Overview

In August 2009 Nedbank Group announced a new structure for the Group Exco, which facilitated Ingrid assuming responsibility for the turnaround of Nedbank Retail to deliver sustainable financial performance through the cycle, while continuing to drive the strategic direction of the Business Banking cluster. In her new position as Group Managing Executive: Retail and Business Banking Ingrid continues to report directly to the CE.

This created the opportunity to appoint Sandile Shabalala to the position of Managing Executive: Business Banking and Saks Ntombela to the position of Managing Executive: Nedbank Retail.

The Business Banking leadership team has been superb in responding to this transition and ensured that Business Banking maintained its momentum and focus.

The accountabilities of the Retail executive team were reviewed to improve the effectiveness and focus on people, clients and strategic risk management. Five new members were appointed and the transformation profile of the team was maintained, tapping into the talent in the greater group and Retail’s own succession plans.

As we bring these businesses closer together, there are opportunities to leverage the inherent strengths of the businesses to improve the total economic profit (EP) generated on over R15 billion of allocated economic capital.

Imperial Bank

In September 2009 Nedbank Group announced its intention to acquire the remaining share capital in Imperial Bank Limited from Imperial Holdings Limited. This transaction positions Nedbank Group to compete favourably in the markets previously serviced by the Imperial Bank joint venture (JV), creating South Africa’s second largest vehicle finance business with an estimated 30% retail market share. In December and subsequent to the financial year-end Competition Commission, SA Reserve Bank and Minister of Finance section 37 approvals have been received with application being made in terms of section 54 to merge the businesses. The merger plans are being developed jointly with Imperial Bank, utilising the significant experience and learnings from previous mergers. A key consideration is the impact on our people and, to reduce uncertainty, there will be no retrenchments during 2010 with the expectation that the people, who are considered permanent, will be placed within the greater Nedbank Group, given likely attrition rates.

The businesses will be combined in accordance with Nedbank’s client-centric business segmentation approach. The largest portion of the JV, namely Motor Finance Corporation (MFC) is aligned with Nedbank Retail’s existing vehicle and asset finance (VAF) business, which has been loss-making for the past five years, and will significantly strengthen Nedbank’s position in this space.

Recognising the importance of the MFC brand, it will be retained for the dealer network while the combined Retail VAF business will be called Nedbank Motor Finance.

The balance of the JV is aligned to Business Banking, Bancassurance and Wealth and the Property Finance division of Nedbank Corporate.

Nedbank Business Banking

Nedbank Business Banking has an aspirational strategic objective to be the leader in business banking for South Africa, which is reflected in its ASCENT programme that was co-created through active staff participation in 2006. ASCENT sets out the strategic focus areas as reflected below:

• Acquire primary-banked clients.
  
• Sales force effectiveness and size.
  
• Cross-selling and collaboration.
  
• Easy to do business.
  
• Talented, skilled and energised people.
  

Under the direct leadership of Ingrid Johnson significant progress has been made over the past five years in effecting transformational change in Business Banking. This has resulted in a significant shift from an old-style business into a 21st-century modern business, embracing a participative, decentralised, client-centric and accountable business model, positioned to partner with our clients for growth for a greater South Africa.

Since 2005 Nedbank Business Banking has delivered R5 billion in cumulative headline earnings and R2,6 billion in EP without significantly increasing its allocated economic capital, currently at R3,3 billion. A key differentiator has been the manner in which the risk management of the business has been conducted, especially during the high-interest-rate and recessionary conditions, giving rise to the credit loss ratio (CLR) being held at modest levels, within the through-the-cycle target range, for the fifth consecutive year. Nedbank Business Banking benefited from being part of Nedbank Corporate under the leadership of Graham Dempster, with risk-mitigating stress-testing scenarios implemented as interest rates began to rise in 2006, while credit granting was carefully managed to avoid high-risk industries and riskier single-product lending clients. A proactive hands-on approach by both risk and frontline sales staff ahead of and during the tough times, ensured impairments were well-contained, and Business Banking could once again deliver a strong return on risk-adjusted capital of 31% in 2009.

The business is operating well within clear principles, accountabilities and strong leadership, creating the capacity for Ingrid, through the new Exco structure, to focus on the Imperial Bank merger and fixing the Retail business.

Nedbank Retail

Over the past five years Nedbank Retail has managed the various business components with a strong product monoline focus to address the operational challenges that the individual areas historically faced, which have now largely been addressed. The tough economic conditions and high levels of consumer indebtedness have tested the effectiveness of lending decisions, risk-based pricing practices and collection strategies implemented prior to the cycle turning. The disappointing 2009 results reflect the consequences of these practices, particularly in the Home Loans business.

The profile of Retail earnings highlights the challenge of having insufficient transactional income and clients to cushion the high level of impairments in a very sizeable advances portfolio. Since 2005 Nedbank Retail, including Bancassurance and Wealth, has generated cumulative headline earnings of R5 billion and economic losses of R300 million as capital invested increased from R5,1 billion to R9,8 billion over the same period.

The approach since assuming responsibility for Nedbank Retail in August 2009 has been to navigate the difficult impairment challenge while deepening our understanding of the business drivers and lessons learnt in this market segment, as well as our understanding of what is great about Retail that can be positioned as the differentiators to generate sustainable performance in the medium term.

The experience of Retail in the secured-lending segments has highlighted that in Nedbank’s focus on market share gains, particularly in 2007/2008, the mix of new business and pricing and risk assessment/collection practices were found wanting once the tough economic times arose. The Home Loans portfolio has felt the brunt of this, with the H2 2007 and H1 2008 vintages evidencing significantly higher default rates and credit loss ratios than those projected by the credit approval rating models. This will be a drag on future profitability. Interventions have taken place to address these issues in terms of sourcing, pricing and assessment of new business as well as the collection and security realisation processes. However given the size of new business being generated relative to the extent of vintages written at high loan-to-value ratios with inadequate pricing for risk, as well as the average life of the portfolio extending to eight years, compared with four years previously, this will take some time to resolve. This was also evidenced by the CLR being substantially above the through-the-cycle target range and, given the impairment challenges, will remain above the preferred risk appetite and proposed new target range for some time.

Our emphasis going forward will be to have a more integrated and client-centred business, where the product monolines are leveraged for efficiency, while the overall client experience is optimised across a diverse set of channels, products, systems, processes and people. The detailed review of Nedbank Retail will guide our strategic choices, with the objective of aligning risk appetite, differentiators and strategy in relation to client segments and their EP potential to redirect Nedbank Retail’s strategy towards delivering sustainable EP through the cycle. While challenging in the short term, given the risk profile of the home loans portfolio, the key focus areas on growing non-interest revenue, strategic risk management and refining our client segmentation strategies will help us to shift to this important outcome, with clients at the core of our business choices. This will ensure that we enhance cross-selling, risk management and risk-based pricing to drive high-quality client service and an EP mindset into the management of the business.

While Nedbank Retail is Nedbank Group’s biggest challenge, there are great opportunities to reposition the business for the medium to long term to be able to deliver sustainable performance through the cycle and make things happen for the communities that we serve.

The Nedbank Business Banking, Nedbank Retail and Imperial Bank operational reviews follow.

Our business

Business Banking

• Business Banking services medium-sized businesses with turnovers between R7,5 and R400 million.
  
• Typically the above businesses would be, but are not limited to, family-owned businesses and are geographically decentralised.
  
• Business banking is a client-centric, relationship-driven, decentralised business model based on accountability.
  
• A full spectrum of financial services is offered, which include:
  

Transactional banking
Electronic payments	Cheques	Cash handling
Cash management	Global trade	Card
Deposit-taking
Current account	Call and term deposits	Fixed deposits
Lending
Senior-debt lending	Working capital	Debtor management
Asset finance	Property finance	Specialised finance
	(owner-occupied)
Other services to business owners
Wealth management	Investments	Insurance
Business risk management	Business financial planning

Nedbank Retail

• Nedbank Retail serves the financial needs of individuals and small businesses with a turnover of up to R7,5 million by providing transactional, card, lending, investment and insurance products and services. Nedbank Retail clients have been grouped into four primary client segments so that product and service solutions may be tailored to their specific needs.These segments are the affluent, middle, mass and small-business segments.
  
• The Nedbank Retail cluster also services merchants and large corporates in respect of card-acquiring services.
  
• The retail product portfolio includes transactional accounts, home loans, vehicle and asset finance, card (both card-issuing and merchant-acquiring services), personal loans and investments. Nedbank Retail continues to build on its competitive product and price offerings while driving the delivery of a superior client service experience across all client segments and channels.
  
• The Nedbank Retail business operating model is organised around product and client segment areas, overlaid by servicing and delivery channels. In addition, three support services divisions underpin our business operating model, including Retail Finance, Projects and Strategy, Risk and Human Resources.
  

Imperial Bank

• Primary focus on servicing the dealer network, predominantly the used-car market, through the Motor Finance Corporation.
  
• Niched positioning servicing clients in Property Finance, Professional Finance and Supplier Asset Finance.

Management team

Sakhiwo (Saks) Ntombela (42) Managing Executive: Nedbank Retail 5 years’ service • BSc Eng (Natal), MBA (UCT), AMP (Harvard Business School, USA)	Sandile Shabalala (43) Managing Executive: Business Banking 16 years’ service • BAdmin, National Higher Diploma: Management Practice, CAIB (SA), MBL, Strategic Management in Banking (Insead Business School)
Ashley Sutton-Pryce (56) Executive Head: Human Resources, Nedbank Retail and Business Banking 36 years' service • BA, Business Strategy for HR Leaders (Insead Business School)	René van Wyk (53)* Chief Executive: Imperial Bank Limited 16 years’ service • BCom, BCompt(Hons), CA (SA), AMP (Insead Business School)

*	Dual reporting with effect from the announcement of the Imperial Bank merger; primary accountability to Imperial Bank board Chairman Hubert Brody and fellow director Philip Wessels.