‘The effects of this meltdown will be felt for some time to come. However, it is hoped that business the world over will learn valuable lessons and once again focus on sustainable business practices, underpinned by ethical behaviour.’
Dr Reuel J Khoza
The past year was one of unprecedented economic turmoil globally. We witnessed the start of a widespread recession, the implosion of the financial sector and the demise and even nationalisation of some of the most established and reputable global institutions. Few could have predicted the magnitude of this catastrophe.
At the core of the problem was the deteriorating credit environment that resulted in the subprime mortgage crisis which surfaced in the United States during 2007. Simplistically stated, credit was extended to people who could not afford it, based on the ill-founded assumption that property values would continue to appreciate.
These substandard mortgage loans were packaged as collateralised instruments using complex derivative structures. These loans defaulted in mounting volumes and resulted in massive writedowns for many leading financial institutions.
Nedbank had no direct exposure to the foreign subprime market or any of these related derivative instruments.
The effects of this meltdown will be felt for some time to come. However, it is hoped that business the world over will learn valuable lessons and once again focus on sustainable business practices, underpinned by ethical behaviour, which is in the interests of all stakeholders, not just the self-serving interests of a few.
South Africas resilience in the face of this worldwide crisis can be attributed largely to the regulatory framework and prudent fiscal policies that define our business practices and banking system and ensure companies and individuals operate within conservative bounds.
Three specific regulations warrant mention. The National Credit Act, introduced in 2006 to curb lending and shield consumers from reckless credit granting, has also sheltered the industry from the poor credit practices applied in many first-world countries. The implementation of the Basel ll risk management philosophy and discipline in January 2008 and the conservative capital adequacy requirements imposed by the Banking Regulator have ensured that local banks continued to manage risk prudently and remained well-capitalised. Finally, our foreign exchange controls, which limit the flow of funds offshore, have added further protection and provided a measure of insulation for our economy. Further details on the impact of the global crisis on South Africa and Nedbank, and the reasons why our country was largely sheltered from the turmoil, are contained in the Risk and Capital Management Report.
Domestically we have not only seen our economy slowing to the brink of a recession, but we have also seen momentous changes on the political front.
It should be reassuring to the international community that South Africa has firmly established institutions and forums such as our constitution and the rule of law that underpin our democracy. This ensures that people in leadership roles are constrained in their actions and that politicians remain accountable to their constituencies.
Recent developments on the political landscape have introduced a healthy diversity and bode well for the future of our young democracy, as well as our economy.
The South African banking environment is experiencing the effects of a slowing domestic economic cycle brought on by high interest rates and high levels of inflation, and the secondary effects of the global financial crisis. Across the banking sector we have seen rising bad-debt levels and lower levels of recoveries in the retail environment as household finances remain strained.
On the positive side our banks have experienced less volatility than many of their international peers, while also not facing the same liquidity challenges and levels of writedowns. Throughout the year rand liquidity remained stable, with the interbank lending market continuing to operate efficiently.
Our banking system is highly advanced with sophisticated, worldclass risk management techniques that have been more conservatively applied than has often been the case offshore.
On the regulatory front the Competition Commissions inquiry into bank charges resulted in the release of its report late in the year and it has called for comment on the recommendations. It is anticipated that the final outcome of the banking inquiry process will be finalised during 2009.We remain supportive of the objectives of the inquiry and are committed to an outcome that provides real benefit to consumers and ensures the ongoing competitiveness and stability of the financial services industry.
While the price of banking shares has been under severe pressure over the past two years owing to the myriad of global and domestic challenges, we believe that Nedbank Group has many aspects an investor should consider when making an investment decision. Management has identified a range of sector- and company-specific criteria on page 4 that an investor could consider when making a decision on a share investment. This highlights how Nedbank Groups strategy and key strengths will favourably position the business as the prospects for the banking sector improve beyond 2010.
A key point to highlight is that we offer a broad spectrum of banking products within southern Africa. Owing to the size of the group and the high percentage of Africas potential banking economic profit being generated from this region, we still have opportunities to grow without having to adopt a higher-risk strategy of acquiring or building businesses further afield.
Nedbank Group posted a robust performance when one considers the adverse trading environment over the past year. The board commends management for its unwavering focus on capital, liquidity and risk management during this tough time. The groups financial and operational performance is covered in further detail in both the Chief Executives Report and the Chief Financial Officers Report.
During the year we took leave of three of our non-executive directors who had collectively served on the board for 18 years and made a profound contribution to boardroom debate at Nedbank Group. Independent non-executive director Barry Davison resigned owing to increased business commitments and fellow independent director Cedric Savage retired, while Jim Sutcliffe stood down from the board
following his resignation as Chief Executive of Old Mutual plc. We are grateful for the role they have played and wish them well into the future.
We welcomed two new independent non-executive directors. Nomavuso Patience Mnxasana joined the board in October 2008 and adds a wealth of financial knowledge garnered in the accounting profession and the corporate world. Alan Knott-Craig was appointed to the board from the start of 2009.Alan was one of the pioneers of the mobile telephone technology industry in Africa and under his leadership Vodacom became one of the most admired companies in the country. Banking is becoming increasingly dependent on technology innovation and we look forward to benefiting from Alans expertise and strategic insight.
Following the creation of the position of senior independent non-executive director, the post held by Chris Ball, the board decided to do away with the position of vice-chairman of the board. The Joint Vice-chairmen of the board, Michael Katz and Lot Ndlovu, will formally step down from their positions at the forthcoming annual general meeting and continue to serve as directors, while also retaining their current board committee responsibilities.
Both these directors have been reclassified from non-executive to independent non-executive directors in terms of the definitions of King ll and the JSE Listings Requirements. It has now been well over three years since these directors were executives of the group and Lot Ndlovus consultancy contract has also now expired. The board has considered the independence in character and judgement of these directors when changing their status to independent directors.
The United Kingdoms Combined Code on Corporate Governance states that independence can be compromised if a non-executive director has served on a board for more than nine years. Four of our directors have exceeded this period. To ensure sound governance the board has introduced a practice that any directors serving for more than nine years will now be required to be reelected every year.
Our board now comprises 16 directors, with nine independent non-executive directors, five non-executive directors and two executive directors. We are committed to retaining a majority of independent directors, also recognising that three of our directors, including myself, are not considered independent owing to our shareholdings in the groups black economic empowerment scheme and that another two directors represent Old Mutual plc on our board.
We plan to appoint further directors to the board in the months ahead, with a combination of seasoned directors and those new to the boardroom, bringing further diversity across ethnicity, gender and business experience.
Nedbank Group is served by a high-calibre board and I thank my fellow directors for their dedication in executing their governance and oversight responsibilities.
We thank the Registrar of Banks for his guidance of the sector through one of its most challenging years.
The group has delivered a creditable performance in trying conditions, and on behalf of the board I extend my thanks to Tom Boardman and the Group Executive Committee for their leadership and guidance over the past year.
It has been pleasing to see the commitment and teamwork of our staff in their efforts towards realising our vision of making Nedbank Group southern Africas most highly rated and respected bank.
Dr Reuel J Khoza
25 February 2009