivisional liabilities			5 596		(5 596)				1 044	(1 044)
Total liabilities			486 872	58 635	(18 557)	526 950		399 014	58 436	(3 719)	453 731
Total equity and liabilities			525 047	60 533	(18 557)	567 023		431 600	60 975	(3 719)	488 856

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

DIVIDEND

A final dividend of 310 cents per share was declared, in line with the interim dividend, bringing the total dividend to 620 cents per share (2007: 660 cents). This reduction of 6,1% reflects the reduced headline earnings per share level over the past year and the tougher conditions expected in 2009. The dividend cover at 2,29 times remains within the target range of 2,25 to 2,75 times headline EPS.  Shareholders have again been offered a scrip dividend alternative to enable the group to further bolster capital levels. 

OUTLOOK 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 decreases 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 following reduced interest rates. 

Nedbank Group’s performance in 2009 is currently expected 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%. This will be a tough target in the current environment.
• 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.

FINANCIAL TARGETS

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. 

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

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

ACKNOWLEDGEMENTS

In closing, I thank the investment community both locally and internationally for their interest in Nedbank Group and for sharing their valuable insights in our ongoing interactions.  I also extend my thanks to the members of the finance teams across Nedbank for their commitment to producing quality financial information and for continually striving to enhance disclosure. 

Mike Brown
Chief Financial Officer

Sandton
25 February 2009

	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