Corporate information

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 Executive’s review and the operational reviews.

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 group’s target of a 20% ROE in 2007 is achieved.

Balance sheet review

A Recovery Programme Office established

• setting targets and identifying quick wins;
• determining measurement rules, reporting and planning processes;
• aligning organisational needs and resources, ensuring accountability;
• managing the remaining merger deliverables; and
• tackling priority strategic issues.

Capital management

• The capital base was strengthened by the R5,15 billion rights issue. This also allowed the bank to improve its Tier 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.
• Assisted 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, which were being integrated into the credit process and pricing, and credit portfolio modelling was established. Nedcor is on target to implement Basel II’s 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 in Business Banking. Improved understanding of client economics is helping to identify and exploit the profitability skews in the bank’s 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 been completed.

Interest rate management

• Group Asset and Liability and Executive Risk Committee (Group ALCO) was reconstituted in February 2004. Group ALCO 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 risk 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 management. 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

• 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 substantially neutralised.

Risk management

• 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 Nedbank’s 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

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 FSC’s priorities.

To ensure accountability and appropriate execution, all strategies form part of the key accountabilities of the respective 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 to plan.

Disposal of non-core operations and assets

• 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 million);
  • reduction of Nedcor’s 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).

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 of businesses).
• 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 technology spend.

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

• 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 measures; and
• 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.

Merger completion

• 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 migrated.
• Approximately 700 000 NBS clients were successfully migrated to Peoples Bank.
• Peoples Bank’s head office and risk management were managed by Nedbank Retail.

Strategy communication and implementation

• Strategy, values and brand workshops were held, involving participation from a cross-section of over 300 staff. The 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 by staff.
• A single-brand strategy was endorsed, subject to shareholder approval. Work on repositioning the Nedbank brand to a Proudly South African and well-respected brand has begun.

Restructure

• 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 group’s 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.
• Responsibility for the Imperial Bank investment was assumed by the Chief Risk Officer.

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

• 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 of targets;
• an alignment of plans across the group to ensure consistency, a common vision, identification of cross-sell opportunities 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.

Divisional achievements

Nedbank Capital

• 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 Awards.
• 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.

Nedbank Corporate

• The executive committee and other senior appointments were finalised.
• 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 platform product developments) was created in Nedbank Corporate. This unit will work closely with the current Transactional Banking Sales and Sales Support Unit.
• Business Banking was restructured into four regional hubs, with six main service centres. This will improve communication 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 revenue (NIR) in 2005.
• Corporate Banking has referred in excess of 60 leads for new business to Nedbank Capital.
• Bad-debt experience is low, driven by healthy recoveries, effective credit management and the benign interest rate environment.
• Property Finance has continued its strong performance.
• A balance sheet efficiency initiative was implemented: R6,2 billion reduction in advances, without affecting client relationships, and improving capital adequacy.

Nedbank Retail

• 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 volumes.
• New frontline credit systems were implemented in the second quarter, which has improved turnaround times significantly.
• The 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 was completed.

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 2004:
  • 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 bank’s 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 Johannesburg’s volumes and balance workload.
• Headcount was reduced by over 1 300.
• The legacy credit card issuing systems for Visa, MasterCard and American Express were decommissioned. All cards are now 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 Nedbank’s 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 bank’s 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 investment activities.
• 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.