RISK AND BALANCE SHEET
MANAGEMENT REVIEW

THE SUSTAINABILITY OF NEDBANK GROUP'S OPERATIONS IS ENSURED BY THE MEANS OF STRICT ADHERENCE TO COMPETITIVE GOVERNANCE AND COMPLIANCE PRACTICES, WHICH INCLUDE GOOD GOVERNANCE, STRONG ETHICS AND A CULTURE OF COMPLIANCE; EFFECTIVE MANAGEMENT OF SOCIAL, ENVIRONMENTAL AND ETHICAL RISKS; AND A COMMITMENT TO RESPONSIBLE LENDING. Nedbank Group follows a policy of enterprisewide risk management (ERM), which aligns strategy, policies, charters, people, processes, technology and knowledge in order to evaluate and manage the opportunities, threats and uncertainties the group may face in its ongoing efforts to create shareholder value. ERM also seeks to integrate risk and capital management across the group’s entire risk universe, including business units and operating divisions, geographical locations and legal entities. Against this backdrop, all risks – including those associated with sustainability – are managed according to a ‘three lines of defence’ model. It is the Nedbank Group’s view that a strong risk governance process is the foundation for successful risk management, which is why this model represents the core of the business’ Enterprisewide Risk Management Framework (ERMF). The ERMF places emphasis on accountability, responsibility, independence, reporting, communications and transparency, and comprises 17 risk categories that are managed, monitored, measured and reported on by the first, second and third line-of-defence functions. The responsibilities of each of these lines of defence are as follows: Nedbank Group has also developed individual risk frameworks for the effective management of social, environmental, and transformation risk. These frameworks serve as best-practice guidelines for the management of risks associated with these pillars of sustainability within the organisation, offering clear governance structures (committees, charters and policies) to deal with risks associated with the group’s sustainability objectives The sustainability governance structures and policy framework are detailed here. OUTLOOK FOR 2011 To build on the solid foundation established in 2010 the strategic emphasis will be placed on the following: •   Being client-driven – preparations will continue in order to meet the new legislative requirements while providing effective risk leadership and maintaining strong relationships with the board, regulators and stakeholders. • Managing for value – this will be achieved through c ontinued embedding and enhancing of the – – Internal Models Approach (IMA) for market risk capital requirements; – Advanced Measurement Approach (AMA) for operational risk; and – Advanced Internal Ratings-based (AIRB) Approach for credit risk. • Primary clients and cross-sell – sound risk principles are to be maintained during a period of focus on non-interest revenue (NIR) growth and assistance will be provided to identify cross selling opportunities, facilitate solutions for new products and services and align these with risk appetite. • Risk as an enabler – alignment to the business will continue to ensure risk and reward optimisation and achievement and exceeding of key performance objectives. • Productivity and execution – the focus remains on working smarter, simplifying policies, charters, and procedures, and streamlining internal approval processes. • Creating a unique and innovative culture – continued emphasis on the importance of the reengineering processes to demonstrate consistent and proactive responses to business needs and offer relevant risk management guidance. In the medium to long term agility and proportionate response to regulation, risk management and strategy will continue to be focus areas. •   Transformation – embedding transformation, achieving transformation targets, and ensuring visible, accessible leadership will continue as high priorities.

•   Being a green and caring group – support of the group’s carbon-neutral strategy will continue as will ensuring a safe and secure environment for staff and clients and the further integration of social and environmental risk management tools and practices across the group.

   

HIGHLIGHTS REGULATORY AND STATUTORY DEVELOPMENTS • Basel III – Majority of the proposals are now finalised but some significant aspects are still outstanding. – Studies and opinions of the impact of Basel III on the banking industry and economic growth vary. – Implementation timelines extended considerably, commencing in 2013 with various phase-ins and transitional arrangements through to 2019.     – On capital ■ Most heavily impacted are banks with relatively large capital market businesses, particularly trading activities, complex securitisations, over-the-counter derivatives (counterparty credit risk) and securities lending. ■ Nedbank Group has a relatively small capital markets business and the overall impact is manageable.     – On liquidity ■ Internationally most banks generally fall short of the two new liquidity ratios, with shortfalls in high-quality liquid assets and stable funding presenting significant business model implications. Both ratios remain under observation and banks have several years to meet them. In particular, the net stable funding ratio (NSFR), in its current form, seems likely to curtail longer-term lending significantly. This is contrary to the primary role of banks to act as regulated financial intermediaries to convert short-term deposits into long-term lending, which enables economies to grow. ■ For Nedbank Group and generally the entire SA banking industry the impact of these two liquidity ratios would be pervasive if implemented as is, particularly the NSFR. However, a pragmatic approach is likely to be followed by the South African Reserve Bank (SARB).     • Solvency II – Solvency Assessment and Management (SAM) is expected to be implemented in South Africa from 2014. SAM is South Africa’s version of the international Solvency II requirements, which is similar to Basel II but for the insurance industry. – Impact on Nedbank Group (in the Nedbank Wealth Cluster only) is relatively small.     • Companies Act – The Companies Act 71 of 2008 required significant amendment. The Companies Amendment Bill, which is expected to come into force on 1 April 2011, amends almost every section of the original act and the regulations are currently in draft form. – For Nedbank Group and the SA banking industry the effect of the unintended consequences of S136(2) was addressed through the Banking Association of South Africa and the proposed revisions should resolve these concerns. Nedbank Group is assessing the full effect that this new act will have on its business.     • The Consumer Protection Act – SA banks are required to be compliant by 31 March 2011. – Nedbank Group awaits the final regulations to complete its compliance programme.     • Protection of Personal Information Act – It is expected that the Protection of Personal Information Bill will be passed into law during the Parliamentary first quarter of 2011.

In addition to the above, Nedbank has provided commentary on various energy, water and climate change regulatory developments CAPITAL ADEQUACY • Regulatory capital – Nedbank Group’s capital ratios continued to strengthen year-on-year.+ ■ Core Tier 1: 10,1% (2009: 9,9%) ■ Tier 1: 11,7% (2009: 11,5%) ■ Total: 15,0% (2009: 14,9%)     – This strengthening occurred despite using internal capital resources to buy out the minorities in Imperial Bank, the negative impact on risk-weighted assets (RWA) of its integration into Nedbank Limited, and the impairment as intangible assets, rather than being treated as fixed assets, of capitalised software development costs that was previously only expected from 2013 onwards under the new Basel III requirements. This is reflective of continuing, successful capital and RWA optimisation in Nedbank Group. * Audited. – Given the predominant focus on the core Tier 1 ratio by Basel III, and new requirements to ensure all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss, all of which will be phased-in over time, Nedbank Group’s focus is firmly on its core Tier 1 ratio. In consideration of Nedbank Group’s high total capital adequacy ratio of 15,0% the Imperial Bank Tier 2 bond (‘IPB2’), amounting to R500 million, was called (without being replaced) and the intention is to do the same with the Nedbank Limited bond (‘Ned 5’) that is callable in April 2011, subject to SARB approval.     • Economic capital – Available financial resources: Economic capital ratio 144% (2009: 142%). R12 784 million surplus capital above minimum requirements plus the 10% buffer. – During 2010 the group implemented several refinements to the calculation and allocation of economic capital.     • Internal Capital Adequacy Assessment Process – The annual group Internal Capital Adequacy Assessment Process (ICAAP) was completed and signed off by the board in July 2010. The SARB’s Supervisory Review and Evaluation Process (SREP) of Nedbank Group’s ICAAP was concluded favourably in H2 2010 with no material issues raised. – Best-practice stress and scenario testing framework and process were followed to confirm the robustness of the group’s capital adequacy.     • Leverage ratio – This remains low at 13,8 times (2009: 14,4 times) when compared with international levels.     • External credit ratings – In July 2010 Moody’s Investor Services reaffirmed Nedbank Limited’s financial strength rating at C- and its global local currency rating at A2. The outlook for all ratings was also maintained at stable. – In July 2010 Fitch Ratings reaffirmed Nedbank Group’s long-term foreign and local currency issuer default rating (IDR) at BBB, and national long-term rating at AA-(zaf). The short-term foreign currency IDR was maintained at F2. The outlook for all three ratings was also maintained at stable.   FUNDING AND LIQUIDITY •   Well managed through another difficult and uncertain year in global banking. • Significantly lengthened the long-term funding ratio to 23% (2009: 18%), including successful issue of R6,2 billion in senior unsecured debt during 2010. • Matched maturity funds transfer pricing (MMFTP) and liquidity premiums (pricing for liquidity risk) well entrenched across the business. • Sound loan-to-deposit ratio of 97%. • Further strengthened the liquidity buffer. • Well-diversified funding mix (ie retail versus wholesale deposit reliance) and strong retail household deposits positioning maintained. • Low reliance on interbank and foreign markets. • Internal Liquidity Adequacy Assessment Process introduced and embedded within the organisation, a similar concept to ICAAP.     MARGIN MANAGEMENT •   Net interest margin (NIM) reduced to 3,35% (2009: 3,39%) mainly due to the impact of endowment (on capital and non-rate-sensitive liabilities) and costs of lengthening the funding profile and holding a higher liquidity buffer. • However, NIM has performed better than originally forecast due to a strong focus on asset pricing and mix (as per manage-for value strategy), application of MMFTP, allocation of risk-based capital and liquidity premiums among growth and market share gains across most categories of advances (with the exception of home loans in line with group strategy of focusing on areas with high economic profit potential).     CHANGES TO AND SOUTH AFRICAN RESERVE BANK APPROVAL FOR CERTAIN METHODOLOGIES • Advanced Measurement Approach and Internal Model Approach – Received approval from the SARB to use the AMA for operational risk (from 2010) and IMA for market trading risk (from 2011) for regulatory capital purposes for Nedbank Limited. – Nedbank Limited now has approval for all three major Pillar 1 risk types for Basel II, having received approval for the AIRB Approach for credit risk on day 1 implementation of Basel II (January 2008). – The regulatory capital approaches above now align with those already in use for economic capital (and ICAAP) purposes. This contributes to Nedbank Group’s RWA optimisation while representing a more sophisticated measurement of risk.     • Capital allocation to businesses (as discussed in the June 2010 results) – Increase in quantum of economic capital allocated to businesses for risk-adjusted performance measurement and segmental analysis due to methodology enhancements and alignment with the group’s regulatory core Tier 1 capital level, which impacts the return on ordinary shareholders’ funds (ROE) calculation.     • Credit loss ratio (as discussed in the June 2010 results) – Change in calculation from simple average to daily averages and exclusion of trading assets to reflect the ratio more accurately.     RISK MANAGEMENT • Strong credit risk management.+ – The credit loss ratio on the banking book improved to 1,36% [2009: 1,52% (restated)]. – Defaulted advances reduced by 1,04% to R26 765 million (2009: R27 045 million). – Maintained a conservative approach and total impairment provisions increased by 14,6% to R11 million (2009: R9 798 million). – Sound credit growth achieved in current external economic environment under the bank’s manage-for-value strategic focus on improving assets quality through active management of the bank’s portfolios towards high economic profit areas.     • Group’s ERMF continued to be resilient. • Sound risk governance and compliance prevails, aligned with Basel II.v requirements. • Effective operational and security risk management, containing impact of crime to reasonable levels. • Alternative operational risks to sustainability, such as environmental and transformation risks, are well managed by the group. • Successful reputational risk management, such as the favourable Securities Regulation Panel ruling on the Pinnacle Point litigation. • Successful Imperial Bank integration into Nedbank Limited. • Significant steps to enhance risk management in Nedbank Retail and to fix economics in secured lending. • Prudent risk appetite followed with group metrics cascaded into all business units. • Risk-based remuneration practices applied since 2008 align in all material respects with recent international requirements. • Robust capital and liquidity risk management.   For the group’s comprehensive disclosure on risk and balance sheet management in line with Regulation 43 of the regulations relating to banks in South Africa please refer to the group’s updated Pillar 3 Report that will be released on the group’s website at www.nedbankgroup.co.za by 8 April 2011. This summary review primarily focuses on the key financial risks and balance sheet management components. + Audited.     OVERVIEW 2010 The SA economy had a strong start to the year primarily driven by global demand for commodities and manufacturing production. However, the fragility of the global recovery as a result of high government debt in developed economies was highlighted by fiscal consolidation in European economies during the course of the year. This impacted global demand for SA exports, resulting in the domestic recovery losing momentum despite the boost from the FIFA 2010 World Cup. Against this backdrop the domestic banking environment improved modestly, supported by 30-year-low interest rates that translated to an improved credit environment. The landscape of banking continues to change following the global financial crisis, although the Euro region remains a major concern, and the significant international regulatory response in particular to what is commonly referred to as Basel III. BASEL III Most of the Basel III proposals have recently been finalised, with some significant aspects remaining outstanding, but envisaged to be completed in 2011. Considerable debate continues on the impact of Basel III on the banking industry and, consequently, economic growth. Particular focus has fallen on the new liquidity ratios and the cumulative impact of the vast array of new Basel III requirements, especially when considering forward growth projections. In South Africa the details of exactly how Basel III will be adopted are still to be advised by the SARB.     SUMMARY OF BASEL III • New Basel II.v requirements (finalised in July 2009) – Enhancements to Pillar 1   ■ Securitisation     ■ Trading market risk     – Enhancements to Pillar 2 (and hence the ICAAP)   ■ Bankwide governance and risk management   ■ Principles for sound liquidity risk management   ■ Principles for risk concentrations   ■ Sound remuneration practices (risk-based)   ■ Valuation and liquidity risks of financial instrument fair-value practices   ■ Principles for sound stress testing practices   ■ Off-balance-sheet exposures and securitisation activities   ■ Reputational risk and implicit support     – Enhancements to Pillar 3 (public disclosure)   ■ Securitisation exposures     The above are incorporated into the draft changes to the SA banking regulations, effective 1 January 2012. In addition, the SARB are proposing to entirely phase out hybrid debt capital (non-core Tier 1), which is contrary to Basel III that allows for existing hybrid debt to remain, and introduce a 1,06 multiplier to credit RWA of AIRB banks (to align with the original Basel II Accord).     • Basel IIl requirements (finalised in December 2010) – Raise quality, consistency and transparency of capital base – Enhance risk coverage – Introduce new leverage ratio – Reduce procyclicality and introduce new countercyclical buffers – Address systemic risk and interconnectedness – Introduce new global liquidity framework [notably the new liquidity coverage ratio (LCR) and NSFR] – Basel III timelines         ■ Commence 2013 with long phase-ins through to 2019.     There is no formal indication yet from the SARB on South Africa’s adoption, other than ‘South African banks will not need to raise additional capital in response to Basel III’ and that ‘a pragmatic approach will be followed in respect of the new Basel III liquidity ratios’.     • Basel III requirements (work in progress; to be finalised during 2011) – Capital surcharge for systemically important financial institutions (SIFIs) – Loss absorbency requirements for all capital instruments (finalised in January 2011) – Counterparty credit risk – Trading book review – Convergence with International Financial Reporting Standards • Observation periods commence in 2011/2012 for: – New liquidity ratios (LCR and NSFR) – New leverage ratio     In summary, greater clarity and finalisation have been achieved to date, but significant uncertainty remains.     POTENTIAL IMPACT ON NEDBANK GROUP OF KEY BASEL III COMPONENTS     • Capital – Overall, considered to be ‘manageable’ but await finalisation of the outstanding Basel III requirements and details from the SARB for adoption in South Africa.     – SA banks’ regulatory capital rules were already considerably more conservative than the Basel II international rules. The Tier 1 minimum ratio is 7% in South Africa, while the core Tier 1 minimum is 5,25%. In addition, a unique to South Africa, 1,5% Pillar 2a capital buffer is already in force. All the major SA banks are currently operating at capital ratios significantly above the minimum regulatory ratios required.       – Core Tier 1 capital is the main focus. In view of the new Basel III capital buffers, it is likely that Nedbank Group’s target may increase from the current 7,5% – 9,0%. The group expects to meet this via earnings, continuing capital and RWA optimisation, the strategic positioning of products, business mix and our new portfolio tilt strategic focus, integrated with the efforts of enhancing ROE and optimising economic profit.       – Nedbank Group has a strong track record over the past three years of significant capital and RWA optimisation. This is expected to continue.       – The new Basel III regulatory deductions against core Tier 1 qualifying capital resources only commence in January 2014. These deductions are not significant for Nedbank Group.       – Hybrid debt capital (non-core Tier 1) will be phased out by the SARB. The group’s Tier 2 debt capital also needs to be addressed (replace and reduce the extent in view of the new Basel III loss absorbency requirements) over the long transitional period.       – All the major SA banks have also completed three comprehensive, annual ICAAPs since 2008. These are required to be signed off by the board of directors of each bank and are then subjected to a detailed SREP by the SARB.     • Leverage – No challenges are envisaged in terms of compliance with Basel III’s new leverage ratio, which includes off-balance-sheet exposure.     • Risk coverage – The Basel III requirements will impact most significantly on banks with large capital markets businesses. Higher RWA requirements will primarily come from trading books, complex securitisations, securities lending and over-the-counter derivatives. – Nedbank Group’s trading book is small in relation to its total bank operations, securitisation exposure and activities are very low, and counterparty credit risk, including repurchase transactions and securities financing, is mostly restricted to low-risk, non-complex transactions. Credit derivative activities are also restricted to single-name trades of SA exposures and biased towards providing risk mitigation. The group does not envisage a significant overall increase in minimum capital or RWA requirements, subject to the outcome of the Basel III proposals still to be finalised in 2011. In particular, the outstanding Basel III proposals on SIFIs and counterparty credit risk do need to be finalised before a conclusion can be reached on this aspect. In South Africa a unique Pillar 2 add-on of 1,5% already exists, additional to the minimum Basel II total ratio requirement of 8%.     • Remuneration – As regards the emphasis on ‘risk-based’ remuneration together with additional sound governance practices, Nedbank Group is very well positioned and has only a few minor gaps to close (see the Remuneration Report in volume 2 of the 2010 integrated report).     BASEL III SUMMARY OF DECEMBER 2010 ANNOUNCEMENTS Click To Enlarge

• Liquidity – Although the implementation timelines have been extended considerably, compliance with the two proposed liquidity ratios (especially the NSFR) remains the major concern for SA banks, unless benefits arise from National Treasury’s Structural Funding and Liquidity Task Team, which is addressing this issue and the structural issues in the country’s financial industry. – SA’s banking industry has remained structurally sound and weathered the global financial crisis and local recession well due to a number of factors, including:   ■ Sound and proactive regulation of financial services, especially in the banking sector.   ■ Strong risk and capital management in the SA banking industry.   ■ Basel II being successfully implemented and embraced in South Africa.   ■ The National Credit Act (NCA) being successfully implemented in South Africa to help minimise irresponsible lending practices, overgearing and excessive consumer debt.   ■ Fiscal authorities in South Africa never allowing interest rates to fall as low, and for as long, as those in the United States, where this resulted in excessive borrowing and untenable levels of household debt. South Africa has not had negative real interest rates.   ■ Exchange controls preventing large flows of funds from local institutions out of the country.   ■ Low reliance on foreign funding/capital markets.   ■ Rand liquidity remaining stable, with the interbank market operating normally.   ■ The originate-and-sell business model and complex credit derivatives and/or securitisation vehicles, which resulted in excessive leverage in some foreign banks, not being implemented and used in South Africa to the same extent.   ■ Charging of liquidity premiums in client borrowings and improved asset pricing.   ■ Lessons learned from the 2002/3 SA banking crisis.   Government support was not required by the SA banking industry at any time during this global financial crisis. While always striving to maintain close alignment with Basel III standards, for the factors set out above South Africa would be justified in appropriately modifying the specific requirements of the proposed liquidity ratios in Basel III. – Nedbank Group fully subscribes to the principles set out in the Basel III liquidity risk framework and has already embedded these principles into its existing liquidity risk management framework. By way of example, Nedbank Group is compliant with the Principles for Sound Liquidity Risk Management and Supervision that were issued in September 2008. – In terms of revising the regulations it is broadly anticipated that the SARB will subscribe to the principles encapsulated in the proposed Basel III liquidity standards. However, it is also anticipated that, given the structural factors impacting the ability of SA banks to comply with the ‘as is’ proposed liquidity ratios, the SARB will follow a pragmatic approach in terms of what can be achieved, without creating unintended consequences (eg slower economic growth and higher unemployment). ‘Once finalised in the course of 2010 by the Basel Committee, these requirements related to a stressed liquidity coverage ratio, and a structural liquidity ratio will be considered for incorporation into the regulatory framework. However, ultimately, liquidity in the SA financial sector is mainly a structural matter that is likely to require extensive dialogue between various key roleplayers such as the National Treasury, the central bank, the Financial Services Board and the Department’ (2009 Annual Report, Bank Supervision Department, South African Reserve Bank). – Compliance with the LCR and the NSFR are not related to issues of principle but rather to specific factors and, in particular, the structural issues, benefits and characteristics of the SA financial system. We have graphically depicted below the manner in which SA banks are currently funded, based on the latest industry data. We draw the following conclusions of total SA bank funding from this data:   ■ Only 16% emanates from household deposits.   ■ Capital markets only contribute 6%, with foreign capital markets contributing only 2%.   ■ Other funding, which includes deposits from local corporates denominated in foreign currency, only represents 4%.   ■ Wholesale and commercial deposits, which attract the most adverse treatment in terms of the proposed Basel III ratios, represent 72%.            On the liability side of the balance sheet, in order to improve both the LCR and NSFR, SA banks would potentially need to do the following:         ■ Increase the proportion of deposits from households significantly in order to reduce deposits from wholesale and corporate depositors proportionally.   ■ Lengthen the funding profile through increased capital market issuance, both domestically and internationally.     – However, the structural challenges likely to constrain SA banks, in terms of executing the strategies outlined above, include:   ■ Low levels of retail savings.   ■ The small SA capital market.   ■ Expensive offshore markets being constrained by overall appetite for emerging-market paper.   ■ Regulations that limit the structural duration of the domestic money market.   ■ An insufficient pool of liquid assets.     – While the SARB has given no formal indication regarding its approach to adopting and/or modifying the proposed Basel III liquidity ratios, the following possibilities exist:         ■ Adopt a pragmatic approach on the basis that the Basel III proposed liquidity ratios do not take the following into account:   ❍ The ‘closed’ nature of SA’s money markets, resulting from exchange controls and the mechanics of the domestic settlement and clearing system, ie rands are more ‘sticky’ for SA banks (in the rand system) than for euro- or dollar-denominated banks (in their respective systems) whose systems are more ‘open’.   ❍ The fact that the large SA asset managers (of which there are approximately 16) have only five major banks with which to deposit funds. In Europe and the United States there are many more banks, implying that their wholesale funding is less ‘sticky’ compared with South Africa.   ❍ Given that liquidity risk is a consequential risk, legislation such as the NCA reduces systemic risk and the need for oversized liquidity buffers. Many developed economies do not yet have the safety net of NCA-type legislation. In South Africa the NCA prohibits the originate-to-distribute model that was at the heart of the US sub-prime crisis. This additional SA safety net should be considered when setting minimum levels of compliance for the ratios.   ❍ SA banks have proportionally higher core Tier 1 capital levels compared with many of the international banks. The conservative capital structure of SA banks, with more loss-absorbing permanent capital, should also be considered when setting the minimum SA liquidity standards.   ❍ A strong capital base can help to mitigate liquidity risk both by providing a capital buffer to allow an entity to raise funds and deploy them in liquid positions and by serving to reduce the credit risk taken by providers of funds to the group.   ❍ Unlike the US, which has not yet embedded Basel II, South Africa has fully embraced the principles of Basel II with robust risk management approaches having been adopted by the domestic banks.   ❍ The Basel III document requires banks to assume that 100% of wholesale deposits (maturing over the next 30 days) flow out of the bank. Applying a look-through principle to money market funds it could be argued that the underlying depositor is retail in nature. To assume that 100% of these funds would therefore leave the bank over a 30-day time horizon (as per the LCR) may be a material overstatement in the SA market.   ❍ Basel III distinguishes between small business and ‘all other business’, which typically includes medium-sized businesses, large businesses and corporate businesses with professional treasuries. All other businesses are treated equally in that 75% of their deposits are assumed to leave the bank within a 30-day interval (assuming they have a low operational relationship with the bank). We believe that there is considerable scope to differentiate between medium, large and corporate-type commercial clients in the SA environment.         ■ Broaden the definition of high-quality assets considered to be eligible in terms of the LCR.   ❍ While addressing the structural issues through National Treasury’s Structural Funding and Liquidity Task Team is a longer-term initiative, the SARB could in the short term consider broadening the definition of high-quality assets. That is, in addition to the Basel III level 1 and 2 liquid assets, the SARB could introduce level 3 and 4 assets (eg other bank debt such as negotiable certificates of deposit, promissory notes and floating-rate notes).         ■ Allow the creation of ‘collateral pools’ for inclusion in the stock of high-quality liquid assets. ❍ In view of the structural constraints to lengthening the funding profile or replacing wholesale funding with retail deposits, that is limitations in terms of addressing the liability side of the balance sheet, a key consideration is addressing the asset side of the balance sheet by bolstering the stock of liquid assets via converting typically long-dated illiquid assets into high-quality liquid assets.   ❍ An option for consideration is to allow banks to create ‘collateral pools’ that meet preagreed SARB requirements (eg maximum loan-to-value, minimum seasoning or payment-to-income ratios) and which may be pledged as security against stress funding. These ‘collateral pools’ could then be included in the stock of liquid assets making up the LCR.           ■   Introduction of a national deposit insurance scheme.   ❍ South Africa is not aligned with many other jurisdictions in terms of deposit insurance schemes. The impact of this needs to be considered as SA banks’ liquidity ratios will reflect negatively compared with international jurisdictions with deposit insurance schemes as, in terms of the Basel III ratios and definitions, such a scheme is required in order to classify deposits as ‘stable’ and thus receive a more favourable treatment.     – Nedbank Group’s additional possible courses of action could include:   ■ Purchasing further level 1 assets (including government bonds, treasury bills, debentures) assuming this quantum of level 1 assets would be available. This would not have a pervasive impact on projected ROEs.   ■ Structuring certain new corporate lending in the form of A- or better corporate bonds rather than as advances (client dependent) in order to increase the market capacity of level two assets.   ■ Through Nedbank Group’s new portfolio tilt strategic approach, reducing certain long-dated lending.   ■ Utilising Nedbank Group’s well-diversified funding mix supported by a strong retail and commercial deposit franchise (and a strong market share of household deposits).   ■ Utilising the domestic and international capital markets, for example securitisation vehicles, as this market is opening up again and is starting to show signs of improved liquidity.     CREDIT RISK The recovery in the credit cycle has proven to be more modest compared with previous cycles. Household demand for credit was contained by the consumer debt burden remaining relatively high, increased regulatory requirements, policy uncertainty and employment growth only resuming late in the year, resulting in a less broad-based recovery. In the corporate sector excess capacity and uncertainty over the sustainability of the local and global recovery limited spending. Government fixed-investment spending, although continuing to contract, emerged as the main foundation for growth. Household finances improved in South Africa as debt was slowly reduced and interest rates eased to the lowest levels in 36 years. Against this background, the ratio of household debt to disposable income decreased to 78,2% from just over 80% at the end of 2009. At the same time debt service costs decreased to 7,5%, the lowest level since June 2006, and are now at a level that is more conducive to improving economic growth in the consumer sector. Nedbank Group gross loans and advances grew ahead of the industry at 5,7% to R486 billion (2009: R460 billion): * 2009 restated to include Imperial Bank loans and advances. ^ 2009 restated to exclude Nedbank Wealth loans and advances. ** These relate to eliminations passed through Central Management. + Audited. Nedbank Corporate advances grew by 8,0%. Nedbank Business Banking advances ended marginally up with R12 billion of new advances being offset to a large extent by repayments of other loans. The repositioning of Nedbank Retail resulted in home loans decreasing, as planned, by 0,2%, while there was stronger growth in personal loans, cards and vehicle and asset finance of 37,7%, 7,9% and 13,3% respectively. Core banking advances in Nedbank Capital grew by 2,6%, with R10,8 billion of new advances largely offset by repayments. The strength of the rand and the investment in UK treasury bills, compared with previous placements with other banks, led to a decrease in advances in Nedbank Wealth. The change in loans and advances by business cluster and by product are given in the tables that follow. NET LOANS AND ADVANCES BY BUSINESS CLUSTER+       2009 Rm % change 2010 (Restated)* Nedbank Capital 12,7 62 328 55 315 Nedbank Corporate 8,0 157 703 146 035 Total Nedbank Retail and Business Banking 3,5 238 099 230 000    Nedbank Retail 4,1 187 334 179 885    Nedbank Business Banking 1,3 50 765 50 115 Nedbank Wealth (11,6) 16 869 19 089 Other >(100,0) 274 (138) Net loans and advances 5,5 475 273 450 301 * 2009 restated to include Imperial Bank loans and advances and disclose Nedbank Wealth separately. + Audited. SUMMARY OF LOANS AND ADVANCES BY PRODUCT+       2009 Rm % change 2010 (Restated)* Home loans 0,7 145 895 144 921 Commercial mortgages 6,7 86 100 80 672 Properties in possession (25,4) 662 887 Credit cards 7,9 7 910 7 334 Overdrafts 20,0 13 307 11 093 Term loans 9,2 74 605 68 321 Overnight loans 1,1 12 552 12 420 Other loans to clients (0,7) 42 897 43 203 Leases and instalment sales 5,9 67 881 64 128 Preference shares and debentures 23,2 20 499 16 633 Factoring accounts 46,9 3 202 2 179 Deposits placed under reverse repurchase agreements 35,2 10 849 8 026 Trade, other bills and bankers’ acceptances (50,4) 140 282 Gross loans and advances 5,7 486 499 460 099 Impairment of loans and advances 14,6 (11 226) (9 798) Net loans and advances 5,5 475 273 450 301 + Audited. * Comparative results have been restated for the integration of Imperial Bank. Mortgage loans as migrated to the Property Finance Division have been reclassified from home loans to commercial mortgages and those to Nedbank Retail have been reclassified from commercial mortgages to home loans in line with the group’s reporting. The net result of this reclassification is a R4,2 billion adjustment from home loans to commercial mortgages. The Basel II on-balance-sheet exposure at year-end is R569 billion (2009: R542 billion). The reconciliation of the Basel II exposure to the gross loans and advances of R486 billion is shown below. BALANCE SHEET CREDIT EXPOSURE** PER BASEL II ASSET CLASS AND BUSINESS CLUSTER Click to Enlarge ADVANCED INTERNAL RATINGS-BASED APPROACH FOR NEDBANK GROUP Through Nedbank Limited and London Branch 87% of the total credit extended in Nedbank Group is covered by the Basel II AIRB Approach, with the Imperial Bank, Fairbairn and Nedbank African subsidiaries’ credit portfolios on TSA. Nedbank intends to apply to the SARB in 2011 for approval to use the AIRB approach for the legacy Imperial Bank book. The results shown below include both the Nedbank Limited and London Branch exposure: SUMMARY OF ADVANCED INTERNAL RATINGS-BASED APPROACH BASEL II CREDIT EXPOSURES BY CLUSTER AND ASSET CLASS Click To Enlarge THE STANDARDISED APPROACH The exposure under TSA, which consists of the legacy Imperial Bank book, Nedbank Group’s African subsidiaries and Fairbairn, is 13% of Nedbank Group total exposure. A breakdown of exposures by asset class is shown in the table below: * Total credit extended is AIRB on-balance-sheet, repurchase and resale, derivatives and off-balance-sheet exposures (includes unutilised facilities). SUMMARY OF THE STANDARDISED APPROACH BASEL II CREDIT EXPOSURES BY CLUSTER AND ASSET CLASS   AIRB on- AIRB off -         balance- balance- Repurchase     2010 sheet sheet and resale Derivative Total credit Rm exposure exposure exposure exposure extended* Nedbank Corporate 20 435 210 – 58 20 703 Corporate 2 904     28 2 932 SME – corporate 10 007 210     10 217 Public sector entities 32       32 Local governments and municipalities 17       17 Sovereign 1 450       1 450 Banks 1 206     30 1 236 Securities rms 313       313 Retail mortgages 2 804       2 804 Retail revolving credit           Retail – other 1 523       1 523 SME – retail 179       179 Nedbank Retail 47 991 835 – 60 48 886 Corporate 159 1     160 SME – corporate 3 047 167     3 214 Local governments and municipalities 4       4 Banks       60 60 Retail mortgages 3 483 436     3 919 Retail – other 37 710 166     37 876 SME – retail 3 267 65     3 332 Securitisation exposure 321       321 Nedbank Wealth 10 911 – – 1 10 912 Corporate           Sovereign 1 239       1 239 Banks 6 797     1 6 798 Securities firms           Retail mortgages 2 137       2 137 Retail revolving credit           Retail – other 738       738 Central Management 155 – – 12 167 Corporate 121     8 129 Banks 34     4 38             Total 79 492 1 045 – 131 80 668 * Total credit extended is AIRB on-balance-sheet, repurchase and resale, derivatives and off-balance-sheet exposures (includes unutilised facilities). IMPAIRMENTS AND DEFAULTED LOANS AND ADVANCES+ The credit loss ratio on the banking book improved to 1,36% for the period [2009: 1,52% (restated)]. The reduction in the impairment charge was driven mostly by Nedbank Retail, particularly in the secured portfolios that had lagged the recovery in the unsecured portfolios. Lower interest rates and the stabilising of job losses contributed to the retail credit loss ratio improving significantly from 3,17% in 2009 to 2,67%. The group further strengthened its provisioning by reducing certain security assumptions in specific impairments and lengthening the emergence periods. The credit portfolios in Nedbank Corporate, Nedbank Business Banking and Nedbank Wealth are of high quality and credit loss ratios remained within or below the respective clusters’ through-the-cycle target levels. Nedbank Capital impairments increased in the higher-risk private equity portfolio. The tables below summarise Nedbank Group’s defaulted portfolio and the level of impairments. The policies, principles and definitions relating to the defaulted portfolio and impairments are well articulated in the group’s credit policy and Pillar 3 Report. SUMMARY OF IMPAIRMENTS, CREDIT LOSS RATIO, DEFAULTED LOANS AND ADVANCES AND PROPERTIES IN POSSESSION+                           Nedbank         2010     Retail and   Nedbank     Nedbank Nedbank Business Nedbank Business Nedbank   % Capital Corporate Banking Retail Banking Wealth Total Impairments to gross loans and advances 1,45 0,86 3,58 3,88 2,42 0,63 2,30   Specific impairments 1,27 0,59 2,94 3,20 1,95 0,48 1,86   Portfolio impairments 0,18 0,27 0,64 0,68 0,47 0,15 0,44 Impairment charge as a % of net interest income (NII) 44,55 9,29 45,82 55,66 8,64 6,17 37,26 Credit loss ratio 1,27 0,20 2,18 2,67 0,40 0,15 1,36   Credit loss ratio – specific 1,17 0,27 2,08 2,46 0,71 0,16 1,32   Credit loss ratio – portfolio 0,10 (0,07) 0,10 0,21 (0,31) (0,01) 0,04 Defaulted loans and advances to gross loans and advances 2,03 2,58 8,51 9,09 6,31 2,16 5,50 Properties in possession to gross loans and advances – – 0,26 0,32 0,02 0,11 0,14                   2009     Total Nedbank Retail and   Nedbank     (Restated)* Nedbank Nedbank Business Nedbank Business Nedbank   % Capital Corporate Banking Retail Banking Wealth Total Impairments to gross loans and advances 0,69 0,82 3,39 3,66 2,38 0,81 2,13   Specific impairments 0,56 0,45 2,83 3,17 1,59 0,67 1,70   Portfolio impairments 0,13 0,37 0,56 0,49 0,79 0,14 0,43 Impairment charge as a % of NII 11,19 11,09 52,10 65,50 10,12 19,43 40,68 Credit loss ratio 0,36 0,25 2,56 3,17 0,52 0,47 1,52**   Credit loss ratio – specific 0,31 0,27 2,69 3,24 0,82 0,40 1,59   Credit loss ratio – portfolio 0,05 (0,02) (0,13) (0,07) (0,30) 0,07 (0,07) Defaulted loans and advances to gross loans and advances 1,41 2,37 9,39 10,47 5,45 2,15 5,88 Properties in possession to gross loans and advances – – 0,37 0,47 0,02 0,03 0,19 + Audited. * 2009 restated to include Imperial Bank and disclose Nedbank Wealth separately. Nedbank Group updated its methodology for calculating the credit loss ratio in 2010, removing trading assets from loans and advances. Impairments are not raised against trading assets as these are designated at fair value through profit or loss, and therefore any losses are realised through a decrease in NIR. Additionally, Nedbank Group’s credit loss ratio is now based on a year-to-date daily average of loans and advances as opposed to a simple average. These changes had a minimal impact on Nedbank Group’s credit loss ratio (ie 0,03% – 0,06% over the past two years). The credit loss ratio at December 2009 increased from 1,47% to 1,52% after incorporating these changes**. In 2009 (with the Retail Cluster following in 2010) Nedbank Group enhanced the consolidation, focus and reporting of key financial risk appetite metrics. Business cluster-specific credit loss ratio targets were formalised for the first time, after taking into account historic, through-the-cycle, sustainable performance as well as desired risk appetite. In addition to this, the group’s credit loss ratio target was reviewed separately, but in conjunction with the consolidated business cluster targets. Nedbank Group’s targeted credit loss ratio is 0,60% – 1,00%. A summary of the impairments movements over the past year is shown below. RECONCILIATION OF IMPAIRMENTS Click To Enlarge The coverage ratio is the amount of specific impairments that have been raised for the total defaulted loans and advances. This is effectively the inverse of the expected recoveries ratio. The expected recoveries are equal to the defaulted loans and advances less the specific impairments, as specific impairments are raised for any shortfall that would arise after all recoveries are taken into account. The expected recoveries of defaulted loans and advances include recoveries as a result of liquidation of security or collateral, as well as recoveries as a result of a client curing or partial client repayments. The absolute value of expected recoveries of defaulted accounts (which includes security values) will increase as the number of defaults increase. The expected recovery amount will, in most instances, be less than the total defaulted exposure, as it is seldom the case that 100% of the defaulted loan would be written off. A decrease in the coverage ratio (or increase in the expected recoveries ratio) may arise as a result of the following: •   Expected recoveries improving due to higher recoveries being realised in the loss-given-default (LGD) calculation. • A change in the defaulted product mix, with a greater percentage of products that have a higher security value and therefore a lower specific impairment, such as secured products (home loans and commercial real estate). • An increase in the collateral value, which is an input into the LGD calculation and would result in a decrease in the LGD and decrease in specific impairments. • A change in the mix of new versus older defaults as, in most products, the recoveries expected from defaulted clients decrease over time. • A change in the writeoff policy, such as extending the period prior to writing off a deal, that will result in a longer period in which recoveries can be realised. Defaulted advances declined by 1,04% to R26 765 million (2009: R27 045 million). Total impairment provisions increased by 14,6% to R11 226 million (2009: R9 798 million), resulting in strengthened coverage ratios. The group’s coverage ratio increased to 33,9% (2009: 29,0%) predominantly due to the decrease in residential mortgage defaulted advances. In addition, improved client affordability combined with stabilising house prices has contributed towards the ongoing improvement of early arrears in home loan advances. However, commercial mortgages, lease and instalment debtors, and other loans and advances increased, as illustrated in the following table. DEFAULTED LOANS AND ADVANCES AND RELATED SECURITY AND IMPAIRMENTS BY BUSINESS CLUSTER AND ASSET CLASS Click To Enlarge The coverage ratio and expected recovery ratio by business cluster and by product are shown in detail in the table below. SUMMARY OF DEFAULTED LOANS AND ADVANCES AND IMPAIRMENTS BY CLUSTER Click To Enlarge Click To Enlarge PROPERTIES IN POSSESSION Click To Enlarge COUNTERPARTY CREDIT RISK Nedbank Group applies the Current Exposure Method (CEM) for Basel II counterparty credit risk. Economic capital calculations also currently utilise the CEM results as input in the determination of credit economic capital. OVER-THE-COUNTER DERIVATIVES FOR NEDBANK LIMITED AND LONDON BRANCH Over-the-counter (OTC) derivative products   Gross positive   Gross positive   Notional value fair value Notional value fair value Rm 2010 2010 2009 2009 Credit default swaps 8 338 56 2 272 8    Embedded derivatives 3 720* 2        Proprietary trading 4 618** 54 2 272 8 Equities 11 740 569 11 005 1 155 Forex and gold 346 824 6 212 189 601 6 437 Interest rates 419 210 7 234 358 738 5 470 Other commodities 4 172 147 45 302 Precious metals except gold 6 487 105 2 56 Total 796 771 14 323 561 663 13 428 *    Credit default swaps embedded in credit-linked notes issued by Nedbank Group whereby credit protection is purchased of R1 078 million or credit-linked notes purchased whereby credit protection is sold of R2 642 million. **    Proprietary trading positions through the purchase (R1 877 million) and sale (R2 741 million) of credit protection.       Netted   Netted           current credit   current credit       Gross Current exposure   exposure Exposure- Risk-   positive fair netting (before Collateral (after at- weighted Rm value benefits mitigation) amount mitigation) default value exposure 2010 14 323 6 983 9 052 368 8 766 11 718 4 428 2009 13 428 7 028 6 963 779 6 443 9 566 3 018 SECURITIES FINANCING TRANSACTIONS FOR NEDBANK LIMITED AND LONDON BRANCH Rm Gross positive fair value Collateral value after haircut Netted current credit exposure (after mitigation) Exposure-at-default value Risk-weighted exposure 2010           Repurchase agreements 10 849 10 343 506 506 26 Securities lending 8 738 9 715 1 237 1 237 89 Total 19 587 20 058 1 743 1 743 115 2009           Repurchase agreements 8 026 7 557 469 469 40 Securities lending 8 567 9 208 415 415 27 Total 16 593 16 765 884 884 67 CREDIT CONCENTRATION RISK SINGLE-NAME CREDIT CONCENTRATION RISK Of total group credit economic capital only 3,1% is attributable to the top 20 exposures, excluding banks and government exposure, and 1,4% to the top 20 banks’ exposure, highlighting that Nedbank Group does not have undue single-name credit concentration risk. The group’s credit concentration risk measurement incorporates the asset size of obligors/borrowers into its calculation of credit economic capital. Single-name concentration is monitored at all credit committees, which includes the applicable regulatory and economic capital per exposure. GEOGRAPHIC CONNCENTRATION RISK Given that 95% of the group’s loans and advances originate in South Africa, geographic exposure risk is high. Practically, however, this concentration has proven positive for Nedbank Group, given the global financial crisis, and reflects its focus on its area of core competence. The direct exposure of Nedbank Group to the banking sectors of Portugal, Italy, Ireland, Greece and Spain (PIIGS) is monitored on an ongoing basis and is not material. The group holds no sovereign bonds issued by these countries. Direct lines to banks in Italy and Spain are restricted to systemically important banks. A summary of Nedbank Group’s exposure to the PIIGS is provided below: • Portugal – total exposure amounts to R20,65 million. • Italy – total exposure amounts to R2,44 billion. • Ireland – total exposure amounts to R21,22 million. • Greece – Nedbank Group has no exposure or lines to Greek banks. • Spain – total exposure amounts to R8,28 million. Note 1: 2009 restated due to the introduction of the sovereign industry segment in 2010. Note 2: The figures above represent the industry (%) split of Nedbank Group’s total exposure, including on-balance-sheet, off-balance-sheet and derivatives based on the proprietary credit portfolio model used for credit economic capital measurement. + Audited. Previously sovereign exposures, including local government exposure, were considered part of the non-cyclical segment. In 2010 this was allocated into a standalone segment and restated for 2009. We conclude that credit concentration risk is adequately measured, managed, controlled and ultimately capitalised. There is no undue single-name concentration or sector concentrations. While there is a concentration of Nedbank Group’s loans and advances in South Africa, this has been positive for Nedbank Group during the global financial crisis. SECURITISATION RISK Nedbank Group uses securitisation exclusively as a funding diversification tool and for adding flexibility in mitigating structural liquidity risk. The group currently has three traditional securitisation transactions: • Synthesis Funding Limited (Synthesis), an asset-backed commercial paper (ABCP) programme launched during 2004. • Octane ABS 1 (Pty) Limited (Octane), a securitisation of motor vehicle loans launched in July 2007. • GreenHouse Funding (Pty) Limited, Series 1 (GreenHouse), a residential mortgage-backed securitisation programme launched in December 2007. Nedbank Group also fulfils a number of secondary roles as liquidity facility provider, swap provider and investor in third-party securitisation transactions. All securitisation transactions entered into thus far have involved the sale of the underlying assets to the special-purpose vehicles. Nedbank Group has not originated or participated in synthetic securitisations. Nedbank Group complies with International Financial Reporting Standards in recognising and accounting for securitisation transactions. In particular, the assets transferred to the GreenHouse and Octane securitisation vehicles continue to be recognised and consolidated in the balance sheet of the group and the respective securitisation vehicles are consolidated under Nedbank Group for financial reporting purposes. Synthesis is also consolidated into the group for financial reporting purposes. Securitisations are treated as sales transactions (rather than financing). The assets are sold to the special-purpose vehicles at carrying value and no gains or losses are recognised. Nedbank Group has not engaged in any new securitisation transactions of its own assets in the period under review. There have been no downgrades of any of the commercial paper issued in Nedbank Group’s securitisation transactions and the performance of the underlying portfolios of assets remains acceptable ASSETS SECURITISED AND RETAINED SECURITISATION EXPOSURE Click To Enlarge LIQUIDITY FACILITIES PROVIDED TO NEDBANK'S ASSET-BACKED COMMERCIAL PAPER PROGRAMME Click To Enlarge TRADING MARKET RISK Most of Nedbank Group’s trading activity is executed in Nedbank Capital. This includes marketmaking and the facilitation of client business and proprietary trading in the commodity, equity, credit, interest rate, and currency markets. Nedbank Capital primarily focuses on client activities in these markets. In addition to applying business judgement, management uses a number of quantitative measures to manage the exposure to trading market risk. These measures include: • risk limits based on a portfolio measure of market risk exposures referred to as value at risk (VaR), including expected tail loss; and • scenario analysis, stress tests and other analytical tools that measure the potential effects on the trading revenue arising in the event of various unexpected market events. While VaR captures Nedbank Group’s exposure under normal market conditions, sensitivity and stress-and-scenario analysis (and in particular stress testing) are used to add insight into the possible outcomes under abnormal market conditions. TRADING MARKET RISK PROFILE The tables below reflect the VaR statistics for the Nedbank Group trading book activities. The first table is for the period January to December 2010 and the second table is for the period January to December 2009. GROUP TRADING BOOK VALUE AT RISK+ Risk categories Historical VaR (99%, one-day VaR) by risk type Rm Average Minimum* Maximum* Year-end 2010         Foreign exchange 2,2 0,6 6,7 3,9 Interest rate 9,0 3,9 14,9 6,2 Equity 3,6 1,4 9,3 2,8 Credit 2,8 0,8 4,0 4,0 Commodity 0,7 0,0 1,5 0,2 Diversification** (7,3)     (6,2) Total VaR exposure 11,0 6,1 18,3 11,0 2009         Foreign exchange 4,1 1,0 10,3 3,7 Interest rate 16,9 7,2 28,7 7,4 Equity 6,3 2,5 13,3 3,8 Credit 6,0 2,5 10,9 3,2 Commodity 0,5 0,0 2,4 1,2 Diversification** (12,5)     (6,0) Total VaR exposure 21,3 9,9 33,1 13,3 *    The maximum and minimum VaR values reported for each of the different risk factors do not necessarily occur on the same day. As a result a diversification number for the maximum and minimum values has been omitted from the table. **    Diversification benefit is the difference between the aggregate VaR and the sum of VaRs for the five risk categories. This benefit arises because the simulated 99%/one-day loss for each of the five primary market risk categories occurs on different days. + Audited. Nedbank Group’s trading market risk exposure expressed as average daily VaR decreased by 48% from R21,3 million in 2009 to R11 million in 2010. The economic and financial outlook in 2010 has remained uncertain against the backdrop of a fragile global economic recovery and the near sovereign default in the Eurozone. This has negatively impacted the risk appetite in all the market risk categories. The following graph illustrates the daily VaR for the period January to December 2010. Nedbank Group remained within the approved risk appetite and the VaR limits allocated by the board. VaR is an important measurement tool and the performance of the model is regularly assessed. The approach to assessing whether the model is performing adequately is known as backtesting, which is simply a historical test of the accuracy of the VaR model. To conduct a backtest the bank reviews the actual daily VaR over a one-year period (on average 250 trading days) and compares the actual daily trading revenue (including net interest but excluding commissions and primary revenue) with the VaR estimate and counts the number of times the trading loss exceeds the VaR estimate. Nedbank Group used a holding period of one day with a confidence level of 99%, and had no backtesting exceptions for 2010. The following histogram illustrates the distribution of daily revenue during 2010 for Nedbank Group’s trading businesses (including net interest, commissions and primary revenue credited to Nedbank Group’s trading businesses). The distribution is skewed to the profit side and the graph shows that trading revenue was realised on 215 days out of a total of 251 days in the period. The average daily trading revenue generated was R6,03 million (2009: R6,7 million). REVISIONS TO THE BASEL II FRAMEWORK In the Revisions to the Basel II Framework published by the Basel Committee in July 2009 a guideline for calculating stressed VaR was provided. Stressed VaR is calculated using market data taken over a period through which the relevant market factors were experiencing stress. Nedbank Group uses historical data from the period 26 March 2008 to 12 March 2009. This period captures significant volatility in the SA market. The information in the following table is the comparison of the VaR using three different calculations at 31 December 2010. The three different calculations are historical VaR, extreme tail loss and stressed VaR. The extreme tail loss measures the expected losses in the tail of the distribution and stressed VaR uses a volatile historical data period. A 99% confidence level and one-day holding period are used for all the calculations. COMPARISON OF TRADING VALUE AT RISK         2010 Historical VaR Stressed VaR Extreme tail loss Rm 99% (one-day VaR) 99% (one-day VaR) 99% (one-day VaR) Foreign exchange 3,9 19,5 5,3 Interest rates 6,2 15,7 8,2 Equities 2,8 3,5 3,7 Credit 4,0 4,0 7,0 Commodities 0,2 3,6 1,2 Diversification (6,2) (23,9) (13,3) Total VaR exposure 10,9 22,4 12,1 EQUITY RISK (INVESTMENT RISK) IN THE BANKING BOOK+ The total equity portfolio for investment risk is R3 919 million (2009: R3 873 million). R2 897 million (2009: R2 947 million) is held for capital gain, while the rest is mainly strategic investments. Investments Publicly listed Privately held Total Rm 2010 2009 2010 2009 2010 2009 Fair value disclosed in balance sheet (excluding associates and joint ventures) 536 485 2 475 2 491 3 011 2 976 Fair value disclosed in balance sheet (including associates and joint ventures) 536 485 3 383 3 388 3 919 3 873 Equity investments held for capital gain are generally classified as fair value through profit and loss, with fair-value gains and losses reported in NIR. Strategic investments are generally classified as available for sale, with fair-value gains and losses recognised directly in equity. + Audited. EQUITY INVESTMENTS HELD FOR CAPITAL GAIN (PRIVATE EQUITY) REPORTED IN NON-INTEREST REVENUE   Nedbank Group Nedbank Capital Nedbank Corporate Rm 2010 2009 2010 2009 2010 2009 Securities dealing 3 268 (46) 251 49 17 Investment income – dividends received 225 36 194 18 31 18 Total private equity 228 304 148 269 80 35 Realised 230 109 214 72 16 37 Unrealised (2) 195 (66) 197 64 (2) Total private equity 228 304 148 269 80 35 OPERATIONAL RISK Nedbank Group was granted SARB approval in December 2010 for the use of the AMA, and now calculates its operational risk regulatory capital requirements using partial and hybrid AMA. The AMA Operational Risk Management Framework was approved by the board’s Group Risk and Capital Management Committee. The AMA methodologies contained therein have already been rolled out and embedded in the businesses, including for the purposes of economic capital and the ICAAP. Nedbank Group Limited was granted approval in December 2010 by the SARB for the use of the AMA to manage operational risk. This approval allowed Nedbank to calculate its operational risk capital requirements using partial and hybrid AMA with effect from 31 December 2010. The Nedbank AMA Operational Risk Management Framework was approved by the board’s Group Risk and Capital Management Committee and the AMA methodologies contained therein have been rolled out and are now embedded across the group. OPERATIONAL RISK STRATEGY, GOVERNANCE AND POLICY Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties or punitive damages resulting from supervisory actions, as well as private settlements. Operational risk is not typically taken in pursuit of an expected return, but exists as part of the normal course of business at all levels. The main sources of operational risk include:

	FINANCIAL CRIME Fraud risk management Nedbank Group follows a multipronged approach in addressing and eradicating financial crime. In 2010 key aspects of this approach included: • Close cooperation with law enforcement by rendering all possible assistance to see to the successful prosecution of offenders. • Client and staff education in printed and electronic media. • A substantial increase in the number of investigators. • Continued focus on proactive, early detection of financial crime both against the bank and its clients. • The introduction of new technologies such as biometric client authentication for the prevention of identity theft. • The creation of a dedicated capacity for the combating of home loans crime to address the increased onslaught. • Additional measures to combat new types of crime, specifically in the area of online fraud.
	Internal fraud and dishonesty Nedbank Group maintains a policy of zero tolerance of any dishonesty committed by staffmembers. Altogether 234 staff members were dismissed as a result of internal investigations in 2010, which is a decrease of 15,8% compared with 2009. Assessment of fraud risk The risk of internal and external fraud is evaluated on several levels: • Risk control self-assessments are conducted on an ongoing basis to ensure that the appropriate controls are in place and monitored effectively. Where controls are lacking, action plans are formulated and implemented to ensure that the risk of fraud is within the accepted risk appetite of the group. • Fraud key risk and control indicators have been developed and are monitored, tracked and reported on in accordance with the Operational Risk Management Framework (ORMF). • Facilitated fraud risk assessments are undertaken as outlined in the International Standards for Auditing 240 (ISA 240). • New products and all processes related to their use are evaluated to ensure that all aspects of fraud risk, legal risk and regulatory risk (such as the anti-money-laundering requirements) are considered. Due-diligence investigations Due-diligence investigations are performed at the outset of any business relationship with clients, partners, vendors, agents/ intermediaries and joint ventures. In addition, an ongoing assessment of the commercial, political, social and security environment where business is undertaken or likely to be undertaken is done. Social, economic and governmental changes in a country can create an environment that reduces security and increases the risk to the group’s assets: staff, premises and information and, consequently, its ability to continue to do business.
	Internal and external whistleblowing reporting lines Security and fraud incidents can be reported, around the clock, through an internal reporting line, which is supported by an external, independently managed whistleblowing hotline, available to staff and clients. The facility also extends to Nedbank Africa subsidiaries in Namibia, Swaziland, Lesotho, Malawi and Zimbabwe. An ethics panel has been established for the appropriate handling of reports of a sensitive or serious nature. In 2010 1 497 anonymous tipoffs were received (2009: 1 114).
	Online fraud During 2010 the group undertook various initiatives to protect its clients from online fraud, including participation in a concerted media campaign with the rest of the banking sector to educate consumers about online safety. Free software to all internet banking clients to protect them from phishing attacks was provided by Nedbank and a sophisticated phishing response infrastructure was created, which led to the successful prevention of 89,6% of all phishing losses. Cybercrime risk Nedbank Group has taken note of the current and expected impact of cybercrime on the banking industry and its clients and has established an extensive internal digital forensic capability to deal with this risk effectively. The group also provides training and awareness in digital forensics at tertiary institutions and to the law enforcement community in South Africa. Security risk In 2010 a concerted focus on staff and client safety saw a 90% decrease in robbery incidents against 2009 figures. Robberies and burglaries remain a threat and these are mitigated, managed and monitored by highly sophisticated technology in a joint operations centre. Biometric doors at branch entrances, automated roller shutter doors, a well-implemented cash management system and improved response to incidents are critical in the management of security risk. A guard tracking device, digital video recorder live camera streaming and a security analysis management system are all scheduled for implementation in 2011. Relations with the South African Police Services (SAPS) and National prosecuting authority were strengthened for the banking sector under the facilitation of South African Business Intelligence Centre. Cooperation with the criminal justice system In addition to the day-to-day cooperation with law enforcement in the fight against crime, in 2010 Nedbank Group reported 522 suspicions of corruption and/or fraud in excess of R100 000 to the SAPS in terms of section 34 of the Prevention and Combating of Corrupt Activity Act. The group was also able to assist the SAPS in its investigations by responding to 3 163 subpoenas. Nedbank Group considers financial crime to be a major operational risk that leads to significant losses, and it is for this reason that the group pursues a vigorous policy of mitigating the risk through active risk management. Legal risk Legal risk arises from the necessity that the group conduct its activities in conformity with the business and contractual legal principles applicable in each of the jurisdictions where the group conducts its business. The possibility of a failure to meet these legal requirements may result in unenforceable contract disputes, litigation, fines, penalties or claims for damages or other adverse consequences. COMPLIANCE AND REGULATORY RISK Compliance and Regulatory risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation that the group may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking and other activities. Compliance and regulatory risk has become increasingly significant and there continues to be considerable demand for the group to comply with various new and amended regulatory requirements. However, the group remains committed to the highest regulatory and compliance standards, especially due to the increasing scale and complexity of laws and regulations. The Enterprise Governance and Compliance function that forms part of the second line of defence risk management model assists the Group in managing compliance and regulatory risk. The objective of compliance and regulatory risk management is to ensure that legal and regulatory requirements to which the business is or will be subject to are identified and complied with. Further details regarding the Enterprise Governance and Compliance function are contained here.
	MONEY LAUNDERING, TERRORIST FINANCING AND SANCTIONS RISK MANAGEMENT Nedbank Group does not associate, in any way, with money-laundering activities or terrorist financing. Clearly defined policies and procedures ensure compliance with all statutory requirements and regulatory obligations or, in the absence of these, that agreed standards are met. The group takes a proactive approach by endeavouring to identify any business relationships or applications for business relationships or transactions with individuals, entities and countries targeted in financial sanctions legislation. The Business Risk Management Forum (BRMF), a Group Executive subcommittee, chaired by the Chief Risk Officer, is mandated to provide strategic direction for, and monitor the effective implementation of, anti-money-laundering (AML), combating the financing of terrorists (CFT) and sanctions compliance initiatives throughout the group. The Executive Steering Committee of the Money Laundering Control Programme, a subcommittee of the BRMF, ensures the internationalisation and operational implementation of AML, CFT and sanctions compliance. Nedbank Group Risk maintains a close and transparent working relationship with the Financial Intelligence Centre (FIC), attends bimonthly meetings with the FIC, regular meetings with the SARB and JSE Limited and the Financial Services Board to ensure compliance with their requirements and obtain clarification, where necessary. At 31 December 2010 a total of 4 387 503 client records were reflected on Nedbank Group’s Client Information System as having been verified. Of the 123 090 non-verified client records 105 946 have been restricted, with 17 144 records currently being restricted. The number of non-verified, not yet restricted records equates to 0,31% of the total number of records, which compares well with the BRMF-approved risk threshold of 0,5%. Training for AML and CFT remains a high priority. For the 24 months to 31 December 2010 a total of 21 255 of the selected 29 699 employees completed the awareness training for AML and CFT. Nedbank Group’s e-learning training intervention for CFT and related activities, which was first implemented in 2009, was recognised by the FIC as ‘innovative and a first of its kind in South Africa’. Annual directors’ training programmes for money-laundering, terrorist financing and sanctions risk management were developed in 2010 and presented to the Group Risk and Capital Management Committee on 19 October 2010 in compliance with SARB, FIC and international requirements. INFORMATION TECHNOLOGY RISK Technology risk stems from risks associated with misalignment with business strategy, uncoordinated or an inefficient information technology (IT) strategy, project failure to deliver desired change, data protection, information privacy, effects of physical disasters on information systems, IT outsourcing, IT performance and information systems governance. The Group Technology Cluster manages information and technology risk through the Technology Management Policy. In addition to the abovementioned existing regulations, Nedbank is providing input into energy, water and climate-change-related regulatory developments, including the Integrated Resource Plan 2010; the National Climate Change Response Green Paper 2010; Reducing Greenhouse Gas Emissions: The Carbon Tax Option; the Strategy for a Developmental Green Economy for Gauteng; the Integrated Energy Plan for the Republic of South Africa; the Long term Mitigation Scenarios – Technical Report and the Renewable-energy Feed-in Tariff – Phase I and II. BUSINESS CONTINUITY MANAGEMENT Business continuity management (BCM) aims at ensuring resilient group business activities emergencies and disasters. The BCM function provides overall guidance and direction, monitors compliance with regulatory and best-practice requirements and facilitates regular review of BCM practices.
	PEOPLE RISK People risk is the risk associated with inadequacies in human capital and the management of human resources, policies and processes resulting in the inability to attract, manage, motivate, develop and retain competent resources, with concomitant negative impact on the achievement of strategic group objectives. The group vigorously manages people risk through Group Human Resources at the central and business clusters. To minimise the exposure to operational risk that arises as a consequence of the group’s financial risk-taking initiatives within credit, market and operating activities, Nedbank Group has implemented and embedded an ORMF, which contains AMA-compliant methodologies, policies and guidelines to facilitate a consistent and worldclass approach to operational risk management. Personnel integrity management Nedbank Group minimises people risk by ensuring that controls are incorporated into the recruitment and selection processes of all employees, including contractors, temporary employees and consultants. This process aims to minimise the group’s vulnerability to fraud, embezzlement, theft, corruption and mismanagement of job responsibilities. It also cultivates a culture of business ethics and integrity in keeping with Nedbank Group’s values and endorses the Code of Good Banking Practice that states that ‘Banks will conduct their business with uncompromising integrity and fairness so as to promote complete trust and confidence in the banking industry’. The Financial Advisory and Intermediary Services Act, 37 of 2002, determines the ‘fit and proper’ requirements that are applicable to all financial service providers, key individuals, representatives and compliance officers. Nedbank ensures screening of these persons every 24 months to ensure the highest level of honesty and integrity. All new appointments of directors or executive directors, as required by the Banks Act, 94 of 1990, are screened to comply with the requirements of honesty and integrity. This also reduces the potential for conflicts of interest. Business clusters act as the first line of defence and are responsible for the identification, management, monitoring and reporting of operational risk. Operational risk is reported and monitored through the divisional and cluster enterprisewide risk committees and overseen by the Group Operational Risk Committee (GORC) and the board’s Group Risk and Capital Management Committee. The Group Operational Risk Management (GORM) Division, within the Group Risk Cluster, acts as the second line of defence in the Nedbank enterprise risk management framework. The primary responsibilities of GORM are to develop, maintain and champion the Group Operational Risk Management Framework, policies and enablers to support ORM in the business as well as the implementation of the Basel II and regulatory requirements and international best practice for ORM. The diagram below depicts the Nedbank Group AMA ORMF elements: Specialist functions in Group Risk, for example Forensic Services, Business Continuity Planning, Group Legal and Corporate Insurance, also assist businesses with specialist advice, policies and standard setting. Pervasive operational risk trends are monitored and reported on to the enterprisewide risk committees and, where appropriate, to GORC and to the Board Risk and Capital Management Committee. Group Internal Audit, being the third line of defence, provides assurance to GORC. OPERATIONAL RISK MEASUREMENT, PROCESSES AND REPORTING SYSTEMS The primary operational risk measurement processes in the group are risk and control self-assessments, internal loss data collection processes and governance, the tracking of KRIs, external loss data, scenario analysis and capital calculation, which are designed to function in an integrated and mutually reinforcing manner. INTERNAL LOSS DATA COLLECTION AND KEY RISK INDICATOR TRACKING The internal loss data collection process and KRI tracking are backward-looking and enable the monitoring of trends and the analysing of the root causes of loss events. Operational risk losses are reported on in the Nedbank Internal Loss Data Collection System. KRIs are designed to be both forward- and backward-looking in the sense that they function not only as early-warning indicators, but also as escalation triggers where set risk tolerance levels have been exceeded. BOUNDARY EVENTS Boundary events are those losses and near misses that manifest themselves in other risk types, such as credit and market risk, but have relevance to operational risk because they emanate from operational breakdowns or failures. Boundary events are often identified by credit and market risk management, and are included in credit risk loss databases and operational risk capital calculations respectively. Material credit risk events caused by operational failures in the credit processes are flagged separately in the Internal Loss Data Collection System. In line with the Banks Act and Basel II requirements, holding of capital related to these events remains in Credit Risk. These events are included as part of the ORMF to assist in the monitoring, reporting and management of the control weaknesses and causal factors within the credit process. Material market risk events caused by operational failures in the market risk processes are also flagged separately in the Internal Loss Data Collection System. The capital holding thereof is included in operational risk capital. EXTERNAL LOSS DATA The purpose of using external data is to incorporate infrequent yet relevant and potentially severe operational risk exposures into the measurement model. The group currently incorporates the effects of external data in the operational risk capital calculation model indirectly in conjunction with the scenario analysis process. SCENARIO ANALYSIS Scenario analysis is also a required element of AMA and is defined in the ORMF as one of the data sources for operational risk modelling and measurement, and serves as the main input for unexpected loss estimation. Scenario analysis is conducted in a disciplined and structured way using expert judgement to estimate the operational risk exposure of the group. Scenario analysis focuses on solvency and aims to identify the major operational risks that can negatively affect the solvency of the group. BUSINESS ENVIRONMENT AND INTERNAL CONTROL FACTORS The group takes into account business environment and internal control factors during the conduct of risk and control self-assessments. Consideration of business environment and internal control factors enables the group to take into account any changes in the external and internal business environment, consider inherent risks as a result of any changes in the business environment and then design appropriate controls. REPORTING A well-defined and embedded reporting process is in place. Risk profiles, loss trends and risk mitigation actions are reported to and monitored by the risk governance structures of the group. INSURANCE OBTAINED TO MITIGATE THE BANK'S EXPOSURE TO OPERATIONAL RISK The group has a well-structured insurance programme for its financial and non-financial risks to mitigate its operational and fraud exposures. The group has an insurance operation that reports to the Group Chief Risk Officer and is responsible for the design and management of the principle insurance programmes addressing the group operational risk exposures. This function is responsible for ensuring that the cover purchased for the group is up to date with the best coverage available within the insurance markets and relevant to the group operating environment. The Group Insurance Division also ensures that cover is purchased where required to meet any statutory or regulatory requirements. The primary insurance policies that cover exposures to operational risk include comprehensive crime and professional indemnity. OPERATIONAL RISK GOVERNANCE STRUCTURE The diagram below depicts the operational risk governance structure:

Operational Risk-weighted assets

Below is a summary of operational RWA at 31 December 2010:

	RWA (TSA)	RWA (AMA)
	Rm	Rm
Nedbank DI entity	41 961	35 667
Nedbank entity – including foreign subsidiaries	42 658	36 259
Nedbank Limited local subsidiaries, foreign branches and foreign subsidiaries	4 797	4 077
Nedbank Limited consolidated	46 758	39 744
Nedbank Group Limited local subsidiairies and foreign subsidiaries	4 287	3 644
Nedbank Group Limited consolidated	51 045	43 388*

* Operational risk includes an insignificant portion of the group that utilised TSA.

 

ASSET AND LIABILITY MANAGEMENT

LIQUIDITY RISK

A portfolio of marketable and highly liquid assets, which could be liquidated to meet unforeseen or unexpected funding requirements, is maintained. The market liquidity by asset type (and for a continuum of plausible stress scenarios) is considered as part of the internal stress testing and scenario analysis process.

The quantum of unencumbered assets available as collateral for stress funding is measured and monitored on an ongoing basis. Nedbank Group’s sources of quick liquidity available for stress funding requirements amounted to R78,6 billion at year-end. The following table reflects the composition of this portfolio.

 

The tables below show the expected profile of cashflows under a contractual and business-as-usual (BaU) scenario:

NEDBANK GROUP CONTRACTUAL LIQUIDITY GAP AT YEAR-END⁺

2010		>3 months	>6 months	>1 year		Non-
Rm	<3 months	<6 months	<1 year	<5 years	>5 years	determined	Total
Cash and cash equivalents (including
mandatory reserve deposits with
central bank)	19 272					473	19 745
Other securities	19 377	2 763	3 128	1 776			27 044
Derivative financial instruments	3 682	1 117	1 361	4 877	2 845		13 882
Government and other securities	352	1 260	5 655	18 335	6 222		31 824
Loans and advances	87 925	18 266	30 134	177 962	160 986		475 273
Other assets	5 911					35 039	40 950
Assets	136 519	23 406	40 278	202 950	170 053	35 512	608 718
Total equity						47 814	47 814
Derivative financial instruments	1 288	582	1 032	4 886	4 264		12 052
Amounts owed to depositors	342 941	49 403	56 765	39 102	2 229		490 440
Other liabilities	9 262					23 046	32 308
Long-term debt instruments	289	1 674		18 102	6 039		26 104
Liabilities and equity	353 780	51 659	57 797	62 090	12 532	70 860	608 718
Net liquidity gap	(217 261)	(28 253)	(17 519)	140 860	157 521	(35 348)	–

The contractual liquidity gap is adjusted with behavioural assumptions in order to determine the group’s BaU or anticipated liquidity risk profile. These adjustments result largely in a lengthening of deposit cashflows, due to behavioural assumptions through which contractually maturing short-term deposits have longer profiles under normal market conditions.
⁺ Audited.

NEDBANK GROUP BUSINESS-AS-USUAL LIQUIDITY GAP AT YEAR-END
2010		>3 months	>6 months	>1 year		Non-
Rm	<3 months	<6 months	<1 year	<5 years	>5 years	determined	Total
Cash and cash equivalents (including
mandatory reserve deposits with
central bank)					19 745		19 745
Other securities	19 377	2 763	3 128	1 776			27 044
Derivative financial instruments	3 682	1 117	1 361	4 877	2 845		13 882
Government and other securities					31 824		31 824
Loans and advances	40 178	26 135	47 971	316 853	44 136		475 273
Other assets						40 950	40 950
Assets	63 237	30 015	52 460	323 506	98 550	40 950	608 718
Total equity						47 814	47 814
Derivative financial instruments	1 288	582	1 032	4 886	4 264		12 052
Amounts owed to depositors	84 383	58 945	76 375	269 565	1 172		490 440
Other liabilities						32 308	32 308
Long-term debt instruments	289	1 674		18 003	6 138		26 104
Liabilities and equity	85 960	61 201	77 407	292 454	11 574	80 122	608 718
Net liquidity gap	(22 723)	(31 186)	(24 947)	31 052	86 976	(39 172)	–

Note: BaU assumptions include rollover assumptions on term maturities. No management actions are assumed in terms of realising cash through the sale of liquid assets or other marketable securities.

The additional disclosure below depicts the contractual and BaU liquidity mismatches in respect of Nedbank Limited, and highlights the split of total deposits into stable and more volatile. Based on the behaviour of the bank’s clients, it is estimated that 82% of the total deposit base is stable.

NEDBANK LIMITED CONTRACTUAL BALANCE SHEET MISMATCH AT YEAR-END

2010				8 days to 1	More than 1 month to 2
Rm	Total	Next day	2 to 7 days	month	months
Contractual maturity of assets	549 968	52 542	6 485	34 856	15 858
Loans and advances	423 576	33 601	1 256	17 609	7 657
Trading, hedging and other investment instruments	72 145	2 991	5 144	13 098	5 275
Other assets	54 247	15 950	85	4 149	2 926
Contractual maturity of liabilities	549 968	203 926	17 540	44 889	27 072
Stable deposits	372 076	175 277	8 306	30 060	21 020
Volatile deposits	83 365	21 921	1 663	6 375	5 229
Trading and hedging instruments	54 035	6 728	7 571	8 454	823
Other liabilities	40 492
On-balance-sheet contractual mismatch	–	(151 384)	(11 055)	(10 033)	(11 214)
Cumulative on-balance-sheet contractual mismatch	–	(151 384)	(162 439)	(172 472)	(183 686)

The BaU table below shows the expected liquidity mismatch under normal market conditions after taking into account the behavioural attributes of Nedbank Limited’s stable deposits, savings and investment products:

NEDBANK LIMITED BUSINESS-AS-USUAL BALANCE SHEET MISMATCH AT YEAR-END

2010				8 days to 1	More than 1 month to 2
Rm	Total	Next day	2 to 7 days	month	months
BaU maturity of assets	549 968	28 093	4 223	14 413	11 286
Loans and advances	423 576	8 400	2 302	11 985	8 533
Trading, hedging and other investment instruments	72 145	19 693	1 921	2 428	2 753
Other assets	54 247
BaU maturity of liabilities	549 968	18 258	10 906	28 946	14 981
Stable deposits	372 076	1 042	1 627	5 577	10 832
Volatile deposits	83 365	1 881	5 133	18 629	3 326
Trading and hedging instruments	54 035	15 335	4 146	4 740	823
Other liabilities	40 492
On-balance-sheet BaU mismatch	–	9 835	(6 683)	(14 533)	(3 695)
Cumulative on-balance-sheet BaU mismatch	–	9 835	3 152	(11 381)	(15 076)

 

As per the table above Nedbank Limited’s BaU inflows exceed outflows in the overnight-to-one-week time bucket, taking into account behavioural assumptions, including rollover assumptions associated with term deals, but excluding BaU management actions.

As illustrated on the following page the BaU maturity mismatch has improved during 2010. In other words, under BaU conditions Nedbank Group’s liquidity position was stronger in 2010 than in 2009. This has been achieved through a strategy of lengthening the funding profile and managing the asset/liability composition from a behavioural perspective.

In terms of lengthening the funding profile the long-term funding ratio increased to 23% in 2010, compared with 18% in 2009. Nedbank Group’s capital market issues of R6,2 billion, with 3-, 5- and 10-year instruments having been issued, contributed to the increase in the long-term funding ratio.

* Expressed on total assets and based on maturity assumptions before rollovers and risk management.
 

INTEREST RATE RISK IN THE BANKING BOOK

Nedbank Group is exposed to interest rate risk in the banking book (IRRBB) primarily because of the following:

• The bank writes a large quantum of prime-linked advances.
  
• Funding is prudently raised across the curve at fixed-term deposit rates that reprice only on maturity.
  
• Three-month Johannesburg Interbank Agreed Rate (JIBAR)-linked swaps and forward-rate agreements are typically used in the risk management of term deposits and fixed-rate advances.
  
• Short-term demand funding products reprice to different shortend base rates.
  
• Certain non-repricing transactional deposit accounts are nonrate-sensitive.
  

• The bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds that do not reprice for interest rate changes.
  

IRRBB comprises:

• (for fixed rate) and repricing (for floating rate) of bank assets, liabilities and off-balance-sheet positions.
  
• of the rates earned and paid on different instruments with otherwise similar repricing characteristics.
  
• curve.
  
• options embedded in bank products.
  

NEDBANK GROUP – INTEREST RATE REPRICING GAP AT YEAR-END⁺

2010		>3 months	> 6 months		Non-rate-
Rm	< 3 months	<6 months	<12 months	> 1 year	sensitive
Net repricing profile before hedging	67 201	(26 844)	(19 982)	29 879	(50 254)
Net repricing profile after hedging	39 376	746	1 952	8 180	(50 254)
Cumulative repricing profile after hedging	39 376	40 122	42 074	50 254	–
+ Audited.

 

At year-end the earnings-at-risk sensitivity of the group’s banking book for a 1% parallel reduction in interest rates was 1,38% of total group equity (2009: 1,30%), well within the approved risk limit of 2,5%. This exposes the group to a decrease in NII of approximately R660 million should interest rates fall by 1%, measured over a 12-month period.

+ Audited.

The level of interest rate sensitivity is managed in conjunction with credit impairment sensitivity and the group’s interest rate view, and is benchmarked regularly against the peer group.

Nedbank Limited’s economic value of equity, measured for a 1% parallel decrease in interest rates, is a loss of R441 million at year-end (2009: loss of R225 million).

The table below highlights the group’s and bank’s exposure to interest rate risk measured for normal and stressed interest rate changes:

EXPOSURE TO INTEREST RATE RISK

2010
Rm	Note	Nedbank Limited	Other group companies	Nedbank Group
NII sensitivity	1
1% instantaneous decline in interest rates		(562)	(98)	(660)
2% instantaneous decline in interest rates		(1 119)	(200)	(1 319)
Linear path space	2
Lognormal interest rate sensitivity		(259)	n/a*	n/a*
Absolute-return interest rate sensitivity**		(1 315)	n/a*	n/a*
Basis interest rate risk sensitivity	3
0,25% narrowing of prime/call differential		(215)	(2)	(217)
Economic value of equity sensitivity	4
1% instantaneous decline in interest rates		(441)	n/a*	n/a*
2% instantaneous decline in interest rates		(909)	n/a*	n/a*
NII sensitivity
Instantaneous stress shock**	5	(3 447)	n/a*	n/a*
Instantaneous stress shock modelled as a ramp**	6	(3 166)	n/a*	n/a*

FOREIGN CURRENCY TRANSLATION RISK IN THE BANKING BOOK

Foreign currency translation risk arises as a result of Nedbank Group’s investments in foreign companies that have issued foreign equity. This foreign equity is translated into rands for domestic reporting purposes, recording a profit where the rand exchange rate has deteriorated and a loss where the rand exchange rate has strengthened between periods.

Foreign currency translation risk remains relatively low and is currently aligned with an appropriate offshore capital structure. Risk limits are based on the expected level of currency-sensitive foreign capital. The exposure was approximately USD267 million at year-end (2009: USD241 million).

OFFSHORE CAPITAL SPLIT BY FUNCTIONAL CURRENCY

$m	Equity	US dollar equivalent ($m)		2010	2009
		Forex-sensitive	Non-forex-sensitive	Total	Total
US dollar	121	121		121	108
Pound sterling	122	122		122	113
Swiss franc	16	16		16	13
Malawi kwatcha	8	8		8	7
Other			543	543	436
Total	267	267	543	810	677

 

FOREX-SENSITIVE PORTION OF OFFSHORE CAPITAL

$m	2010	2009
Forex-sensitive portion of offshore capital	267	241
Limit	325	250

The total RWA for foreign entities (R7,6 billion) relative to that for Nedbank Group (R323 billion) is 2,3% at year-end. The effective average capitalisation rate of the foreign-denominated business is 27% (2009: 26%). Any foreign exchange rate movement will therefore have a limited effect on Nedbank Group’s capital adequacy ratio (eg a 10% appreciation in the rand will decrease the capital adequacy ratio only by 0,02%).

INSURANCE RISK

Within Nedbank Group insurance risk encompasses underwriting and product design risk.

Actuarial and statistical methodologies are used to price insurance risk (eg morbidity, mortality, theft). Underwriters align clients with this pricing basis and respond to any anti-selection by placing clients in substandard-risk pools, pricing this risk with an additional risk premium, excluding certain claim events or causes, or excluding clients from entering pools at all.

The failure to reinsure with acceptable-quality reinsurers (beyond the level of risk appetite mandated by the board of directors) for risks underwritten by the short-term insurance and/or life assurance activities of the group, and also including catastrophe insurance (ie more than one insurance claim on the group arising from the same event), could lead to disproportionate losses (reinsurance risk).

Insurance underwriting activities are predominantly undertaken by Nedgroup Life Assurance Company Limited (Nedgroup Life) and Nedgroup Insurance Company Limited (Nedgroup Insurance) within the Nedbank Wealth Cluster.

Nedgroup Insurance is a short-term insurer that focuses predominantly on homeowner’s insurance and limited vehicle-related value-add products for the retail market.

Nedgroup Life offers credit life, simple-risk and savings solutions, as well as a set of differentiated underwritten individual risk life products supported by a wellness programme. A large part of the book is derived from the provision of life cover linked to Nedbank Group’s lending activities.

The group’s risk appetite for insurance risk is currently low, reflected by its consumption of only 0,7% of total minimum required group economic capital (refer page 194). The solvency ratios are set out on page 192.

 

CAPITAL MANAGEMENT

REGULATORY CAPITAL ADEQUACY

Ongoing balance sheet management has further strengthened the group’s capital ratios, well above the group’s internal targets in preparation for Basel III, to 10,1% (core Tier 1), 11,7% (Tier 1) and 15,0% (total) from 9,9%, 11,5% and 14,9% in 2009.

In the first quarter of 2010 the acquisition of the minority shareholding in Imperial Bank was settled in cash and, together with the negative impact of its integration into Nedbank Limited in Q4 2010 on RWA, and the impairment as intangible assets,

rather than being treated as fixed assets, of capitalised software development costs (previously only expected from 2013 onwards under the new Basel III requirements), resulted in an approximate 1,3% decrease in the group’s capital adequacy ratios. However, this was offset by continuing capital and RWA optimisation, Nedbank Group’s manage-for-value strategic focus, retained earnings and a 0,3% increase in capital from higher levels of takeup under the scrip dividend alternative in the second quarter.

In the light of the predominant focus on the core Tier 1 ratio by Basel III and its future new requirements to ensure all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss, all to be phased-in over time, Nedbank Group’s focus is firmly on its core Tier 1 ratio.

Due to the high total ratio of 15,0%, the group called the Imperial Bank Tier 2 bond (‘IPB2’) amounting to R500 million (without replacing it) in December 2010 and the intention is likewise with the R1,5 billion Nedbank Limited bond (‘Ned 5’) that is callable in April 2011, subject to SARB approval.

The annual group ICAAP was completed and signed off by the board in July 2010. SARB’s SREP of Nedbank Group’s ICAAP concluded favourably in H2 2010, with no material issues raised.

Nedbank Limited’s regulatory capital ratios decreased year-on-year, but still remain well above the internal target ranges, due to the Imperial Bank acquisition and impact on RWA of its integration, and impairment of capitalised software development costs, which in aggregate had an impact of decreasing the bank’s capital ratios by 2,4%, offset to a large degree by retained earnings, and capital and RWA optimisation. Nedbank Limited’s capital ratios are core Tier 1: 9,3% (2009: 9,6%), Tier 1: 11,1% (2009: 11,7%) and total: 14,9% (2009: 15,6%).

All capital adequacy ratios remain well above the group’s target ranges. This is deemed prudent in the light of the uncertainty that still remains with regard to Basel III. They include unappropriated profits for the year to the extent that these are not expected to be reversed and are expected to be appropriated subsequent to the year-end.

The group’s leverage ratio is low at 13,8 times (2009: 14,4 times), compared with international levels. Consolidation of entities for regulatory purposes is performed in accordance with the requirements of Basel II, the Banks Act and accompanying regulations. Some differences exist in the basis of consolidation for accounting and regulatory purposes. These include the exclusion of certain accounting reserves [eg the foreign currency translation (FCT) reserve, share-based payments (SBP) reserve and available-for-sale (AFS) reserve], the deduction of insurance entities and the exclusion of trusts that are consolidated in terms of IFRS but are not subject to regulatory consolidation.

The FCT, SBP and AFS reserves that arise in the consolidation of entities in terms of IFRS amounted to approximately R1 billion at year-end and are excluded from qualifying regulatory capital. Restrictions on the transfer of funds and regulatory capital within the group are not material factors. These restrictions mainly relate to those entities that operate in countries other than South Africa where there are exchange control restrictions in place.

 

SUMMARY OF RISK-WEIGHTED ASSETS (BY RISK TYPE AND BUSINESS CLUSTER)

	2010	Mix	2009	Mix
			(Restated)**
	Rm	%	Rm	%
Credit risk	246 793	76,3	246 099	75,4
Nedbank Capital	28 632	8,9	25 389	7,7
Nedbank Corporate	76 794	23,7	76 569	23,5
Nedbank Business Banking	37 005	11,4	33 616	10,3
Nedbank Retail	97 483	30,1	102 468	31,4
Nedbank Wealth	6 031	1,9	7 051	2,2
Central Management	848	0,3	1 006	0,3
Equity risk	13 273	4,1	13 396	4,1
Market risk	7 339	2,3	5 718	1,8
Operational risk*	43 415	13,4	47 222	14,4
Other assets	12 861	3,9	14 031	4,3
Total RWA	323 681	100,0	326 466	100,0

*	2009 based on TSA, 2010 based on AMA.
**	Restated to reflect full integration of Imperial Bank into Nedbank Limited

Nedbank Group’s total RWA are marginally lower year-on-year. This is mainly due to credit RWA remaining flat on the back of low levels of growth and capital-related optimisation, and the decrease in operational-risk RWA following the adoption of the AMA given SARB approval in 2010.

Risk methodologies and capital allocation

Nedbank Group received approval from SARB to use the AMA for operational risk (from 2010) and IMA for market trading risk (from 2011) for regulatory capital purposes, and now has approval for all the three major Pillar 1 risk types for Basel II, having received approval for the AIRB Approach for credit risk on day-one implementation of Basel II in January 2008.

The regulatory capital approaches above now align with those already in use for economic capital and ICAAP.

SUMMARY OF RISK-WEIGHTED ASSETS AND CAPITAL ADEQUACY POSITION

Risk type	Nedbank Group			Nedbank Limited***
Rm		2010	2009	2010	2009
Credit risk		246 793	246 099	225 719	184 472
Credit portfolios subject to AIRB Approach		188 610	192 842	176 680	180 968
Corporate, sovereign, bank, SME		106 312	105 669	95 545	95 274
Residential mortgages		46 305	51 023	45 141	49 543
Qualifying revolving retail		8 489	7 385	8 490	7 386
Other retail		27 504	28 765	27 504	28 765
Credit portfolios subject to TSA		52 771	49 344	43 694
Corporate, sovereign, bank		17 645	19 534	12 111
Retail exposures		35 126	29 810	31 583
Counterparty credit risk (CEM)		4 543	3 057	4 476	2 908
Securitisation risk (IRB Approach)		869	856	869	596
Equity risk (Market-based Simple Risk Weight Approach)		13 273	13 396	10 829	10 781
– Listed (300% risk weighting)		1 605	1 447	1 596	1 447
– Unlisted (400% risk weighting)		11 668	11 949	9 233	9 334
Market risk (TSA****)		7 339	5 718	6 373	4 455
Operational risk (2010: AMA; 2009: TSA)		43 415	47 222	35 693	39 025
Other assets (100% risk weighting)		12 861	14 031	9 721	10 429
Total risk-weighted assets		323 681	326 466	288 335	249 162
Total minimum regulatory capital requirements*		34 481	35 097	31 034	27 560
Total qualifying capital and reserves**		48 419	48 584	42 860	38 939
Total surplus capital over minimum requirements		13 938	13 487	11 826	11 379
Analysis of total surplus capital**
Core Tier 1		15 603	15 296	11 571	10 816
Tier 1		15 250	14 820	11 838	11 691
Total		13 938	13 487	11 826	11 379

*	Includes Basel II capital floor requirements.
**	Includes unappropriated profits
***	Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.
****	SARB approval received to change to IMA from 2011.

 

The integration of Imperial Bank increased Nedbank Limited’s RWA by R49 billion year-on-year, mainly in credit RWA. The introduction of AMA resulted in lower operational risk RWA.

SUMMARY OF QUALIFYING CAPITAL AND RESERVES

white-

Excluding unappropriated profits			Nedbank Group		Nedbank Limited
Rm			2010	2009	2010	2009
Tier 1 capital (primary)			36 861	36 627	31 249	28 600
Core Tier 1 capital			31 549	31 389	25 937	23 365
Ordinary share capital			449	436	27	27
Ordinary share premium			15 522	13 728	14 434	14 434
Reserves			28 130	25 485	17 605	15 610
Minority interest: ordinary shareholders			153	1 849
Deductions			(12 705)	(10 109)	(6 129)	(6 706)
Impairments			(10)	(8)	(720)	(3 430)
Goodwill			(4 945)	(4 981)	(1 410)	(1 126)
Capitalised software development costs*			(1 998)		(1 936)
Other intangibles			(544)
Excess of expected loss over eligible provisions (50%)			(866)	(780)	(869)	(861)
Unappropriated profits			(1 217)	(1 312)	(942)	(798)
FCT reserves			20	(223)	(9)	(9)
SBP reserves			(949)	(875)	557	206
Property revaluation reserves			(1 146)	(1 002)	(747)	(666)
AFS reserves			(98)	(76)	(9)	(9)
Capital held in insurance and financial entities (50%)			(562)	(489)
Other regulatory differences			(390)	(363)	(44)	(13)
Non-core Tier 1 capital			5 312	5 238	5 312	5 235
Preference share capital and premium			3 560	3 486	3 560	3 483
Hybrid debt capital instruments			1 752	1 752	1 752	1 752
Tier 2 capital (secondary)			10 511	10 911	10 839	9 807
Long-term debt instruments			11 000	11 500	10 998	10 848
Revaluation reserves (50%)			573	501	374	333
Deductions			(1 062)	(1 090)	(533)	(1 374)
Capital held in insurance and financial entities (50%)			(562)	(489)
Excess of expected loss over eligible provisions (50%)			(866)	(780)	(869)	(861)
General allowance for credit impairment			410	212	380
Other regulatory differences			(44)	(33)	(44)	(513)
Total			47 372	47 538	42 088	38 407
* Treated as an impairment rather than as fixed assets.

Including unappropriated profits	Nedbank Group		Nedbank Limited
Rm	2010	2009	2010	2009
Core Tier 1 capital	32 596	32 435	26 709	23 897
Tier 1 capital (primary)	37 908	37 673	32 021	29 132
Total capital	48 419	48 584	42 860	38 939

 

DIVIDEND COVER

The group has a dividend cover policy range of 2,25 to 2,75 covered by headline earnings per share, with dividends per share for 2010 at 2,3 times. Historically the effective cover has been higher as a result of takeup under the scrip dividend alternative and the reinvestment of dividend proceeds by black economic empowerment (BEE) shareholder trusts.

SUMMARY OF REGULATORY CAPITAL ADEQUACY OF ALL BANKING SUBSIDIARIES

A summary of all the group’s banking subsidiaries’ Basel II regulatory capital positions is provided below:

	2010		2009
		Total capital		Total capital
	RWA	ratio	RWA	ratio
Bank	Rm	%	Rm	%
Nedbank Limited (including unappropriated profits)	288 335	14,9	249 162	15,6
Nedbank Limited (excluding unappropriated profits)	288 335	14,6	249 162	15,4
Imperial Bank Limited			43 887	11,2
Nedbank (Namibia) Limited	5 067	13,5	3 864	14,6
Fairbairn Private Bank (IOM) Limited	1 729	18,2	2 327	15,9
Fairbairn Private Bank Limited	1 400	14,7	1 697	14,2
Nedbank (Swaziland) Limited	1 290	20,2	1 374	15,7
Nedbank (Lesotho) Limited	984	20,6	905	18,8
MBCA Bank Limited	761	15,3	571	15,2
Nedbank (Malawi) Limited	232	22,8	98	50,1

In October 2010 Imperial Bank ceased to be a registered banking entity. It was integrated into Nedbank Limited by year-end. This largely explains the significant increase in Nedbank Limited in RWA year-on-year.

The capitalisation of all these banking entities is deemed adequate; all have conservative risk profiles and are managed and monitored within the group’s Enterprisewide Risk Management Framework and ICAAP.

 

SUMMARY OF SOLVENCY OF INSURANCE SUBSIDIARIES

In South Africa the regulators currently require the insurers to hold capital at a minimum of one times cover. The new SAM requirements (South Africa’s version of Solvency II) are expected to be implemented in 2014 with revised measurements, similar to Basel II.

SOLVENCY RATIOS

	Minimum	2010	2009
Long-term insurance (Nedgroup Life)	1,00 x	4,00 x	3,60 x
Short-term insurance (Nedgroup Insurance Company)	1,25 x	1,38 x*	1,56 x*

* The decrease in the solvency ratio is the result of the timing of a dividend payment made of R140 million during October 2010 (2009: R30 million).

ECONOMIC CAPITAL ADEQUACY AND ICAAP

Nedbank Group’s economic capital methodology is contained in the group’s Pillar 3 Report. Set out below is a summary of the group’s economic capital adequacy and ICAAP position.

All risk and balance sheet methodologies and models are reviewed regularly to ensure they remain in line with best industry practice and regulatory developments.

As previously advised, enhancements relating to capital allocation to business clusters were implemented in 2010. One major effect of these adjustments has been to allocate most of the surplus capital held at group to the business clusters. This has been done and the comparative results for the business clusters restated.

The key capital allocation enhancements implemented in 2010 were:

• Increase of the group’s internal target solvency standard from 99,9% (or A-) to 99,93% (or A) (implemented in 2009).
  
• Update of the credit portfolio modelling correlations and revision of the credit economic capital allocation methodology, taking into account recent global developments and experience, current best practice and Basel III.
  

• Change in internal measurement of operational risk for economic capital purposes using AMA.
  
• Incorporation of 100% of Imperial Bank.
  
• Implementing refined parameters used in the business risk methodology based on more recent data.
  
• Adding a new risk type for insurance risk.
  
• Increasing the aggregate amount allocated to business clusters using bottomup calculated economic capital via the allocation of a capital buffer and thus aligning the clusters’ aggregated allocated capital closely with group regulatory capital levels (limited to an effective 10% core Tier 1 regulatory ratio level for the group), on which its ROE is based.
  

The above had no impact on the group’s overall capital level, but significantly increased the quantum of capital allocated to each business cluster and impacted the ROE recorded by the clusters on a steady-state basis.

Nedbank Group’s ICAAP confirms that the group is capitalised above its current A or 99,93% target debt rating (solvency standard) in terms of its proprietary economic capital methodology. This includes a 10% capital buffer, the incorporation of the group’s risk appetite as approved by the board and the application of comprehensive stress and scenario testing.

ECONOMIC CAPITAL REQUIREMENTS (BY RISK TYPE) AND AVAILABLE FINANCIAL RESOURCES

Rm		2010	2009*
Credit risk		15 488	15 414
Securitisation risk		18	26
Transfer risk		89	146
Market risk		3 340	3 255
Trading risk		424	442
IRRBB risk		27	39
Property risk		1 436	1 161
Investment risk		1 421	1 580
Forex translation risk		32	33
Business risk		4 715	4 157
Operational risk		1 997	1 968
Other assets risk		864	622
Insurance risk		192	150
Minimum economic capital requirement		26 703	25 738
+ Capital buffer (10%)**		2 670	2 574
= TOTAL economic capital requirement		29 373	28 312
vs Available financial resources		42 157	40 147
Tier A capital (shareholders’ equity)		36 845	34 909
Tier B capital (non-core Tier 1-type capital)		5 312	5 238
= Surplus available after capital buffer		12 784	11 835

*	Imperial Bank is included at 100% ownership for economic capital purposes retrospectively to 2009. Results shown incorporate the enhancements made to the economic capital model for 2010.
**	Includes goodwill and other intangible assets.

 

AVAILABLE FINANCIAL RESOURCES
Rm		2010	2009
Tier A capital		36 845	34 909
Ordinary share capital and premium		15 971	14 164
Minority interest: ordinary shareholders		153	1 849
Reserves		28 130	25 485
Retained income		16 924	14 130
Unappropriated profits		1 217	1 309
Distributable reserves		7 692	7 697
Non-distributable reserves		124	173
FCT reserves		(20)	223
SBP reserves		949	875
AFS reserves		98	76
Property revaluation reserves		1 146	1 002
Deductions		(9 225)	(7 827)
Impairments		(10)	(8)
Capitalised software development costs		(1 998)
Other intangibles		(544)
Goodwill		(4 945)	(4 981)
Subordinated-debt portion of unappropriated profits		(170)	(266)
First loss credit enhancement in respect of securitisation scheme (100%)*		(88)	(33)
Capital held in insurance and financial entities (100%)*		(1 124)	(489)
Other adjustments		(346)	(2 050)
Excess of IFRS provisions over expected loss (100%)		1 816	1 238
Tier B capital		5 312	5 238
Preference shares		3 560	3 486
Hybrid debt capital instruments		1 752	1 752
Total Available Financial Resources		42 157	40 147

* 100% deduction in 2010 to align with Basel III changes.

;

The total economic capital (including a 10% buffer) increased by R1,1 billion from R28,3 billion in 2009 (restated) to R29,4 billion in 2010, largely due to an increase in business risk economic capital. The introduction of an economic risk type for insurance risk had a small impact on total economic capital of R192 million (2009: R150 million), which is reflective of the low risk appetite in this business sector. The decrease in other adjustments for available financial resources is largely due to the purchase of Imperial Bank (minority interest). In conclusion, Nedbank Group’s economic capital adequacy is strong at its A (99,93%) target debt rating (solvency standard), with a surplus at group level of R12,8 billion. This is after the implementation of the enhancements previously mentioned and providing for a 10% economic capital buffer, the adequacy of which is confirmed by sophisticated stress testing.

RISK-BASED CAPITAL ALLOCATION TO BUSINESS CLUSTERS

Risk-based economic capital allocation to the business clusters has been in place since 2008 for risk-adjusted performance

measurement and remuneration purposes. It is a fundamental component in the measurement of the businesses’ contribution to economic profit, return on risk-adjusted capital and risk-adjusted return on capital.

As discussed on page 192, further enhancements have been made in 2010 to the group’s methodology for allocating capital to its businesses. Overall this resulted in additional capital being allocated to each cluster, the main component of which was the introduction of a capital buffer, aligning total allocated capital more closely with total equity upon which the group is measured.

Further refinements to the 2011 allocation methodology have been finalised as part of the 2011-to-2013 business planning process, and will be communicated with the 2011 half-year results.

A summary of the economic capital allocation at 2010 by business cluster is presented below. The key movements in 2010 were the allocation of higher economic capital buffers and an increase in business risk economic capital requirements.

SUMMARY OF MINIMUM ECONOMIC CAPITAL REQUIREMENT AT 2010 (BY BUSINESS CLUSTER)

				Nedbank
At 31 December 2010				Business		Nedbank		Central
	Nedbank	Nedbank	Nedbank	Banking	Nedbank	Business	Nedbank	Manage-
Rm	Group	Capital	Corporate	and Retail	Retail	Banking	Wealth	ment
Credit risk	15 488	1 239	3 194	10 552	8 961	1 591	492	11
Securitisation risk	18	18
Transfer risk	89	66	23
Market risk	3 340	1 161	532	235	229	6	83	1 329
Trading risk	424	424
IRRBB risk	27	2	6	18	15	3	1
Property risk	1 436		38	212	209	3	10	1 176
Investment risk	1 421	721	483	5	5		61	151
Forex translation risk	32	14	5				11	2
Business risk	4 715	711	835	2 910	2 412	498	259
Operational risk	1 997	546	504	799	596	203	85	63
Other assets risk	864	32	93	191	184	7	57	491
Insurance risk	192						192
Minimum economic
capital requirement	26 703	3 773	5 181	14 687	12 382	2 305	1 168	1 894
Capital buffer*	17 398	1 342	2 109	6 683	5 715	968	314	6 950**
Total capital allocated (IFRS)	44 101	5 115	7 290	21 370	18 097	3 273	1 482	8 844

*	Unallocated buffer included in Central Management.
**	Includes goodwill and intangibles.

 

 

SUMMARY OF MINIMUM ECONOMIC CAPITAL REQUIREMENT AT 2009 (BY BUSINESS CLUSTER)

				Nedbank
At 31 December 2009				Business		Nedbank		Central
	Nedbank	Nedbank	Nedbank	Banking	Nedbank	Business	Nedbank	Manage-
Rm	Group	Capital	Corporate	and Retail	Retail	Banking	Wealth	ment
Credit risk	15 414	1 051	3 544	10 240	8 556	1 684	549	30
Securitisation risk	26	21	–	5	5	–	–	–
Transfer risk	146	103	43	–	–	–	–	–
Market risk	3 255	1 299	613	298	290	8	90	955
Trading risk	442	442
IRRBB risk	39	3	11	23	18	5	2
Property risk	1 161		37	270	267	3	1	853
Investment risk	1 580	842	561	5	5		72	100
Forex translation risk	33	12	4				15	2
Business risk	4 157	663	793	2 502	1 821	681	181	18
Operational risk	1 968	535	506	801	603	198	56	70
Other assets risk	622	19	52	193	190	3	26	332
Insurance risk	150	–	–	–	–	–	150	–
Minimum economic
capital requirement	25 738	3 691	5 551	14 039	11 465	2 574	1 052	1 405
Capital buffer*	13 911	1 065	1 814	5 361	4 602	759	315	5 356
Total capital allocated	39 649	4 756	7 365	19 400	16 067	3 333	1 367	6 761

* Unallocated buffer included in Central Management buffer.

COST OF EQUITY

>Following a shift in the constituents of the cost of equity calculated using the Capital Asset Pricing Model, Nedbank Group revised its cost of equity to 13,00% at the beginning of 2011 (2010: 14,15%). The risk-free rate applied was the primary driver of this change with the 10-year point of the SA sovereign yield curve declining to 8,16% (2009: 9,17%) at 31 December 2010. The cost of equity is revised and updated on an annual basis but also reviewed quarterly.

EXTERNAL CREDIT RATINGS

MOODY’S INVESTORS SERVICE

Moody’s Investors Service (Moody’s) has reaffirmed the ratings of Nedbank Limited, the 100%-owned subsidiary of Nedbank Group Limited (Nedbank Group) in July 2010:

MOODY’S INVESTORS SERVICE		NEDBANK LIMITED
		July 2010
Bank financial-strength rating		C-
Outlook – financial-strength rating		Stable
Global local currency – long-term deposits		A2
Global local currency – short-term deposits		Prime-1
Foreign currency – long-term bank deposits		A3
Foreign currency – short-term bank deposits		Prime-2
Outlook – foreign currency deposit rating		Stable
National scale rating – long-term deposits		Aa2.za
National scale rating – short-term deposits		Prime-1.za
Outlook – national scale rating		Stable
FITCH RATINGS
Fitch Ratings (Fitch) affirmed its ratings for Nedbank Group and Nedbank Limited. Below is the ratings-related outlook at July 2010.
FITCH RATINGS	NEDBANK GROUP	NEDBANK LIMITED
	July 2010	July 2010
Individual	C	C
Support	2	2
Foreign currency
Short-term	F2	F2
Long-term	BBB	BBB
Long-term rating outlook	Stable	Stable
Local currency
Long-term senior	BBB	BBB
Long-term rating outlook	Stable	Stable
National
Short-term	F1+ (zaf)	F1+ (zaf)
Long-term	AA- (zaf)	AA- (zaf)
Long-term rating outlook	Stable	Stable