Review of 2009

In the most challenging market conditions Retail faced leadership uncertainties, with the cluster having a member of the Retail executive team acting in a caretaking capacity from April 2009 until Saks Ntombela’s appointment in August 2009.

The immediate emphasis was on rebuilding the team at executive and divisional levels, ensuring sufficient span of control in the various roles to optimise the new appointees’ ability to deliver on their responsibilities. Key in the initial organisational redesign was strengthening the risk, client and people functions to support the turnaround of Retail to a more client-centred and integrated business, while enhancing the transformation profile, managing the mix of new appointees and continuing to hold existing leaders accountable for their business through the cycle.

Nedbank Retail had a difficult year and reported a headline loss of R156 million (2008: R1 002 million profit) and an economic loss of R1 448 million for the period (2008: R291 million economic loss). These numbers include Nedbank Bancassurance and Wealth. The tough economic conditions experienced throughout 2009 and high levels of consumer indebtedness tested the effectiveness of lending decisions and risk-based pricing and collection strategies implemented prior to the cycle turning, and the results reflect the consequences of these practices, especially in the Home Loans business.

Net interest income was 6,4% lower, primarily as a result of reduced endowment income on capital and non-rate-sensitive deposits, as well as the higher cost of funding.

Impairments increased by 35,7% to R4 925 million, with the credit loss ratio (CLR) increasing to 3,08% (2008: 2,47%), driven mainly by Home Loans, where the defaulted advances increased by 58,5% on 2008. The slower property market and debt counselling processes make it more difficult to cure clients in default. It is therefore taking longer than initially anticipated to rehabilitate clients, notwithstanding the cashflow relief from interest rate reductions. The CLR is substantially above Retail’s through-the-cycle target range of 0,95% to 1,50%.

In response to the challenges experienced in Home Loans a number of steps were taken to improve collection efficiencies, differentiate sales in execution based on value and ease of saleability, and improve the economic profitability of new business written. Greater emphasis was placed on pricing for risk, tightening the loan-to-value (LTV) ratios (which resulted in the weighted average LTV on new business dropping from an average of 82,93% to 79,52% during the year), supporting our existing clients, increasing client rates to reflect higher funding costs and reducing fees paid to originators. Asset margins on new business have widened and the underlying risk quality has improved; however, this will take some time to be evidenced in the margin and advances risk profile, given the low volumes of new business currently being written. New Home Loans business was also increased through Nedbank’s own channels (now at 55% from 45% previously) where the cost of origination is much less and the underlying risk experience of better quality, a trend which is encouraged.

Expense growth has been controlled at 9,9% through curtailment of headcount growth in backoffice and support areas. The higher efficiency ratio of 64,9% (2008: 61,1%) arose mainly as a result of lower endowment earnings.

Retail’s segmental analysis highlighted the impairment challenges with Home loans generating a headline loss of R1,16 billion on a R92 billion advances portfolio.

The vehicle and asset finance business improved its risk and operational processes, which saw a rise in the quality and quantum of new business written, leading to reduction in headline losses to R117 million. The turnaround times and service delivery are now comparable with the best in the industry.

The unsecured lending of Card and Personal Loans fared well in 2009, generating headline earnings of R362 million and R263 million respectively and growth on last year, at good returns on risk-adjusted capital.

The earnings reduction in Private Banking, Small Business Services and Transactional and Investment Products is largely as a consequence of lower endowment income of R412 million from declining interest rates and R124 million from higher impairments, largely home loans.

The network and product offering of Retail is an important generator of new business for Bancassurance and Wealth, and these important links will be maintained.

The profile of Nedbank 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.

Notwithstanding these challenges, it is important to remain relevant to our clients’ needs and continually enhance their experience and access to Nedbank.

Key investments in 2009 include:

• 58 new staffed outlets covering traditional branches, personal loans and kiosks in retailers. Nedbank now has 109 non-cash outlets that can be run at lower cost, given different security requirements.
  
• 270 new automated teller machines (ATMs), with a net of 127 as less-profitable sites were closed. In support of our bank-for-all strategy, 65% of new ATMs were deployed in typical mass-market areas. This was complemented by consumer education projects.
  

• A state-of-the-art client contact centre opened in Sugar Mill, which is the home of the great conversations with Nedbank.
  
• Extending our AskOnce service promise to help clients move transactional accounts hassle-free.
  
• Rolling out new NetBank functionality, with internet users/ transactions growing at 15%. High growth rates were also noted in our cellphone banking channel.
  

Our core activity levels evidenced a 25% increase in sales of transactional products, with our people being our key differentiator.

Other key areas of focus are summarised below.

Client growth

We have made steady progress in growing our client base, attracting some 108 000 net new primary clients for the year (2008: 130 000). Primary clients now total 1,3 million, with about 15% being Mzansi clients.

Client service

Nedbank Retail has made good strides over the years in the journey towards delivering worldclass service, both in our internal measure using the Customer Management Assessment Tool™ and as evidenced in external surveys. During 2009 Nedbank achieved a rating of 66,19 in the Ask Afrika poll of service excellence, the Orange Index, registering an improvement of 0,55 over the past 12 months. However, while Nedbank made modest improvements in the latest survey, our competitors have closed on the previous gaps, leaving us in the fourth position in the banking industry. Although the current differential between us and our competitors is marginal, we will focus on improving client experience, especially in respect of promptness, products suited to client needs and professionalism.

Having held the position of top bank in service delivery for the past two years, Nedbank Retail is even more focused on improving its service-related attributes and building on the improvements noted, including its rating of best-in-class channel rating for cellphone banking and delighted clients. Nedbank Group was awarded a top accolade at the 2009 Ombudsman for Banking Services Awards for excelling ahead of its peers on client dispute management and resolution.

We are still fully committed to our AskOnce promise campaign, which is our guarantee to clients that we will continuously enhance their banking experience with us. During 2009 we saw the extension of the proposition to include a specific service promise for clients wishing to switch their current accounts to Nedbank, with Nedbank undertaking to move their debit orders free of charge and hassle-free.

Enhanced productivity and execution

Project Client Information System focused on improving our data management capabilities. We aligned the entire data platform infrastructure and created an interface with the rest of our key product systems in 2009. We will continue enhancing our data platform with value-adding services to improve our data management capabilities.

Project Siyakha is focused on delivering a step change in the systems with which our sales and service staff interact with clients ultimately to improve service and staff efficiency. Siyakha is a four-year phased programme, which began in 2007. The result will be one frontend for sales, in addition to streamlined and reengineered processes to minimise the impact on both clients and bankers.

Project Hassle-free Move focused on delivering an efficient solution for switching clients from other banks to Nedbank, which has translated into increases in the acquisition of new primary clients.

We have also improved client communication on transactional products by introducing electronic alerts in order to reduce losses as a result of fraudulent transactions and rolling out eStatements across card and transactional products.

Accelerating transformation

Transformation remains a key focus area and business imperative for Nedbank Retail, with sustainable transformation achieved through improved dialogue around transformation issues. Employment equity targets were achieved despite internal restrictions on headcount growth, which significantly reduced staff turnover opportunities. Retail has achieved its headcount targets for total black and black female staff at senior, middle and junior management levels. The challenge remains to achieve African targets at all levels.

Winning the war for talent

The Barrett Survey has shown consistent improvement and increased participation levels, with 10 290 Nedbank Retail staff members participating (a 47% increase from 2008). The Nedbank Retail entropy score improved from 13% in 2008 to 12% in 2009 (a lower percentage represents an improved score in this assessment).

The Nedbank Staff Survey for Retail also improved across all dimensions with the overall score improving from 72% in 2008 to 76% in 2009.

Retail Makes Things Happen for the communities we serve

• The Boxer Project – arranges logistics around providing consumer education to Boxer stores and facilitates staff training.
  
• In-Civil Project – follows up on leads provided or referred by channels, educates staff and assists consumer sales teams and Nedbank@work to acquire new business and to cross-sell.
  
• In-Workplace Project – trains people in the place where they work and uses consumer education to complement skills development in the workplace.
  
• In-Community Project – trains people in the community and empowers the general public by providing critical literacy skills required for managing daily financial needs.
  
• Community Integration Project –establishes and maintains strategic relationships in communities with key and influential stakeholders, ie government and municipal officials, organised labour and other relevant structures, to facilitate and identify mutually beneficial business opportunities, including consumer education.
• Special Projects – includes Teach Children to Save (TCTS) that teaches children to save through fostering a culture of saving and promoting volunteerism. TCTS SA™ highlights the important role that volunteer bankers/ financial sector professionals can play in educating our nation’s youth to become lifelong savers. TCTS SA™ is supported by the Department of Basic Education and is integrated with the Economic Management Science learning area of the school curriculum.
  

Prospects and strategy

The high levels of consumer indebtedness and fragile economic recovery means defaulted clients will take longer to cure. This requires a strong focus on risk management and further strengthening of Retail’s capabilities, especially as impairments remain well outside the preferred risk appetite and proposed new target ranges.

Looking forward, as Retail shifts to a more client-centred and integrated business, the focus will be on non-interest revenue (NIR) growth and delivering economic profit using risk as an enabler. In managing the business through the current challenging economic cycle, fewer focus areas have been prioritised, balancing short- and long-term impact. These include:

• Focusing on NIR growth through primary-client acquisition, quality sales, driving cross-selling and reducing attrition.
• Creating a focus on reducing economic losses through effective collection and risk management practices while emphasising selective asset growth, capital optimisation and retaining and growing liabilities, especially savings accounts.
• Developing a client segmentation strategy to drive retention, efficiencies, acquisition and penetration across the business.
• Developing a comprehensive technology roadmap to ensure that technology investment is focused on addressing core client needs.
• Defining and investing in the three levels of a competency-based culture to equip staff with appropriate skills and improve the efficiency and effectiveness of human resources functions.

These focus areas will be underpinned by a culture of disciplined execution and differentiated client service.

Management team

David Crewe-Brown (41) Executive Head: Finance, Projects and Strategy 15 years’ service • BCom, BAcc, CA (SA)	Anton de Wet (43) Managing Executive: Personal Banking and Client Value Management 11 years’ service • BCom, MBA, AMP (Insead Business School)
Brian Duguid (48) Managing Executive: Retail Banking Services 28 years’ service • CAIB (SA), FIBSA	Sydney Gericke (51) Managing Executive: Nedbank Card 21 years’ service • BCom(Acc), BCom(Hons), MCom, CPA, SEP (Insead Business School)
Millicent Lechaba (42) Executive Head: Human Resources 4 years’ service (Imperial Bank) • BA(Hons), HRM, SAP – HRM	Sibongiseni Ngundze (40) Managing Executive: Small Business Services 5 years’ service • BCom, SMDP, Credit Diploma, Global Executive Dev Prog (GIBS)
Alfred Ramosedi (40) Managing Executive: Nedbank Private Bank 15 years’ service • BCom, MBA, FCMA	Phumla Ramphele (47) Executive Head: Retail Risk 3 years’ service • CAIB (SA), BCom(Acc), Postgraduate Certificate in Business Administration
Sarel Rudd (54) Managing Executive: Nedbank Personal Loans 6 years’ service • BCom(Acc), BCompt(Hons), CA (SA)	Clive van Horen (43) Managing Executive: Retail Secured Lending 10 years’ service • CA (SA), PhD(Econ)