In 2004 the group implemented
structural and strategic changes to restore its performance
and lay a
foundation for sustainable growth. A Strategic Recovery Programme
was initiated. The bank is now strongly capitalised, earnings
volatility has been reduced, progress has been made to restore
the return on equity (ROE) and strategic focus areas have
been identified. This report highlights the major achievements
and issues addressed by the group during 2004. This report
is intended as a brief summary of issues addressed in 2005
and further detail is included in the Chief
Executives review and the operational
New executive team appointed
- A new Group Executive Committee (Group Exco) was appointed
in November 2003. Philip Wessels was appointed Chief Risk
Officer in May 2004, Mike Brown Chief Financial Officer
in June 2004, Rob Shuter Head of Nedbank Retail in August
2004, Nolitha Fakude Head of Group Strategy and Corporate
Affairs in August 2004 and Selby Baqwa Head of Compliance
and Corporate Governance in November 2004. Pete Backwell,
Head of Nedbank Retail, and Ivan Mzimela, Group Human Resources
Director, resigned during the year.
- Major operating divisions executive committees
have also been restructured, incentive schemes
put in place and
buy-in obtained regarding the strategic direction
of the group.
- The Strategic Recovery Programme was launched, with
detailed action plans and timelines, to restore the
business on to a sustainable growth path to ensure
that the groups
target of a 20% ROE in 2007 is achieved.
Balance sheet review
At the end of 2003 a comprehensive review of the carrying value
of the groups investments, advances and fixed assets
occurred. The 2003 cleanup as a result of this was thorough.
issues were discovered in 2004.
A Recovery Programme Office established
A Recovery Programme Office and recovery plan blueprint were established to track
and monitor and thereby ensure efficiencies identified are extracted
by the underlying business. All deliverables are tracked and
variances or risks immediately addressed and resolved. The main
initiatives of the plan are:
- setting targets and identifying quick wins;
- determining measurement rules, reporting and planning
- aligning organisational needs and resources, ensuring
- managing the remaining merger deliverables; and
- tackling priority strategic issues.
The following initiatives were undertaken
in 2004 to ensure that Nedcor had an optimal capital mix
and sufficient capital
for growth that would meet potential future regulatory
requirements and that the group priced correctly for risk:
- The capital base was strengthened by the R5,15 billion
rights issue. This also allowed the bank to improve its
1 and Tier 2 mix by repaying R2,5 billion of Tier 2 capital.
- The group Tier 1 capital adequacy ratio increased from
5,0% to 8,1%.
- A risk-weighted (Basel I-based) capital allocation methodology
was introduced, resulting in more accurate segmental information
and an improvement in the allocation of capital.
by Mercer Oliver Wyman, Basel II initiatives were
fast-tracked. By the end of 2004 over 80% of the Nedcor
portfolio was covered by dedicated credit risk models,
were being integrated into the credit process and pricing,
and credit portfolio modelling was established. Nedcor
on target to implement Basel IIs advanced approach
to credit risk in line with industry timelines. Improved
risk management capabilities and significant time savings
have been achieved from redesigning the credit process
Business Banking. Improved understanding of client economics
is helping to identify and exploit the profitability skews
in the banks portfolio.
- The rollout of an Economic
Capital Framework (including risk-adjusted performance
measurement) commenced and will
be fully implemented by 2006.
- The building of other new
capabilities and a design of a blueprint for best practice
in capital management have
Interest rate management
In line with the commitment to
improve the net interest margin and reduce interest rate
volatility risk the following
- Group Asset and Liability and Executive Risk Committee
(Group ALCO) was reconstituted in February 2004. Group
was reduced from 27 members to eight and is charged
with developing strategies to ensure inter alia that interest
rate risk is managed effectively. All interest rate
has been taken out of the various business clusters
and centralised in the Asset and Liability Management (ALM)
Division to help ensure effective interest rate risk
Group ALCO also manages all major balance sheet risks.
- Unhedged expensive fixed-rate negotiable certificates
of deposit (NCDs), promissory notes (PNs) and retail
fixed deposits of approximately R24 billion have matured.
- The R6 billion fixed-rate subordinated debt has been hedged
against future interest rate movements.
- New fixed-rate liabilities with maturities of between
four and 12 months are hedged appropriately.
- All new balance
sheet interest rate risks of greater than
12 months are hedged, unless a specific decision
is taken to the contrary.
Foreign exchange management
recognised that the group historically held excess amounts
of capital in foreign currencies. In line with the
commitment to improve the yield on and reduce the currency
volatility of foreign capital the following was implemented:
- The group repatriated, converted and/or hedged R5 058
million of capital sensitive to foreign exchange movements.
- The remaining offshore capital is now largely in line
with capital required by offshore businesses and capital
volatility arising from foreign exchange movements has been
The role of Chief Risk Officer was separated from that of Chief
Financial Officer. The enterprise-wide risk management programme
has been enhanced and management processes have been redesigned
to ensure there is a logical and streamlined framework to control
risk and ensure proper governance. Further highlights include:
- A focused project was launched to address credit card
fraud, resulting in significant decreases of losses from
card fraud in the second half of the year.
- The Financial Advisory and Intermediary Services Act (FAIS)
requirements were met.
- Progress in reverifying clients in terms of the Financial
Intelligence Centre Act (FICA) has been made.
- Comparisons from 1999 to date clearly indicate a decline
in Nedbanks violent crime incidents. Nedbank is the
target of only 8% of violent crime incidents and 6% of losses
in the industry.
The Financial Sector Charter
Responsibility for tracking
the implementation of the requirements of the Financial
Sector Charter (FSC) is allocated to the
Executive Transformation Committee, which was established
in June 2004. Prior to the establishment of the Executive
Transformation Committee, work on the requirements of the
FSC was led by Derek Muller, who was responsible for focus
groups that not only participated in industry workgroups,
but also focused on the implementation of specific areas
the FSC in the group.
During August 2004 the Financial Sector Charter Unit was
positioned under the leadership of Nolitha Fakude as Head
of Group Strategy and Corporate Affairs, with the responsibility
for overseeing the implementation of the FSC strategy and
the measurement of performance against the FSCs priorities.
To ensure accountability and appropriate execution, all
strategies form part of the key accountabilities of the
business cluster executives, with regular oversight of the
Executive Transformation Committee. The approved strategies
and actions were included in the three-year plans of the
respective clusters for implementation.
The FSC has been identified as one of the key strategic
drivers for Nedcor, with commitment to go beyond mere target
setting to achieve sustainability.
The preparation of the Financial Sector Scorecard report
for submission to the Charter Council is progressing according
Disposal of non-core operations and assets
As part of Nedcors strategic focus on the core business
of banking, and in an effort to improve ROE, Nedcor implemented
a project to dispose of approximately R2 billion of non-core
operations and assets over a period of two years. This included:
- Reduction in offshore operations:
- sale of Chiswell Associates R244 million (book
value R104 million);
- sale of the Stenham Group R238 million (book
value R318 million);
- sale of BoE Life International R62 million
(book value R149 million);
- sale of BoE International Fund Services and BoE International
Fund Managers R44 million (book value R23 million);
- scaled back physical presence in Asia: the Beijing
representative office was converted to an Old Mutual
Group office; the Taipei and Singapore offices were
closed; and the Hong Kong office is in the final stages
of being closed; and
- closure of investment in BNP Paribas MTN (linked
to performance of units in NIBi Capital Fund) of US$108
million and repayment of Barclays fixed-rate loans
of US$90 million.
- Onshore investment disposals:
- sale of vacant land at Century City for R82 million
(book value R80 million);
- sale of buildings for R94 million (book value R73
- reduction of Nedcors holding in Net1 UEPS Technologies
(NUEP) from 25% to 15%;
- R1 252 million from endowment policies (book value
R1 280 million); and
- sale of Edward Nathan & Friedland (Pty) Limited
(ENF) R50 million (book value R70 million).
Nedcors expenses had been growing
at a higher rate than revenue, resulting in a squeeze on
earnings and an increase
in the efficiency ratio. During 2004 the newly appointed
Group Exco focused on reversing this trend, which included
on expense reduction:
- A carefully considered retrenchment programme was introduced.
Retrenchments occurred across all levels of management and
staff. South African staff numbers reduced by 3 102 during
the year (1 439 voluntary and 596 business-initiated retrenchments
and the balance through net natural attrition and from sale
- Other expense reductions resulted from process reengineering
initiatives (including improving throughput and eliminating
duplication), groupwide procurement savings, the rationalisation
of premises and the rationalisation of the non-centralised
Expense savings in 2004 amounted to R531 million. However,
the full benefit of these initiatives will be felt only in
the years ahead. As a result of the above the group expects
further savings in 2005.
Improved management information systems
The group has
committed itself to improved financial disclosure and segmental
analysis as well as providing accurate internal
measurement and allocations to encourage the correct behaviour
of staff. Progress in this regard includes:
- Implementation of improved funds transfer pricing to facilitate
sound interest rate risk management and allocate appropriate
ownership of the respective components of margin to the
individual business clusters and the ALM Division;
- Implementation of activity-justified transfer pricing
to allocate costs on a more accurate basis, which facilitates
more accurate product, channel and client profitability
- The introduction of a risk-weighted capital allocation
and charging methodology, which will be used as a foundation
for more sophisticated risk-adjusted capital allocation
in line with Basel II.
The BoE merger is largely complete.
Major initiatives were:
- 115 000 BoE Business Banking clients were successfully
migrated. The loss of clients was below management expectations
(less than 3% on advances and 5% on liabilities).
- Property Finance successfully integrated four operating
systems onto a single platform, with R16 billion in value
- Approximately 700 000 NBS clients were successfully migrated
to Peoples Bank.
- Peoples Banks head office and risk management were
managed by Nedbank Retail.
Strategy communication and implementation
With progress made on restoring the bank in the first half of
2004, the focus shifted to building the business for sustainable
growth. This included a thorough review of the overall group
strategy, in collaboration with staff, as well as detailed action
plans. The process included:
- Strategy, values and brand workshops were held, involving
participation from a cross-section of over 300 staff.
workshops resulted in a greater buy-in of strategy, values
and brand, better morale and an improved bias for action.
- Countrywide staff roadshows were held, focusing on strategy
in an effort at improving morale, aligning the vision and
creating a more external focus.
- Group values of integrity, respect, accountability and
pushing beyond boundaries were aligned with those of Old
Mutual. The fifth value, being people-centred, was chosen
- A single-brand strategy was endorsed, subject
approval. Work on repositioning the Nedbank brand to
a Proudly South African and well-respected brand has begun.
Structure follows strategy and to ensure greater accountability
within the business units and to improve client service levels
6 913 people moved from Operations and Group Business
Innovation into Nedbank Retail, Nedbank Corporate and Nedbank
Capital. This included:
- 4 641 people who were moved from branch operations into
Nedbank Retail following the decision to integrate retail
and branch operations to remove conflicting interests within
the branches, improve client service levels and eliminate
duplication. This involved the placement of divisional directors,
the assessment and placement of 22 regional managers and
454 branch managers, involving 13 venues, with 32 panels
conducting over 850 interviews.
- Card, Home Loans and Domestic Microlending were consolidated
within Nedbank Retail.
- An Integrated Operations and Shared Services Unit
was created within Nedbank Corporate.
- A new Centralised
Information Technology Unit was created, with overall responsibility
for all components of the groups
technology, operations and support services (Group Technology
and Support Services).
- The mandate of the Strategic Recovery
Programme was enhanced to monitor, assure and provide
assistance, where necessary,
on group strategic initiatives.
- Group Compliance and Corporate
Governance were combined to form a new cluster and the
Group Compliance Officer was
appointed to the Group Exco.
- Group Strategy and Corporate
Affairs, including Marketing and Communications, assumed
responsibility for group corporate
social investment activities, the Financial Sector Charter
Strategy Team, the Economic Unit, and a new area focusing
on driving organisational change and transformation.
for the Imperial Bank investment was assumed by the Chief
Following the reorganisation all client-facing businesses
have been incorporated into Nedbank Retail, Nedbank Corporate
and Nedbank Capital. This clarified accountability, introduced
flexibility and ensured a focus on client service levels.
Three-year plan in place
In October 2004 Nedcor completed an extensive groupwide
three-year planning process. This involved:
- reviewing existing businesses, together with a competitor
and industry analysis, to produce a top-down strategy and
three-year financial model;
- a bottom-up assessment and finalisation
- an alignment of plans across the group to
ensure consistency, a common vision, identification of
and the elimination of duplication; and
- detailed management
actions and timeframes.
The plan sets out goals for the group to achieve its target
of a 20% ROE and 55% efficiency ratio in 2007. The plan is
based on the premises of maintaining market share from midway
through 2005, growing total income by at least 9% above expense
growth, a focus on growing transactional revenues, building
Nedbank Retail and transforming beyond the FSC targets.
There has been significant progress
within the underlying divisions. All divisions are
being aligned to the methodologies
and disciplines of management processes developed for
the Group Exco and have established divisional project
offices that are involved in the implementation and monitoring
of Nedcors Strategic Recovery Programme. Some of
the divisional achievements are outlined below.
- All positions in Nedbank Capital have been evaluated and
a new executive team is in place. Performance-based incentive
schemes were put in place and communicated early in 2004.
- To align the trading and structuring functions single
debt and equity capital markets businesses were created
during the year.
- Good progress was made in implementing an investment banking
model and developing a single house approach to add
more value to the client base.
- Closer working relationships were developed with both
Nedbank Corporate and Old Mutual to focus on improved
client service and cross-sell opportunities.
- The minority shareholders in NIB Namibia were bought out.
- Nedbank Capital took responsibility for the London branch.
Staff have co-located with Old Mutual and a matrix reporting
structure has been introduced.
- A more rigorous structured process was put in place for
developing, monitoring and converting the deal pipeline.
- An acceleration in activity occurred during the second
half of the year, including the R6 billion Telkom BEE deal,
the R203 million Incwala Platinum preference share
deal, the R170 million Metropolitan/Kagiso BEE preference
share deal and the R1,3 billion Metcash deal. A strong
pipeline has been built for 2005.
- The Taquanta empowerment deal was concluded.
- The Foreign Exchange and Fixed-Income Treasury Desk was
rated third in the world for the rand short-dated and two-
to ten-year category, and second in the over-ten-year category
by Risk Magazine.
- Debt Origination and Structured Products were ranked joint
first for BESA-listed deals and issued the first inflation-linked
BESA-listed corporate paper.
- Corporate Finance was ranked second by deal value in the
Investment Adviser Merger and Acquisition Category in the
Dealmakers Awards and also ranked second by deal value in
the SA Merchant Banks category of the Ernst & Young
- Nedcor Securities was ranked as the number one domestic
equity research house in South Africa and number two out
of all competitors in South Africa, with top analysts in
a number of sectors in the Financial Mail Ranking
the Analysts Survey.
- The executive committee and other senior appointments
- Headcount was reduced by approximately 400 people during
the year. Subsequent planning sessions and workshops were
undertaken to ensure a unified vision and to help create
a high-performance culture.
- Asset-based Finance was consolidated into Business Banking
to improve client service and create cross-sell opportunities.
- All electronic sales were consolidated into Transactional
Banking and a channel convergence strategy was determined.
- A Transactional Banking sales team was established, with
the objective of increasing primary banker status.
- To ensure that centres of excellence and core competencies
are maintained and duplication eliminated, an Integrated
Operations and Shared Services Unit (including groupwide
responsibility for payments and key electronic banking
product developments) was created in Nedbank Corporate.
This unit will work closely with the current Transactional
Sales and Sales Support Unit.
- Business Banking was restructured into four regional
hubs, with six main service centres. This will improve
with clients, and better client query facilities have resulted
in further improvements to client service. Recent client
survey results show an improvement in client satisfaction
scores as well as problem resolution.
- Corporate Banking has gained a number of new large primary
client relationships, which will enhance non-interest
(NIR) in 2005.
- Corporate Banking has referred in excess
of 60 leads for new business to Nedbank Capital.
experience is low, driven by healthy recoveries, effective
credit management and the benign interest rate
- Property Finance has continued its strong
- A balance sheet efficiency initiative was
implemented: R6,2 billion reduction in advances, without
relationships, and improving capital adequacy.
- The cluster was reorganised to improve client service,
reduce resource duplication and improve accountability.
This resulted in the appointment of a new divisional executive
team, the integration of the operational and support structures
into Nedbank Retail and the formation of integrated standalone
Card, Home Loan and Personal Loans businesses.
- The Peoples Bank and NBS merger/integration was successfully
completed. Complex geomapping and on-the-ground assessments
occurred to determine the extent of the branch closures
that will occur when Peoples Bank is fully integrated into
Nedbank Retail during 2005. Legal Day One of the Peoples
Bank integration into Nedbank was 1 February 2005.
- To improve returns and optimise management time the Capital
One and JD Group alliances were terminated. Increased weight
and effort was put behind Pick n Pay Go Banking, which
is showing good growth in client numbers and transaction
- New frontline credit systems were implemented in the
second quarter, which has improved turnaround times significantly.
integration of Cape of Good Hope Bank Retail clients
and BoE Card clients into Nedbank was completed.
- The integration
of the wealth management businesses into Nedbank Retail
the groupwide restructuring and the formation of the
centralised technology unit, GTSS, a new executive
committee was constituted. Major achievements for the
Group Technology and Support Services (GTSS)
- Operating expenses were 4,3% down, compared with 2003.
- Employment equity targets were exceeded 32,9%
against a bank target of 25,9%.
- Excellent service level availability was maintained throughout
- LAN uptime > 99,2%;
- WAN uptime > 99,1%;
- Mainframe/Servers > 99,6%.
- The number of changes implemented throughout 2004 increased
by 15%, without impacting service level availability.
- Extensive improvements were made to the banks disaster
recovery ability and comprehensive and successful tests
were undertaken by the bank during 2004.
- A fully functional backup call centre has been established
in Durban to support Johannesburgs volumes and balance
- Headcount was reduced by over 1 300.
- The legacy credit card issuing systems for Visa, MasterCard
and American Express were decommissioned. All cards are
being processed on the CAMSII production platform.
- All projects to integrate the technology of all previous
BoE companies progressed according to plan. All support
operations for automated teller machines, self-service terminals
and points of sale between the merged entities have been
successfully combined into one unit.
- New core network switches, to improve client service
significantly in terms of availability and response times,
have been installed.
- A project to integrate Old Mutual and Nedbanks network
infrastructures commenced implementation in the fourth quarter
of 2004 and is well on track.
- A new fast-cycle development process was successfully
introduced during 2004.
- The GTSS/Group
Operations intranet site was voted the best in the financial
services industry at the Computer
Society of SA Annual Awards.
Other central services
- Swisscard is now fully operational in Switzerland.
- Initiatives were launched to manage staff morale, including
countrywide roadshows, a Talk to Tom intranet
facility, and the involvement of staff in a participative
process in building the banks overall strategy, including
the brand and values.
- A remuneration policy focusing on specific performance
measures was implemented throughout the group.
- Nedcor continues to be recognised for its corporate social
- In the global ranking and awards for investor relations
websites (the MZ Awards) Nedcor was placed first in the
online financial reporting category in the Asia, Pacific
and Africa region.