| Mon 20 Feb 2006, 7:59 | | Nedbank Group Limited - Reviewed Financial Results |
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NED
NED
Nedbank Group Limited - Reviewed Financial Results For The Year Ended 31
December 2005
Nedbank Group Limited
(Reg No: 1966/010630/06)
Share code: NED
ISIN code: ZAE000004875
REVIEWED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005
COMMENTARY
HIGHLIGHTS
* Strong performance from all operating divisions
* Headline earnings up 81,7% to R3 167 million
* Headline EPS up 65,0% to 797 cents
* Fully diluted HEPS up 64,1% to 791 cents
* ROE increased from 11,0% to 15,5%
* Efficiency ratio improved from 71,8% to 65,1%
* Strong group capital adequacy of 12,9%
* Final dividend per share up 143% to 185 cents
"The Nedbank Group made significant progress during 2005. In 2004 the base was
set and during 2005 we gained momentum as the group became more outwardly
focused. The group"s resources are now being directed to improving client
service. This outward focus will enable us to meet the commitments we have made
to our shareholders, clients and staff."
Tom Boardman
Chief Executive
Overview
Headline earnings per share increased by 65,0% to 797 cents (2004: 483 cents),
which was ahead of management"s initial expectations for the year. Fully diluted
headline earnings per share increased from 482 cents to 791 cents, the 2005
dilution being impacted by accounting for the black economic empowerment (BEE)
scheme under International Financial Reporting Standards (IFRS).
Basic earnings per share grew by 128% from 423 cents in 2004 to 966 cents in
2005.
In line with the circular on the BEE scheme, shareholders will be offered a
capitalisation award with a cash dividend alternative. This award is 185 cents
per share, up 143% from the 76 cents per share declared in February 2005.
The group"s return on average ordinary shareholders" equity (ROE) continued to
improve, increasing from 11,0% for the year ended 31 December 2004 to 15,5% for
the year ended 31 December 2005. The group"s ROE, while still below its banking
peers, is now comfortably above the group"s cost of capital.
The improved performance for the year was driven mainly by:
* the continued realisation of benefits from the recovery programme, which are
reflected in the growth in operating income and the containment of expenses,
resulting in the efficiency ratio improving from 71,8% for the 2004 year to
65,1% (excluding the costs of the BEE deal: 62,8%) for the year ended 31
December 2005;
* significantly improved performance from Nedbank Retail, with headline earnings
growing 66,4% to R938 million and ROE improving from 12,1% to 18,4%;
* strong operating performances from Nedbank Capital and Nedbank Corporate, with
headline earnings growing 17,8% to R1 017 million and 11,8% to R1 984 million
respectively;
* favourable private equity revaluations and realisations in Nedbank Corporate"s
Property Finance division;
* year-on-year advances growth of 12,4%;
* an improvement in the overall quality of the advances book, with a 42,6%
decrease in non-performing assets from R7,5 billion in December 2004 to R4,3
billion in December 2005;
* the weakening of the rand from R5,63:US$ at 31 December 2004 to R6,33:US$ at
31 December 2005, resulting in an income statement foreign currency translation
gain of R126 million compared to a loss of R280 million for the year to December
2004; and
* the sale of the major portion of the group"s holding in Net1 UEPS Technologies
Inc (Net 1 UEPS) which resulted in a capital profit of approximately R793
million (before taxation).
Together with the improved financial performance, the group"s earnings
volatility has been significantly reduced and the capital position strengthened.
Since the beginning of the recovery programme, the group has reduced its excess
offshore capital exposure thereby limiting foreign exchange risk. The majority
of its fixed-rate debt has been hedged to reduce interest margin volatility.
Non-core assets have been sold which has lowered market risk and further
strengthened the capital base.
The total share-based payments cost of Nedbank Group"s BEE transaction has
increased from the previously estimated R933 million (pre-taxation) to R1 287
million mainly as a result of the group"s share price increasing between the
announcement of the transaction and date of implementation. After the group"s
trading update on 14 November 2005, the International Financial Reporting
Interpretations Committee (IFRIC) issued further clarification on the
interpretation of notes D16 and D17 (Scope of IFRS 2), as issued in May 2005.
IFRIC"s final interpretation was subsequently released as IFRIC 8 (Scope of IFRS
2) as announced on 12 January 2006. IFRIC 8 is effective for periods beginning 1
May 2006 and Nedbank Group has early adopted this statement, resulting in the
group expensing more of the share-based payments costs of the BEE transaction in
2005. This has resulted in share-based payments costs relating to the BEE
transaction of R371 million in 2005, compared to R156 million previously
forecast. Other transaction costs amounted to R22 million and the tax relief on
the grant portion of the transaction and transaction costs of R59 million is in
line with the forecast given at the time of announcing the BEE transaction.
Progress against three-year plan
In the 2004 year-end results announcement in February 2005, Nedbank Group
outlined five major action plans which form the foundation of the group"s three-
year plan. An update on the group"s progress and delivery against each of these
actions is detailed below:
* Ensure that income growth is at least 9% higher than expense growth (9% "jaws"
ratio) (on a three-year compound annual growth rate basis with 2004 as the base)
Good progress has been made towards achieving this target. Gross operating
income (excluding foreign currency translation gains) grew by 9,6% while total
expenses (excluding the cost of the BEE transaction) reduced by 1,6% for the
period, resulting in a "jaws" ratio of 11,2%. If the cost of the BEE transaction
is included, expenses increased by 2,0%, resulting in a "jaws" ratio of 7,6%.
* Maintain market share from the second half of 2005
Although the group continued to lose market share in total advances, there has
been a slowdown in the rate of decline during the second half of 2005,
particularly in the key area of home loans in Nedbank Retail. The group
continued to lose market share in credit card balances during 2005, partially as
a result of the group"s high proportion of clients who do not make use of
revolving credit balances. However, the impact of growing at a slower rate than
the market did not have a significant effect on the group"s progress against its
three-year plan as the market as a whole, and particularly the retail banking
sector, grew more than initially expected. The group grew market share in Mzansi
accounts and cash handling. Nedbank Capital maintained its strong market share
and Property Finance held its dominant market position among the banks in
commercial and industrial real estate. Nedbank Retail maintained its
significant market share in card acquiring.
* Grow non-interest revenue through a focus on transactional revenue
In order to grow transactional revenue, the group has created focused teams and
is implementing a range of initiatives to improve cross-selling, upselling,
client service, pricing and bancassurance. Nedbank Corporate started piloting a
new integrated electronic banking platform towards the end of 2005 and has begun
rolling this out to clients during 2006. Nedbank Retail"s expanded branch
footprint has improved accessibility and reach, which together with a more
outward focus, positions the group to grow transactional revenue. The group"s
bancassurance revenue continued to grow strongly, with new business premiums
increasing by 40% in 2005. As reported with the interim results in July 2005,
the group recognises that transactional revenue growth is a longer term goal and
the full benefits are only expected to be realised over the next few years.
* Build Nedbank Retail
Nedbank Retail has historically generated ROEs significantly lower than its
retail banking peers. A key focus of the group is to deliver the financial
turnaround of Nedbank Retail while improving client service. Following the
restructuring of Nedbank Retail in 2004, good progress has been made in growing
revenue and containing expenses, resulting in headline earnings increasing by
66,3% and ROE increasing from 12,1% to 18,4%. The integration of Nedbank and
Peoples Bank was completed during the year under review and over 1,5 million
clients were seamlessly migrated onto Nedbank systems. These Peoples Bank
clients are now offered the full range of Nedbank"s products and services,
providing considerable upsell and cross-sell opportunities. This also resulted
in the group increasing its Nedbank branded branches from 271
to 426 by the year-end, including the opening of 24 new branches, the majority
being in previously under-serviced areas.
* Transform the business beyond the Financial Sector Charter (FSC) targets
The group is committed to going beyond mere compliance with the FSC targets.
Nedbank Group"s unique BEE transaction, with a value of more than R3 billion,
resulted in a broad range of black stakeholders acquiring direct ownership worth
11,5% of the value of the group"s South African businesses.
The Eyethu scheme for retail clients attracted 47 523 participants who invested
R740,5 million, making it the largest retail share scheme by value ever in South
Africa. The corporate scheme involved 76 black corporate and business banking
clients.
The working relationship with the strategic black business partners, namely the
Brimstone consortium, the Wiphold consortium and Aka Capital, is progressing
well, with numerous deals having been introduced by these partners to the bank.
The black business partners are also working closely with management on all
other areas of transformation in the group, including employment equity, skills
development, procurement and social responsibility.
After a slow start, the group has increased its market share of new Mzansi
accounts and Nedbank Capital and Nedbank Corporate continue to be at the
forefront of structuring, financing and advising on BEE transactions.
Financial performance
Nedbank Group continued to show a turnaround in financial performance, with
headline earnings growing by 81,7% from R1 743 million in 2004 to R3 167 million
in 2005. Basic earnings grew by 151,0% from R1 528 million in 2004 to R3 836
million in 2005.
Net interest income (NII)
The group"s NII increased by 19,4% from R7 145 million to R8 529 million.
Despite margin compression experienced by the industry, the group"s net interest
margin for the period was 3,55%, up from 3,18% for the year to December 2004.
The margin increase can be attributed to:
* the uplift created from a full year of the rights offer proceeds received in
May 2004;
* reduced funding drag following the hedging strategies implemented in 2004;
* income on the proceeds of the sale of non-core investments;
* the repatriation of certain foreign capital during 2004;
* the settlement of the expensive empowerment funding for Peoples Bank in April
2005; and
* mix changes as higher margin retail and business banking advances grew faster
than corporate advances.
Margins have been negatively impacted by the lower interest rate environment
resulting in lower yields on endowment.
Non-interest revenue (NIR)
NIR increased by 1,2% from R8 379 million for the year ended 31 December 2004 to
R8 483 million for the year to December 2005.
Initial estimates for the year were that NIR would decline, primarily due to the
sale of certain subsidiaries which generated R313 million of NIR during 2004.
NIR was above management"s initial expectations mainly due to:
* higher than expected private equity revaluations and realisations in Property
Finance amounting to R242 million (2004: R81 million);
* continued strong growth from Bond Choice with its NIR increasing by 125% to
R416 million (2004: R185 million) following large mortgage origination volume
increases; and
* higher than expected commission and fee income in Nedbank Retail, despite not
increasing the average fees charged to their clients during 2005.
On a comparable basis, commission and fee income increased by 8,4%. Trading
revenue increased from R1 369 million for 2004 to R1 431 million for 2005.
Exchange and non-interest dealing decreased from R511 million in 2004 to R334
million as a result of positive revaluations of the `fair value through profit
and loss financial asset and financial liabilities" in the 2004 base, as
reported in June 2005.
Foreign currency translation gains
In line with the strategy of reducing earnings volatility, the group reduced its
exposure to foreign currency movements during 2004, retaining sufficient capital
offshore to support its international businesses. The 12,4% decline in the value
of the rand resulted in income statement translation gains of R126 million on
this foreign capital.
Restructuring of offshore subsidiaries and repatriation of capital during the
second half of 2005 will further reduce the volatility of earnings resulting
from exchange rate movements.
Impairment losses on loans and advances
The introduction of IFRS during 2005 has required accounting for credit
impairments on an "incurred loss" basis as opposed to an "expected loss" basis.
In addition, the discount rate used to calculate the recoverable amount of an
advance now excludes any future credit losses not yet incurred. These changes
will have increased the volatility in the income statement charge for
impairments.
The favourable credit environment was sustained throughout 2004 and 2005, and
improved credit quality resulted in a relatively flat year-on-year impairment
charge for 2005 at R1 189 million and a drop in the impairments charge to
average loans and advances ratio from 0,55% to 0,48%.
Total non-performing advances decreased by 42,6% from R7,5 billion to R4,3
billion.
Expenses
Expenses were impacted by the IFRS 2 charge in respect of the group"s BEE
transaction during the second half of 2005, as mentioned above. Operating
expenses were well controlled and together with a reduction in recovery
programme and merger expenses resulted in total expenses increasing by only 2,0%
from R 10 939 million to R11 157 million, with the efficiency ratio improving
from 71,8% to 65,1%. If the R393 million of expenses relating to the BEE
transaction are excluded, the efficiency ratio improved to 62,8%.
Combined recovery programme and merger expenses for the year ending December
2005 were R155 million, consistent with the guidance given to the market at the
group"s 2005 interim results. The recovery and merger programmes were completed
during 2005 and these expenses will not recur in 2006.
Indirect taxation
Indirect taxation decreased by 53% from R470 million for the year ended 31
December 2004 to R223 million for 2005. During the 2004 financial year,
provisions were raised for potential transaction tax liabilities relating
primarily to the bank"s value added taxation (VAT) recovery methodology. These
issues have now been resolved and portion of the associated provisions were
released in 2005.
Direct taxation
The effective taxation rate decreased from 24% to 23%. In line with the circular
to shareholders on the BEE scheme, the group now offers a capitalisation share
award with a cash dividend alternative. The acceptance level of the 2005 interim
capitalisation award was higher than expected, which resulted in a decrease in
the group"s Secondary Taxation on Companies (STC) charge. The taxation rate on
business operations normalised from 37% to 27%, mainly as a result of the
movement in foreign currency translation gains / losses, which are not taxable.
Non-trading and capital items
During the year the group continued its non-core asset disposal programme. The
major disposals were the sale of 58,5 million shares in Net 1 UEPS and the
investment in Internet Solutions (Pty) Limited. These sales generated profits of
R877 million, which together with other non-trading capital items resulted in an
overall profit of R701 million.
The non-core asset disposal programme has now largely been concluded, with total
realisations being ahead of management"s initial expectations.
Balance sheet
Capital
The group"s capital position continued to strengthen, with the Tier 1 group
capital adequacy ratio increasing from 8,1% in December 2004 to 9,4% in December
2005. The total group capital adequacy ratio has improved from 12,1% in December
2004 to 12,9% in December 2005 which facilitates future asset growth. This
improvement was above management"s original expectations due largely to higher
than anticipated non-core asset disposals and a higher than expected acceptance
of the group"s 2005 interim capitalisation award.
Taking these factors into account a share repurchase programme has been
initiated to proactively manage capital levels. The group acquired 1,02 million
ordinary shares during 2005, which are now held as treasury shares, resulting in
a decrease in ordinary share capital of R100 million. The group has changed its
dividend cover policy, reducing the cover ratio from between 3,0 to 3,5 times
headline earnings to between 2,5 to 3,0 times headline earnings.
During 2005 the group issued 48,6 million shares (41,3 million for the BEE
transaction and 7,3 million for obligations under the share option scheme). 41,1
million of the BEE shares are currently accounted for as treasury shares.
Advances
Although asset growth rates are lower than the rest of the market, advances
compared to December 2004 increased by 12,4% to R248,4 billion. Residential home
loan advances grew by 24,5%, narrowing the gap between Nedbank"s growth and that
of its competitors.
Deposits
Deposits have remained stable and the group maintained a strong liquidity
position.
Divisional performance
Management information systems and reporting was further enhanced, with the
operational implementation of funds transfer pricing and the refinement of
activity-justified expense transfer pricing to allocate additional costs from
the centre to the respective operating divisions. As reported in the 2005
interim results, the 2004 segmental reports have been adjusted to reflect these
changes as well as other changes resulting from the group reorganisation
completed in late 2004. Economic capital measurement was successfully run in
parallel to the existing reporting systems during 2005 and will be implemented
internally in 2006.
Nedbank Capital
Nedbank Capital increased headline earnings by 17,8% from R863 million to R1 017
million and ROE remained strong at 29,2% (2004: 29,3%). Favourable market
conditions and the solid platform established in 2004 resulted in 2005 being a
good year for Nedbank Capital, with significant growth in almost all of its
businesses, as well as concluding some landmark transactions. All divisions
showed growth in excess of 25%, with the exception of Nedbank Capital"s Private
Equity division and its Foreign Exchange Trading division. Private Equity came
off a high base in 2004 and the Foreign Exchange Trading division was negatively
impacted by a drop in global trade exchange commissions and margin contraction.
Expenses have reduced despite higher joint venture fees paid to Macquarie. This
expense reduction was aided by the sale of Edward Nathan & Friedland and lower
rental costs following the relocation of the London offices to premises shared
with Old Mutual plc.
The deal pipeline remains strong and, subject to market conditions remaining
constant, the group expects continued growth in earnings in all of Nedbank
Capital"s businesses during 2006.
Nedbank Corporate
Nedbank Corporate increased headline earnings by 11,8% from R1 775 million to R1
984 million supported by the favourable economic and credit environment, cost
management and strong private equity revaluations and realisations in Property
Finance. ROE increased from 18,7% to 19,7%.
NII in this capital intensive business was negatively impacted by lower
endowment levels and a lower margin as a result of market margin compression on
funding costs. A continued focus on asset quality, both in terms of credit
quality and ROE saw average lending advances grow by R3 355 million to R96 728
million, even though the group reduced exposure to non-core offshore assets and
continued to feel the effects of disintermediation and clients having surplus
cash in the Corporate Banking market. Business Banking benefited from continued
growth of small and medium enterprises, driven by a good economic environment
and growth of BEE.
NIR increased by 14,5% to R2 426 million, boosted by a strong performance from
Bond Choice and positive private equity revaluations and realisations in
Property Finance which resulted from the group"s strategy of co-investing with
its clients in certain property deals. Lower than expected global trade revenues
negatively impacted NIR.
The impairment charge of 0,24% of average lending assets reflects the continued
positive economic cycle as well as good asset quality and increased recoveries.
Adjusting for the effect on expenses of the abnormal growth in Bond Choice (R212
million) during 2005 and prior year recovery programme and merger costs (R145
million), operating expenses remain well controlled.
Nedbank Corporate"s executive committee was restructured in early 2005 with the
appointment of new managing directors in Corporate Banking, Business Banking and
Nedbank Africa. This opportunity was used to make high-level employment equity
appointments in these business units. Nedbank Corporate"s commitment to going
`beyond transformation" is reflected through five of the eight divisional
executive appointments in Business Banking being black or female.
Significant electronic banking system developments known as the "channel
convergence project" took place and will start to be implemented during 2006.
This is expected to enhance service delivery to clients and grow transactional
business in the medium term.
A key challenge for 2006 is to continue building sustainable non-interest
revenue streams through our goal of increasing our primary banker status in the
various market segments.
Nedbank Retail
Nedbank Retail increased headline earnings by 66,3% from R564 million to R938
million and ROE increased from 12,1% to 18,4%. Despite the negative endowment
impact from the interest rate cut in April 2005, NII was driven by strong
advances growth primarily due to the 21,6% year-on-year growth in home loans.
NIR benefited from increased volumes, bancassurance commissions and a strong
performance from Nedbank Card.
The growth in impairments is largely attributable to one-off adjustments in 2005
to align default definitions and interest reserve accounting methods, partially
offset by an improvement in the probability of default and loss given default
metrics. In addition, significant growth in the personal lending book resulted
in additional impairment requirements. Adjusting for the above, year-on-year
growth was flat.
As a result of continued focus on efficiency and expense control, expense growth
on a comparable basis was contained to 3,9% despite significantly increased
volumes and increased headcount primarily in the branch network and sales
functions.
A key objective for 2005 was to arrest market share losses. Good progress was
made, particularly in the home loans category where market share losses have
largely stabilised. This has been driven by improved channel management and
process and structural changes made in Nedbank Retail. In Asset-based Finance
the ongoing roll-out of the dealer strategy should yield results in 2006. The
group continues to lose market share in card advances due to the low percentage
of clients using revolving credit for their cards, but maintained its
significant market share in card acquiring.
The Nedbank / Peoples Bank merger was completed during 2005, which resulted in
144 branches being rebranded to Nedbank, 69 closures and 24 new branches being
opened. Following this integration Nedbank Retail has 426 Nedbank branches, 46
Old Mutual Bank branches, 1 119 Nedbank ATMs, 55 Old Mutual Bank ATMs and 330
Pick `n Pay Go Banking outlets.
Nedbank Retail is currently replacing and upgrading all ATMs and self-service
terminals at a capital cost of approximately R160 million, of which R84 million
occurred in 2005. This is planned for completion by the second half of 2006.
The Bancassurance and Wealth Management division showed strong results, with new
business premiums growing by 40% and continued strong investment performance
underpinned by its unique "best of breed" philosophy. Nedgroup Collective
Investments was placed third in the Company of the Year category at the annual
Raging Bull Awards, with several of its unit trust funds being highly placed in
the individual rankings.
Good progress has been made in 2005 towards setting the foundation for the
future of Nedbank Retail. Key future focus areas include client service, staff
morale, bancassurance, reducing impairments, growing assets, liabilities and
transactional banking as well as efficiency and expense control.
Imperial Bank
Imperial Bank increased headline earnings by 102,8% from R71 million to R144
million, reflecting the benefits of the growing economy as well as the
favourable credit environment. NII grew by 25,0%, with loans and advances growth
of 30,1% being partially offset by the negative endowment impact of capital
following the interest rate cuts in 2004 and 2005. Advances growth was driven by
strong growth from Motor Vehicle Finance division. Expenses grew by 12,0%,
resulting in the efficiency ratio improving from 43,6% to 41,5%. Impairments
declined by 52,7% due to a more favourable credit environment and a reduction in
provisioning requirements in both Property Finance and Aviation.
Nedbank Group and Imperial Holdings Limited each contributed R107,7 million of
additional capital to Imperial Bank during 2005 to support the continued strong
asset growth.
During 2005, the bank addressed its cost base, strengthened its management (a
new chief executive, chief financial officer and chief risk officer were
appointed) and focused on prudently growing its business in its chosen market
segments, while maintaining tight control over costs.
Central services
Costs in central services divisions for 2004 were restated to reflect the
reorganisation which saw a number of previously centralised functions being
relocated to the operating divisions, including the move of all branch
operations to Nedbank Retail. Overall the headline loss from central services
has reduced from R1 530 million to R916 million.
The group continues to invest in technology and infrastructure related projects.
Strategic initiatives are in progress to upgrade several legacy systems while at
the same time preparing for the Basel ll systems requirements. Projects to
upgrade transactional banking systems and consolidate multiple Corporate Banking
channels are well advanced. New financial processing systems and client
information projects have been approved to support the client-centric strategy
of the bank.
Strategic focus
The completion of the major restructuring of the group has improved
accountability and empowered staff. This, together with restructured incentive
programmes, staff training, the payment of reasonable bonuses and the improving
results, have all helped to boost morale. Internal staff surveys show an
improvement in all areas of morale measured by the group compared to 2004. The
group continues to focus on addressing this critical issue.
The group has moved its focus outward, with projects to improve products,
systems and processes and training being intensified in order to improve client
service.
The marketing focus has shifted to keeping the Nedbank brand aspirational, but
accessible to all South Africans. The integration and rebranding of Peoples Bank
and the BEE transaction also helped position the bank as being more accessible.
Bancassurance within Nedbank continues to grow strongly, with the group
increasing its sales of new business premiums from R3 447 million to R4 840
million, of which 86% were within the greater Old Mutual group.
Capital management
Nedbank Group"s strategic capital plan is focused on optimising the level, mix
and structure of the capital base required to support future growth. The group
commenced a share repurchase programme during the last quarter of 2005 and will
continue to proactively manage capital in order to balance Tier 1 capital and
the overall capital mix more efficiently, subject to the appropriate shareholder
and regulatory approvals.
The group is currently restructuring the subordinated (Tier 2) debt profile.
During 2006 the group currently plans to call the R2 billion of subordinated
debt (NED 1 bond) and issue two new bonds of approximately R1,5 billion each,
the first of which will be issued around March/April 2006, with a second issue
planned around September 2006.
Sustainability
Nedbank Group continues to focus on long-term sustainable development. The group
was again included in the 2005 JSE Socially Responsible Investment (SRI) Index
and was rated among the top three companies in its category. The group"s 2004
Sustainability Report was awarded second place in the Ernst & Young Excellence
in Sustainability Reporting Awards, as well as gaining the annual award for
Emerging Markets Corporate Social Responsibility Bank of the Year at the The
Banker Awards in London.
Prospects
Nedbank Group reaffirms its targets of achieving a ROE of 20% and an efficiency
ratio of 55% for 2007, notwithstanding the impact of IFRS and the BEE
transaction.
Assuming a stable interest rate environment, performance in 2006 is likely to be
impacted by the following:
* an improvement in margin due to:
# the settlement of the expensive empowerment funding for Peoples Bank in the
first half of 2005;
# the repayment of R2 billion of expensive Tier 2 funding;
# the endowment impact of retained income growth;
# income on the additional cash generated from the sale of non-core assets
during 2005; and
# mix changes as higher margin retail and business banking advances grow faster
than corporate advances.
However, continued industry pressure on margins could partially offset these
benefits;
* a more external focus which is expected to result in enhanced revenues as
client service improves and market share is sustained. However, the group
expects continued pressure on retail bank charges which may lead to more muted
growth in transactional revenue; and
* containment of expense growth from:
# a continued focus on extracting operational efficiencies, including possible
further synergies that can be gained by working with other Old Mutual group
companies;
# a reduction of approximately R200 million in share-based payments costs for
the BEE transaction;
# additional savings from the outsourcing of data and voice networks implemented
in 2005 (approximately R70 million); and
# no further recovery programme, merger or branch rationalisation costs; but
# expenses will increase as a result of increased marketing expenditure
(approximately R75 million) and a normalisation of indirect taxation.
Change to the Group Executive Committee (Group Exco)
Nedbank Group will be bidding farewell to Barry Hore who has been a key member
of the Group Exco. Barry has been with Nedbank for 23 years and held positions
including Head of Information Technology, Head of Technology and Operations and
Head of Group Business Innovation, before being appointed Head of the Strategic
Recovery and Turnaround Office (SRTO) in August 2004.
Given the progress in the turnaround of the Nedbank Group and having met the
initial objectives of the recovery programme and operationalised disciplined
execution capabilities throughout the organisation, the SRTO unit will be re-
sized and report to the Chief Financial Officer. Barry has elected to make a
career change and is currently exploring opportunities in the greater Old Mutual
Group.
The board and management thank Barry for his contribution, particularly the
strategic role that he has played as a member of the Group Exco and the board,
as well as in the development of the group"s technology capability and more
recently driving the recovery programme.
Changes to the board of directors
During the year under review, the following changes were made to the board of
Nedbank Group:
* Bob Head was appointed as a non-executive director (1 January 2005);
* Hixonia Nyasulu resigned as an independent non-executive director and Vice-
chairman (26 January 2005);
* Phuthuma Nhleko resigned as a non-executive director (21 April 2005);
* Lot Ndlovu changed status from an executive director to a non-executive
director (1 May 2005); and
* Mustaq Enus-Brey, Reuel Khoza and Gloria Serobe were appointed as non-
executive directors (16 August 2005).
At the annual general meeting (AGM) in May 2005 Warren Clewlow announced his
intention to retire as a non-executive director and Chairman of the board at the
AGM in 2006. On 25 November 2005 Reuel Khoza was appointed Chairman elect and
will succeed Warren Clewlow at the AGM on 4 May 2006.
Old Mutual plc has nominated its group finance director, Julian Roberts, as
chief executive officer and a director of Skandia. If his nomination is accepted
by the new board of Skandia, Julian will stand down as a non-executive director
of Nedbank Group at the AGM in May.
Accounting policies
The group"s principal accounting policies have been applied consistently and the
Nedbank Group financial results have been prepared in accordance with IFRS as
adopted by the International Accounting Standards Board (IASB) and
interpretations issued by IFRIC. These standards are subject to ongoing review
and possible amendment and the results may therefore be subject to change at
future reporting dates.
Restatements of 2004 results
The group"s results for the 2004 reporting year were restated to reflect the
requirements of reporting under IFRS. These restated results for 2004 were
disclosed in an announcement on 3 May 2005 and on 4 August 2005 when the interim
results were released.
Further restatements reflected in the accompanying table are as follows:
1. The group changed its treatment of operating leases with fixed escalations
from previously being expensed on a cash basis, to being expensed on a straight-
line basis in terms of circular 7/2005 issued by the South African Institute of
Chartered Accountants on 2 August 2005 and in accordance with IAS 17 Leases.
2. The IASB issued the fair value option (FVO) amendment to IAS 39 Financial
Instruments: Recognition and Measurement (IAS 39) during June 2005. The FVO
amendment defines the criteria under which an entity is permitted to designate a
financial instrument at initial recognition as being at fair value through
profit or loss (FVTPL).
Previously the group fair valued certain assets and liabilities, with the
intention of eliminating any mismatch. These instruments were designated as
held for trading on transition or inception. The FVO amendment has changed this
and the FVTPL designation is now applied. One or both of the following
conditions need to be met to designate a financial instrument as at FVTPL:
accounting mismatch - this eliminates or significantly reduces a measurement or
recognition inconsistency that would arise from measuring assets or liabilities
or recognising gains or losses on such assets using a different basis; and/or
Documented risk management or investment strategy - where a group of financial
assets and liabilities is managed and performance is evaluated on a fair value
basis and this is documented and reported internally on this basis.
In line with Old Mutual plc, Nedbank Group early adopted the FVO amendment to
IAS 39 and has restated its results as of 1 January 2004. The group has reviewed
all previously designated assets and liabilities, which were classified as held
for trading and all assets and liabilities that do not meet the required
criteria have been de-designated. .
Notwithstanding the above, all derivatives are still fair valued as required by
IAS 39.
3. Previously the group did not consolidate its disability fund in the results.
In the current period, and in terms of IAS 27, the disability fund has been
incorporated and comparative figures have been restated from 1 January 2004.
4. In terms of IAS 1 Presentation of Financial Statements, the group has chosen
to present assets and liabilities on the face of the balance sheet in order of
their liquidity. Therefore deposits, which are mandatory in terms of the South
African Reserve Bank regulations, have been reclassified from cash and cash
equivalents to a separate line on the face of the balance sheet.
5. Foreign exchange spot trades have been reclassified as either other assets or
other liabilities on the balance sheet, from derivative financial instruments.
During 2004 certain short trading securities that were recorded as amounts owed
to depositors have been restated on the balance sheet as other liabilities.
6. In previous periods loans to associates and joint ventures were included in
the carrying value of associate investments and these loans have now been
reclassified on the balance sheet to be included in loans and advances.
7. Deferred revenue was previously disclosed separately on the balance sheet and
has been reclassified against the individual loans and advances to which it
relates.
8. The first time consolidation of a subsidiary on 1 January 2004 resulted in
realised reserves of R132 million being incorrectly classified as available for
sale reserves. These reserves have now been reclassified as distributable
reserves from 1 January 2004 with no effect to overall equity attributable to
ordinary shareholders.
Comparative results in the segmental report have been restated to take into
account the improvements in internal profitability measurement and group
restructures. The restatements include the new internal funds transfer pricing
system, the improved activity-justified transfer pricing process and a risk-
weighted capital allocation and charging methodology. The restatements also take
into account that liquid assets and cash reserving costs are no longer held at
the centre, but are charged to the operating segments.
Subsequent events
As of the date of this announcement there are no post-balance-sheet events to
report.
Reviewed results - auditors" opinion
The group"s auditors, KPMG Inc and Deloitte & Touche, have reviewed these
results and the review opinion is available for inspection at the company"s
registered office.
Capitalisation award with a cash dividend alternative
Notice is hereby given that the directors of the company have resolved to issue
fully paid ordinary shares in the company as a capitalisation award to ordinary
shareholders. Ordinary shareholders will be entitled, in respect of all or part
of their shareholding, to elect to receive new fully paid ordinary shares which
shares will be issued only to those ordinary shareholders who elect in respect
of all or part of their shareholding, on or before 12:00, Friday, 31 March 2006
to receive the capitalisation award shares. Shareholders not electing to receive
new fully paid ordinary shares in respect of all or part of their shareholding
will be entitled to receive a cash dividend alternative of 185 cents per
ordinary share (the cash dividend alternative).
In accordance with the provisions of STRATE, the electronic settlement and
custody system used by JSE Limited, the relevant dates for the capitalisation
award election and the cash dividend alternative are as follows:
2006Last day to trade to participate in the capitalisation award or the cash
dividend alternative onFriday, 24 MarchShares trade ex the capitalisation award
election and the cash dividend alternative on Monday, 27 MarchListing of the
maximum number of new ordinary shares that could be taken up in terms of the
capitalisation award onMonday, 27 MarchLast day to elect to receive
capitalisation award shares, failing which you will receive the cash dividend
alternative, by 12:00 onFriday, 31 MarchRecord date to participate in the
capitalisation award or receive the cash dividend alternative onFriday, 31
MarchPayment of the cash dividend alternative to shareholders who have elected
to not participate in the capitalisation award or have participated in
capitalisation award in respect of only part of their shareholdingMonday, 3
AprilNew shares issued and posted or CSDP or broker accounts credited regarding
the shares to be issued to shareholders participating in the capitalisation
award in respect of all or part of their shareholding onMonday, 3 AprilThe
maximum number of new shares listed in terms of the capitalisation award
adjusted to reflect the actual number of shares issued in terms of the
capitalisation award on or about Wednesday, 5 April
Shares may not be dematerialised or rematerialised between Monday, 27 March
2006, and Friday, 31 March 2006, both days inclusive. The above dates and times
are subject to change. Any changes will be published on the Securities Exchange
News Service (SENS) and in the press.
The number of capitalisation shares to which shareholders are entitled will be
determined in the ratio that 185 cents per ordinary share bears to the 30 day
volume weighted average price for the company"s share, to be determined by no
later than Wednesday, 15 March 2006. Details of the ratio will be published on
SENS not later than Thursday, 16 March 2006 at 12:00 and in the financial press
the following business day. Trading in the STRATE environment does not permit
fractions and fractional entitlements. Accordingly, where a shareholder"s
entitlement to new ordinary shares calculated in accordance with the above
formula gives rise to a fraction of a new ordinary share, such fraction will be
rounded up to the nearest whole number where the fraction is greater than or
equal to 0,5 and rounded down to the nearest whole number where the fraction is
less than 0,5.
A circular relating to the capitalisation award and the cash dividend
alternative will be posted to shareholders on or about Monday, 13 March 2006.
Note:
Dematerialised shareholders are required to notify their duly appointed central
securities depository participant (CSDP) or broker of his/her election in terms
of the capitalisation award in the manner and at the time stipulated in the
agreement governing the relationship between the shareholder and his/her CSDP or
broker.
For and on behalf of the board
WAM Clewlow TA Boardman
Chairman Chief Executive
20 February 2006
Registered office:
Nedbank Group Limited, Nedbank Sandton, 135 Rivonia Road, Sandown, 2196
PO Box 1144, Johannesburg, 2000
Transfer secretaries:
Computershare Investor Services 2004 (Pty) Ltd, 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), MA Enus-Brey, Prof B de L Figaji, RM
Head (British), Dr RJ Khoza, JB Magwaza, ME Mkwanazi, JVF Roberts (British), CML
Savage, GT Serobe, JH Sutcliffe (British)
Company Secretary: GS Nienaber
Sponsors: Merrill Lynch South Africa (Pty) Limited
Nedbank Capital
This announcement is available on the group"s website - www.nedbankgroup.co.za-
together with the following additional information:
* Detailed financial information in HTML and PDF formats;
* Financial results presentation to analysts; and
* Link to a webcast of the presentation to analysts.
For further information kindly contact Nedbank Group Investor Relations by
e-mail at nedbankgroupir@nedbank.co.za.
Financial highlights
at 31 December
2005 2004
Restated
Share statistics
Number of shares listed m 442,8 394,2
Weighted average number of shares m 397,2 360,9
Number of shares in issue excluding
shares
held by group entities m 401,8 394,0
Fully diluted weighted average number of
shares m 400,4 361,8
Headline earnings per share cents 797 483
Fully diluted headline earnings per share cents 791 482
Basic earnings per share cents 966 423
Fully diluted basic earnings per share cents 958 422
Dividends declared per share cents 290 120
Dividend paid per share cents 181 79
Dividend cover times 2,7 4,0
Net asset value per share cents 5 597 4 654
Tangible net asset value per share cents 4 351 3 361
Closing share price cents 10 000 7 780
Price earnings ratio historical 13 16
Market capitalisation Rbn 44,3 30,7
Key ratios
Return on ordinary shareholders" equity
(ROE) % 15,5 11,0
Return on total assets (ROA) % 0,93 0,54
Net interest income to interest-earning
assets % 3,55 3,18
Non-interest revenue to total income % 50,2 53,1
Impairment charge to average advances % 0,49 0,55
Efficiency ratio % 65,1 71,8
Effective tax rate % 23,4 24,2
Group capital adequacy ratio
- Tier 1 % 9,4 8,1
- Total % 12,9 12,1
Number of employees 22 188 21 103
Balance sheet
Ordinary shareholders" equity Rm 22 490 18 337
Total shareholders" equity Rm 26 309 21 787
Loans and advances Rm 248 408 221 008
Gross Rm 253 622 227 692
Impairment Rm (5 214) (6 684)
Total assets Rm 352 258 327 840
Assets under management Rm 72 063 60 369
Total assets administered by the group 424 321 388 209
Earnings reconciliation
Profit attributable to equity holders of
the parent Rm 3 836 1 528
Non-trading and capital items Rm 669 (215)
Impairment of goodwill Rm (1) (87)
Profit/(loss)on sale of subsidiaries,
investments
and property and equipment Rm 904 (74)
Net impairment of investments, property
and
equipment and capitalised development
costs Rm (202) (93)
Taxation on above items Rm (32) 39
Headline earnings Rm 3 167 1 743
Income statement
for the year ended 31 December
2005 2004
Rm Restated
Interest and similar income 24 343 22 789
Interest expense and similar charges 15 814 15 644
Net interest income 8 529 7 145
Impairment losses on loans and advances 1 189 1 217
Income from lending activities 7 340 5 928
Non-interest revenue 8 483 8 379
Foreign currency translation gains/(losses) 126 (280)
Operating income 15 949 14 027
Total expenses 11 157 10 939
Operating expenses 10 609 10 314
Merger and recovery expenses 155 625
BEE transaction expenses 393
Indirect taxation 223 470
Profit from operations before non-trading and capital
items 4 569 2 618
Non-trading and capital items 701 (254)
Impairment of goodwill (1) (87)
Profit/(Loss) on sale of subsidiaries, investments
and property and equipment 904 (74)
Net impairment of investments, property and
equipment and capitalised development costs (202) (93)
Profit from operations 5 270 2 364
Share of profits of associates and joint ventures 167 147
Profit before direct taxation 5 437 2 511
Direct taxation 1 108 668
Taxation on non-trading and capital items 32 (39)
Profit for the year 4 297 1 882
Attributable to:
Profit attributable to equity holders of the parent 3 836 1 528
Profit attributable to minority interest ordinary
shareholders 233 125
Profit attributable to minority interest preference
shareholders 228 229
Profit for the year 4 297 1 882
Balance sheet
at 31 December
2005 2004
Rm Restated
Assets
Cash and cash equivalents 11 142 4 630
Other short-term securities 17 014 16 310
Derivative financial instruments 16 176 27 276
Government and other securities 22 658 26 224
Loans and advances 248 408 221 008
Other assets 11 601 7 101
Customers" indebtedness for acceptances 1 291 1 509
Current taxation receivable 134 196
Investment securities 6 875 6 561
Non-current assets held for sale 385 48
Investments in associate companies and joint ventures 657 1 019
Deferred taxation asset 680 1 258
Investment property 163 174
Property and equipment 3 095 2 828
Post-employment assets 1 225 1 183
Computer software and capitalised development costs 1 320 1 419
Mandatory deposits with central bank 5 747 5 420
Goodwill 3 687 3 676
Total assets 352 258 327 840
Shareholders" equity and liabilities
Ordinary share capital 402 394
Ordinary share premium 10 465 9 892
Reserves 11 623 8 051
Total equity attributable to ordinary shareholders 22 490 18 337
Minority shareholders" equity attributable to
- ordinary shareholders 1 049 680
- preference shareholders 2 770 2 770
Total equity 26 309 21 787
Derivative financial instruments 17 055 27 781
Amounts owed to depositors 261 311 250 747
Other liabilities 32 357 13 153
Liabilities under acceptances 1 291 1 509
Current taxation liabilities 466 193
Deferred taxation liabilities 959 1 143
Post-employment liabilities 1 071 1 109
Investment contract liabilities 4 166 3 109
Long-term debt instruments 7 273 7 309
Total liabilities 325 949 306 053
Total shareholders" equity and liabilities 352 258 327 840
Guarantees on behalf of customers excluded from assets 11 064 10 770
Statement of changes in shareholders" equity
Ordinary Preference Minority
shareholders" shareholders" shareholders" Total
Rm equity equity equity equity
Balance at
31 December 2003
in accordance
with SA GAAP 11 647 2 802 652 15 101
Net effect of
adopting IFRS (134) (30) (164)
Restated balance
at 31 December 2003
in accordance
with IFRS 11 513 2 802 622 14 937
Net income
recognised
directly
in equity 355 - (52) 303
Release of
reserves
previously
not available (48) (48)
Foreign currency
translation
reserve
movement (148) (148)
Available-for-sale
reserve movement 489 489
Share-based
payments
reserve movement 26 26
Other movements 36 (52) (16)
Profit for the
year 1 528 229 125 1 882
Dividends to
shareholders (269) (261) (15) (545)
Issue of shares
net of expenses 5 211 5 211
Shares held by
group entitites (1) (1)
Balance at
31 December 2004 18 337 2 770 680 21 787
Net income
recognised
directly
in equity 463 - 136 599
Release of
reserves
previously not
available (70) (70)
Foreign currency
translation
reserve
movement 95 10 105
Available-for-sale
reserve movement (204) (204)
Revaluation of
owner-occupied
property 153 153
Share-based
payments reserve
movement 466 466
Capitalisation of
minority 107 107
Other movements 23 19 42
Profit for the
year 3 836 228 233 4 297
Dividends to
shareholders (727) (228) (955)
Issue of shares
net of expenses 1 336 1 336
Shares held by
group entities (755) (755)
Balance at
31 December 2005 22 490 2 770 1 049 26 309
Cash flow statement
for the year ended 31 December
2005 2004
Affected line items - Rm Restated
Generated by operating activities 7 228 5 884
Change in funds for operating activities 2 023 (11 891)
Taxation paid (1 075) (835)
Cash flows (utilised in)/from investment activities (927) 2 762
Cash flows (utilised in)/from financing activities (410) 1 903
Net increase/(decrease) in cash and cash equivalents 6 839 (2 177)
Cash and cash equivalents at beginning of year 10 050 12 227
Cash and cash equivalents including mandatory
deposits with central bank 16 889 10 050
Income statement restatements
for the year ended 31 December 2004
IAS 17 IAS 39 IAS19
Notes 1 2 3
Fair value
through
Reported Operating profit Disability
Rm IFRS* leases and loss fund Restated
Non-interest revenue 8 373 6 8 379
Total expenses 10 934 14 (9) 10 939
Profit before direct taxation 2 510 (14) 6 9 2 511
Direct taxation 688 (5) 2 3 668
Profit for the year 1 881 (9) 4 6 1 882
Refer SENS announcement 4 August 2005
Segmental analysis - by operation
for the year ended 31 December
2005 2004 2005
Restated
Total Total Operating
Rm assets assets income
Nedbank Corporate 138 271 123 013 6 223
Nedbank Capital 117 502 110 010 2 442
Nedbank Retail 96 272 80 823 7 208
Imperial Bank 21 832 16 720 737
Shared services 9 165 8 113 306
Central management 14 264 20 528 (920)
Eliminations (45 048) (31 367) (47)
Total 352 258 327 840 15 949
2004 2005 2004
Restated Restated
Operating Headline Headline
Rm income earnings earnings
Nedbank Corporate 5 845 1 984 1 775
Nedbank Capital 2 454 1 017 863
Nedbank Retail 6 686 938 564
Imperial Bank 482 144 71
Shared services 523 (35) (147)
Central management (1 694) (881) (1 383)
Eliminations (269)
Total 14 027 3 167 1 743
Geographical segmental analysis
for the year ended 31 December
2005 2004 2005 2004
Restated Restated
Operating Operating Headline Headline
Rm income income earnings earnings
South Africa 14 834 12 847 2 884 1 507
Business operations 14 708 13 127 3 406 2 441
BEE transaction costs (334)
Merger and recovery
programme expenses (86) (425)
Foreign currency
translation profit/(loss) 126 (280) 126 (280)
Minority interest income
attributable to
preference shareholders (228) (229)
Rest of Africa 512 304 135 45
Rest of World 603 876 148 191
Business operations 603 876 182 211
Merger and recovery
programme expenses (34) (20)
15 949 14 027 3 167 1 743
Balance sheet restatements
at 31 December 2004
IAS 17 IAS 39
Notes 1 2
Fair value
Reported Operating through profit
IFRS* leases and loss
Affected line items - RM
Cash and cash equivalents 10 050
Derivative financial instruments 27 560
Loans and advances 221 275 (115)
Other assets 6 806 1
Deferred acquisition costs 10
Investment securities 6 565
Investments in associate
companies and
joint ventures 1 089
Deferred taxation asset 1 169 53 36
Post-employment assets 992
Mandatory deposits with central
bank
Reserves as previously reported 8 211 (121) (82)
- Additional adjustments on 1
January 2004 (112) (86)
- Adjustment for the year ended
31 December 2004 (9) 4
Profit attributable to minority
ordinary
shareholders 681 (1)
Derivative financial instruments 28 055
Amounts owed to depositors 254 299 3
Other liabilities 9 117 176
Deferred taxation liabilities 1 125
Post-employment liabilities 979
Deferred revenue 257
*Refer SENS announcement 4 August
2005
Reclassifications
IAS 19
3 4 5
Derivative
Mandatory and short
Disability deposits with trading
fund regulators securities
Assets
Cash and cash equivalents (5 420)
Derivative financial instruments (284)
Loans and advances
Other assets 284
Deferred acquisition costs
Investment securities
Investments in associate
companies and
joint ventures
Deferred taxation asset
Post-employment assets 191
Mandatory deposits with central
bank 5 420
Reserves as previously reported 43
- Additional adjustments on 1
January 2004 37
- Adjustment for the year ended
31 December 2004 6
Profit attributable to minority
ordinary
shareholders
Derivative financial instruments (274)
Amounts owed to depositors (3 555)
Other liabilities 3 829
Deferred taxation liabilities 18
Post-employment liabilities 130
Deferred revenue
*Refer SENS announcement 4
August 2005
Reclassifications
6 7
Loans and Deferred
investments revenue Restated
Assets
Cash and cash equivalents 4 630
Derivative financial instruments 27 276
Loans and advances 74 (226) 221 008
Other assets 10 7 101
Deferred acquisition costs (10) -
Investment securities (4) 6 561
Investments in associate companies and
joint ventures (70) 1 019
Deferred taxation asset 1 258
Post-employment assets 1 183
Mandatory deposits with central bank 5 420
Reserves as previously reported 8 051
- Additional adjustments on 1 January
2004
- Adjustment for the year ended
31 December 2004
Profit attributable to minority
ordinary
shareholders 680
Derivative financial instruments 27 781
Amounts owed to depositors 250 747
Other liabilities 31 13 153
Deferred taxation liabilities 1 143
Post-employment liabilities 1 109
Deferred revenue (257) -
*Refer SENS announcement 4 August 2005
Date: 20/02/2006 07:59:31 AM Produced by the JSE SENS Department
