CHIEF EXECUTIVE’S REPORT

A RESILIENT PERFORMANCE

While the South African banking sector has largely avoided the impact of the global banking crisis, our industry has been severely affected by the environment of high interest rates in South Africa and the downturn in the global economic cycle.

Nedbank Group has performed well in the face of these extreme challenges. Our corporate businesses have shown their resilience while our retail business has felt the impact of the consumer slowdown. At R5,8 billion the group’s headline earnings are down only marginally on last year.

Over the past year we have seen the value of many global banks destroyed, so it is pleasing for Nedbank Group to report a 16% growth in our tangible net asset value.

We have understandably adopted a more conservative approach to managing the business. We have focused on increasing our capital levels, with the total capital adequacy ratio increasing from 11,4% to 12,4%, well above the regulatory minimum level of 9,75%. Our risk management systems are proving effective in volatile markets, aided by the successful implementation of Basel ll at the start of the year. Liquidity levels remain sound.

The significant investment we have made over the past four years in our people, our systems, our brand and our distribution network to service our clients has stood us in good stead and allowed us to weather the storm. Even as the economy slowed over the past year we continued to invest for growth. The progress made during the recovery programme and over the recent past to build a sustainable business continues to benefit the group.

Harsh lessons have been learnt from the global banking crisis. Early warning signals will no doubt be heeded in future and taken more seriously. There is also a realisation of the need to respond in a coordinated and coherent manner in a time of crisis, rather than businesses or even countries acting individually.

We also hope that these lessons will be applied to other pressing issues facing us, most notably the challenge of climate change that is rapidly accelerating to the point that it will become irreversible, with devastating consequences on a global scale. Hopefully the current financial and economic crisis will not see climate change relegated further down corporate and national agendas.

As with the financial crisis, early warnings have been ignored and countries continued to put national interests ahead of the greater good of humankind.

National solutions will not resolve a global crisis.

VISION-LED AND VALUES-DRIVEN

In last year’s annual report I outlined how we have focused on building an organisation that is vision-led and values-driven, and on our commitment to using corporate culture as a competitive advantage.

Values are a key component of corporate culture as it is ultimately values that drive behaviour. Transformation specialist Richard Barrett in his groundbreaking book Liberating the Corporate Soul makes three key points based on research in over 500 companies in 35 countries. They are:

The most successful organisations on the planet are vision-guided and values-driven.
Organisational transformation begins with the personal transformation of the leadership group. Organisations don’t transform, people do.
Values alignment helps build sustainable, long-lasting organisations that can withstand shocks and transform under conditions of prolonged duress.

The global financial and economic crisis has shown, amid a host of other lessons, the consequences of losing the moral compass. Long-term success, for countries as much as for companies, needs a compelling vision and a solid foundation built on principles and values that act as a centre of gravity.

It is extremely encouraging that over the last five years we have achieved a significant shift in both the awareness and alignment of values across the majority of our staff at Nedbank.We have started building a cultural resilience that will equip us to withstand the type of shocks to which banks are being subjected as well as to remain sustainable under the prolonged conditions of duress that we are now facing.

The continued investment in our staff is also reflected in the results of our annual staff survey. The survey covers 12 dimensions and, as it is completed by a high proportion of our staff, provides clear insight into staff morale and highlights issues that need to be addressed. In 2008 the overall score improved to 75,1% from 71,5% in 2007 and 59,6% when we introduced the survey in 2005. The dimensions for which our staff give Nedbank the highest ratings are ‘ethics’, ‘strategic direction’, ‘leadership’ and ‘communication’. The dimensions that reflect the greatest positive change over the last four years are ‘change and transformation’ and ‘organisational culture and values’.

We have included in this annual report a section on our view of the causes of the current financial crisis as well as our view on why the South African banking system has avoided the worst of the fallout.

As part of our response to the crisis, we have reviewed the group’s risk appetite limits, exposures and processes.We have also reviewed remuneration structures, which have certainly played a role in the crisis. Most of all we strive to ensure that ethics permeate the corporate culture and that the bank is in alignment with public opinion.

TRANSFORMATION

Transformation remains a strategic differentiator for the group and our ability to accelerate the pace of transformation is key to achieving our goal of becoming a truly southern African group.

All our transformation initiatives are driven within a framework we established called the '10 transformation truths'. Key to our approach is that transformation initiatives should seek to unify rather than divide and should be underpinned by our corporate values.We are committed to seeking solutions that will use all the skills of all our people.

We are ever mindful of Oliver Tambo’s injunction, ‘It is our responsibility to break down barriers of division and create a country where there will be neither whites nor blacks, just South Africans free and united in diversity’.

We have always said that transformation is more than compliance and numbers, but our performance against the Financial Sector Charter (FSC) scorecard and Department of Trade and Industry (dti) Codes of Good Practice targets over the past year highlight the good progress we have made.

The bank submitted an audited score of 99,07 (2007: 97,50) out of a possible 100 points to the FSC Council, while our rating under the dti Codes has been verified as a level-three black economic empowerment (BEE) contributor (2007: level four).

While employment equity is only one aspect of transformation, it is pleasing to note that the number of black staff, as a percentage of the total staff complement, has increased to 65%, up from 51% in 2004.Within the management ranks, black executives account for 60% of all management. Black directors now make up 60% of our board.

GROWTH IN BUSINESS BANKING

Our Business Banking Division within Nedbank Corporate has experienced strong growth momentum in recent years under the leadership of Ingrid Johnson. In recognising the strategic importance of this business and the major market segment it serves, Business Banking has become a standalone business cluster from the start of 2009. Nedbank Group’s client-facing structures now comprise Nedbank Corporate, Nedbank Business Banking, Nedbank Capital, Nedbank Retail and Imperial Bank.

Business Banking is differentiated in the market through its decentralised, regional structure and client-centric business model, serving over 23 000 clients with annual turnovers of up to R400 million. Since 2004 headline earnings have increased at a compound annual growth rate of 32% per annum.With headline earnings of R1 369 billion, Business Banking was the largest single contributor to group profits in 2008. The return on capital has grown from 16% to 31%, while the efficiency ratio has improved from 64% to 47% over the same period.

Business Banking is expected to remain an area of high growth for the group.

STRENGTHENED LEADERSHIP

Over the past year we have not only strengthened the Group Executive Committee (Group Exco), but also enhanced transformation and succession planning. Following the establishment of the Business Banking Division as a standalone cluster, Ingrid Johnson was appointed to the Group Exco. Mfundo Nkuhlu, the Managing Executive of Corporate Banking, was appointed Deputy Managing Executive of the Nedbank Corporate business cluster and also joined the Group Exco.We also welcomed Fred Swanepoel to the Group Exco as Chief Information Officer and Managing Executive of Group Technology following the resignation of Len de Villiers.

GROUP FOCUS

Our vision is to become southern Africa’s most highly rated and respected bank. Sound progress has been made in our strategy of providing a full-spectrum banking service by driving our strong and highly competitive wholesale franchise and continuing to build our retail presence as we aim to become a bank for all southern Africans.

Late in the year the bank entered into a strategic alliance with Ecobank, the Pan-African banking group that operates mainly in West and Central Africa. The alliance will provide a seamless experience to clients of Ecobank and Nedbank in 30 countries through more than 1 000 branches across the continent.

In the current volatile financial environment the group has increased its focus on capital, liquidity and risk management. We are taking a more conservative stance and focusing on the longer-term profit potential of the group, rather than seeking to maximise short-term profitability. Our areas of focus in the year ahead will be:

managing risk as an enabler by proactively managing capital, liquidity, risk and credit;
enhancing productivity and efficiency, execution and ongoing smart cost management; and
growing our share of economic profit and managing for value.

The year 2009 will undoubtedly be very tough for the local banking sector, but we currently anticipate improved prospects for growth in the medium term. We are confident that the bank is well-positioned for what lies ahead and our people are committed to Make Things Happen. At the same time we understand how difficult life is for many of our clients. This includes the small-business sector, which is the growth engine of our economy. By understanding our clients’ needs and maintaining close relationships we are trying wherever possible to reach solutions together.

APPRECIATION

We are operating in an unprecedented time of global financial crisis and economic downturn. It is at times like this that our dependence on the integrity and ability of our people become more apparent than ever. I would like to thank all my colleagues on the Group Exco and all staff at Nedbank for their loyalty, commitment and hard work. I am privileged to work with one of the best teams with whom I have been associated in my 35 years in South African business.

I would like to thank all our clients for their ongoing support of Nedbank and assure you of our commitment to continually strive to improve our sevice levels.

Our Chairman, Reuel Khoza, leads the board with distinction, and in closing I thank him for the supportive role he has played in the group.

Tom Boardman

Tom Boardman
Chief Executive

Sandton
25 February 2009

Main Report