With the macroeconomy and its prospects now in positive territory, new challenges have to be met. South Africa needs to harness these new factors in the way that mining development and activity drove the economy in decades past.
Chairman
The results reflect another year of steady improvement for the Nedbank Group, marked by a continued turnaround in financial performance. Management has set challenging targets to be achieved by 2007. It is pleasing to report on the progress that has been made towards reaching these goals, although we all acknowledge the challenges that still lie ahead.
The return on ordinary shareholders' equity (ROE) increased from 11,0% to 15,5% as we moved towards our target of 20%. The efficiency ratio improved from 71,8% to 65,1%. While we have some way to go to reach our targets in 2007, our performance is in line with our business plans and we remain confident of achieving these objectives.
Headline earnings grew strongly off a low base from R1 743 million in 2004 to R3 167 million this year, while basic earnings grew by over R2 300 million to R3 836 million.
The group's balance sheet remains sound and all the key ratios, including capital adequacy measurements, are conservatively within the targets set.
In line with the legal structuring of our BEE deal, all shareholders have been offered a capitalisation award with a cash dividend alternative. The BEE shareholders have preelected the capitalisation award. This award is 185 cents per share, an increase of 143% from the 76 cents per share declared in 2004.
This brings the total dividend for 2005 to 290 cents per share, an increase of 170 cents per share over the dividends declared in 2004.
Detailed analysis of the results is contained in the Chief Financial Officer's report.
Improved economic prospects
The South African economy has performed well under the guidance of experienced and disciplined fiscal management. The fruits of these efforts are starting to be reaped as economic growth moves to a higher level and foreign investors take note of the new mood of confidence. During the year the country was again upgraded by key sovereign rating agencies. Several large foreign investments, notably in the banking and telecommunications sectors, and a flood of foreign buying on the JSE, demonstrated the improved sentiment.
The banking sector benefited from this increased economic activity as lower interest rates continued to stimulate borrowing and reduce impairments.
Importantly, the current upswing and the low inflation/low interest rate environment looks far more sustainable than in the past, when bust inevitably followed boom.
Not only are the key fundamentals for macroeconomic stability in place, but there is a confluence of positive factors, including structurally higher commodity prices (due to a booming Asia) and more inclusive participation by all groups in economic activity.
The recent budget underscored the financial health of the South African economy. The fiscal deficit narrowed to a record low level of 0,5% of GDP, having remained below 2,5% over the past seven years.
Improved tax collection efficiency, lower interest servicing costs and burgeoning domestic spending gave the National Treasury more resources to meet the needs of, and accelerate, infrastructural and social spending.
The real boost to investment and therefore economic growth will come about from the wide range of taxation relief that was announced in our national budget.
With the macroeconomy and its prospects now in positive territory, new challenges have to be met. South Africa needs to harness these new factors in the way that mining development and activity drove the economy in decades past.
South Africa is benefiting from what I describe as the many ‘new immigrants’ who are making a positive contribution to the economy. By ‘new immigrants’ I am not referring to an influx of people from foreign countries, but rather we are seeing the benefits of including our own people who were previously disenfranchised. Real black economic empowerment is focusing on improving the quality of life, skills upgrading and opportunities for career advancement of many of our people. This has become a strong stimulating factor for the growth of South Africa. The real thrust of the Nedbank Group BEE strategy focuses strongly on this important aspect.
As the leading southern African economy and the pivot between the world’s more advanced and the vulnerable developing economies, South Africa will be called on to play a more active role in global trade negotiations. Effective and appropriate trade agreements that will help, rather than hinder, development in the less-developed world, and in southern Africa in particular, are urgently needed. South Africa is uniquely placed to play a strategic part in the current round of negotiations, given its mixed economy and moral authority. The South African banking sector, with its reputation of financial stability and discipline and good governance practices, will be at the forefront of the implementation of these trade agreements. Already the country is facilitating trade and investment in the region. Sadly, there is no role for Zimbabwe in these expanding opportunities while its political situation remains unchanged and is steadily deteriorating, despite all the efforts that have been made to date. The only means for a solution rests with South Africa leading from the front, not only to facilitate discussions, but also with the aim of achieving meaningful and sustainable change. If and when this is achieved, our banking institutions, which already have a presence, will have to play a role in the restoration of a normal trading economy.
To achieve the national goal of a 6% GDP growth, a key thrust is to convert the increasingly global interest in the economy into investment, jobs and social development. Perceived negatives to foreign investors have been an unstable exchange rate, the cost of labour – especially for skilled workers – and the cost and prevalence of crime. However, the basic attraction for foreign investment is to have a modern infrastructure with reliable power and roads, rail routes, airports and telecommunications to enhance the passage of raw materials and manufactured goods to their destinations in an efficient manner. To this has to be added a sound and effective banking system, giving access to finance. Nedbank Group recognises this need and is positioning itself for this role.
I believe South Africa is now in a position to enter a new phase, moving away from the past era of dependency when the general public, the business world and media expected government to be responsible and accountable for solving all problems. South Africa now needs to move to a government focused on stability and a framework for fiscal discipline, but with renewed emphasis on providing the regulatory and enabling environment to the private sector to support growth.Allowing the greatest practical freedom for financial markets to operate would be one example. International evidence shows that private interests are always more likely to find solutions to the complex challenges in a fast-changing world environment. Increased private sector participation in all aspects of government’s rebuilding process will be the key to success in the years ahead. In this regard government’s Accelerated and Shared Growth Initiative for South Africa (ASGISA) is very encouraging as it seeks to identify and address the stumbling blocks to higher growth and employment creation. Some of these are infrastructural, but better delivery at local government level is becoming increasingly crucial and the private sector is well-placed to provide the logistical and project planning support needed.
So, while the Nedbank Group, in recent times, has had to focus mainly inwardly to achieve its recovery targets, it will now be preparing for the outward challenges of the future and to play its role in the development of our nation. The Nedbank Group is well-positioned to be able to do this.
Prospects
The Nedbank Group is ably led by Chief Executive,Tom Boardman, backed by experienced executives and staff.
The group adopted a three-year strategic plan, with clearly defined objectives and goals, and to date the committed management team has achieved these targets. While the task is not yet complete, the benefits of the recovery programme and the tough decisions taken two years ago are being reflected in the overall performance and results to date.
While the domestic economy and environment are sound, we have to be cognisant of the potential consequences of world events for our country.After taking the relevant factors into account, including the prospects for the banking sector, market share growth opportunities, competitor activities and our operating and management skills, I believe we can look ahead to further positive growth in the year that lies ahead.
Board changes and appreciation
Having reached the mandatory retirement age, I shall be leaving the Nedbank Group Board at the conclusion of the forthcoming annual general meeting in May 2006. It has been a privilege to lead a board and executive team who work well together and trust each other implicitly. I can look back at the rewarding time spent as Chairman with great satisfaction. I wish to thank my fellow directors, Tom Boardman, his executive team and all the staff of the bank for the loyal support and encouragement during these past years.
The board has appointed Reuel Khoza to succeed me as Chairman. The group is indeed fortunate to have such a distinguished man of integrity and wisdom to guide it through the interesting and challenging times ahead.
Following the successful completion of the Nedbank Group BEE transaction, Reuel, together with Gloria Serobe and Mustaq Enus-Brey, joined the board and are bringing to us their talent and skills.
Thank you to all the group’s internal and external stakeholders for your ongoing contribution to our improved performance. I wish you well in all your endeavours.
Warren Clewlow
Chairman
Sandton
22 March 2006
