| Mon 23 Feb 2004, 8:56 | | REVIEWED FINANCIAL RESULTS FOR THE YEAR ENDED 31 D |
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NEDCOR LIMITED -
NEDCOR LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06
JSE share code: NED
ISIN code: ZAE000004875
("Nedcor" or "the group")
REVIEWED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003
Full transparency on financial position of the group
Recovery programme initiated
New management team
Progress in addressing strategic, financial and structural issues
Strong franchise and solid core businesses
R5 billion rights issue fully underwritten
Financial overview:
* Headline earnings: R55 million
* Headline earnings, excluding foreign currency translation loss: R1,5
billion
* ROE, excluding foreign currency translation loss: 8,5%
* Net interest margin: 2,96%
* Cost-to-income ratio, excluding foreign currency translation loss: 70,1%
* NAV per share: 4 240 cents
* Restatement of 2002 financial results in line with commitment to increase
transparency
Overview of 2003
The 2003 financial year was extremely challenging for Nedcor. The financial
performance was disappointing, as indicated in the trading updates provided to
shareholders in November and December 2003.
Following the appointment of the new management team in November 2003 under the
leadership of Chief Executive Tom Boardman, a recovery programme was launched to
address the issues facing the group and to restore the business to a sustainable
growth path.
As part of this programme, the balance sheet has been thoroughly analysed and
the group is now focused on the implementation of aggressive cost reduction
measures and the central management of the group"s interest rate risk and
foreign exchange exposure. Management is now being held accountable for
performance delivery, and will be rewarded on an ROE-based incentive system. A
key focus will be on improving client service, and further leveraging Nedcor"s
strong franchise and solid core businesses to grow revenues.
Management believes that the group"s core businesses are solid and attractive,
with strong market shares in the business banking and corporate banking sectors
in particular. Retail banking has a broad footprint for the implementation of
its strategy, and the attractive growth rates of the local banking market also
bode well for the group"s prospects.
Management also believes that it will be able to improve Nedcor"s profitability
through aggressive cost cutting and revenue-enhancing programmes, as detailed
below. Further recovery opportunities include enhanced cross selling after the
merger implementation, strengthening the group"s pricing discipline and improved
margin potential.
As part of the recovery programme that is discussed more fully below under
`Recovery programme and prospects" the original Nedbank Corporate Division has
now been split into two clusters to focus the group"s activities better, track
related financial performance and maximise cross-selling opportunities. These
clusters are Nedbank Corporate, which comprises the Corporate Banking, Business
Banking, Property and Asset Finance, International and Africa Divisions, as well
as Imperial Bank, and Nedbank Capital, which comprises the Capital Markets,
Corporate Finance, Treasury and Edward Nathan & Friedland Divisions. The third
principal business cluster is Retail and Wealth Management, which comprises the
Nedcor Retail and Wealth Management Divisions, together with Peoples Bank. In
addition, the former Technology and Operations Division has been split into the
Group Business Innovation (`GBI") and Group Operations Divisions within the
Shared Services Cluster to align their activities more closely with those of the
group"s businesses.
The adoption of new accounting standards and other structural changes, which are
detailed later in this announcement, have impacted the comparability of the
financial results for 2002 and 2003. The 2002 figures include BoE for six months
only and those for 2003 are prepared in accordance with AC133. In addition,
Nedcor"s 2002 consolidated financial statements have been restated, as discussed
more fully below under `Restatement of accounts" to reallocate (i) foreign
exchange gains, (ii) losses relating to the Business Banking Division"s loan
book and (iii) other prior-period charges into the respective financial periods
in which they occurred. The restatement did not relate to 2003 and, accordingly,
had no impact on the group"s financial results in that period. However, the
restatement reduced headline earnings in 2002 by R109 million from R2,6 billion
to R2,5 billion, and reduced opening retained earnings in 2002 by an equal
amount. The impact of this on headline earnings in 2001 would have been a
reduction in headline earnings from R3,8 billion to R3,6 billion. All 2002
figures contained in this announcement have been restated as explained in the
table under `Reconciliation of 2002 financial results" below.
The practice of reporting core, headline and attributable earnings has created
confusion around the most appropriate measurement of earnings and, as a result,
the group will no longer be reporting core earnings.
More detailed information on the group"s results, together with the presentation
to investment analysts, is available on the group"s website at www.nedcor.com.
Financial Performance
The key factors that influenced the group"s headline earnings performance were:
(i) expenses, which grew at a disproportionately higher rate than revenues,
notwithstanding merger savings; (ii) the strengthening of the rand, which
resulted in exchange losses on the translation of foreign capital and earnings;
(iii) interest rate mismatches; and (iv) a higher tax charge.
Headline earnings declined from R2,5 billion to R55 million, with net
profit/loss attributable to ordinary shareholders down from a profit of R875
million to a loss of R1,6 billion.
The formal consolidation of the banking licences of BoE Bank (`BoE"), Nedcor
Investment Bank (`NIB") and Cape of Good Hope Bank (`CoGHB") into both Nedbank
and Peoples Bank took place on 1 January 2003. While the merger and
reorganisation (`M&R") process has progressed well, the long-term funding raised
since the acquisition of BoE has had a negative impact on the group"s 2003
financial results.
Analysis Of Operating Income
Net interest income
Net interest income represents interest earned net of interest paid in
connection with the group"s portfolio of bank accounts, deposits, loans and
financial and structured products. Net interest income increased by R853 million
from R6,0 billion in 2002 to R6,8 billion in 2003. The increase in net interest
income was principally due to the inclusion of BoE for the full year, which was
offset by a number of one-off items. Excluding the impact of BoE and one-off
items in both 2002 and 2003, net interest income across the group"s clusters
declined marginally over the period, mainly due to a number of fixed-cost
funding items that increased the interest expense in a falling interest rate
environment.
The principal elements affecting net interest income comprised the following:
* Net interest income declined by R356 million in 2003 due to a change in the
application of AC102, which resulted in a decrease in interest income
recognised on structured finance deals and a corresponding reduction in
notional taxation that had been previously recognised. The taxation charge
in 2003 is discussed under `Taxation" below.
* In January 2002 BEE consortia subscribed for a 30% interest in Peoples
Bank. The consortia funded the acquisition of this interest through
preference share funding, with Nedbank guaranteeing a 20% annual return by
way of a put option granted to the funders. The put option will, if
exercised, effectively require Nedbank to assume the preference share
funding obligation by paying the funders R864 million in April 2005. In
return, Nedbank would receive the consortia"s 30% interest as security for
assuming that funding. However, as Nedbank has now assumed substantially
all of the risks and rewards of the 30% interest, Nedbank is required to
consolidate Peoples Bank fully. This has had the effect of increasing the
group"s interest expense in the restated 2002 results by R130 million,
compared with an increase of R98 million in 2003, and is expected adversely
to affect the interest expense by approximately R140 million in 2004, to
reflect the liability to pay the 20% return to the funders. This
restatement of the treatment of Peoples Bank has resulted in the
elimination of the minority interest and associated goodwill relating to
Peoples Bank from the group"s financial statements.
* Prior to the adoption of AC133 in January 2003, the group"s net interest
income excluded in full the recognition of interest charged on non-
performing loans. As a result of the application of AC133, the group"s net
interest income includes the recognition of the effective rate of interest
earned on non-performing loans. The unrecognised interest is now reflected
in the group"s income statement under `Impairment of advances".
Accordingly, the group"s net interest income in 2003 benefited from a one-
off increase of R424 million, which reflected the reversal of the interest
reserve that would have been taken in 2003 had AC133 not applied. This was
a group-wide adjustment. The effects of AC133 on the group"s financial
statements are discussed more fully below.
* Funding for the acquisition of BoE included R4 billion of 13,15% fixed-rate
notes callable in 2007. Neither these notes, nor a further R2,0 billion of
fixed-rate 11,3% notes issued by Nedcor and callable in 2006, were hedged
for interest rate exposure in 2003. This had a negative impact on the
group"s margin. Nedcor is putting into place a R3,5 billion natural hedge
in respect of further interest rate movements.
* As a smaller bank facing liquidity pressures, BoE"s funding book was more
expensive than that of Nedcor. As a result of its acquisition, this more
expensive funding had the effect of reducing Nedcor"s margin by
approximately five basis points during the period, although this decrease
was offset by cheaper funding obtained by Nedcor when the Treasuries of
Nedcor and BoE were integrated in January 2003.
* As a result of the need to improve the group"s liquidity profile during the
merger and to repay the funders, the group increased its fixed-rate
negotiable certificates of deposit (`NCD") and promissory note funding from
R22 billion to R34 billion during 2003. As a result of lengthening the term
of the funding book and not hedging the interest rate risk, its yield
deteriorated significantly. The impact of this action was reflected in the
Treasury Division of Nedbank Capital. The bulk of this funding will mature
by April 2004.
To address the interest rate risk inherent in the balance sheet and to improve
the asset liability matching, hedging policies and other initiatives are being
implemented, including:
* R3,5 billion of the subordinated debt will be progressively hedged over the
next few weeks.
* New NCD and promissory notes with maturities of between four and 12 months
will be hedged.
* All new balance sheet interest rate risks of greater than 12 months will be
fully hedged, unless a specific decision is taken to the contrary.
* The asset and liability committee (`ALCO") was reconstituted in February
2004. It was reduced from 27 members to eight senior executives, and is
charged with seeing to it that strategies are developed and implemented to
ensure that interest rate risk is managed effectively to reduce the group"s
volatility in earnings.
* The Asset and Liability Management (`ALM") Department was restructured to
help to ensure an increased level of sophistication in modelling the
balance sheet, to understand the group"s risk profiles, to analyse all
elements of the group"s margin, and to develop and execute strategies to
achieve the objectives set by ALCO. Interest rate risk will be stripped out
of the various business clusters, and will be centralised in the ALM
function to help ensure effective risk management.
* The matched maturity funds transfer pricing methodology will be implemented
across the group during 2004 to facilitate sound interest rate risk
management and to allocate appropriate ownership of the respective
components of margin to the individual business clusters.
As a result of these and other initiatives within the group, Nedcor management
expects that the net interest income margin will improve and be more stable in
2004.
Non-Interest Revenue
Non-interest revenue (`NIR") includes commissions and fees, exchange and
securities trading income, dividends from investments and net gains on the sale
of investment banking assets. In addition, the net income from Nedcor"s non-
banking activities, which comprise property development, insurance and portfolio
related management activities, as well as computer-related services, are also
included in NIR.
NIR increased from R6,8 billion in 2002 to R8,0 billion in 2003. The principal
reason for the increase in NIR in 2003 is the consolidation of BoE for the full
year, as well as the R512 million positive impact of the group-wide AC133 fair-
value adjustments. Included in the transitional adjustment for AC133 made to
opening retained earnings for 2003 was a decrease of R1,2 billion relating to
fair-value adjustments. See `Implementation of AC133" below for a more detailed
discussion of AC133.
* The principal factor impacting NIR in 2003 was commission and fee income,
which increased by R668 million from R4,5 billion in 2002 to R5,2 billion
in 2003. Fee and commission income consists of fee income for the provision
of banking services and investment advice, retainers, institutional
stockbroking commissions and brokerage, fund management, and similar items
that are likely to recur due to the nature of the activities, as well as
facility arrangement fees, corporate finance fees and similar items that
are transactional in nature and therefore generate more erratic income
streams. The increase in commission and fee income during the period was
largely attributable to Nedbank Corporate (excluding Imperial Bank),
particularly in the Property and Asset Finance and Business Banking
Divisions, as well as to the Nedbank Retail Division of Retail and Wealth
Management, and Imperial Bank. The increase was offset slightly by a
decline in income attributable to all divisions across Nedbank Capital. Of
these movements, BoE"s consolidation accounted for the entirety of that
within Retail and Wealth Management and for most of that within Nedbank
Corporate.
* The bulk of the remainder of NIR comprised trading income, which includes
trading income derived from equities and other securities such as foreign
exchange instruments. Debt securities and equity shares held for trading
purposes are revalued at each balance sheet date and the change in value is
recognised as a charge or a profit under trading profits. Trading income
rose by R514 million from R1,2 billion in 2002 to R1,7 billion in 2003.
This was largely due to the R409 million allocation of group-wide AC133
fair-value held-for-trading adjustments. The remaining increase in trading
income during the period was largely attributable to the Treasury Division
within Nedbank Capital, as well as to Nedbank Corporate (excluding Imperial
Bank), particularly in the Property and Asset Finance and International
Divisions. The increases in these clusters were partly offset by a decline
in the Group Capital Management Division of Capital Management and Central
Funding that resulted from currency gains in 2002, which were attributable
to the former NIB business that did not recur.
* In addition, BoE Private Clients, a 50:50 joint venture between Old Mutual
South Africa (`OMSA") and Nedcor, was, prior to 2003, wholly owned by
Nedcor. This business is now equity-accounted by Nedcor following OMSA"s
acquisition of a 50% stake in January 2003, and is reflected in the Wealth
Management Division of Retail and Wealth Management. R11 million of
earnings (post-tax) from this business in 2003 was reflected in the group"s
income statement as `attributable earnings of associates". The commission
and fee income attributable to this joint venture in 2003 was R223 million.
Previously this would have been reflected in NIR with the associated
expenses of R201 million, as discussed below under `Expenses".
Opportunities for sustained growth in NIR include:
* improving pricing discipline to ensure a consistent pricing policy and its
application across the business clusters;
* exploiting cross-selling opportunities between the business clusters and
between members of the Old Mutual group;
* mass-marketing opportunities through retail alliances;
* generating profits from the sale of investments;
* increasing the productivity of the sales force; and
* eliminating duplication in Retail and Wealth Management following the
planned integration of Peoples Bank.
Foreign Exchange Translation Losses
The strengthening of the rand from R8,60/$ to R6,62/$ and R13,85/GBP to
R11,81/GBP during 2003 resulted in the recognition in the group"s income
statement of unrealised translation losses of R1,4 billion, compared with R1,2
billion in 2002. These translation losses primarily reflected the effect of
translating the net assets of the group"s integrated foreign operations into
rands on consolidation of the group financial statements. Management recognises
that the group has held excessive amounts of its capital in foreign currencies
and, therefore, has made it one of ALCO"s priorities to address this issue. To
reduce this exposure, the group converted offshore capital to rand-denominated
capital in the amount of R1,0 billion in November and December 2003. In
connection with the group"s rationalisation of its offshore operations, the
group intends to dispose of Chiswell Associates and various other international
wealth management subsidiaries in 2004 and to repatriate the proceeds during
2005. The repatriation of offshore capital is expected to enhance net interest
income and to reduce future volatility in the balance sheet and capital position
of the group.
Due to expected changes in applicable accounting standards in 2004, Nedcor
expects that a portion of foreign exchange translation movements may in future
be reflected directly in equity in the balance sheet under `Reserves", although
it cannot quantify the impact of any such changes at this time. In addition, new
legislation enacted during December 2003 will allow the group to return the
accumulated reserves of its offshore subsidiary companies without any South
African tax effects after 1 January 2005. Previously, these dividends would have
been taxable at the South African ruling tax rate. The group plans to take
advantage of this relief in connection with its intended reduction of its
offshore capital base.
Credit Impairment
Prior to January 2003 the `legal certainty" provisioning methodology was applied
to Nedcor"s business, resulting in the later recognition of provisions than is
the case under the new accounting standard, AC133.
AC133 introduces a fundamental shift in the manner in which specific impairments
are determined, in that it requires the present value of future cash flows to be
calculated for all advances that are considered to be impaired. The difference
between the present value of those future cash flows and the carrying value is
recognised as an impairment. As the anticipated cash flows in respect of
impaired advances were not previously discounted, this results in an increase in
the specific impairment for doubtful advances.
Prior to the implementation of AC133, a general provision for bad debts of 0,8%
of total advances was carried by Nedcor to cover unexpected defaults inherent in
its performing advances book. Under AC133 the credit risk premium included in
interest rates charged is expected to offset losses inherent in the portfolio of
performing advances. Therefore, a portfolio impairment is required only to the
extent that the originally anticipated risk profile has deteriorated.
In determining the portfolio impairment against performing advances that are not
considered to be individually impaired, expected default rates are applied to
all future cash flows. Discounting these expected cash flows to present value
results in a significant decrease in the required new portfolio impairment, as
compared with the previous Nedcor general provision. The determination of the
portfolio impairment is dependent on accurate credit-risk-pricing models.
Nedcor"s current risk-pricing models are adequate and will need refinement as
the banking industry moves towards the implementation of the Basel II
requirements.
In August 2003 the group announced in its 2003 interim statement that it booked
an additional credit impairment under AC133 of R963 million against advances.
Subsequently the principles relating to amounts included in the transitional
adjustment were clarified by the Accounting Practices Board. As a result of this
clarification and the refinement by Nedcor of its credit impairment processes,
the actual transitional adjustment as of 1 January 2003 increased by an
additional impairment charge of R737 million, resulting in a total transitional
adjustment of R1,7 billion. These amounts are reflected as transitional
adjustments to opening retained income. As the group indicated in August 2003,
the calculation of the adjustment was still not finalised. However, the group
has made a significant investment since that time to determine the correct
transitional adjustment and believes that the group will benefit from
recognising impaired advances at an earlier stage in the credit cycle.
The credit climate held steady during the first half of 2003 in spite of the
high interest rate environment, and is showing an improvement following the 5,5%
decrease in interest rates during the second half of 2003. As discussed above,
there has been an increase in the impairments in 2003, including those in
respect of a loan to fund a housing advances book in Gabon of R180 million,
which was reflected in the Capital Markets Division of Nedbank Capital, and the
property development and other related losses of R64 million, which were
reflected in the Property and Asset Finance Division of Nedbank Corporate, as
well as additional write-downs in BoE"s loan portfolio. In 2003, there was also
an additional AC133 negative impact of R368 million, which represented the
reclassification of an interest reserve balance of R424 million, as noted above,
and a release of R56 million in credit impairments.
Expenses
Operating expenses, excluding M&R costs of R394 million, but including synergies
of R341 million, grew by 35% from R7,4 billion in 2002 to R9,9 billion in 2003.
The cost-to-income ratio (excluding foreign currency translation losses)
increased from 59% in 2002 to 70% in 2003. A significant portion of this
increase was due to the inclusion of BoE for the full year.
The major issues impacting the increase in expenses were:
* Staff expenses increased by R1,1 billion from R3,9 billion in 2002 to R4,9
billion in 2003. This increase primarily reflected the consolidation of BoE
for the full year, as well as the addition of contractors and other
temporary staff during the period. In addition, the increase reflected the
inclusion of R165 million of employee incentive awards. In 2002 employee
incentive awards were allocated in the form of share options and
appropriately recognised in shareholders" equity in line with then
applicable accounting standards. Had these awards been recognised in the
income statement, staff expenses in 2002 would have increased by R340
million.
* Fees and insurances increased by R453 million from R593 million to R1 046
million in 2002 and 2003, respectively. In addition to the impact of BoE,
this increase principally reflected a R142 million decrease in the amount
of management fees recoverable by Nedcor from certain of its alliance
partners pursuant to the terms of their joint venture agreement, a R63
million increase attributable to a reclassification of expense items from
NIR, and an increase in consulting fees of R69 million.
* Computer processing fees increased by R322 million from R948 million in
2002 to R1,3 billion in 2003, primarily as a result of an increase in
project spend of R158 million, as well as the consolidation of BoE for the
full period of 2003, which resulted in an increase in computer processing
fees of R110 million.
* Occupation and accommodation expenses increased by R204 million from R765
million in 2002 to R969 million in 2003. A large portion of this increase
was due to the full year"s contribution of lease and related expenses
associated with BoE"s branch network and offices.
* The growth in strategic projects and the resultant write-offs in respect of
these increased expenses by R162 million. These expenses were reflected in
the GBI Division of Shared Services.
* An increase of R123 million resulted from the consolidation of certain
companies for the first time in 2003.
* Expenses of R201 million relating to the BoE Private Clients joint venture
were not reflected in expenses in 2003 as a result of the change in
accounting treatment described above under NIR.
Management recognises the imperative to reduce costs aggressively and intends to
provide Nedcor"s stakeholders with a detailed report on progress in reducing the
group"s expenses when it announces the group"s 2004 half-year results in August.
More generally, the group will seek to reduce costs through, among other
initiatives:
* the continued implementation of the M&R programme and the delivery of
synergies from the merger;
* the integration of Peoples Bank into Nedbank Retail;
* the introduction of a new activity-justified transfer pricing process
between the central functions and the business divisions - this initiative
reflects management"s commitment to promote accountability within the group
and to allow costs to be more effectively managed and allocated; and
* the elimination of duplication of central and back-office services that
continue to operate within each of Nedbank, BoE, CoGHB and NIB - the full
benefit of these synergies can be achieved only once these businesses are
fully integrated.
Taxation
The group"s effective taxation rate, excluding the impact of foreign currency
translation losses and exceptional items, increased from 10% in 2002 to 32% in
2003. In 2002 the taxation charge was reduced by a deferred-tax asset raised in
Peoples Bank of R185 million. In 2003 the tax charge was affected by:
* additional secondary tax on companies (`STC") of R63 million;
* an increase in the taxation of foreign entities, which now have their
revenue taxed at the South African rate for a full year;
* a reallocation from net interest income as a result of AC102, which
decreased notional taxation by R356 million, compared with R134 million in
2002;
* contingencies of R261 million that have been raised against specific tax
industry issues; and
* a tax charge of R147 million in 2003 due to the AC133 adjustments discussed
above.
In addition to the R261 million raised in the income statement, an additional
amount of R583 million was raised as a similar provision in respect of BoE
preacquisition items. The AC102 entries arising from Nedcor"s structured finance
book resulted in a reduction in the carrying value of structured finance assets
of R1,2 billion, with a corresponding decrease in deferred tax liabilities of
R1,2 billion.
The group, through structured finance deals in the past, has oversold its tax
base. This has created estimated tax losses that will take some time for the
group to utilise fully. The group"s taxation rate is likely to be closer to the
statutory rate of 30% in future periods.
Exceptional Capital Items
Exceptional capital items amounted to R1,8 billion and R1,7 billion in 2002 and
2003 respectively. The main components in 2002 comprised a R1,0 billion write-
down of Nedcor"s investment in Dimension Data plc, goodwill amortisation of R426
million and a goodwill impairment charge of R75 million.
The impairment and amortisation of goodwill in 2003 totalled R1,8 billion. This
was due to the impairment in full of the goodwill on the acquisition of the
remaining shares in NIB of R362 million and Peoples Bank of R193 million, and an
impairment of the goodwill on the acquisition of BoE and its subsidiaries of
R650 million. The amortisation charge was R424 million, and the remaining
goodwill impairments principally related to a subsidiary of the group"s UK-based
wealth management company, Gerrard Private Bank, and Acturis, a UK-based
software company that was consolidated for the first time in 2003.
Prior to this impairment the goodwill attributable to the acquisition of BoE was
increased by R858 million as a result of a reassessment of the fair value of the
net assets of BoE acquired by Nedcor. This resulted principally from:
* an additional provision for tax liabilities of R583 million;
* a further provision in respect of the carrying value of Century City of
R118 million; and,
* an additional impairment of R70 million against non-performing advances.
All of these items were disclosed by BoE to Nedcor. In line with AC131 the group
had a window period until 31 December 2003 to reassess preacquisition
adjustments, which it has now completed.
Management believes that no further impairment is considered necessary for the
BoE goodwill, as the revenue being generated by the former BoE divisions,
together with merger savings, should exceed the estimated return envisaged at
the time of the transaction.
From 1 January 2005 the accounting policy for goodwill will change as a result
of the proposed introduction of a new South African accounting standard. If this
standard is introduced, goodwill will be subject to an annual impairment review
rather than amortisation.
Following a comprehensive review of the carrying value of Nedcor"s investments
and fixed assets, a total impairment charge of R239 million was made in 2003.
This included an impairment of capitalised and development software of R137
million.
The disposal of certain non-core subsidiaries, investments and property, plant
and equipment generated a net profit of R349 million.
Shareholders" Equity
The group"s total shareholders" equity declined from R19,5 billion at
31 December 2002 to R15,1 billion at 31 December 2003. This decline will be
remedied by the rights issue referred to below. The principal reasons for this
decline were:
* a net loss attributable to ordinary shareholders for 2003 of R1,6 billion;
* the application of AC133 resulting in a reduction to opening shareholders"
equity of R2,1 billion;
* ordinary and preference dividends paid in 2003 of R1,5 billion;
* the release of reserves relating to the Nedcor employee share scheme of
R357 million; and
* a foreign currency translation loss of R181 million that was not included
in the net loss attributable to ordinary shareholders.
These declines were offset by the issuance by Nedbank during the year of R825
million of preference shares and R381 million of ordinary shares issued in
respect of share options exercised during the period.
Restatement Of Accounts
The process of finalising the 2003 financial results included a review of prior-
year disclosure items. In particular, there were a number of non-recurring
income and expense items in the 2002 income statement that related to prior
years. An amount of R610 million in respect of historic foreign currency
translation gains previously not recognised was released in the 2002 income
statement. Of this amount R405 million was included across various income and
expense lines, but was offset by expense items relating to prior years totalling
R308 million. The remaining R205 million gain was included in net foreign
currency translation losses. These amounts have been removed from the 2002
income statement, along with a further adjustment of R193 million (post-tax) to
reallocate the losses from the Business Banking book, and have been allocated to
the years to which they related. The cumulative effect of these adjustments had
the net effect of reducing headline earnings in 2002 by R109 million and
increased opening retained earnings by an equal amount. If 2001 had been
restated, the impact would have included additional expenses of R308 million
(post-tax) that were originally booked in 2002, foreign currency translation
gains of R150 million and the negative impact of losses in the Business Banking
book of R81 million (post-tax). This would have resulted in a decrease in
headline earnings of R239 million in 2001.
While the 2002 financial statements have been restated for these items, it is
important to note that the offsetting nature of these items meant that the
original 2002 financial statements were not materially affected. However, in the
interest of full disclosure, these adjustments have been made to their correct
lines for the prior years.
AC102 - As disclosed in net interest income, notional tax on structured finance
transactions was included in net interest income. As a result of the restatement
of the 2002 results in full compliance with AC102, the following restatements
have been made:
* deferred tax assets have increased by R1,2 billion;
* deferred tax liabilities have increased by R259 million;
* sundry debtors have decreased by R348 million; and
* sundry creditors have increased by R491 million.
This has also resulted in a reduction of net interest income of R142 million.
Peoples Bank - The 2002 results have been restated for the Peoples Bank put
option described under `Net Interest Income" above to ensure full compliance
with AC412. As a result of the restatement, minority interest in the balance
sheet was reclassified as `Deposit, current and other accounts". Minority
interest attributable to ordinary shareholders declined by R130 million and
interest expense increased by an equivalent amount.
Refer to the reconciliation of the 2002 financial results restatement noted in
the table below.
Capital Raised During 2003
In September 2003 Nedcor raised two tranches of indebtedness: R500 million
subordinated debt due 2005 that qualifies as Tier 3 capital; and R500 million
unsecured subordinated callable notes due 2009, with a call option in June 2004,
that qualifies as Tier 2 capital. As noted above, the group also raised R825
million of qualifying Tier 1 non-redeemable, non-cumulative preference share
capital in November 2003. Following a balance sheet review in December 2003 the
group announced the likelihood of significant write-downs to its capital and
raised additional qualifying Tier 2 capital of R2 billion in the form of
unsecured subordinated debt from OMSA. The rights issue will significantly
improve Nedcor"s Tier 1 capital ratio, and it intends to use a portion of the
net proceeds to redeem the R500 million of subordinated callable notes and the
R2,0 billion loan provided by OMSA.
Rights Issue
To ensure that the group has sufficient capital to provide a foundation for
growth and to meet Nedcor"s anticipated minimum capital requirements, the group
has proposed a rights offer to raise R5,0 billion of additional ordinary share
capital, the application of which will allow it to achieve a better balance
between Tier 1 and Tier 2 capital.
This capital raising, together with more active balance sheet management, is
planned to enable the group to meet the proposed 7,5% regulatory minimum for
primary capital by 31 December 2004. Active management of the balance sheet will
include:
* the reorganisation of the group structure so that certain assets are not
impaired for the purposes of the calculation of the group"s capital
adequacy;
* the disposal of non-core assets; and
* the reduction of risk-weighted assets.
Management believes that these measures will allow the group to achieve
acceptable levels of new business in advances.
Old Mutual plc has undertaken to take up its rights under the rights issue. The
balance of the new shares to be issued has been fully underwritten.
A circular is being posted to Nedcor shareholders today to convene a general
meeting to increase the company"s authorised but unissued share capital to
facilitate the rights issue and the capitalisation share award as well as to
allow the company to meet its obligations to issue shares required for its share
incentive scheme prior to the annual general meeting.
The full terms of the rights issue, including the number of shares to be issued
and the issue price, are expected to be announced no later than 25 March 2004.
This will enable stakeholders to consider the financial results and our plans
for the future, prior to the pricing of the issue. The rights issue will be
subject to customary conditions, including regulatory approvals by the JSE
Securities Exchange South Africa and the Registrar of Banks, and the
underwriting agreement having become unconditional and not having been
terminated in accordance with its terms.
The securities offered in the rights issue will not be registered under the US
Securities Act of 1933, and may not be offered or sold without registration or
an applicable exemption from the registration requirements.
Prices and values of, and income from, Nedcor"s shares may go down, as well as
up, and an investor may not get back the amount invested. It should be noted
that past performance is no guide to future performance. Persons needing advice
should consult an independent adviser.
This announcement does not constitute an offering of securities in the United
States, Canada, Australia or Japan or otherwise constitute an invitation to any
person to acquire securities in any company within the group.
Recovery Programme And Prospects
Management believes that real progress has been made in addressing the
strategic, financial, risk and structural issues confronting the group. In
October 2003 the new Chief Executive, Tom Boardman, announced a five-point
recovery programme:
* the appointment of a new executive team;
* a strategic review of the business;
* the successful completion of the M&R programme;
* improved transparency; and
* a clear focus on client service.
The immediate priority was to align the structure of the group with its strategy
and reconstitute the Group Executive Committee. Accordingly, the group now
comprises three principal business clusters, Nedbank Corporate, Nedbank Capital
and Retail and Wealth Management. In addition, the former technology and
operation functions of the group have been split into GBI and Group Operations.
The retail banking interests are being aligned, and Nedcor is in the process of
integrating Peoples Bank under the Nedbank Retail banner. The group is at an
advanced stage of negotiations with the BEE consortia of Peoples Bank in this
regard.
At the same time the group finance function is being reviewed to improve
financial management and management information systems. This includes the
introduction of appropriate allocation policies around funds transfer pricing
and cost transfer pricing as well as ensuring that capital is consistently
applied within divisions. This will help to ensure appropriate measurement of a
division"s profitability and is expected to lead to greater accuracy and
accountability of divisional management.
Seven new members were added to the group"s executive team. They are Pete
Backwell (Retail and Wealth Management), Graham Dempster (Nedbank Corporate),
Len de Villiers (Group Operations), Brian Kennedy (Nedbank Capital), Ivan
Mzimela (Group Human Resources), Rob Shuter (Corporate Affairs and Strategy) and
Nolitha Fakude, formerly Chairperson of the Black Management Forum (`BMF"), who
was recruited externally to coordinate BEE and, the implementation of the
requirements of the Financial Sector Charter in the group. The newly appointed
management team is actively addressing the governance and structural and
cultural issues, and implementing measures to enhance returns to shareholders.
Bob Head has been seconded from Old Mutual plc to Nedcor as acting Chief
Financial Officer at the request of Tom Boardman. The board is currently
considering a number of candidates for the position of Chief Financial Officer,
and expects to make an appointment in the next six months.
Nedcor has initiated a project to realise its non-core assets, including certain
technology investments, non-core foreign operations in Nedcor Wealth Management,
and its luxury property investments.
The group acknowledges that its progress relating to the Financial Sector
Charter has been hampered by the merger and the unfolding events of the past
year. During this time of uncertainty it has been difficult to initiate plans
with potential empowerment partners and the ability to recruit and retain black
professionals has also been limited. The group remains determined to meet its
targets under the Financial Sector Charter and will pursue its transformation
goals with vigour in the year ahead.
The merger and restructuring process is proceeding according to a well-defined
plan, and most synergy benefits are being realised earlier than originally
projected. The full annual benefit of R700 million is expected to be realised
during 2006. The total cost to achieve these merger benefits is still expected
to be R868 million.
The major migration of the Business Banking Division"s corporate clients was
completed in February 2004, and the last client migration project is the
transfer of NBS clients to the Nedbank Retail Division during 2004. It then
remains to consolidate certain data centres, general ledgers and other back-
office functions for the merger to be completed.
A key strategy of the group is to increase the number of clients for whom it is
the primary banker, in both the corporate and retail markets. To achieve this
goal the group is focusing on providing enhanced client service through the
following key initiatives:
* a major client-service-related initiative involving comprehensive staff
training is being introduced over the next six months;
* systems are being reviewed and functionality is being improved to ensure
that products are client-focused;
* client research is being intensified; and
* staff incentive schemes are being implemented to align rewards with client
service excellence.
Transparency is an ongoing priority, and management is committed to pursuing
this policy both internally and externally. Management believes that there is
now greater transparency on the financial position of the group following the
comprehensive review of its balance sheet, the ongoing derisking of its balance
sheet through interest rate and foreign exchange risk management and the solid
AC133 credit risk impairments against non-performing advances. Management
believes that this results announcement demonstrates its commitment to this
policy, which will continue.
Board Of Directors
The Chairman of Nedcor, Chris Liebenberg, who will reach the mandatory
retirement age this year, will be retiring, after more than fifty years" service
with the group, at the time of the annual general meeting (`AGM") of
shareholders in May. Warren Clewlow, currently the Deputy Chairman, will succeed
Mr Liebenberg. The group is not proposing to appoint a Deputy Chairman.
In accordance with the recommendations of the Myburgh Commission the number of
directors on the Nedcor Board is being reduced. It is the group"s intention that
in future only the Chief Executive and the Chief Financial Officer will be
Executive Directors on the board.
In line with this policy Executive Directors Barry Hore and Derek Muller, who
retire by rotation and are eligible for reelection as directors at the AGM, will
not be making themselves available for reelection.
Executive Directors Izak Botha and Stuart Morris have both elected to take early
retirement with effect from 31 May 2004, and will be stepping down from the
board with effect from 23 February 2004.
As a result of these changes, the board will be reduced from 22 to 17, which
aligns the group more closely with the governance requirements of King ll and
the recommendations of the Myburgh Report. The board has also established a
Financial Oversight Committee under the chairmanship of experienced South
African banker Chris Ball, who is an independent non-executive director of the
group. The mandate of the committee is to ensure that the group"s accounting and
control systems meet the highest standards.
Relationship With Old Mutual Plc
The relationship between Nedcor and its parent company, Old Mutual plc, has
strengthened over the past year, as evidenced by Old Mutual"s support for the
recovery programme, the granting of the R2,0 billion loan described above, the
secondment of Bob Head, and its commitment to take up rights in the forthcoming
rights issue. The relationship has now been formalised through an agreement that
outlines the manner in which the two companies will conduct their relationship.
This agreement can be obtained from both companies.
Dividend Policy
The board of directors has amended the group"s dividend policy for 2004 onwards
to a range of between 3,0 and 3,5 times cover at the headline earnings level.
Management believes that this policy will allow Nedcor to retain sufficient
qualifying capital and reserves to grow the business.
Changes In Group Structure And In Basis Of Accounting
These abridged financial statements have been prepared in accordance with South
African Statements of Generally Accepted Accounting Practice.
BoE was acquired and consolidated with effect from 1 July 2002 and the
outstanding NIB minorities of 16% were acquired and consolidated with effect
from 1 October 2002. In addition, in accordance with South African Generally
Accepted Accounting Practices, Nedcor was required to adopt the complex
accounting standard AC133 `Financial instruments: Recognition and Measurement"
with effect from 1 January 2003. This was a significant change in the basis of
accounting for the banking industry. AC133 is a prospective statement, which
means that historical figures are not adjusted to the new basis of accounting,
and adjustments to determine the new equity and asset and liability base are
dealt with as transitional adjustments to opening retained earnings.
A number of amendments to International Financial Reporting Standards (`IFRS")
were published at the end of 2003 and several others are likely to be introduced
during 2004. The significant changes that are likely to affect Nedcor"s results
include the calculation and expensing of share options and changes to IAS 39
(AC133 in South Africa), which will be effective from 1 January 2005.
Furthermore, South African companies listed on the JSE Securities Exchange South
Africa will have to comply with IFRS from 2005 onwards.
Two accounting standards that have been in place for some time, being AC105
(leases) and AC102 (tax), are particularly relevant to structured finance deals.
AC105 requires that income on lease-based structured finance deals be recognised
from period to period without taking account of the tax cash flows inherent in
the deal, only the cash flows from the client. By the same token, AC102 requires
that tax benefits passed on to the client in the form of lower funding costs be
reported as reduced tax charges.
Nedcor had recognised revenue in accordance with the economic reality of the
structured finance deal, over the life of the deal, taking account of when the
economic (not accounting) benefits of the tax cash flows arose. Following a
guideline released by the Banking Council, Nedcor identified that it was not in
line with the treatment applied in the rest of the industry. Accordingly the
group restated its financial results to comply fully with accounting standards
as explained under `Restatement of accounts" and `Reconciliation of 2002
financial results". This has led to the reclassification of certain revenue and
taxation items, which are detailed above.
Following recent amendments to IFRS it is likely that accounting standard AC112
(foreign exchange) will also change. This will mean that some of the foreign
exchange translation losses or gains will be taken directly to reserves in the
future.
Implementation Of AC133
AC133 impacts on the recognition and measurement of financial instruments,
including credit impairments against advances. To address the prospective nature
of the statement the transitional adjustments to the carrying values of
financial instruments at 1 January 2003 are recognised directly in opening
retained earnings.
AC133 is based on International Accounting Standard 39 (`IAS 39"), which is
subject to a number of amendments and interpretations, the most recent of which
does not yet form part of AC133. Furthermore, interpretation and presentation
issues with regard to the implementation of AC133 in South Africa continue to be
debated by the accounting profession and business locally. The treatment adopted
by Nedcor in these results accords with the current interpretation of
recommended practice.
Credit Impairment Adjustments
For a discussion of credit impairment adjustments, see `Credit Impairment"
above.
Fair-Value Adjustments
AC133 requires all financial instruments to be classified, which classification
determines the accounting treatment. Nedcor has accordingly reclassified the
bulk of its financial assets and liabilities as "originated loans" and "non-
trading liabilities", respectively, which continue to be carried at original or
amortised cost. The remainder are dealt with as follows:
Held-for-trading portfolios
AC133 requires certain financial instruments to be measured at their fair value.
This includes all derivatives and instruments held for trading purposes. In
addition, in terms of the statement Nedcor has elected to designate certain
financial instruments at fair value to reflect the match between such items and
their hedge. The fair-value adjustments at 1 January 2003 required in respect of
the above financial instruments are recognised as an adjustment to opening
retained income and thereafter in the income statement.
Embedded derivatives
An embedded derivative arises when derivatives are a component of a financial
instrument in such a way that the cash flows in respect of the instrument vary
in a similar way to those in respect of a standalone derivative. In certain
circumstances embedded derivatives are accounted for separately at their fair
value.
Internal transactions
Prior to AC133 common local and international banking practice was to recognise
internal hedging derivatives. Risks were pooled and managed centrally at a
bankwide level. AC133 prescribes the accounting treatment for hedges and
accordingly banks have been required to reconsider the accounting treatment of
internal hedges. Nedcor has identified and eliminated all internal transactions,
thereby reflecting external derivatives only.
Available-for-sale portfolios
Financial assets are classified as available-for-sale where the intention,
origination and designation of an instrument do not fall within the ambit of the
other asset classifications. Available-for-sale instruments are typically assets
that are held for a longer period and in respect of which short-term
fluctuations in value do not affect Nedcor"s hold or sell decision. In terms of
AC133 Nedcor has elected to recognise fair-value gains and losses on these
instruments directly in equity until such time as such an instrument is
derecognised. However, when available-for-sale equity instruments are determined
to be impaired to the extent that the fair value declines below its original
cost, as is the case with Nedcor"s investment in Dimension Data plc, the
resultant losses are recognised in the income statement.
Non-qualifying foreign exchange hedges
Items that were hedged with forward exchange contracts have in certain cases in
the past been recognised at the forward rate to reflect their hedged nature. In
terms of AC133 all derivatives, including hedging derivatives and forward
exchange contracts, need to be recognised at their fair value. Some structured
transactions originating from NIB did not qualify as hedges under AC133 and the
necessary adjustments at 1 January 2003 are recognised in opening retained
income and thereafter in the income statement.
Reviewed Results - Auditors" Opinion
These results have been reviewed by the company"s auditors, KPMG Inc and
Deloitte & Touche, and the review opinion is available for inspection at the
company"s registered office.
Capitalisation Award With Cash Dividend Election
The directors of Nedcor Limited (`the company") have resolved to issue fully
paid ordinary shares in the company as a capitalisation award to ordinary
shareholders. Such shareholders will be entitled, in respect of all or part of
their shareholding, to elect instead to receive a cash dividend of 35 cents per
ordinary share (`the election"). New fully paid ordinary shares in the company
will be issued only to those ordinary shareholders who do not elect in respect
of all or part of their shareholding, on or before Thursday, 8 April 2004, to
receive the aforementioned dividend.
In accordance with the provisions of STRATE, the electronic settlement and
custody system used by the JSE Securities Exchange South Africa, the relevant
dates for the capitalisation award with cash dividend election are as follows:
Last day to trade to participate
