OPERATIONAL OVERVIEW
NEDBANK CAPITAL

NEDBANK CAPITAL PROVIDES SPECIALIST ADVICE, DEBT AND EQUITY RAISING AND EXECUTION, AND TRADING CAPABILITIES TO CLIENTS IN ALL MAJOR SA BUSINESS SECTORS. CLIENTS INCLUDE THE TOP 200 DOMESTIC CORPORATES, PARASTATALS, FINANCIAL INSTITUTIONS, MULTINATIONAL CORPORATES AND MAJOR INFRASTRUCUTRE AND MINING PROJECTS IN AFRICA AS WELL AS EMERGING BLACK ECONOMIC EMPOWERMENT CONSORTIUMS.
The cluster comprises three primary businesses, from which it makes its distinctive products, services and solutions available to its clients. These are:

INVESTMENT BANKING, which includes:
• Advisory services, comprising corporate finance, debt origination and debt advisory services.
•Specialised finance, entailing debt-financing solutions with a portfolio that includes project finance, export credit finance, leveraged debt, acquisition finance, securitisation and structured trade and commodity finance.
•Sectoral specialist teams, providing clients with insight and advice into energy, infrastructure, telecommunications, aviation, mining and resources, retail, healthcare and diversified industrials industries.

GLOBAL MARKETS, which includes:
•Equity Trading, providing hedging and structuring services to corporate, institutional and retail clients. This division exploits the synergies between trading and structuring equities and facilitates black economic empowerment (BE) transactions. A prime broking service is also offered.
• Fixed Income, Currency and Commodities and Foreign Exchange, offering currency, interest rate derivative and bond-related products as well as proprietary trading in various markets.
• NedGroup Securities (Pty) Limited, offering research, sales and trading services to major institutions.

TREASURY
This is Nedbank Group’s funding interface with local and international financial and investment markets. All domestic and foreign currency-funding requirements are satisfied and managed through this unit. Treasury also includes the Carbon Finance Unit and offers structured financial solutions.

THE YEAR UNDER REVIEW

While the SA equity markets enjoyed a marginal recovery in 2010 - assisted to a certain degree by the successful 2010 FIFA World Cup - this did not translate into any notable increase in corporate activity for the period under review. A benign interest rate environment and relatively low levels of volatility also meant fewer opportunities for clients to avail themselves of Nedbank Capital’s products and solutions.

Credit extension was muted as corporates predominantly focused inwards, placing greater emphasis on prudent business management in order to ride out the difficult economic period. The business environment has also become far more competitive, both locally and internationally, with global organisations increasing their local presence and many local businesses extending their product offerings in preparation for an eventual economic upturn.

The challenging economic environment limited the need for clients to raise capital due to a generally compressed credit extension environment. As a result, while Nedbank Capital’s main asset generating businesses added R9 billion in new advances, repayments of a similar amount occurred.

The Global Markets business also experienced difficult trading conditions, which impacted negatively on foreign exchange volumes and margins. A general lack of volatility in fixed-income and interest rate markets also had an adverse effect on revenue

Given the uncertain economic outlook, as well as reduced earnings in some of Nedbank Capital’s private equity investments, the business adopted a conservative approach in the mark-to-market valuation of its portfolio. This resulted in higher impairment levels.

The cluster’s equity businesses were supported by a moderate recovery in the equity markets, resulting in an impressive turnaround from the loss-making position of 2009.

Despite this challenging environment, Nedbank Capital retained its strong position in the local finance market, as evidenced by the many awards it garnered during the year under review, the most significant of which were:

• Global Trade Review Best Deal award for FirstCape Vineyards.
• EMEA Finance Project Finance award for Best Telecommunications Deal (Neotel).
•Euromoney Project Finance Deal of the Year for Bakwena in the Transport and Public-private Partnership category.
• Three Dealmakers awards, including second place in mergers and acquisitions activity (Investment Advisers and Sponsors categories).
•Fourth-ranked mining project finance lead arranger in the world in Ernst & Young’s Mining Eye Report.




Nedbank Capital remains the primary sponsor of the SA arm of the ChessKids (UK) chess education programme in South Africa, which first started out as a means of making a difference in the lives of orphans and vulnerable children in the Zandspruit squatter area.

Since its establishment in 2008, the programme has grown in leaps and bounds and, with the support of Gauteng Department of Education District 14, now sees children from 16 primary schools and three high schools developing their analytical, strategic thinking, mathematical and social skills simply by playing chess every week.

The programme was also expanded to include a scholarship and bursary scheme that has already enabled a number of talented young chess players to attend private high schools and follow their dreams by furthering their studies at Monash University.

Given the immense success of the ChessKids Academy programme thus far, the vision is to offer the ChessKids School Programme to 160 Gauteng schools by 2013.

Both the Gauteng Department of Education and the schools have agreed to provide the ChessKids Academy with learning material to track and evaluate individual and group performance in order to measure the benefits and effectiveness of the programme. This research will be available towards the end of 2011.

In 2010 the ChessKids Academy also rolled out a spelling programme called Spell It. The programme is endorsed by the Gauteng Department of Education and is being implemented in District 14 schools. Spell It seeks to teach the children how to spell in a fun and relaxing manner by playing a game. Interschool and interdistrict Spelling Bee competitions are also held.

Both programmes afford staff members a unique opportunity to give of their time and talents by volunteering at fun days, graduations and Spelling Bees.

The fifth annual Nedbank Capital Green Mining Awards took place in 2010. Nedbank Capital instituted these awards in 2005 to acknowledge and celebrate the invaluable contribution that responsible mining and mineral beneficiation make to the economic development of Africa (see the Sustainability Development Performance section of this report, for more information).

Innovation and client service remain key to Nedbank Capital’s sustainable-business model. Every deal is structured around the creation of innovative solutions, delivered from a base of understanding and full service support. While most of the deals are tailored to specific client needs, this innovative thinking also led to the development and launch of a number of off-the-shelf products during the year under review – many of which will serve as a useful foundation for structuring individual deals in the future.


Nedbank Capital continues to review all potential finance transactions for environmental and social compliance with International Finance Corporation (IFC) performance standards and legislation. An integrated and proactive approach to current and future legislation and standards is followed, while strictly complying with the Equator Principles – a set of guidelines drawn up in 2003 by the IFC in conjunction with 10 of the world’s largest banks with a view to ensuring a consistent approach to managing environmental and social risks in project financing. To embed the principles of responsible investing further, the origination and credit teams underwent compliance training in 2010 to increase their awareness and understanding of social and environmental risks and their influence on the sustainability of the book.

Nedbank Group was the first African bank to adopt the Equator Principles in November 2005 and applies these to all project finance transactions exceeding US$10 million. The Equator Principles risk categories are broadly as follows:

• Category A: High risk – Projects with potentially significant adverse social and/or environmental impacts that are diverse, irreversible and/or unprecedented.
• Category B: Medium risk – Projects with potentially limited adverse social and environmental impacts that are few in number, generally site specific, largely reversible and readily addressed through mitigation measures.
• Category C: Low risk – Projects with minimal or no social and/or environmental impacts.


Over the past four years the Nedbank Capital project finance portfolio has grown in strength with multiple projects financed across the globe.



NEDBANK CAPITAL EQUATOR PRINCIPLES PROJECT FINANCE TRANSACTIONS 2005 – 2010


All project finance transactions that are impacted by the Equator Principles must comply with the guidelines, as well as World Bank and IFC performance standards and environmental health and safety guidelines. Every project finance application is assessed and categorised in terms of its potential environmental and social impacts, using the IFC performance standard as a benchmark. Prospective borrowers are required to abide by the standard and, once finance is approved, all potential environmental impacts are closely monitored to ensure ongoing compliance. Borrowers undertake to comply with specific obligations related to their high- or medium-risk projects.

An IFC prerequisite for any reporting of Equator Principles-linked transactions is that the first drawdown must occur in the financial year being reported on. In this regard the only project finance transaction by Nedbank Capital that was subject to the Equator Principles (as its first drawdown was in 2010) was an energy transaction situated in Ghana that is categorised as a B (medium risk). The Nedbank Capital value of the deal is US$25 million.

TOTAL EQUATOR DEALS 2007 – 2010
  2010 2009 2008 2007
Total number of deals that experienced their        
first drawdown 1 5 4 13
Category A 0 1 1 5
Category B 1 3 3 4
Category C 0 1 0 4
Total value of deals $25m $174m $83,8m $239m

Equator Principles transactions are typically complex with material lead times to implementation. The figures above only reflect transactions drawn in the respective years and not total approvals for those years.

Innovation-powered Environmental Sustainability

In June 2010 Nedbank Capital was part of an innovative power-saving initiative that saw solar-powered traffic lights installed at a number of intersections around Sandton in Johannesburg. The lights are powered exclusively by solar energy, thereby lessening the load on the region’s power grid, reducing dependency on an increasingly unreliable power source, and reducing carbon emissions by keeping traffic flowing more freely.

The project has economic spinoffs in that it enables higher productivity by reducing the amount of man hours lost by businesses due to employee lateness as a result of traffic congestion.

The sponsorship by Nedbank Capital funded two rotar lights, which include battery backup power to ensure smooth traffic flow, regardless of the weather or national power grid conditions. Each solar-powered intersection has the potential to save up to 385 kW hours per month, or 4 620 kW hours per year – enough to power 17 325 energy-saver light bulbs for 24 hours.

CBD

FINANCIAL REVIEW

Year ended % change 2010 2009
Headline earnings (Rm) (17,2) 1 202 1 452*
Efficiency ratio (%)   45,1 45,9
Credit loss ratio banking advances (%)   1,27 0,36*
Average banking advances (Rm) 6,2 42 113 39 638
Average deposits (Rm) 16,4 182 637 156 934
Allocated economic capital (Rm) 9,4 5 116 4 678*
Return on equity (ROE) (%)   23,5 31,0*

* Restated.

Nedbank Capital’s ROE remained strong in the 2010 financial year at 23,5%. Headline earnings decreased by 17,2% to R1 202 million (2009: R1 452 million) for the first time in six successive years. Economic profit of R477 million declined 42,7% as a result of higher capital allocation and increased cost of equity. Capital allocation increased from R4 678 million to R5 116 million as the group realigned economic and regulatory capital utilisation.

The operating environment continued to be challenging, with corporate and project demand for credit remaining muted. Average banking advances grew by 6,2% and average deposits by 16,4%, boosted by negotiable certificates of deposit and fixed-rate notes as institutional clients sought higher-yield, longer-dated instruments.

The cluster remains a strong generator of non-interest revenue (NIR) as evidenced by the continued improvement in the NIR-to-expenses ratio from an already high ratio of 139,2% to 145,0%. Trading income showed strong growth of 14,8%, primarily due to a significant improvement in the equity trading business. The forex business experienced margin compression and lack of volatility compared with 2009. Income from the advisory business and private equity decreased as a result of subdued levels of advisory activity and difficult markets respectively.

Nedbank Capital impairments increased to R535 million due to a conservative approach to mark-to-market valuation adjustments in the private equity portfolio. This largely contributed to a 12,7% decrease in operating income to R2 930 million for the 2010 financial period.

Total expenses declined by 2,8% to R1 561 million, which can be attributed to tight cost control. This is also reflected in the efficiency ratio improving to 45,1%, compared with 45,9% in 2009, despite the cluster investing for growth in a number of systems to improve trading.

STRATEGY

For 2011 and beyond the strategic direction for Nedbank Capital remains to drive growth by providing its clients with solutions that meet their unique needs rather than selling them products.

Sector-focused teams, specialising in resources, power, infrastructure, telecommunications, BE, and diversified industrials will continue to cooperate closely with product experts to deliver tailored solutions that enable Nedbank Capital’s clients to achieve their objectives.

The continued focus on new business opportunities will be linked to regulatory changes and market trends. Detailed strategies are being developed with the aim of leveraging the growing green economy and renewable energy sources, both of which are already creating a fundamental shift in focus for finance providers around the world.


 The expertise gained by Nedbank Capital in recent years in carbon origination, financing and regulation positions the business as a centre of excellence in these areas. This position will be strengthened and extended to provide valuable advisory services to clients around carbon financing. The green positioning is further entrenched by Nedbank Capital’s commitment to fund renewable sources of energy and a pipeline of deals in this area is in place and will be pursued in 2011.

A boutique-driven international strategy will see the business building on its sector expertise to expand its offering mainly throughout Africa and, in the case of resources, globally, off the established London platform.

Nedbank Capital will also continue to leverage its close working relationship with Nedbank Corporate to initiate a greater number of Nedbank Group-driven joint deals, as opposed to merely acting as a participant in deals originated by other parties.

Innovative product and solutions development, effective risk management in all aspects of the business, and the attraction, retention and development of talented people constitute the cornerstones of Nedbank Capital’s strategy.

LOOKING FORWARD

We are cautiously optimistic regarding the outlook for 2011 and expect some corporate leveraging to take place. With a stable earnings platform and good credit quality book in place, Nedbank Capital’s focus for the coming year will be on increasing the cluster’s share of wallet, attracting new clients, and developing innovative solutions that generate growth in income. Disciplined risk management will underpin all these endeavours.

The business boasts a broad spectrum of profitable investment banking products and services, which offers good portfolio diversification. With this in mind, Nedbank Capital will focus on acquiring additional stable and diversified funding sources, while reinforcing its integrated investment banking model.

The cluster will continue its theme of responsible investment banking by formalising several of the initiatives it has undertaken – particularly the creation of a sustainability forum that reports on, and monitors, its green activities, carbon financing, ChessKids and renewables financing.

Nedbank Capital’s significant investment in updating its trading systems (the Wallstreet implementation) will be further bedded down in 2011, realising operational savings and optimising trading opportunities. The strong Ecobank Nedbank Alliance will be leveraged further and is expected to gain further traction with the formation of an investment banking arm known as Ecobank Capital.