|One of the most rewarding aspects of
the past year has been the groups delivery on the
commitments we made to shareholders.
Our focus in 2004 was on restoring the business
and building a base for the future. We had to implement
a recovery programme
to arrest the declining performance, adopt a greater external
focus to make the group more competitive, restore the dented
morale of staff, while at the same time ensuring the long-term
sustainability of the business.
Market conditions were generally positive during the year,
marked by a stable currency, declining interest rates, low
inflation and strong credit growth. Regrettably, while we
were focusing our energies internally, we lost market share
in the key retail segments of home loans and credit cards.
Our competitors, on the other hand, were taking advantage
of this favourable climate for the banking industry and showed
Commitment to recovery
One of the most rewarding aspects of the past year has been
the groups delivery on the commitments that we made to
shareholders to address the key issues affecting the groups
performance. Significant progress has been made on most fronts.
We acknowledge that the benefits of all these actions will be
fully realised only over time, but I should like to outline
to shareholders what the group had achieved by year-end.
Balance sheet review and capital raising
Our immediate priorities in the first half of the year were
to review the balance sheet, recapitalise the bank, reduce risk
and finalise the composition of the executive team.
The review of the balance sheet at the end of 2003 was
comprehensive and nothing of substance has subsequently
come to light. We
are confident that the groups investments and fixed
assets are realistically valued and that we have now established
a base for the future.
The rights offer was successful in raising R5,15 billion
to strengthen the capital base. R2,5 billion of subordinated
debt (Tier 2 capital) was repaid from the proceeds of the
rights issue, with the balance being used to reduce expensive
funding. This improved the balance between Tier 1 and Tier
The group targeted a Tier 1 capital adequacy ratio of at
least 7,5% by year-end. It is pleasing to report that, through
the rights issue and proactive capital management, the group
Tier 1 capital adequacy ratio at 31 December 2004 was 8,1%
and total group capital adequacy 12,1%.
Reducing the risk profile
We recognised that the group was holding excess capital in foreign
currencies. Over the past year the group repatriated, converted
and hedged R5,058 billion of capital sensitive to foreign exchange
movements. The foreign exchange translation loss reduced to R372
million from R1,416 billion in 2003.
Interest rate risk was significantly reduced. An active
hedging programme was implemented, swapping all new fixed-rate
liabilities to floating rates. In addition, the groups
R6 billion fixed-rate subordinated debt issued in 2001 and
2002 was hedged against further interest rate movements from
July 2004. Interest rate risk was further reduced with the
expensive unhedged fixed-rate negotiable certificates of deposit
(NCDs), promissory notes (PNs) and retail fixed deposits in
issue at December 2003 having matured by April 2004.
Executive management team
In appointing the Group Executive Committee (Group Exco),
we focused on attracting a core of young leaders who are committed
to restoring and transforming the group.
The remaining appointments made in 2004 included Philip
Wessels as Chief Risk Officer in May, and Mike Brown as Chief
Financial Officer in June. Advocate Selby Baqwa was appointed
Head of Group Compliance and Corporate Governance and joined
the Group Exco in November.
On a disappointing note, we bid farewell to two members
of the team. Pete Backwell, Head of Nedbank Retail, resigned
to follow business interests in the agricultural sector, while
our Human Resources Director, Ivan Mzimela, left for a position
in the leisure sector. Rob Shuter has replaced Pete as Head
of Nedbank Retail and he has already started to make his mark
in this area of crucial importance to the group. Nolitha Fakude
took on the responsibility for Group Strategy and Corporate
Affairs from Rob Shuter and Derek Muller has assumed the additional
portfolio of Human Resources until a new Head of Human Resources
has been appointed.
Clear strategic direction
Other areas of the recovery programme have a longer-term
horizon. The strategy is to focus on the core business of banking.
As a result the group implemented a programme to dispose of
non-core businesses and in 2004 R2 billion of non-core assets
Offshore businesses Chiswell Associates, the Stenham Group,
BoE Life International, BoE International Fund Services and
BoE International Fund Managers were sold. The group has also
exited its Asian operations. Edward Nathan & Friedland,
the corporate law advisory business, was sold, as well as
land at Century City and other property investments.
As part of the strategic review the groups alliances
and joint ventures were reevaluated. A mutual decision was
taken to terminate the arrangement with the JD Group, and
the group acquired Capital Ones interest in the American
Express and the Peoples Bank microlending ventures.
The Strategic Recovery Programme was initiated to reverse
the trend of expenses growing at a higher rate than revenue.
part of the restructure and cost reduction programme, the
staff headcount was reduced by 3 102 people, from 24 205
21 103. This was achieved through voluntary retrenchment
of 1 439 people, business-initiated retrenchment of a further
596, the sale of businesses and natural attrition. Care was
taken not to affect the client-interfacing areas of the
and the majority of the retrenchments were in support divisions.
The integration of BoE was probably the single biggest operational
challenge and opportunity that the group has
faced. It is gratifying to report that the merger was largely
by the end of 2004. The remaining client migrations from the
BoE merger were completed on time and within budget. A total
of 115 000 BoE Business Banking clients, with loans of R10
billion and deposits of R4 billion, were migrated onto Nedbank
with a client loss of less than 3%. Some 700 000 NBS clients
were migrated onto Nedbank and Peoples Bank systems, with
client loss. More than 12 600 contracts for Property Finance
clients, with loans of around R8 billion, were migrated onto
the Property Finance SAP system, also with minimal client loss.
While a significant amount of work still needs to be done to
achieve the financial targets for 2007, it is pleasing to note
the progress made in 2004. Headline earnings grew from R55 million
in 2003 to R1,447 billion this year, while headline earnings,
excluding foreign exchange losses of R1,819 billion, were
23,7% up on the 2003 figure of R1,471 billion.
Attributable income showed a recovery from the R1,6 billion
loss to a R974 million profit this year.
Net interest income increased by 11% to R7,567 billion,
while non-interest revenue, excluding foreign exchange translation
losses, increased by 3% to R8,197 billion.
The financial results are detailed in the Chief
Financial Officers report.
It is difficult to quantify the impact of the retrenchment programme
on staff morale. We are aware of the stress that this placed
on our people and have focused extensive resources on restoring
staff morale and positioning the group as an employer of choice.
I am confident that the morale is stabilising. Strategy, values
and brand workshops were held throughout the country, allowing
staff to share their views and participate in the development
of the strategy that the group is now following. Internal communications
programmes were also enhanced to ensure staff were kept abreast
of changes, problems and successes in the group. Staff incentive
schemes have been revised and all staff have performance measurement
standards that reward the right behaviours.
Throughout what was a difficult year we have remained cognisant
of our role as a responsible corporate citizen and continue
to focus on the long-term sustainability of our business and
our country. Our efforts in this area have been recognised
through the groups inclusion in the JSE Socially Responsible
Investment (SRI) Index and being one of only four South African
corporates to have been included in the Dow Jones World Sustainability
An independent survey conducted by Trialogue saw Nedcor
rated by non-governmental organisations as the financial
company with the strongest contribution to development
and rated Nedcor third-best corporate grantmaker
out of 48 competitors. In the annual Mail & Guardian Investing
in the Future Awards, Nedcor was recognised for the best
social responsibility report.
The groups vision is:
To become Southern Africas most highly rated
and respected bank . . . by our staff, clients, shareholders,
regulators and the communities in which we operate.
The core values underpinning the vision are:
pushing beyond boundaries; and
The strategy is simple: we are returning
to the basics of banking. We are a full-spectrum bank ranging
from retail to corporate banking and from basic banking products
to complex tailored banking solutions. The bank will operate
primarily in Southern Africa.
Currently our strategic focus is to:
- drive transactional banking;
- build a high-performance culture in which staff exceed
- align the organisation to ensure a client-driven business
model, with the authority and ability to service clients
in an optimal way;
- move beyond transformation and become a company that is
truly representative of the diversity of the people in Southern
- optimise the mix of business to ensure that we maximise
returns to shareholders at the lowest possible level of
This strategy is set out in further detail in the Group
In last years annual report I stated that . . .
a lack of accountability in the group has been one of the single
biggest causes of poor performance. The operational structure
was simply not aligned with the needs of the business.
To address this structural deficiency, we developed a new
business model that has been designed to devolve authority
and transfer decisionmaking into the client-facing units in
order to improve service delivery to clients. This will lead
to enhanced accountability, a greater understanding of client
needs, improved service levels and faster decisionmaking.
The single biggest change to the group structure was the
integration of areas of the former Technology and Operations
Division into the client-facing divisions, and in particular
into Nedbank Retail. Branch operations were fully integrated
within Nedbank Retail, which involved a change in reporting
line for 4 641 staff. A large amount for central costs that
were previously unallocated have now been assigned to the
client-facing businesses from January 2005.
The groups brand strategy has also been reviewed. Nedcor
has traditionally operated a multibrand strategy, which positioned
the bank as a niche player aimed at selective target markets.
We will be adopting a single-brand strategy for the group under
the Nedbank banner. The Nedbank Group will be positioned as
aspirational to all markets. We own a powerful franchise and
need to maximise the benefits for all stakeholders.
Shortly after the merger with BoE in 2002 the group operated
under 22 different brands, and this has now been scaled down
to eight, which could be further streamlined over time.
We need to listen to clients, understand their needs and
deliver what they want. The first stage of this has been encapsulated
in the current marketing campaign of listening.
As the benefits of the increased focus on client
service become evident, the group expects to show growth
in advances and anticipate
maintaining its market share in the second half of 2005.
We expect margins to continue to improve as a result of:
- the expensive, unhedged short-dated fixed-rate funding
having matured by the end of April 2004;
- the positive endowment effect of the rights offer proceeds
for the full year from 2005 onwards;
- offshore capital being repatriated and earning higher
yields in rands; and
- the hedging of the fixed-rate subordinated debt and its
The group will focus on growing transactional revenue. Revenue
is anticipated to continue to improve and costs to reduce
as the groups initiatives under the three-year plan
are implemented. The group will also benefit from a significant
reduction in one-off merger and recovery programme costs.
The directors and management are aware that a considerable
amount of effort lies ahead in the recovery programme. The
business is, however, well-placed to deliver improved earnings
growth in 2005.
The detailed three-year plan anticipates that the group
will maintain market share in Nedbank Retail from the second
half of 2005. Over the next three years the compound annual
revenue growth is targeted to grow at 9% more than the compound
annual growth in expenses. The plan focuses on growing transactional
revenue through a combination of focused teams, cross-selling,
upselling, improving client service, consistent pricing and
bancassurance initiatives. Nedbank Retail has been identified
as a critical growth area.
The groups 2007 target of achieving a return on average
ordinary shareholders equity of 20% and an efficiency
ratio of 55% remains unchanged.
As the turnaround of the bank becomes a reality, I would like
to acknowledge the incredible efforts of everyone at Nedcor
in what has been a very difficult year. The delivery on our
commitments to shareholders would not have been achieved without
everyone working in a collaborative manner. Id like to
thank the Chairman and the board for their guidance and unwavering
support. I am particularly grateful to all the staff at Nedcor
who have worked tirelessly to get the bank back on track, often
under very difficult circumstances. I would also like to acknowledge
all our families who have supported us during the last year.
Without our clients we dont have a business, so I
would like to thank all Nedcors clients who have stood
by us through thick and thin.
17 March 2005