21

Cash and cash equivalents

22

Other short-term securities

23

Derivative financial instruments

Swaps
These are over-the-counter (OTC) agreements between two parties to exchange periodic payments of interest, or payments for the change in value of a commodity, or related index, over a set period based on notional principal amounts. The group enters into swap transactions in several markets. Interest rate swaps exchange fixed rates for floating rates of interest based on notional amounts. Basis swaps exchange floating or fixed interest calculated using different bases. Cross currency swaps are the exchange of interest based on notional values of different currencies.

Options
Options confer the right, but not the obligation, on the buyer to receive or pay a specific quantity of an asset or financial instrument for a specific price at or before a specified date. Options may be exchange-traded or OTC agreements. The group principally buys and sells currency, interest rate and equity options.

Futures and forwards
Short-term interest rate futures, bond futures, financial and commodity futures and forward foreign exchange contracts are all agreements to deliver, or take delivery of, a specified amount of an asset or financial instrument based on a specified rate, price or index applied against the underlying asset or financial instrument, at a specified date. Futures are exchange-traded at standardised amounts of the underlying asset or financial instrument. Forward contracts are OTC agreements and are principally dealt in by the group, in interest rates as forward rate agreements and in currency as forward foreign exchange contracts.

Collateral
The group may require collateral in respect of the credit risk present in derivative transactions. The amount of credit risk is principally the positive fair value of the contract. Collateral may be in the form of cash or in the form of a lien over a client’s assets, entitling the group to make a claim for current and future liabilities.

24

Financial instruments designated as at fair value through profit or loss

Various fixed-rate advances and liabilities are entered into by the group. The overall interest rate risk of the group is economically hedged by the Asset and Liability Management Division of the group by way of interest rate swaps. The interest rate risk is then traded to the market through the central trading desk.

The swaps and frontdesk trading instruments meet the definition of ‘derivatives’, and are therefore measured at fair value in terms of IAS 39. Fixed-rate advances and liabilities, however, do not meet this definition. Therefore, to avoid any accounting mismatch of holding the advances at amortised cost and the hedging instruments at fair value, the advances and liabilities are designated as at fair value through profit or loss and are held at fair value.

Various instruments are designated as at fair value through profit or loss, which is consistent with the group’s documented risk management or investment strategy. The fair value is the attribute of the instrument that is managed and reviewed on a regular basis by the risk-investment strategies of the group. The risk of the portfolio is measured and monitored on a fair-value basis.

The change in fair value due to credit risk has been determined as the difference between fair values determined using a credit-adjusted liability curve and a risk-free liability curve.

The curves are constructed using a standard ‘bootstrapping ’ process to derive a zero-coupon yield curve. The credit-adjusted curve was based on offer rates of negotiable certificates of deposit and promissory notes with maturity periods of up to five years, and thereafter the offer rates of issued Nedbank bonds are applied.

25

Government and other securities

26

Loans and advances

The group extends advances to individuals and to the corporate, commercial and public sectors. Advances made to individuals are mostly in the form of mortgages, instalment credit, overdrafts, personal loans and credit card borrowings. The group’s main activity is in the corporate and commercial sector, where advances are made to a large cross-section of businesses, predominantly in the finance and service area, manufacturing and building and property finance sectors.

The disclosure of loans and advances is presented as the gross amount owing before any impairment charges as follows:

This note should be read in conjunction with note 27 ‘Impairment of Loans and Advances’, as this represents the gross exposure before any impairment provision.

Specific impairments have been raised against those loans identified as impaired, and the analysis per product type can be found in note 27.2.

Portfolio impairments are recognised against loans and advances classified as ‘neither past due nor impaired’ or ‘past due’.

The group uses a master rating scale for measuring credit risk, which measures borrower risk excluding the effect of collateral and any credit mitigation (ie probability of default only). The comprehensive probability of default rating scale, which is mapped to default probabilities and external rating agency scales, enables the group to measure credit risk consistently and accurately across its entire portfolio. A brief explanation of the scale follows:

NGR 1 – 12: Represents borrowers who demonstrate a strong capacity to meet financial obligations and who have a negligible or low probability of default. This category comprises, but is not limited to, the group’s large corporate clients, including financial institutions, parastatals and other government-related institutions.

NGR 13 – 20: Represents borrowers who demonstrate a satisfactory ability to make payments and who have a low or moderate probability of default. This category comprises, but is not limited to, small and medium businesses, medium-sized corporate clients and individuals.

NGR 21 – 25: Represents borrowers who are of higher-risk. This category comprises higher-risk individuals or small businesses as well as borrowers that were rated higher on inception but have since migrated down the rating scale as a result of poor financial performance. However, the borrower has not defaulted and is continuing to make repayments.

NP 1 – 3: Represents clients who have defaulted. Where this rating appears in the ‘past due but not impaired’ category, the borrowers are continuing to make repayments against their obligation and are being closely monitored.

27

Impairment of loans and advance

Interest on specifically impaired loans and advances is determined for the period for which the loan and advance was classified as specifically impaired.

The amount is calculated by multiplying the discounted expected recovery by the effective interest rate for the specifically impaired loan and advance. The interest on specifically impaired loans and advances reflects the unwinding of the time value of money for the expected discounted recovery.

Interest on specifically impaired loans and advances does not represent the contractual interest that has been earned on the outstanding balance of a loan and advance.

28

Other assets

29

Investment securities

30

Investments in associate companies and joint ventures