CHIEF EXECUTIVE’S REPORT
‘We continued to focus on balancing short-term profitability with the overriding goal of long-term sustainability. This approach has enabled us to weather the financial crisis and emerge stronger on the other side.’
| Tom Boardman | Mike Brown |
| Chief Executive | Chief Executive Designate |
Tom Boardman retired on 28 February 2010 and Mike Brown became Chief Executive with effect from 1 March 2010.
Message from Tom Boardman, retiring Chief Executive
Resilience through sustainability
The year 2009 was extremely difficult for the financial services sector worldwide as the global financial crisis continued to impact the real economy. The economic hardship brought on by the crisis continued to gain momentum and in many ways 2009 was even tougher than 2008 for both the bank and our clients.
The financial crisis is an example of how governments, financial institutions and individuals behaving in a non-sustainable way can destroy trillions of dollars of shareholder wealth and bring about economic hardship and recession across the globe. The causes of the crisis are both complex and multifaceted.
At the heart of the problem was excessive liquidity creating an unsustainable bubble in asset prices. This was compounded by credit being extended to people who could not afford it and executive compensation rewarding the wrong behaviours. The financial crisis was an unintended consequence of monetary, economic and social policies combining to create unsustainable business practices. Parallels can be drawn between the global financial crisis and the climate crisis where scarce resources are being consumed in a non-sustainable manner.
It has been reassuring to see how the SA banking system, and also Nedbank, remained resilient throughout the crisis. The strength of our banking system was recognised in the latest World Economic Forum Global Competitiveness Report’s ranking of the soundness of banks, where South Africa improved from 15th to 6th place out of 133 countries.
However, local banks were not immune to the aftershocks of the crisis. This was compounded by the slowdown in the domestic economic cycle during the previous two years, which saw the country slide into recession in the first quarter of 2009. However, the group’s commitment to sustainable business practices enabled us to offer support to our clients during these difficult times, and we continued to find ways to assist distressed clients, promote responsible lending and encourage a savings environment.
During the economic downturn Nedbank continued to advance loans within prudent risk parameters and this is reflected in the 8,4% growth of our loan book in the second half of the year.
Over the past year Nedbank’s strategy has been to strengthen our capital position further, with our total capital ratio improving from 12,4% to 14,9%, well in excess of the regulatory minimum of 9,75%, while our liquidity position has remained sound. The strength of our balance sheet is reflected in the 6,8% increase in the net asset value of the business at a time when earnings and profits are under severe pressure. Our robust balance sheet positions us to capitalise on growth opportunities and to benefit from the expected turnaround in economic conditions.
Building a sustainable business
During 2009 we continued to focus on balancing short-term profitability with the overriding goal of long-term sustainability. Our business philosophy of ‘sustainability through accountability’ goes beyond financial performance. It also focuses on our people, in particular staff development, corporate culture and values; transformation; building our brand; the environment; social investment and cooperation with the industry regulators. This sustainable approach to our business has enabled us to weather the financial crisis and emerge stronger on the other side.
Investors the world over are increasingly placing a premium on well-governed and sustainable companies. This awareness is aided by a range of sustainability indices on international stock exchanges as well as our own securities exchange, where Nedbank has qualified for the Dow Jones World Sustainability Index and the JSE Socially Responsible Investment index for the past six years.
Sustainability through transformation
Transformation is a key aspect of sustainability in South Africa. Five years ago Nedbank lagged its peer group and was behind on the transformation curve. Since then we have made good progress in realising our ambition of becoming a truly southern African group. This is reflected in the group’s empowerment status being elevated to a level-two black economic empowerment contributor based on the Department of Trade and Industry scorecard.
In addition, in 2009 Nedbank was ranked as the most empowered financial institution in South Africa and the third most empowered company out of the top 200 companies listed on JSE Limited in the Empowerdex Survey.
Our philosophy is that transformation goes beyond compliance and numbers. This is echoed in the words of Oliver Tambo: ‘It is our responsibility to break down barriers of division and create a country where there will be neither whites nor blacks, just South Africans free and united in diversity’.
Vision-led and values-driven
Central to building a sustainable business has been our focus on creating a vision-led and values-driven bank where shared values create a common corporate culture. Corporate culture is increasingly being recognised as a key competitive differentiator.
At the recent World Economic Forum in Davos, Switzerland, it was interesting to see the increasing emphasis being placed on corporate values in the wake of the global financial crisis. This is a reassuring sign that business is again focusing on moral, principled behaviour.
Developing our people
We have always said that staff are our most crucial asset and recognise that great things begin with great people. In the demanding economic conditions of the past two years when many companies have reduced their workforces to cut costs the group has adopted a responsible approach and has not undertaken retrenchment programmes, rather relying on natural attrition to achieve efficiencies.
In this environment we have in fact increased our investment in people development and committed over 4,32 % of basic payroll costs to training.
Management development is a critical area of investment. At Nedbank we share the view that, while people join companies for many different reasons, the most common cause of staff leaving an organisation is because of their immediate line manager. Our management development programme caters for management at every level and is aimed at creating a common values-based management approach. In the past year more than 8 700 staff participated in leadership workshops, while 36 senior managers attended executive education programmes locally and internationally and 484 managers attended business education programmes at leading business schools.
Leadership
I would like to congratulate Mike Brown on his appointment as Chief Executive of Nedbank Group with effect from 1 March 2010. Mike is an outstanding leader and banker with whom I have had the pleasure of working over a number of years. He is well-qualified to lead Nedbank Group into the future and I have every confidence that he will take the bank to new heights.
Nedbank Group is blessed with an abundance of talent and no fewer than seven internal candidates were considered for the position of Chief Executive, along with a shortlist of high-quality local and international candidates.
Mike has restructured the Group Executive Committee (Group Exco) and I believe he has appointed an outstanding team that combines extensive experience in the group with an infusion of new talent and fresh thinking.
Reflection
It is often said that one should look to the future but learn from the past. As I reflect on the progress made by the group since 2004 when the current management team assumed office at a low period in the bank’s history, the central theme remains one of sustainability. The team set out first and foremost to recapitalise the bank, focus on the basics of banking, and return Nedbank Group to its core business. At the same time we started to build a sustainable business, based on accountability, as well as a strong corporate culture.
In February 2004 the group undertook a successful rights issue to recapitalise the bank and at the time made a commitment to achieve two key financial objectives within three years, namely return on equity of 20% and an efficiency ratio of 55%. Both were delivered in 2007.
We were under no illusions as to the magnitude of the task that lay ahead of Nedbank Group. We said there would be no miracle moment, rather that small, incremental wins in a common direction would restore Nedbank Group to its rightful position as a highly rated and respected financial institution.
- We have built a vision-led and values driven organisation by creating a common vision, developing common values and building a unique culture.
- Our strategy has been built around a domestically focused universal bank with African aspirations, creating a powerful brand, enhancing the image of the ‘green’ bank and delivering sustainable and competitive financial performance.
- The business was restructured and transformed within an environment of accountability.
- We have developed our people, improved risk and capital management, upgraded systems and infrastructure and disposed of non-core assets.
Appreciation and farewell
Leading the Nedbank Group over the past six years has been the highlight of my 35-year working career. I am pleased to be maintaining my association with the group after my retirement at the end of February as a non-executive director.
During my time at Nedbank Group I have developed relationships and created special bonds with so many individuals and organisations. Our Chairman, Reuel Khoza, is a leader of distinction and we have formed a unique partnership. I thank him along with my fellow directors for their support and guidance. The Group Exco team has been the driving force behind the success of Nedbank Group and it has been a pleasure to lead such talented and energised executives.
It is difficult to go wrong when more than 27 000 people who are united by a common vision and shared values are pushing you in the right direction.
Our relationships with shareholders, analysts and the broader investment community are always key. We were honoured to have received the Investment Analysts Society award for the best reporting and communication in 2009.
Banks are unique institutions that play a special role in society. Banks need to be regulated and I thank all our industry regulators, in particular our lead regulator, the SA Reserve Bank, and the Registrar of Banks, Errol Kruger, for his constant support and guidance.
We are in business to service the needs of our clients and we are grateful that they have chosen Nedbank Group in such a competitive banking environment. To our other stakeholders, including the media, suppliers, business and professional partners, thank you too for your support.
Two values that feature highly in the Nedbank values surveys are ‘family’ and ‘maintaining balance’. These are values that I also hold dear and I thank my family, and especially my wife, Sheila, for the support not only over the past six years but throughout my working career.
Tom Boardman
Chief Executive
24 February 2010
Message from Mike Brown, Chief Executive Designate
Introduction
At the outset I would like to thank the board for its confidence in appointing me as Chief Executive Officer. It is an honour and a privilege to be leading Nedbank Group at such a critical time not only for the bank, but also the broader financial services sector locally and internationally.
We have commented throughout the annual report on the resilience of the SA banking sector over the past year and its performance relative to global peers. Many banks failed globally, others needed to be recapitalised and some became a burden on taxpayers after being rescued by the state. South Africa has suffered no banking casualties during the crisis. While Nedbank Group’s headline earnings for the reporting period declined by 25,8%, we recorded earnings of R4,3 billion, and we believe this is a solid performance in the context of the global financial crisis.
Importantly, we strengthened our core Tier 1 capital ratio by 1,7% to 9,9% and hold R15,3 billion surplus capital above the regulatory minimum. Shareholders should note that the regulatory minimum core Tier 1 capital level in South Africa is 5,25%, which is more than double the current 2% international minimum requirement under Basel ll.
Business philosophy
Nedbank Group’s business philosophy is based on building a sustainable organisation that delivers to all stakeholders. This approach is integrated into our business and our thinking, and is deeply ingrained in our culture.
Our philosophy is underpinned by a focus on growing our share of financial services economic profit, but we are mindful that this must be done in a sustainable manner as we continue to build an organisation that is vision-led and values-driven.
South Africa currently accounts for approximately 65% of the financial services economic profit in Africa, with the other Southern African Development Community countries comprising a further 10%. Nedbank has a 14% to 16% share of the economic profit in South Africa and therefore we will continue to focus our resources on the southern African region to grow our business.
At the same time we are cognisant of the increasing importance of growth in the rest of Africa, and recognise South Africa’s position as the gateway to the continent, and continue to look for opportunities to expand selectively into Africa both organically or by acquisition.
As part of our philosophy of sustainability we subscribe to the balanced scorecard approach. Our remuneration schemes are not excessive and are conservative when measured by both local and global standards. In 2008 the group’s headline earnings declined 3% and our bonus pools were reduced by 33%. Bonus schemes were refocused in 2009 to recognise headline earnings and economic profit against predetermined targets, as well as increased capital and liquidity weightings in scorecards. Bonus pools in 2009 consequently increased by 5%. Therefore, using 2007 as our base, headline earnings in 2009 are 28% lower than 2007 and bonus pools are 29% lower.
Experienced executive team
Both the Chairman and the Chief Executive in their respective reports have referred to the strength and experience of the new Group Exco that was appointed in the second half of the year, and I echo their sentiments.
We have assembled a well-balanced team with an average of 20 years’ relevant industry experience and 12 years’ service with the group. There are seven new members of the team, which allows for new energy and ideas. Importantly, many of the executives were previously in senior management roles in the same business areas, which has ensured a smooth transition and a retention of accountability.
I would like to thank the team for what they have achieved so far and I believe we have the talent, ability and desire to become the most admired management team in the industry.
Strategic direction
Nedbank’s strategic direction remains largely unchanged as our objective of becoming the most highly rated and respected bank in southern Africa evolves naturally into building Africa’s most admired bank.
The group has emerged stronger from 2009 and has built a platform for sustainable growth. We have recognised the strategic importance and growth potential of bancassurance within our business and have created a standalone Bancassurance and Wealth cluster, with the Managing Executive, Dave Macready, joining the Group Exco. Following the acquisition of the Old Mutual shares of the BoE Private Clients, Nedgroup Life Assurance and Fairbairn Private Bank joint ventures, Nedbank now owns all the levers in this high non-interest revenue (NIR), high economic profit business. The integration of Imperial Bank is also key to our strategy and Ingrid Johnson, the Managing Executive of Retail and Business Banking, will be accountable for the integration process.
Our alliance relationship with Ecobank provides our clients with access to seamless banking in 33 countries across Africa, and also protects our domestic banking franchise.
Looking at our more established businesses, Nedbank Capital has performed well in a difficult market and the challenge is now to grow faster, but remain within acceptable risk limits. While Nedbank Corporate is an excellent lending franchise, we need to gain the same reputation in transactional banking. Business Banking too is a strong franchise with attractive returns, and our focus will be on leveraging the decentralised business model and increased levels of NIR.
Nedbank Retail is currently overweight in secured loans and underweight in transactional banking. Our major challenges in this business are to grow in scale and increase the footprint, as well as address the underperforming home loan business.
Outlook for 2010
The year 2010 is expected to be another difficult period, although the prospects for the year ahead are likely to be better than those for 2009 as the country emerges from the recession.
The group currently anticipates gross domestic product growth of around 2,2% in 2010, indicating slightly better prospects for the banking sector. The global environment and the 2010 FIFA World Cup are primary factors influencing domestic recovery. The global recovery remains fragile and the balance can easily be tipped by unexpected shocks, such as the recent sovereign funding crisis affecting countries like Greece.
The local retail trading environment is expected to improve as disposable income stabilises, retrenchments ease, labour conditions start to improve, debt burdens moderate and house prices start to recover. Interest rates are likely to remain steady at current levels and lead to lower impairment levels. However, the recovery will be slow as consumers remain highly geared. We would expect the full benefit of interest rate relief to take another 12 to 18 months to feed into the economy.
The 2010 FIFA World Cup is expected to lift confidence and encourage an increase in household credit demand and transactional banking volumes.
Fixed-investment activity is expected to remain modest as a result of excess capacity in the private sector and some loss of momentum in the government infrastructure spending programme as several large projects relating to the World Cup are completed. These developments are likely to contain corporate demand for credit, while competition will place pressure on margins.
Interest rate cuts from 2009 will continue to have a negative endowment effect on banking interest margins, but should be partially offset by a gradual decrease in impairments as recoveries and arrears levels improve. The reversal of provisions in the balance sheet is expected to take longer as defaulted advances continue to increase, although at a slower rate. The group remains cautious about impairments as, although corporate impairments have been relatively benign, there can be large once-off charges that are difficult to predict, and it is uncertain how the current economic challenges could further impact consumers.
The drivers of the group’s performance for 2010, as well as the financial targets, are outlined in the Chief Operating Officer’s Report.
Objectives for 2010
We expect to increase profitability over 2009 and are committed to growing economic profit. A critical factor driving growth in earnings will be our ability to manage impairments. This includes managing the defaulted-loans book within Nedbank Retail and preventing surprises in the wholesale businesses.
In this environment of fragile recovery the group aims to continue to increase net asset value and further strengthen capital and liquidity positions, and we expect to increase our core Tier 1 capital ratio further in 2011 in preparation for the introduction of Basel lll at the end of 2012.
Other priorities in the year ahead are to complete the integration of Imperial Bank and to refocus Retail on a more client-centric model.
Thanks
Nedbank Group can reflect with pride on what has been achieved under the leadership of Tom Boardman over the past six years. It is often said that the true measure of a chief executive is to leave behind a sustainably better organisation than the one inherited. Tom has certainly achieved this and I aim to do the same.
Under Tom’s guidance we have built a good bank; the challenge for myself and the new Group Exco is to make it a great bank.
Mike Brown
Chief Executive Designate
24 February 2010