Brian Kennedy (48)
Group Executive: Nedbank Capital

13 years’ service • MSc(Eng)(Elec), MBA, AMP (Harvard, USA)

NEDBANK CAPITAL

MANAGEMENT TEAM

OVERVIEW

Nedbank Capital comprises the group’s investment banking businesses that together manage the structuring, lending and underwriting activities and all trading and broking activities in the equity, capital, interest rate, and foreign exchange and derivative markets.

With a full product spectrum that stretches from equity research to the provision of long-term project financing, Nedbank Capital is able to compete effectively in the southern African market.

Market environment and overview

Notwithstanding very difficult market conditions, as well as significantly lower income from private equity, earnings in Nedbank Capital increased by 7,7%. Equity continues to be well-deployed with return on equity (ROE) at 38,4% and costs well-controlled with the cost-to-income ratio at 52,2%. Increased client activity and market volatility enabled foreign exchange and interest rate sales and trading to produce very strong growth in earnings. The investment in skilled people and the development of sound risk, IT and finance platforms over the past few years, combined with a prudent risk appetite, have contributed significantly to these results and the achievement of a more balanced earnings profile in extreme market conditions.

STRATEGY

• The key differentiator embedded in the Nedbank Capital vision is that of sector expertise used in developing multidisciplinary solutions, which requires cooperation between different product areas.
• The vision of an integrated investment bank necessitates creating a culture of collaboration, which itself enables cross-pollination of ideas and aids origination.
• Collaboration ensures optimal information flow, shared deal opportunities and creating the maximum value for our clients.

The overall strategic orientation set out below remains the same for 2009 and beyond.

• Optimise scarce resources, including liquidity and capital, away from traditional activity. Success will be driven by the ability to sell solutions rather than products.
• Link sector-focused teams [resources, power, infrastructure, black economic empowerment (BEE), diversifieds] with product expertise.
• Link new business opportunities to regulatory/market trends – in this case metals, hedging, trading, credit/portfolio management, syndication and export credit.
• Implement a boutique international strategy where Nedbank Capital has sector expertise – mostly in the region, but in the case of resources internationally driven off the London platform.
• Establish an origination presence (representative office) in Lagos, Luanda and Nairobi to selective new-product opportunities in equity and debt markets. This will be enhanced with the Ecobank alliance.
• Utilise the Wall Street Programme to complete the system scalability initiative (in forex and money market products).
• Continue to focus on skills development, attraction and retention of highly specialised staff.
• Focus on economic profit (EP) growth in Investment Banking, including trading in the domestic market.

REVIEW OF THE YEAR

Within an integrated Investment Bank an effective portfolio is of utmost importance to weather the external storms. Within our trading business, both Treasury and Global Markets experienced very strong growth of 405% and 129% respectively, optimising increased volatility, widening spreads and increased client activity.

Debt Capital Markets (DCM) were adversely affected by widening credit spreads, which cost approximately R95 million. Equity profits were adversely affected by reduced volumes, sharply lower market levels and a reduced portfolio size as well as a reduction in book size and concentration risk resulting from management decisions in October when markets deteriorated.

The investment in and development of strong support functions such as risk, finance, IT and human resources over the past five years have contributed significantly to the results and the achievement of a more balanced, less volatile and robust earnings profile in extreme market conditions.

When Treasury, Equity Capital Markets (ECM) and DCM are combined to create a trading view of Nedbank Capital's business, trading represents 59% of Nedbank Capital’s earnings, compared with only 20% in 2007.

FINANCIAL REVIEW

Interest income growth has been strong, growing at 71% and originated in the following business units:

• Investment Banking contributed R49 million through strong asset growth and margin expansion.
• Treasury added R96 million as it stepped into the role of liquidity provider for the group and Nedbank Capital in difficult times.
• The preference share book added R100 million as its business activities expanded.

Through all the financial turmoil experienced in the markets over the 2008 financial year, diligent credit control and risk processes helped limit the cost of credit-related impairments in the financial statements.

Impairments grew by R10,4 million, resulting in a credit ratio of 0,06%, which is slightly higher than the 0,05% at the end of 2007.

Nedbank Capital’s ability to maintain or grow non-interest income was hampered by the following four significant contributing factors:

• The private-equity portfolio, which contributed 22,9% of total income in 2007, could not maintain its growth in 2008 as equity markets declined significantly.
• The trading income line was adversely impacted by mark-to-market reduction in equity upsides on some BEE deals with hedges of R40 million.
• Credit default swap exposure caused losses in the DCM area of R95 million, which was as a result of the unexpected widening of credit spreads. The underlying exposure of this credit remains healthy and within acceptable risk appetite.
• Volatile equity markets in the second half resulted in management taking a more conservative stance. Equity arbitrage and single stock and contracts for different books were significantly reduced. Difficult broking and trading conditions as well as the reduced value of the JSE share investment caused a R199 million decline.

Capital’s expense base grew by 10,4%, which includes R330 million of indirect transfer pricing growth of 17,1%. Nedbank Capital's own cost base grew by 7,1% in an inflationary environment where CPIX was at 12% at the end of December 2008, indicating adequate action by management to curtail significant spending in difficult circumstances.

Nedbank Capital’s effective tax rate of -2,67% was driven by:

• preference share dividends being a significant portion of income generated in investment banking mainly through BEE funding structures;
• the cluster's ability to claim credits in respect of secondary tax on companies; and
• the change in section 9C of the Income Tax Act, allowing certain private-equity investments to be taxed at capital gains tax levels (once-off adjustment of R98,9 million).

The effective use of capital has been a continued focus for Nedbank Capital. The economic profit contribution has increased from R778 million in 2007 to R806 million in 2008 and now contributes 45% of the total economic profit generated by the group, compared with 29% in 2007.

Nedbank Capital’s return on risk-adjusted capital (RORAC) remains healthy at 38,1%.

PROSPECTS

Nedbank Capital’s results are highly dependent on levels of corporate activity and new prospects, as well as volatility in foreign exchange and interest rates and levels of commodity prices and equity markets.

With available liquidity, a full-spectrum service offering, and highly skilled staff, Nedbank Capital remains well-positioned to participate in Corporate and public sector activity in the region.

While the business employs a broad and diversified set of risk monitoring and risk-mitigating techniques, these systems and their application cannot anticipate every financial outcome or the timing thereof.

The global economic crisis could have a negative impact on the performance of Nedbank Capital and the likelihood of higher impairment levels will constrain growth.

Each business in Nedbank Capital has clear strategies and plans to take the business forward and contribute to the development of the region. The leadership team remains vigilant and ready to respond to the challenges ahead.