| Tue 22 Feb 2005, 11:29 | | Reviewed financial results and cautionary announce |
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Nedcor Limited - Reviewed financial results and cautionary announcement
Nedcor Limited
Registration number 1966/010630/06
Incorporated in the Republic of South Africa
Share code: NED ISIN code: ZAE000004875
Reviewed financial results and cautionary announcement for the year ended 31
December 2004
Headline earnings: R1 447 million
Headline earnings, excluding foreign currency translation losses: R1 819 million
Ordinary shareholders` equity up 55%
Group Tier 1 capital adequacy ratio up from 5,0% to 8,1%
Earnings volatility significantly reduced
Recovery programme delivering tangible benefits
Competitive, sustainable base established
Group on track to meet 2007 targets
Overview
2004 was a year of delivering on commitments made to shareholders, reducing
earnings volatility, improving risk management and establishing a competitive
and sustainable base for growth. A detailed recovery programme was implemented
with clear priorities and the directors are pleased to report that all key
objectives of this programme have been achieved so far.
Headline earnings per share (excluding foreign currency translation losses) of
504 cents (2003: 502 cents) were ahead of the group`s expectations. Headline
earnings per share of 401 cents were significantly up from 19 cents in 2003. The
group made attributable earnings per share of 270 cents (2003: attributable
loss of 546 cents).
Management remains committed to a targeted return on equity (RoE) of 20% in
2007. Detailed plans for the next three years are in place to meet this target.
Delivering on commitments to shareholders
Nedcor gave shareholders a commitment to resolve the strategic, financial and
risk management issues that had affected the performance of the group.
Highlights of the year included:
* a thorough review of the balance sheet and the successful capital raising
through the rights issue;
* a substantial reduction of the risk profile;
* appointment of a new and effective management team;
* setting a clear strategic direction for the group;
* a comprehensive restructure of the group to ensure improved accountability
and better service to clients;
* delivery of the merger; and
* improved management information systems and financial reporting.
Balance sheet review and capital raising
Following the 2003 balance sheet review the group undertook a rights issue in
May 2004, which was successful in raising R5,15 billion of Tier 1 capital and
strengthening the group`s capital base.
The group repaid R2,5 billion of subordinated debt (Tier 2 capital) from the
rights issue proceeds. This improved the balance between Tier 1 and Tier 2
capital. The balance was used to reduce expensive funding.
Nedcor set a target of reaching a group Tier 1 capital adequacy ratio of at
least 7,5% by the year-end and is pleased to report that, through the rights
issue and proactive capital management, the group Tier 1 capital adequacy ratio
at year-end was 8,1% and total group capital adequacy was 12,1%.
This provides the group with a strong foundation for future growth.
Substantially reduced risk profile
Significant steps have been taken to reduce a number of risks inherent in the
group at the end of 2003:
- The improved capital position stabilised the group`s credit ratings.
- The capital and earnings volatility arising from foreign exchange movements
was substantially reduced. The group repatriated, converted and/or hedged
R5 058 million of capital sensitive to foreign exchange movements. The
foreign exchange translation loss reduced to R372 million in 2004 (2003: R1
416 million) within the income statement and from R181 million to R57
million within reserves.
- Interest rate risk was significantly reduced. An active hedging programme
was implemented, swapping new term fixed-rate deposits to floating rates.
In addition, the group`s R6 billion fixed-rate subordinated debt issued in
2001 and 2002 was hedged against further interest rate movements from July
2004. Interest rate risk was further reduced, with the expensive unhedged
fixed-rate negotiable certificates of deposit (NCDs), promissory notes
(PNs) and retail fixed deposits in issue at December 2003 having matured by
April 2004.
- The recovery programme, initiated to reverse the deterioration in the
group`s efficiency ratio, is starting to show positive results, which will
impact in 2005.
A number of structural and operational improvements have been made to the group
enterprise-wide risk management framework.
- The roles of the Chief Financial Officer and Chief Risk Officer were
separated.
- Capital management was placed under the control of the Chief Financial
Officer. This enabled the group to improve the allocation of capital to
divisions to ensure optimum use of capital and enhance long-term capital
planning.
- The Asset and Liability Management Committee (ALCO) was restructured to
allow for a more effective and efficient decision- making process. The ALCO
responsibilities were extended to include all interest rate risk management
as well as the management of capital, foreign exchange, investment and
market risks.
- Management processes have been redesigned to ensure a logical and
streamlined framework to monitor risk and ensure governance.
- The group has completed its Financial Advisory and Intermediary Services
Act (FAIS) licensing requirements. Progress has been made in complying with
the Financial Intelligence Centre Act (FICA).
- The group is on track to meet its January 2008 Basel ll commitments.
Management team in place
Additional appointments were made to the Group Executive Committee (Exco).
Philip Wessels was appointed Chief Risk Officer in May and Mike Brown Chief
Financial Officer in June, while Advocate Selby Baqwa was appointed Head of
Group Compliance and Corporate Governance and joined Exco in November. Pete
Backwell, Head of Nedbank Retail, resigned to follow business interests in the
agricultural sector and the Human Resources Director, Ivan Mzimela, left for a
position in the leisure sector.
Rob Shuter was appointed Head of Nedbank Retail to replace Pete Backwell.
Nolitha Fakude took on the responsibility for Corporate Strategy, Communications
and Marketing from Rob Shuter and Derek Muller has assumed the additional
portfolio of Human Resources until a new Head of Human Resources is appointed.
As a result of the internal appointments to the Exco, the group restructure and
the retrenchment programme, all management positions in the group were reviewed
and 70 of the top 100 managers were appointed to new positions during 2004.
Throughout this process the group has been conscious of its employment equity
commitments. While we acknowledge the transformation challenges facing the
group, it is pleasing that the percentage of black managers improved from 23,3%
to 26,8% during the year. At December 2004, 25% of the Exco was black and 19% of
the top 100 managers was black. The number of women in the top 100 management
group also improved from 8% to 20%.
Detailed balanced score cards with performance measures directly linked to the
three year plan are in place for all top managers. These drive the calculation
of management incentives.
Clear strategic direction
In Nedcor`s interim report the following strategic focus areas were identified:
* to focus on the basics of banking by disposing of non-core assets,
simplifying the brand strategy, optimising the asset and liability
management and improving management information systems;
* to focus on growing the retail business and transactional banking in
particular, while building on the group`s strengths in the corporate and
commercial sector;
* to focus on Southern Africa and retain only core offshore operations;
* to attract, retain and develop staff, while building a client-centred
culture, with an improvement in staff morale remaining a key focus;
* to align products and processes to optimise client service;
* to monitor client satisfaction on a constant basis, with client retention
strategies firmly embedded in the recovery programme;
* to expand bancassurance; and
* to drive transformation and sustainability and to comply with the spirit of
the Financial Sector Charter (FSC).
These focus areas have not changed, but the group conducted indepth scenario
planning to test their appropriateness.
The strategic direction of the group has been communicated through staff
workshops, roadshows and internal publications.
The group has consolidated its brand portfolio from 14 at the beginning of 2004
to eight brands in December. The group also plans, subject to shareholder
approval, to change its name from Nedcor Limited to Nedbank Group Limited. This
proposal will be put to shareholders at the group`s annual general meeting in
May 2005.
The planned disposal of non-core operations and assets is progressing well.
Offshore subsidiaries sold include:
Subsidiary Proceeds Book Profit/(loss)
value
Rm Rm Rm
Chiswell Associates 244 104 140
BoE Life International 62 149 (87)
BoE International Fund 44 23 21
Services and BoE International
Fund Managers
Stenham Group 238 318 (80)
Total 588 594 (6)
A review of the international businesses resulted in the closure of the Asian
operations, which reduced risk and will improve the return on ordinary
shareholders` funds. Advances have been reduced to US$26 million (from over
US$400 million), with no additional losses.
Repatriation of the capital from the Asian businesses commenced in October 2004
with the first US$1 million, followed by US$19 million in January 2005, and the
balance is expected to be remitted in May 2005.
Onshore investments and subsidiaries disposed include:
Investment/Subsidiary Proceeds Book Profit/(loss)
value
Rm Rm Rm
Century City - vacant land 82 80 2
NUEP* 38 17 21
Edward Nathan and Friedland 50 70 (20)
Endowment policies 1 252 1 280 (28)
Other 17 13 4
Total 1 439 1 460 (21)
- Following the partial sale and restructuring of Net1 Applied Technology
Holdings (Aplitec) into Net1 UEPS Technologies (NUEP) Nedcor has reduced
its shareholding in this group from 25% to 15%.
The group has remaining non-core assets of approximately R1,1 billion that are
earmarked for disposal.
The group reduced its office space needs and disposed of 17 buildings for R93,8
million at a profit of R20,0 million.
A reevaluation was conducted of all alliances and joint ventures and their role
in the group`s strategy. As a result, the alliance with the JD Group was
terminated by mutual agreement and the group acquired Capital One`s interests in
the American Express and Peoples Lending joint ventures.
Comprehensive restructure
To align the group`s structure with its strategy a comprehensive restructure was
completed. The aim was to ensure better client focus and client service, while
ensuring clear accountability, faster response times and an emphasis on
improving the return on ordinary shareholders` equity.
The restructure was also designed to devolve product design and process, the
credit approval function and branch and card operations to the line units.
The single biggest change to the group structure was the integration of areas of
the former Technology and Operations Division into the client-facing divisions,
and in particular into Nedbank Retail. Branch operations were fully integrated
within Nedbank Retail. This entailed 850 interviews, with 454 new branch
managers being appointed in 72 days and the transfer of more than 5 000 staff
from the Central Operations Division to Nedbank Retail. In addition, several
other functions, including card operations and the group call centres, were
consolidated in Nedbank Retail. Product and process staff were transferred into
client-facing divisions.
The restructure has not only achieved a more focused organisation, but resulted
in operational efficiencies. The staff headcount (excluding temporary staff) was
reduced by 3 102 people from 24 205 to 21 103. This was achieved through the
voluntary retrenchment of 1 439 people, business-initiated retrenchment of a
further 596 people, the sale of certain businesses and net natural attrition.
Divisions within the group are working well together, with a notable example
being the new coverage model developed between Nedbank Corporate and Nedbank
Capital to ensure that larger clients are effectively serviced through a single
channel.
The minority interests in Peoples Bank were acquired and the management and the
head office functions integrated into Nedbank Retail. Regulatory approval to
integrate the Peoples Bank clients into Nedbank with effect from 1 February 2005
was received in December 2004 and the group will complete this integration
during 2005.
Merger delivered
The remaining client migrations from the BoE merger were completed on time and
within budget. A total of 115 000 BoE Business Banking clients, with loans of
R10 billion and deposits of R4 billion, were migrated on to Nedbank systems,
with a client loss of less than 3% (5% was expected at the time of the merger).
700 000 NBS clients, with deposits amounting to R7 billion, were migrated on to
Nedbank and Peoples Bank systems, with minimal client loss. 12 600 contracts for
Property Finance clients, with loans of R8 billion, were migrated on to the
Property Finance SAP system, also with minimal client loss.
Improved management information systems (MIS)
The group committed itself to enhance financial disclosure and has achieved
improved market and segmental disclosures.
A new internal funds transfer pricing system has been implemented and pro forma
2004 segmental results have been adjusted to reflect this.
The group also implemented an improved activity-justified transfer pricing
process between divisions to allocate costs on a more accurate basis. While
there are still central costs that could be charged to divisions, the process is
substantially complete. This will facilitate more accurate product, channel and
client profitability measures.
A risk-weighted capital allocation and charging methodology was introduced. This
is being used as a foundation for more sophisticated risk-adjusted economic
capital allocation, which will be implemented in 2006.
Liquid assets and cash reserving costs are no longer held at the centre, but are
being charged to divisions.
These processes have resulted in more accurate and meaningful segmental
analysis, improving the group`s ability to evaluate and manage capital and
helping management and investors to measure and benchmark divisional
performance. 2003 segmental results have been restated for the above
improvements to afford better comparability.
The group is in the process of redesigning its long-term financial architecture
process framework.
Financial performance
Income attributable to shareholders of R974 million shows a significant
turnaround from the loss of R1 600 million for the year to 31 December 2003.
Headline earnings of R1 447 million increased from the R55 million for the year
to 31 December 2003. Headline earnings (excluding foreign currency translation
losses) of R1 819 million was 23,7% above the R1 471 million reported in 2003.
Net interest income
Net interest income (NII) for the group increased by 11,1% from R6 808 million
for the 2003 year to R7 567 million. The group`s net interest margin for the
year to December 2004 was 3,13%, up from 3,04% in 2003 (the group`s previously
reported margin for 2003 of 2,95% has been restated to give a more accurate
reflection of the margin by changing the calculation of average interest-earning
assets to exclude certain assets that do not generate margin income).
Margins are likely to improve further as a result of
- the expensive, unhedged short-dated fixed rate funding having matured by
the end of April 2004;
- the positive endowment effect of the rights offer proceeds for the full
year from 2005 onwards;
- offshore capital being repatriated and earning higher yields in rands;
- the hedging of the fixed-rate subordinated debt and its maturity profile;
and
- the settlement of the expensive empowerment funding for Peoples Bank in
April 2005.
Non- interest revenue
Non-interest revenue (NIR), excluding foreign currency translation losses,
increased by 3,1% from R7 953 million in 2003 to R8 197 million. NIR before the
AC133 adjustment increased by 8,3% from R7 441 million to R8 057 million, with
commission and fees increasing by 9,8% from R5 208 million to R5 716 million.
The major factors that have contributed to the movement in NIR are set out
below.
2004 2003
Rm Rm
AC133 fair-value adjustment 140 512
Exchange and securities trading 816 1 201
Private equity revaluation 170
Consolidation of Fasic Limited 136
Consolidated for the first time during 228 140
second half of 2003
Sale of Canal Walk and Virgin Active 145
Realisation of endowment policies 114
Subsidiaries sold 220 269
Nedcor`s three-year plan has a major focus on growing transactional NIR. This
includes gaining more primary banking relationships with clients, increasing
cross-sell and upsell actions and bancassurance initiatives. The group was
awarded a number of significant corporate and business banking transactional
mandates in 2004.
Foreign exchange translation losses
The group incurred a foreign currency translation loss of R372 million (2003: R1
416 million) as the rand strengthened during 2004 from R6,63 to US$1,00 at 31
December 2003 and to R5,63 to US$1,00 on 31 December 2004. The group
historically held excess levels of capital in its offshore operations and
repatriated, restructured and/or hedged foreign capital during the year,
reducing exposure to foreign currency translation movements by 71%, as set out
below.
FX Non-FX
Rm sensitive sensitive Total
December 2003 FX exposure 7 146 2 122 9 268
Capital repatriated and (760) (760)
foreign dividends
Preference funding (1 956) (1 956)
repatriated
Sale of subsidiaries and (1 605) (118) (1 723)
foreign restructuring
Loss on translation (372) (372)
Hedge of future capital (365) (365)
repatriation
December 2004 FX exposure 2 088 2 004 4 092
Note: FX = foreign exchange
If the group had not taken these active steps, foreign currency translation
losses would have amounted to R929 million.
The adoption of International Financial Reporting Standards (IFRS) from 2005
onwards will lead to a larger portion of the foreign currency translation
profits or losses being treated as movements in the balance sheet foreign
currency translation reserve rather than as income statement profits and losses.
Credit impairments
In line with the favourable credit environment the bad debt experience within
Nedcor improved, with non-performing assets reducing from R8 444 million in
December 2003 to R7 488 million, including disposals and write-downs of R627
million of properties in possession. Recoveries of bad debts increased from R98
million in 2003 to R227 million. The only major credit impairment was in Peoples
Bank, where a once-off adjustment in the first six months of some R90 million
resulted from the refinement of AC133 default ratios and the recognition of
certain concentration risks in the mortgage book.
All minimum regulatory provision requirements were met.
In the absence of any significant deterioration in economic conditions, the
credit outlook remains positive.
Expenses
Operating expenses increased by R736 million (7,1%) from R10 305 million in 2003
to R11 041 million. This movement is mainly attributable to the following:
Factors resulting in an increase/(decrease) in Rm
expenses
First-time consolidation of subsidiaries 69
Decrease in expenses from subsidiaries disposed (106)
of
Increase in Nedbank Namibia and Tando (Swisscard)
consolidated for
the first time during the second half of 2003 135
Normalisation of bonus provision in 2004 462
Excess of actual costs over 2003 estimates 75
Increase in fees paid to originators 109
Additional regulatory costs for Basel II and FICA 103
Increase in provision for transaction taxes 112
Benefit from expense merger synergies (117)
Benefit from expense recovery synergies (531)
311
Other movement mainly due to inflation 425
Total increase in expenses 736
The group will continue its focus on costs to ensure revenue growth exceeds
expense growth.
Alliance partner fees moved from payment of a profit share of R4 million to R70
million, primarily as a result of the profitability of the Capital One alliances
prior to their termination.
Recovery expenditure of R379 million includes retrenchment costs of R298
million. As indicated in November 2004, certain recovery costs were held over to
2005 and the group estimates that further restructuring costs of R59 million
will be incurred in 2005.
Merger costs during the period amounted to R246 million, slightly below the
original estimate for the year. A final contingency of R107 million is projected
for 2005. The group will complete the merger in the first quarter of 2005,
within the R868 million once-off costs previously communicated to the market.
The group has realised R634 million of synergies from the merger to date and is
on track to realise in 2005 the balance of the R700 million initially
anticipated.
The cost-to-income ratio, excluding foreign exchange translation losses, was
74,5% (2003: 72,5%). Significant improvements to this ratio are anticipated as a
result of the recovery programme from 2005 onwards. When the once-off recovery
and merger costs are excluded, the efficiency ratio is 70,5%.
Taxation
The effective tax rate of 26% is higher than initially anticipated, as R126
million of additional provisions have been raised for potential taxation
liabilities. The tax rate was impacted positively by a R342 million (2003: R356
million) credit on the tax line arising from AC102 treatment of structured
finance transactions. This credit is offset by lower reported margin income on
these transactions.
The taxation charge is also lower as a result of a saving in secondary tax on
companies (STC) due to the high acceptance rate of the 2003 final capitalisation
award.
The tax rate should be lower in 2005, but the sustainable tax rate will trend to
between 25% and 30%, once historical structured finance transactions have wound
down.
Capital items
The capital items comprise:
Rm 2004 2003
Goodwill amortisation 251 424
Goodwill impairment 123 1 379
Impairment of software and development 90 134
costs
Impairment of fixed assets and equipment 23 105
Profit on sale of buildings (20) (29)
Disposal of the various subsidiaries and 43 (320)
other non-core investments
Total before taxation 510 1 693
Taxation 37 38
Total 473 1 655
The adoption of IFRS from 2005 onwards will result in goodwill no longer being
amortised, but being subject to an impairment assessment at each reporting
period.
Balance sheet
Capital
The rights issue raised capital of R5,15 billion. This, together with improved
earnings, the realisation of non-core investments, the focus on managing
advances growth and the reduction of foreign currency exposures, all contributed
to increasing the group`s Tier 1 capital adequacy ratio from 5,0% at 31 December
2003 to 8,1% at 31 December 2004.
Deposits
All expensive unhedged fixed-rate funding, in the form of NCDs, PNs and retail
fixed deposits amounting to approximately R24 billion in December 2003, matured
in the first half of the year. Structural shifts in the group`s funding mix
reduced the cost of funds.
Advances
Advances increased by 5,3% from R210,1 billion in December 2003 to R221,1
billion at 31 December 2004. The group actively reduced certain categories of
low-yielding corporate short-term loans and followed a generally cautious
approach to asset growth prior to the completion of the rights issue.
The overall loss of market share was disappointing, with retail average advances
growing by 13,4%, but lagging competitor growth, and corporate average advances
reducing by 6,3%, mainly as a result of the R6,2 billion balance sheet
efficiency programme initiated to optimise the use of capital and generally slow
demand for credit in the corporate environment.
Divisional overview
Divisional management reporting has been enhanced with the introduction of
liquid assets and cash reserving charges, improved activity-justified cost
transfer pricing and better capital allocation methodologies. The inclusion of
funds transfer pricing from 2005 and the establishment of an improved baseline
will allow for more meaningful segmental reporting.
Nedbank Capital
Nedbank Capital achieved a 5% growth in headline earnings from R837 million to
R878 million and an RoE of 31%, in an environment of more subdued trading
conditions. Strategic recovery and merger programme expenses of R52 million
(2003: R27 million) also negatively impacted Nedbank Capital`s results.
Activity accelerated during the second half of the year, particularly in respect
of BEE transactions. These included Telkom, Incwala Platinum, Metropolitan Life
and Dimension Data. Private Equity had an excellent year.
Nedbank Capital was restructured to create focus and optimise client service. A
new Executive Committee was established, the component businesses colocated into
the head office building and the division streamlined to eliminate duplication
and optimise resources.
A focused debt and equity capital markets business was created to align the
trading and structuring functions. Good progress was made in delivering a single
house approach to add value to the client base. The minority interests in NIB
Namibia were bought out and the business consolidated. A more rigorous process
was put in place for developing, monitoring and converting the transaction
pipeline.
A closer working relationship was developed with both Nedbank Corporate and Old
Mutual to focus on improved client service and cross-sell opportunities. During
August Nedbank Capital took responsibility for the Nedbank London branch. Staff
were colocated with Old Mutual Plc and a matrix reporting structure with Nedbank
Corporate introduced.
The consolidated Nedbank Capital brand is starting to achieve recognition in the
market, which is reflected in the major investment banking league tables. The
division has a strong pipeline of potential deals for 2005.
Nedbank Corporate
Nedbank Corporate increased headline earnings by 14,7% from R1 841 million to R2
112 million, despite the asset reduction programme and the endowment impact of
the lower interest rate environment. Nedbank Corporate improved its RoE from
19,0% in 2003 to 23,4%.
This increase in earnings can be mainly attributed to:
- growth in business volumes;
- improvement in the funding margin;
- price increase in non-interest revenues;
- first-time full-year consolidation of Nedbank Namibia, as well as the
consolidation of Fasic;
- improvement in credit impairments driven by healthy recoveries, effective
credit management and the favourable interest rate environment;
- uplift in listed property loan stock valuations; and
- containment of operating expenses.
A focus on asset quality, both in terms of credit and RoE, gave rise to a
proactive reduction in the loan book of approximately R6,2 billion, primarily in
Corporate Banking. Nedbank Corporate has used the low interest rate environment
to reduce its exposure to potentially higher-risk advances, leading to a
significant reduction in the level of risk and overall bad-debt experiences in
2004.
Strategic recovery and merger programme expenses of R145 million (2003 R7
million) impacted on Nedbank Corporate`s results.
Nedbank Corporate`s Executive Committee was restructured, which resulted in the
appointment of a skilled team with experience in client value management and
risk management methodologies aligned with the Basel II framework. The
restructure also resulted in the consolidation of Asset-based Finance into
Business Banking, and the establishment of a focused Transactional Banking Sales
Division to enhance cross-selling and increase market share of clients to whom
we are the primary banker. The review of the international operations has
resulted in the closure of the Asian activities, which has reduced the risk
profile and will improve the group`s RoE.
A major project was initiated to consolidate and improve the bank`s electronic
banking systems to grow transactional banking market share and enhance NIR. The
cluster successfully completed the migration of R10 billion of advances and R4
billion of deposits of ex-BoE Business Banking clients on to Nedbank systems as
well as the remaining R8 billion migration of Nedbank and ex-NIB Property
Finance clients on to the Property Finance SAP system. This process largely
completed the merger-related client migration in Nedbank Corporate.
Nedbank Retail
Nedbank Retail increased headline earnings by 41% from R455 million to R641
million. However, RoE remains low at 12,8% (2003: 9,7%). The performance of
Nedbank Retail, including Peoples Bank, was negatively impacted by the cost of
expensive fixed-rate deposits and the additional impairments required in Peoples
Bank, as well as recovery programme expenses of R79 million.
Following the appointment of Rob Shuter as Head of Nedbank Retail in August 2004
the cluster was reorganised to improve client service, reduce resource
duplication and improve accountability. This resulted in the appointment of a
new divisional executive team, the integration of the operational and support
structures into Retail and the formation of integrated standalone card, home
loan and personal lending businesses.
A detailed review was undertaken of Nedbank`s alliances:
- The Go Banking alliance with Pick `n Pay is fulfilling the objectives of
growing the client base, as well as providing a low-cost platform for
enhancing transactional banking services;
- The Old Mutual Bank Division of Nedbank continues to provide excellent
service and the division is working well with Old Mutual to increase the
relevance of this business to the Old Mutual client base and intermediary
network. Old Mutual Bank recorded a loss for the full year due to marketing
and client acquisition activities.
- The alliance relationships with Capital One and the JD Group were
terminated. Capital One`s share of the alliances were acquired for
approximately R160 million, facilitating the integration of the card
business within Nedbank Retail under one management team. The alliance with
the JD Group was terminated by mutual agreement.
The restructuring of the local and international businesses of the Wealth
Management Division is largely complete. As referred to earlier, Chiswell
Associates, the Stenham Group, BoE Life International, BoE International Fund
Services and BoE International Fund Managers have all been sold.
The integration of Peoples Bank into Nedbank Limited will reduce costs,
streamline business activities and focus the group`s retail growth initiatives.
New frontline credit systems were implemented in the second quarter, which
improved turnaround times significantly.
While Nedbank Retail has created a solid growth platform, performance is still
below expectations and considerable effort is required to improve the RoE, cost-
to-income ratio and client satisfaction.
Imperial Bank
Results for 2004 were disappointing, primarily due to large credit impairments
in the Aviation Finance book and expenses growth. This is the first year in
which the bank has not shown earnings growth on the previous financial year,
with Imperial Bank`s contribution to Nedcor earnings dropping from R116 million
to R83 million.
The Motor Finance Corporation (MFC) was the strongest performer, doubling profit
before tax. The Medical Division, which is in a startup phase, made strong
inroads into its niche market. Residential Development Property Finance had
another strong year, but penetration into the commercial market was
significantly below expectations. Cost growth impacted negatively on results.
Asset-based Finance experienced reasonable performances from Corporate Asset
Finance and Supplier Finance, but suffered significant losses in the aviation
sector. These losses are directly related to the strengthening of the rand and
the continued weakness in the global aviation market. This affected Imperial
Bank`s aviation charter clients in particular and resulted in a second year of
losses for this division. It is anticipated that 2005 will be better, but the
division will continue to be at risk while the aviation sector is weak.
Shared Services, Capital Management and Central Funding
The central service divisions have all reduced costs, with the exception of
Group Risk, which incurred additional regulatory expenses on the group`s money
laundering projects and Basel II implementation. Approximately 6 913 staff were
moved from the Central Operations and Group Business Innovation Divisions into
client-facing businesses and this will reflect in the 2005 segmental reporting.
Achievements over the period include:
- Swisscard is now fully operational in Switzerland.
- An additional call centre was commissioned in new premises in Durban.
- A tracking and storage infrastructure was set up to accommodate the FICA
documentation and legislative requirements.
- Extensive improvements were made to the group`s disaster recovery ability
and the most comprehensive test ever undertaken by the bank was
successfully concluded.
- New core network switches that significantly improve client service in
terms of availability and response times were installed.
- Nedcor`s intranet site was voted the best in the financial services
industry at the Computer Society of SA annual awards.
- In the global ranking and awards for investor relations websites (the MZ
Awards) Nedcor was placed first in the online financial reporting category
in the Asia, Pacific and Africa region and third in South Africa for its
investor relations website.
- Good progress was made on the implementation of an economic capital model,
in conjunction with Old Mutual, scheduled for completion in 2006.
- The low number of armed robberies and burglaries was maintained.
- The focus on reducing the high level of card fraud was sustained and
yielded pleasing results, particularly in the last quarter.
- A remuneration policy focusing on specific performance measures was
implemented throughout the group.
Sustainability
Nedcor continues to be recognised for its corporate social investment (CSI)
activities. In the 2004 Trialogue CSI ratings non-profit organisations rated
Nedcor third among 70 corporates in the category `Good Corporate Grantmaker`.
Nedbank was also ranked third among 48 corporates as `Most widely recognised
corporate grantmaker`. In the Mail & Guardian, Investing in the Future awards,
Nedcor won the best corporate responsibility report for its 2003 Sustainability
Report and was a finalist in the best corporate employee involvement programme.
Nedcor is included in the JSE Socially Responsible Investment (SRI) Index and is
one of only four South African companies to be included in the Dow Jones World
Sustainability Index.
Prospects
As the benefits of the increased focus on client service become evident, the
group expects to show growth in advances and anticipates bringing asset growth
back into line with market growth in the second half of 2005.
Margins should continue to improve as a result of:
- the expensive, unhedged short-dated fixed rate funding having matured by
the end of April 2004;
- the positive endowment effect of the rights offer proceeds for the full
year from 2005 onwards;
- offshore capital being repatriated and earning higher yields in rands;
- the hedging of the fixed-rate subordinated debt and its maturity profile;
and
- the settlement of the expensive empowerment funding for Peoples Bank in
April 2005.
The group will focus on growing transactional revenue. Revenue is anticipated to
continue to improve and costs to reduce as the group`s initiatives under its
three-year plan are implemented. The group will also benefit from a significant
reduction in once-off merger and recovery programme costs.
The directors and management are aware that a considerable amount of effort lies
ahead in the recovery programme and that not all the fruits of these endeavours
will be reflected in 2005. The business is, however, well-placed to deliver
improved earnings in 2005.
The detailed three-year plan anticipates that the group will maintain its asset
market share from the second half of 2005. Using 2004 as a base, the next three
years total expense growth is targeted to grow at 9% below revenue growth on a
compound annual growth rate basis. However, this differential is expected to be
bigger in 2005, given the once-off merger and recovery costs in 2004. The plan
focuses on growing transactional revenue through a combination of focused teams,
cross-selling, upselling, improving client service, consistent pricing and
bancassurance initiatives. Nedbank Retail has been identified as the major
growth area. Importantly, the plan focuses on the transformation process within
Nedcor.
The group continues to pursue its target of achieving a return on average
ordinary shareholders` equity of 20% and an efficiency ratio of 55% or better in
2007.
Thanks
The directors and management express their thanks to clients and other
stakeholders for their continued support, and particularly thank all staff
members for the incredible job they have done during this difficult period.
Accounting policies
The consolidated financial statements are prepared in accordance with, and
comply with, South African Statements of Generally Accepted Accounting Practice
and the requirements of the South African Companies Act and Banks Act. The
accounting policies adopted are in all material respects consistent with those
applied for the year ended 31 December 2003. Certain restatements for 2003 are
reflected in these financial statements, being the reclassification of
transaction taxes from taxation to operating expenses and the gross up of assets
and liabilities relating to certain pension fund assets and liabilities
amounting to R529 million. The disclosures within the 2003 segmental reports
have been restated to take into account the changes for the improved
profitability measurements during 2004 as noted above.
Preliminary results - auditors` opinion
These results have been reviewed by the company`s auditors, KPMG Inc and
Deloitte, and the review opinion is available for inspection at the company`s
registered office.
Cautionary announcement pertaining to Black Economic Empowerment Transaction
Shareholders are advised that Nedcor is in the process of finalising a broad-
based black economic empowerment (BEE) ownership transaction. Accordingly,
shareholders are advised to exercise caution in dealing in their shares until
Nedcor announces further detail on its BEE transaction.
Dividend - Nedcor ordinary
Notice is hereby given that a final dividend of 76 cents per ordinary share has
been declared in respect of the year ended 31 December 2004.
Trading in the STRATE environment requires settlement within five business days.
In accordance with the settlement procedures of STRATE Nedcor has determined the
last day for trading to participate in the final dividend to be Wednesday, 23
March 2005. The shares will commence trading ex-dividend on Thursday, 24 March
2005, and the record date will be Friday, 1 April 2005. Payment will be made on
Monday, 4 April 2005.
Share certificates may not be dematerialised or rematerialised between Thursday,
24 March 2005, and Friday, 1 April 2005, both days inclusive.
For and on behalf of the board
WAM Clewlow TA Boardman
Chairman Chief Executive
22 February 2005
Registered office
Nedcor Limited, Nedcor Sandton,
135 Rivonia Road, Sandown, 2196
PO Box 1144, Johannesburg, 2000
Transfer secretaries
Computershare Investor Services 2004 (Pty) Limited
70 Marshall Street, Johannesburg, 2001
PO Box 61051, Marshalltown, 2107
Directors
WAM Clewlow (Chairman), Prof MM Katz (Vice-chairman), ML Ndlovu* (Vice-
chairman), TA Boardman* (Chief Executive),
CJW Ball, MWT Brown* (Chief Financial Officer), RG Cottrell, BE Davison, N
Dennis (British), Prof B Figaji, RM Head (British), JB Magwaza, ME Mkwanazi, PF
Nhleko, JVF Roberts (British), CML Savage, JH Sutcliffe (British) *Executive
Company Secretary
GS Nienaber
Registration number 1966/010630/06
Incorporated in the Republic of South Africa
Share code: NED ISIN code: ZAE000004875
This announcement is available on the group`s website - www.nedcor.com -
together with the following additional information:
* detailed financial information in HTML, PDF and Excel formats;
* financial results presentation to analysts;
* link to a webcast of the presentation to analysts.
For further information kindly contact Nedcor Investor Relations by email at
nedcorir@nedcor.com
Financial highlights
at 31 December
Reviewed Audited
Rm 2004 2003
Headline earnings reconciliation
Income/(Loss) attributable to 974 (1 600)
shareholders
Less: Non-headline-earnings items (473) (1 655)
Non-trading and capital items (510) (1 693)
Taxation on non-trading and 37 38
capital items
Headline earnings 1 447 55
Headline earnings (excluding 1 819 1 471
foreign currency translation
losses)
Key ratios
Return on ordinary shareholders` % 9,2 0,4
equity (ROE)
ROE (excluding foreign currency % 11,6 10,3
translation losses)
ROE (excluding foreign currency % 14,4 12,5
translation losses, merger and
recovery expenses)
Return on total assets (ROA) % 0,45 0,02
ROA (excluding foreign currency % 0,57 0,46
translation losses)
Net interest income to interest- % 3,13 3,04
earning assets
Non-interest revenue to total % 50,8 49,0
income
Impairments to total advances % 2,9 3,4
Efficiency ratio % 76,3 80,2
Efficiency ratio (excluding % 74,5 72,5
foreign currency translation
losses)
Share statistics
Number of shares in issue m 394,0 274,8
Weighted average number of m 360,9 293,0
shares**
Fully diluted weighted average m 361,8 293,4
number of shares**
Headline earnings per share** cents 401 19
Headline earnings per share cents 504 502
(excluding foreign currency
translation losses)**
Fully diluted headline earnings cents 400 19
per share**
Attributable earnings per share** cents 270 (546)
Fully diluted attributable cents 269 (545)
earnings per share**
Dividends declared per share cents 120 240
Dividends paid per share cents 79 515
Dividend cover times 3,3 0,1
Net asset value per share cents 4 590 4 240
(investments at market value)
Tangible net asset value per cents 3 357 2 247
share (investments at market
value)
** 2003 adjusted for the rights issue
Income statement
for the year ended 31 December
Reviewed Audited*
Rm 2004 2003
Interest income 23 825 28 141
Interest expense 16 258 21 333
Net interest income 7 567 6 808
Non-interest revenue 8 197 7 953
Foreign currency translation losses (372) (1 416)
Gross operating income 15 392 13 345
Impairment of advances 1 416 2 063
Income after impairment of advances 13 976 11 282
Total expenses 11 736 10 703
Operating expenses 11 041 10 305
Fees due to alliance partners 70 4
Recovery programme expenses 379
Merger expenses 246 394
Profit from operations before non- 2 240 579
trading and capital items
Non-trading and capital items (510) (1 693)
Amortisation and impairment of (374) (1 803)
goodwill
(Loss)/Profit on sale of subsidiaries, (23) 349
investments and property and equipment
Net impairment of investments, (113) (239)
property and equipment, computer
software and capitalised development
costs
Profit/(Loss) from operations 1 730 (1 114)
Attributable earnings of associates 147 132
and joint ventures
Profit/(Loss) before taxation 1 877 (982)
Taxation 576 390
Taxation on non-trading and capital (37) (38)
items
Profit/(Loss) after taxation 1 338 (1 334)
Minority interest income attributable
to
- ordinary shareholders (135) (133)
- preference shareholders (229) (133)
Income/(Loss) attributable to 974 (1 600)
shareholders
* Restated
Cash flow statement
for the year ended 31 December
Reviewed Audited
Rm 2004 2003
Cash and short-term funds at beginning 12 227 16 607
of year
Cash flows from operating activities 5 723 5 643
Net increase in operating funds (11 978) (14 124)
Taxation paid (835) (616)
Cash flows from investment activities 2 836
