Nedbank Capital

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Target market and activities

Nedbank Capital seeks to provide seamless specialist advice, debt and equity raising and execution and trading capabilities in all the major South African business sectors. Principal clients include the top 200 domestic corporates, parastatals, leading financial institutions, non-South African multinational corporates and clients undertaking major infrastructure and mining projects in Africa, as well as emerging black economic empowerment (BEE) consortiums.

Debt Capital Markets deals with securitisation, credit derivatives, the asset-backed conduit and bond origination businesses and provides interest rate solutions.

Equity Capital Markets, the equity derivatives operation, provides hedging and structuring services to corporate, institutional and retail clients. This division exploits the synergies between trading and structuring equities and facilitates BEE transactions.

Global Markets focuses on providing the bank's client base with currency, interest rate derivative and bond-related products as well as proprietary trading in the various markets.

Investment Banking includes the group's corporate finance, private equity and coverage teams.

Specialised Finance provides debt-financing solutions with a portfolio of services, including project finance, leveraged debt, acquisition finance, structured trade and commodity finance and structured financial solutions. The division also has three sectoral specialist teams that serve as Nedbank Capital's knowledge hub in energy, infrastructure, and mining and resources. In addition, the division covers retail, healthcare and diversified industrials.

Treasury is the group's funding interface with financial and investment markets, locally and internationally. All the group's local and foreign currency funding requirements are executed and managed through this unit.

Nedcor Securities (Pty) Limited is the institutional equities business of the group. It provides research, sales and trading services to major institutions.

Overview

Nedbank Capital comprises the group's investment banking businesses that together manage the structuring, lending, underwriting and trading businesses. It provides the full product spectrum in the South African market, with an offering that stretches from equity research to the provision of longterm project financing, enabling Nedbank Capital to compete effectively in the southern African market.

The year 2007 was generally challenging for investment banks globally. Against this background we achieved headline earnings growth for the year of 11,2% with second-half growth of 33,5% and return on equity (ROE) of 36,8%.

Our private-equity portfolio continued to perform well and we were rewarded for sound investments made in previous years. The specialised-finance business benefited from increased project finance activity throughout Africa, with the mining finance business delivering exceptional results.

During the first half of 2007 we agreed to terminate our equities-trading business alliance with Macquarie Bank of Australia.While this business alliance had performed poorly in the first half of the year, it allowed for the transfer of skills to our business and resulted in our building a strong equities franchise, which is an integral part of our client offering.

Strategy

The environment in which Nedbank Capital operates necessitates a high-performance culture, which has been articulated as follows:

'We unshackle ourselves from conventional thinking and bureaucratic limitations to understand and honour the needs of our clients, colleagues and shareholders. With gumption, we convert our ideas into sustainable relationships and create a thriving destiny shared by all.'

Key strategic initiatives for 2007 were to:

construct a strategic framework for expansion into Africa and increase project finance activity on the continent through participation in project equity deals;
leverage the group's London presence further to access deal flow;
increase presence in selected jurisdictions and widen equity underwriting and placing capacity;
increase our geographical reach by expanding into countries in which we can leverage our sector expertise, namely mining and resources, infrastructure and energy;
leverage our sector expertise in creating innovative resources investment banking instruments to suit our clients' needs;
continue leveraging inter- and intragroup relationships by entrenching the collaborative model between Nedbank Capital, Nedbank Corporate, Nedbank Retail and Old Mutual;
create innovative new product offerings for the market and develop new businesses;
build a specialised unit that explores and develops new ideas across all Nedbank Capital business units;
continue leveraging Nedbank's BEE deal and coverage of BEE players, as well as transforming our own business;
increase efficiency by reducing fixed costs paid in the trading businesses and streamlining current processes;
build on our interest derivative and securitisation initiatives; and • refine pricing models and optimise capital consumption.

Review of the year

Positive market conditions, together with the benefits of the integrated investment banking business model, resulted in strong, profitable deal flow during 2007. Some of the more innovative and prominent transactions included:

Afripalm: Funding and structuring a 19% (R1,2 billion) stake in Mvelaphanda, the largest secondary BEE transaction in the market to date.
Imperial Bank and Nedbank: Structurer and arranger for inaugural securitisations.
Eland Platinum: Sole arranger and underwriter in respect of a R1 billion project finance facility.
Group 5: Adviser on the acquisition of Quarry Cats and associated R1,5 billion debt- and equity-funding solution.
Sun International: Structurer and arranger of R2 billion share buyback programme.
African Eagle: Adviser on JSE Altx listing.
TWP: Adviser on JSE main board listing.
Sappi: Sole lead arranger on R1 billion corporate bond issue.
Eland Platinum: Adviser on R7,5 billion sale of Eland Platinum to Xstrata.
Harmony: R2 billion senior-debt facility for Harmony Gold Mining Company.
Seacom: Limited-recourse project finance facility for the financing of a state-of-the-art undersea fibre-optic cable.

Nedbank Capital received accolades in various high-profile industry surveys. The highlight was winning The Banker Deal of the Year 2007 Award for Africa and South Africa for the Exxaro deal.

Operationally, system rationalisation continued to be a key focus. Dan Zulu joined the Nedbank Capital Executive Committee as Head of IT in the second half of 2007. He oversaw the successful migration of the book relating to the previous Macquarie business alliance from the Macquarie Bank systems onto our own trading platforms. All bonds, equities and derivatives trading are now on a common platform. During 2008 and 2009 we will implement a new platform for foreign exchange and money market trading.

Financial highlights and statistics

	2007	2006
Headline earnings (Rm)	1 272	1 145
Efficiency ratio (%)	45,4	43,0
Return on total assets (%)	0,94	1,01
Return on total equity (%)	36,8	31,3
Number of employees	625	626

Financial review

Nedbank Capital increased headline earnings by 11,2% to R1 272 million and improved its ROE to 36,8% (2006: 31,3%).

Net interest income increased by 2,7% to R693 million due to a 26,3% growth in loans and advances and a higher endowment on capital. This was offset by a higher proportion of preference share deals and the funding effect of an increased investment portfolio. The credit loss ratio improved from 0,28% in 2006 to 0,05% in 2007, as the cluster benefited from impairment recoveries and reduced credit losses.

Non-interest revenue (NIR) grew 4,2% to R2 135 million. Within NIR:

advisory and other income increased by 47,3%, benefiting from strong deal flow;
income from private-equity investments amounted to R608 million for the year, an increase of 108,9% (2006: R291 million); but
trading revenue decreased by 22,7% to R1 172 million, mainly as a result of disappointing trading from the business alliance with Macquarie Bank in the first half of 2007.

After a disappointing first half it was pleasing to see secondhalf earnings grow by 33,5% compared with the first half and up 28,1% on the same period last year.

Prospects

Nedbank Capital's results are highly dependent on levels of corporate activity and new projects, as well as volatility in foreign exchange, interest rates, commodity prices and equity markets. With forecast infrastructural, mining and energy investment in southern Africa expected to increase and acquisition finance still required to fund BEE and private equity deals, Nedbank Capital remains well-positioned to participate in this activity. However, protracted market dislocation and/or a slowing down of new projects and infrastructure spend could have an impact on our earnings.

While we employ a broad and diversified set of risk-monitoring and risk-mitigating techniques, these systems and their application cannot anticipate every financial outcome or the timing thereof.

Nedbank Capital's established client base and market share will allow the business to play a leading role in the advisory, acquisition finance and private-equity markets. Furthermore, the sector-focused teams will continue to provide innovative debt solutions to clients in the resources, infrastructure and energy sectors on the continent. The trading and structuring businesses are well-placed to provide structured solutions across all asset classes.

Equity derivative usage should continue to grow in response to the ongoing demands of regulatory changes, ownership transfer, accounting standard revisions and social obligations.

Notwithstanding current market dislocations, momentum remains good and, subject to market conditions, the group expects continued growth in earnings in all of Nedbank Capital's businesses during 2007.


This page was updated on 21 August, 2008	Return to top