22nd Feb 2005 07:00
Nedcor22 February 2005 Nedcor Limited Reviewed financial results and cautionary announcement for the year ended 31December 2004 Headline earnings: R1 447 millionHeadline earnings, excluding foreign currency translation losses: R1 819 millionOrdinary shareholders' equity up 55%Group Tier 1 capital adequacy ratio up from 5,0% to 8,1%Earnings volatility significantly reducedRecovery programme delivering tangible benefitsCompetitive, sustainable base establishedGroup on track to meet 2007 targets Overview 2004 was a year of delivering on commitments made to shareholders, reducingearnings volatility, improving risk management and establishing a competitiveand sustainable base for growth. A detailed recovery programme was implementedwith clear priorities and the directors are pleased to report that all keyobjectives of this programme have been achieved so far. Headline earnings per share (excluding foreign currency translation losses) of504 cents (2003: 502 cents) were ahead of the group's expectations. Headlineearnings per share of 401 cents were significantly up from 19 cents in 2003. Thegroup made attributable earnings per share of 270 cents (2003: attributable lossof 546 cents). Management remains committed to a targeted return on equity (RoE) of 20% in2007. 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 andrisk 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 raisingthrough 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 andbetter 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 inMay 2004, which was successful in raising R5,15 billion of Tier 1 capital andstrengthening the group's capital base. The group repaid R2,5 billion of subordinated debt (Tier 2 capital) from therights issue proceeds. This improved the balance between Tier 1 and Tier 2capital. The balance was used to reduce expensive funding. Nedcor set a target of reaching a group Tier 1 capital adequacy ratio of atleast 7,5% by the year-end and is pleased to report that, through the rightsissue and proactive capital management, the group Tier 1 capital adequacy ratioat 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 thegroup at the end of 2003: • The improved capital position stabilised the group's credit ratings. • The capital and earnings volatility arising from foreign exchange movementswas substantially reduced. The group repatriated, converted and/or hedged R5 058million of capital sensitive to foreign exchange movements. The foreign exchangetranslation loss reduced to R372 million in 2004 (2003: R1 416 million) withinthe income statement and from R181 million to R57 million within reserves. • Interest rate risk was significantly reduced. An active hedging programme wasimplemented, swapping new term fixed-rate deposits to floating rates. Inaddition, the group's R6 billion fixed-rate subordinated debt issued in 2001 and2002 was hedged against further interest rate movements from July 2004. Interestrate risk was further reduced, with the expensive unhedged fixed-rate negotiablecertificates of deposit (NCDs), promissory notes (PNs) and retail fixed depositsin issue at December 2003 having matured by April 2004. • The recovery programme, initiated to reverse the deterioration in the group'sefficiency ratio, is starting to show positive results, which will impact in2005. A number of structural and operational improvements have been made to the groupenterprise-wide risk management framework. • The roles of the Chief Financial Officer and Chief Risk Officer wereseparated. • Capital management was placed under the control of the Chief FinancialOfficer. This enabled the group to improve the allocation of capital todivisions to ensure optimum use of capital and enhance long-term capitalplanning. • The Asset and Liability Management Committee (ALCO) was restructured to allowfor a more effective and efficient decision- making process. The ALCOresponsibilities were extended to include all interest rate risk management aswell as the management of capital, foreign exchange, investment and marketrisks. • Management processes have been redesigned to ensure a logical and streamlinedframework 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 theFinancial Intelligence Centre Act (FICA). • The group is on track to meet its January 2008 Basel II 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 ChiefFinancial Officer in June, while Advocate Selby Baqwa was appointed Head ofGroup Compliance and Corporate Governance and joined Exco in November. PeteBackwell, Head of Nedbank Retail, resigned to follow business interests in theagricultural sector and the Human Resources Director, Ivan Mzimela, left for aposition 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, Communicationsand Marketing from Rob Shuter and Derek Muller has assumed the additionalportfolio 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 andthe retrenchment programme, all management positions in the group were reviewedand 70 of the top 100 managers were appointed to new positions during 2004.Throughout this process the group has been conscious of its employment equitycommitments. While we acknowledge the transformation challenges facing thegroup, 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% ofthe top 100 managers was black. The number of women in the top 100 managementgroup also improved from 8% to 20%. Detailed balanced score cards with performance measures directly linked to thethree year plan are in place for all top managers. These drive the calculationof 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, simplifyingthe brand strategy, optimising the asset and liability management and improvingmanagement information systems; • to focus on growing the retail business and transactional banking inparticular, while building on the group's strengths in the corporate andcommercial 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 retentionstrategies firmly embedded in the recovery programme; • to expand bancassurance; and • to drive transformation and sustainability and to comply with the spirit ofthe Financial Sector Charter (FSC). These focus areas have not changed, but the group conducted indepth scenarioplanning to test their appropriateness. The strategic direction of the group has been communicated through staffworkshops, roadshows and internal publications. The group has consolidated its brand portfolio from 14 at the beginning of 2004to eight brands in December. The group also plans, subject to shareholderapproval, to change its name from Nedcor Limited to Nedbank Group Limited. Thisproposal will be put to shareholders at the group's annual general meeting inMay 2005. The planned disposal of non-core operations and assets is progressing well. Offshore subsidiaries sold include:Subsidiary Proceeds Book value Profit/ (loss) Rm Rm RmChiswell Associates 244 104 140BoE Life International 62 149 (87)BoE International Fund Services and BoE 44 23 21International Fund ManagersStenham Group 238 318 (80)Total 588 594 (6) A review of the international businesses resulted in the closure of the Asianoperations, which reduced risk and will improve the return on ordinaryshareholders' funds. Advances have been reduced to US$26 million (from overUS$400 million), with no additional losses. Repatriation of the capital from the Asian businesses commenced in October 2004with the first US$1 million, followed by US$19 million in January 2005, and thebalance is expected to be remitted in May 2005. Onshore investments and subsidiaries disposed include: Investment/Subsidiary Proceeds Book value Profit/ (loss) Rm Rm RmCentury City - vacant land 82 80 2NUEP* 38 17 21Edward Nathan and Friedland 50 70 (20)Endowment policies 1 252 1 280 (28)Other 17 13 4Total 1 439 1 460 (21) * Following the partial sale and restructuring of Net1 Applied TechnologyHoldings (Aplitec) into Net1 UEPS Technologies (NUEP) Nedcor has reduced itsshareholding in this group from 25% to 15%. The group has remaining non-core assets of approximately R1,1 billion that areearmarked for disposal. The group reduced its office space needs and disposed of 17 buildings for R93,8million at a profit of R20,0 million. A reevaluation was conducted of all alliances and joint ventures and their rolein the group's strategy. As a result, the alliance with the JD Group wasterminated by mutual agreement and the group acquired Capital One's interests inthe American Express and Peoples Lending joint ventures. Comprehensive restructure To align the group's structure with its strategy a comprehensive restructure wascompleted. The aim was to ensure better client focus and client service, whileensuring clear accountability, faster response times and an emphasis onimproving the return on ordinary shareholders' equity. The restructure was also designed to devolve product design and process, thecredit approval function and branch and card operations to the line units. The single biggest change to the group structure was the integration of areas ofthe former Technology and Operations Division into the client-facing divisions,and in particular into Nedbank Retail. Branch operations were fully integratedwithin Nedbank Retail. This entailed 850 interviews, with 454 new branchmanagers being appointed in 72 days and the transfer of more than 5 000 stafffrom the Central Operations Division to Nedbank Retail. In addition, severalother functions, including card operations and the group call centres, wereconsolidated in Nedbank Retail. Product and process staff were transferred intoclient-facing divisions. The restructure has not only achieved a more focused organisation, but resultedin operational efficiencies. The staff headcount (excluding temporary staff) wasreduced by 3 102 people from 24 205 to 21 103. This was achieved through thevoluntary retrenchment of 1 439 people, business-initiated retrenchment of afurther 596 people, the sale of certain businesses and net natural attrition. Divisions within the group are working well together, with a notable examplebeing the new coverage model developed between Nedbank Corporate and NedbankCapital to ensure that larger clients are effectively serviced through a singlechannel. The minority interests in Peoples Bank were acquired and the management and thehead office functions integrated into Nedbank Retail. Regulatory approval tointegrate the Peoples Bank clients into Nedbank with effect from 1 February 2005was received in December 2004 and the group will complete this integrationduring 2005. Merger delivered The remaining client migrations from the BoE merger were completed on time andwithin budget. A total of 115 000 BoE Business Banking clients, with loans ofR10 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 toNedbank and Peoples Bank systems, with minimal client loss. 12 600 contracts forProperty Finance clients, with loans of R8 billion, were migrated on to theProperty Finance SAP system, also with minimal client loss. Improved management information systems (MIS) The group committed itself to enhance financial disclosure and has achievedimproved market and segmental disclosures. A new internal funds transfer pricing system has been implemented and pro forma2004 segmental results have been adjusted to reflect this. The group also implemented an improved activity-justified transfer pricingprocess between divisions to allocate costs on a more accurate basis. Whilethere are still central costs that could be charged to divisions, the process issubstantially complete. This will facilitate more accurate product, channel andclient profitability measures. A risk-weighted capital allocation and charging methodology was introduced. Thisis being used as a foundation for more sophisticated risk-adjusted economiccapital allocation, which will be implemented in 2006. Liquid assets and cash reserving costs are no longer held at the centre, but arebeing charged to divisions. These processes have resulted in more accurate and meaningful segmentalanalysis, improving the group's ability to evaluate and manage capital andhelping management and investors to measure and benchmark divisionalperformance. 2003 segmental results have been restated for the aboveimprovements to afford better comparability. The group is in the process of redesigning its long-term financial architectureprocess framework. Financial performance Income attributable to shareholders of R974 million shows a significantturnaround 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 yearto 31 December 2003. Headline earnings (excluding foreign currency translationlosses) 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 millionfor the 2003 year to R7 567 million. The group's net interest margin for theyear to December 2004 was 3,13%, up from 3,04% in 2003 (the group's previouslyreported margin for 2003 of 2,95% has been restated to give a more accuratereflection of the margin by changing the calculation of average interest-earningassets 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 theend of April 2004; • the positive endowment effect of the rights offer proceeds for the full yearfrom 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 April2005. 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 theAC133 adjustment increased by 8,3% from R7 441 million to R8 057 million, withcommission 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 outbelow. 2004 2003 Rm RmAC133 fair-value adjustment 140 512Exchange and securities trading 816 1 201Private equity revaluation 170Consolidation of Fasic Limited 136Consolidated for the first time during second half of 2003 228 140Sale of Canal Walk and Virgin Active 145Realisation of endowment policies 114Subsidiaries sold 220 269 Nedcor's three-year plan has a major focus on growing transactional NIR. Thisincludes gaining more primary banking relationships with clients, increasingcross-sell and upsell actions and bancassurance initiatives. The group wasawarded a number of significant corporate and business banking transactionalmandates in 2004. Foreign exchange translation losses The group incurred a foreign currency translation loss of R372 million (2003: R1416 million) as the rand strengthened during 2004 from R6,63 to US$1,00 at 31December 2003 and to R5,63 to US$1,00 on 31 December 2004. The grouphistorically held excess levels of capital in its offshore operations andrepatriated, restructured and/or hedged foreign capital during the year,reducing exposure to foreign currency translation movements by 71%, as set outbelow. FX Non-FXRm sensitive sensitive TotalDecember 2003 FX exposure 7 146 2 122 9 268Capital repatriated and foreign dividends (760) (760)Preference funding repatriated (1 956) (1 956)Sale of subsidiaries and foreign (1 605) (118) (1 723)restructuringLoss on translation (372) (372)Hedge of future capital repatriation (365) (365)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 translationlosses would have amounted to R929 million. The adoption of International Financial Reporting Standards (IFRS) from 2005onwards will lead to a larger portion of the foreign currency translationprofits or losses being treated as movements in the balance sheet foreigncurrency translation reserve rather than as income statement profits and losses. Credit impairments In line with the favourable credit environment the bad debt experience withinNedcor improved, with non-performing assets reducing from R8 444 million inDecember 2003 to R7 488 million, including disposals and write-downs of R627million of properties in possession. Recoveries of bad debts increased from R98million in 2003 to R227 million. The only major credit impairment was in PeoplesBank, where a once-off adjustment in the first six months of some R90 millionresulted from the refinement of AC133 default ratios and the recognition ofcertain concentration risks in the mortgage book. All minimum regulatory provision requirements were met. In the absence of any significant deterioration in economic conditions, thecredit outlook remains positive. Expenses Operating expenses increased by R736 million (7,1%) from R10 305 million in 2003to R11 041 million. This movement is mainly attributable to the following: Factors resulting in an increase/(decrease) in expenses RmFirst-time consolidation of subsidiaries 69Decrease in expenses from subsidiaries disposed of (106)Increase in Nedbank Namibia and Tando (Swisscard) consolidated forthe first time during the second half of 2003 135Normalisation of bonus provision in 2004 462Excess of actual costs over 2003 estimates 75Increase in fees paid to originators 109Additional regulatory costs for Basel II and FICA 103Increase in provision for transaction taxes 112Benefit from expense merger synergies (117)Benefit from expense recovery synergies (531) 311Other movement mainly due to inflation 425Total increase in expenses 736 The group will continue its focus on costs to ensure revenue growth exceedsexpense growth. Alliance partner fees moved from payment of a profit share of R4 million to R70million, primarily as a result of the profitability of the Capital One alliancesprior to their termination. Recovery expenditure of R379 million includes retrenchment costs of R298million. As indicated in November 2004, certain recovery costs were held over to2005 and the group estimates that further restructuring costs of R59 millionwill be incurred in 2005. Merger costs during the period amounted to R246 million, slightly below theoriginal estimate for the year. A final contingency of R107 million is projectedfor 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 ison track to realise in 2005 the balance of the R700 million initiallyanticipated. The cost-to-income ratio, excluding foreign exchange translation losses, was74,5% (2003: 72,5%). Significant improvements to this ratio are anticipated as aresult of the recovery programme from 2005 onwards. When the once-off recoveryand merger costs are excluded, the efficiency ratio is 70,5%. Taxation The effective tax rate of 26% is higher than initially anticipated, as R126million of additional provisions have been raised for potential taxationliabilities. The tax rate was impacted positively by a R342 million (2003: R356million) credit on the tax line arising from AC102 treatment of structuredfinance transactions. This credit is offset by lower reported margin income onthese transactions. The taxation charge is also lower as a result of a saving in secondary tax oncompanies (STC) due to the high acceptance rate of the 2003 final capitalisationaward. The tax rate should be lower in 2005, but the sustainable tax rate will trend tobetween 25% and 30%, once historical structured finance transactions have wounddown. Capital itemsThe capital items comprise:Rm 2004 2003Goodwill amortisation 251 424Goodwill impairment 123 1 379Impairment of software and development costs 90 134Impairment of fixed assets and equipment 23 105Profit on sale of buildings (20) (29)Disposal of the various subsidiaries and other non-core 43 (320)investmentsTotal before taxation 510 1 693Taxation 37 38Total 473 1 655 The adoption of IFRS from 2005 onwards will result in goodwill no longer beingamortised, but being subject to an impairment assessment at each reportingperiod. Balance sheet Capital The rights issue raised capital of R5,15 billion. This, together with improvedearnings, the realisation of non-core investments, the focus on managingadvances growth and the reduction of foreign currency exposures, all contributedto increasing the group's Tier 1 capital adequacy ratio from 5,0% at 31 December2003 to 8,1% at 31 December 2004. Deposits All expensive unhedged fixed-rate funding, in the form of NCDs, PNs and retailfixed deposits amounting to approximately R24 billion in December 2003, maturedin the first half of the year. Structural shifts in the group's funding mixreduced the cost of funds. Advances Advances increased by 5,3% from R210,1 billion in December 2003 to R221,1billion at 31 December 2004. The group actively reduced certain categories oflow-yielding corporate short-term loans and followed a generally cautiousapproach to asset growth prior to the completion of the rights issue. The overall loss of market share was disappointing, with retail average advancesgrowing by 13,4%, but lagging competitor growth, and corporate average advancesreducing by 6,3%, mainly as a result of the R6,2 billion balance sheetefficiency programme initiated to optimise the use of capital and generally slowdemand for credit in the corporate environment. Divisional overview Divisional management reporting has been enhanced with the introduction ofliquid assets and cash reserving charges, improved activity-justified costtransfer pricing and better capital allocation methodologies. The inclusion offunds transfer pricing from 2005 and the establishment of an improved baselinewill allow for more meaningful segmental reporting. Nedbank Capital Nedbank Capital achieved a 5% growth in headline earnings from R837 million toR878 million and an RoE of 31%, in an environment of more subdued tradingconditions. 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 respectof BEE transactions. These included Telkom, Incwala Platinum, Metropolitan Lifeand Dimension Data. Private Equity had an excellent year. Nedbank Capital was restructured to create focus and optimise client service. Anew Executive Committee was established, the component businesses colocated intothe head office building and the division streamlined to eliminate duplicationand optimise resources. A focused debt and equity capital markets business was created to align thetrading and structuring functions. Good progress was made in delivering a singlehouse approach to add value to the client base. The minority interests in NIBNamibia were bought out and the business consolidated. A more rigorous processwas put in place for developing, monitoring and converting the transactionpipeline. A closer working relationship was developed with both Nedbank Corporate and OldMutual to focus on improved client service and cross-sell opportunities. DuringAugust Nedbank Capital took responsibility for the Nedbank London branch. Staffwere colocated with Old Mutual Plc and a matrix reporting structure with NedbankCorporate introduced. The consolidated Nedbank Capital brand is starting to achieve recognition in themarket, which is reflected in the major investment banking league tables. Thedivision has a strong pipeline of potential deals for 2005. Nedbank Corporate Nedbank Corporate increased headline earnings by 14,7% from R1 841 million to R2112 million, despite the asset reduction programme and the endowment impact ofthe lower interest rate environment. Nedbank Corporate improved its RoE from19,0% 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 theconsolidation of Fasic; • improvement in credit impairments driven by healthy recoveries, effectivecredit 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 aproactive reduction in the loan book of approximately R6,2 billion, primarily inCorporate Banking. Nedbank Corporate has used the low interest rate environmentto reduce its exposure to potentially higher-risk advances, leading to asignificant reduction in the level of risk and overall bad-debt experiences in2004. Strategic recovery and merger programme expenses of R145 million (2003 R7million) impacted on Nedbank Corporate's results. Nedbank Corporate's Executive Committee was restructured, which resulted in theappointment of a skilled team with experience in client value management andrisk management methodologies aligned with the Basel II framework. Therestructure also resulted in the consolidation of Asset-based Finance intoBusiness Banking, and the establishment of a focused Transactional Banking SalesDivision to enhance cross-selling and increase market share of clients to whomwe are the primary banker. The review of the international operations hasresulted in the closure of the Asian activities, which has reduced the riskprofile and will improve the group's RoE. A major project was initiated to consolidate and improve the bank's electronicbanking systems to grow transactional banking market share and enhance NIR. Thecluster successfully completed the migration of R10 billion of advances and R4billion of deposits of ex-BoE Business Banking clients on to Nedbank systems aswell as the remaining R8 billion migration of Nedbank and ex-NIB PropertyFinance clients on to the Property Finance SAP system. This process largelycompleted the merger-related client migration in Nedbank Corporate. Nedbank Retail Nedbank Retail increased headline earnings by 41% from R455 million to R641million. However, RoE remains low at 12,8% (2003: 9,7%). The performance ofNedbank Retail, including Peoples Bank, was negatively impacted by the cost ofexpensive fixed-rate deposits and the additional impairments required in PeoplesBank, as well as recovery programme expenses of R79 million. Following the appointment of Rob Shuter as Head of Nedbank Retail in August 2004the cluster was reorganised to improve client service, reduce resourceduplication and improve accountability. This resulted in the appointment of anew divisional executive team, the integration of the operational and supportstructures into Retail and the formation of integrated standalone card, homeloan 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 ofgrowing the client base, as well as providing a low-cost platform for enhancingtransactional banking services; • The Old Mutual Bank Division of Nedbank continues to provide excellent serviceand the division is working well with Old Mutual to increase the relevance ofthis business to the Old Mutual client base and intermediary network. Old MutualBank recorded a loss for the full year due to marketing and client acquisitionactivities. • The alliance relationships with Capital One and the JD Group were terminated.Capital One's share of the alliances were acquired for approximately R160million, facilitating the integration of the card business within Nedbank Retailunder one management team. The alliance with the JD Group was terminated bymutual agreement. The restructuring of the local and international businesses of the WealthManagement Division is largely complete. As referred to earlier, ChiswellAssociates, the Stenham Group, BoE Life International, BoE International FundServices 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, whichimproved turnaround times significantly. While Nedbank Retail has created a solid growth platform, performance is stillbelow 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 impairmentsin the Aviation Finance book and expenses growth. This is the first year inwhich the bank has not shown earnings growth on the previous financial year,with Imperial Bank's contribution to Nedcor earnings dropping from R116 millionto R83 million. The Motor Finance Corporation (MFC) was the strongest performer, doubling profitbefore tax. The Medical Division, which is in a startup phase, made stronginroads into its niche market. Residential Development Property Finance hadanother strong year, but penetration into the commercial market wassignificantly below expectations. Cost growth impacted negatively on results. Asset-based Finance experienced reasonable performances from Corporate AssetFinance and Supplier Finance, but suffered significant losses in the aviationsector. These losses are directly related to the strengthening of the rand andthe continued weakness in the global aviation market. This affected ImperialBank's aviation charter clients in particular and resulted in a second year oflosses for this division. It is anticipated that 2005 will be better, but thedivision 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 ofGroup Risk, which incurred additional regulatory expenses on the group's moneylaundering projects and Basel II implementation. Approximately 6 913 staff weremoved from the Central Operations and Group Business Innovation Divisions intoclient-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 FICAdocumentation and legislative requirements. • Extensive improvements were made to the group's disaster recovery ability andthe most comprehensive test ever undertaken by the bank was successfullyconcluded. • New core network switches that significantly improve client service in termsof availability and response times were installed. • Nedcor's intranet site was voted the best in the financial services industryat the Computer Society of SA annual awards. • In the global ranking and awards for investor relations websites (the MZAwards) Nedcor was placed first in the online financial reporting category inthe Asia, Pacific and Africa region and third in South Africa for its investorrelations website. • Good progress was made on the implementation of an economic capital model, inconjunction 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 yieldedpleasing results, particularly in the last quarter. • A remuneration policy focusing on specific performance measures wasimplemented 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 ratedNedcor third among 70 corporates in the category 'Good Corporate Grantmaker'.Nedbank was also ranked third among 48 corporates as 'Most widely recognisedcorporate grantmaker'. In the Mail & Guardian, Investing in the Future awards,Nedcor won the best corporate responsibility report for its 2003 SustainabilityReport and was a finalist in the best corporate employee involvement programme. Nedcor is included in the JSE Socially Responsible Investment (SRI) Index and isone of only four South African companies to be included in the Dow Jones WorldSustainability Index. Prospects As the benefits of the increased focus on client service become evident, thegroup expects to show growth in advances and anticipates bringing asset growthback 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 theend of April 2004; • the positive endowment effect of the rights offer proceeds for the full yearfrom 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 April2005. The group will focus on growing transactional revenue. Revenue is anticipated tocontinue to improve and costs to reduce as the group's initiatives under itsthree-year plan are implemented. The group will also benefit from a significantreduction in once-off merger and recovery programme costs. The directors and management are aware that a considerable amount of effort liesahead in the recovery programme and that not all the fruits of these endeavourswill be reflected in 2005. The business is, however, well-placed to deliverimproved earnings in 2005. The detailed three-year plan anticipates that the group will maintain its assetmarket share from the second half of 2005. Using 2004 as a base, the next threeyears total expense growth is targeted to grow at 9% below revenue growth on acompound annual growth rate basis. However, this differential is expected to bebigger in 2005, given the once-off merger and recovery costs in 2004. The planfocuses on growing transactional revenue through a combination of focused teams,cross-selling, upselling, improving client service, consistent pricing andbancassurance initiatives. Nedbank Retail has been identified as the majorgrowth area. Importantly, the plan focuses on the transformation process withinNedcor. The group continues to pursue its target of achieving a return on averageordinary shareholders' equity of 20% and an efficiency ratio of 55% or better in2007. Thanks The directors and management express their thanks to clients and otherstakeholders for their continued support, and particularly thank all staffmembers for the incredible job they have done during this difficult period. Accounting policies The consolidated financial statements are prepared in accordance with, andcomply with, South African Statements of Generally Accepted Accounting Practiceand the requirements of the South African Companies Act and Banks Act. Theaccounting policies adopted are in all material respects consistent with thoseapplied for the year ended 31 December 2003. Certain restatements for 2003 arereflected in these financial statements, being the reclassification oftransaction taxes from taxation to operating expenses and the gross up of assetsand liabilities relating to certain pension fund assets and liabilitiesamounting to R529 million. The disclosures within the 2003 segmental reportshave been restated to take into account the changes for the improvedprofitability measurements during 2004 as noted above. Preliminary results - auditors' opinion These results have been reviewed by the company's auditors, KPMG Inc andDeloitte, and the review opinion is available for inspection at the company'sregistered office. Cautionary announcement pertaining to Black Economic Empowerment Transaction Shareholders are advised that Nedcor is in the process of finalising abroad-based black economic empowerment (BEE) ownership transaction. Accordingly,shareholders are advised to exercise caution in dealing in their shares untilNedcor announces further detail on its BEE transaction. Dividend - Nedcor ordinary Notice is hereby given that a final dividend of 76 cents per ordinary share hasbeen 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 thelast day for trading to participate in the final dividend to be Wednesday, 23March 2005. The shares will commence trading ex-dividend on Thursday, 24 March2005, and the record date will be Friday, 1 April 2005. Payment will be made onMonday, 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 BoardmanChairman Chief Executive 22 February 2005 Registered officeNedcor Limited, Nedcor Sandton,135 Rivonia Road, Sandown, 2196PO Box 1144, Johannesburg, 2000 Transfer secretariesComputershare Investor Services 2004 (Pty) Limited70 Marshall Street, Johannesburg, 2001PO Box 61051, Marshalltown, 2107 DirectorsWAM 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, NDennis (British), Prof B Figaji, RM Head (British), JB Magwaza, ME Mkwanazi, PFNhleko, JVF Roberts (British), CML Savage, JH Sutcliffe (British) *Executive Company SecretaryGS Nienaber Registration number 1966/010630/06Incorporated in the Republic of South AfricaShare 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 [email protected] Financial highlightsat 31 December Reviewed AuditedRm 2004 2003Headline earnings reconciliationIncome/(loss) attributable to shareholders 974 (1 600)Less: Non-headline-earnings items (473) (1 655)Non-trading and capital items (510) (1 693)Taxation on non-trading and capital items 37 38Headline earnings 1 447 55Headline earnings (excluding foreign currency 1 819 1 471translation losses)Key ratiosReturn on ordinary shareholders' equity (ROE) % 9,2 0,4ROE (excluding foreign currency translation % 11,6 10,3losses)ROE (excluding foreign currency translation % 14,4 12,5losses, merger and recovery expenses)Return on total assets (ROA) % 0,45 0,02ROA (excluding foreign currency translation % 0,57 0,46losses)Net interest income to interest-earning assets % 3,13 3,04Non-interest revenue to total income % 50,8 49,0Impairments to total advances % 2,9 3,4Efficiency ratio % 76,3 80,2Efficiency ratio (excluding foreign currency % 74,5 72,5translation losses)Share statisticsNumber of shares in issue m 394,0 274,8Weighted average number of shares** m 360,9 293,0Fully diluted weighted average number of shares* m 361,8 293,4*Headline earnings per share** cents 401 19Headline earnings per share (excluding foreign cents 504 502currency translation losses)**Fully diluted headline earnings per share** cents 400 19Attributable earnings per share** cents 270 (546)Fully diluted attributable earnings per share** cents 269 (545) Dividends declared per share cents 120 240Dividends paid per share cents 79 515Dividend cover times 3,3 0,1Net asset value per share (investments at market cents 4 590 4 240value)Tangible net asset value per share (investments cents 3 357 2 247at market value) ** 2003 adjusted for the rights issue Income statementfor the year ended 31 December Reviewed Audited*Rm 2004 2003Interest income 23 825 28 141Interest expense 16 258 21 333Net interest income 7 567 6 808Non-interest revenue 8 197 7 953Foreign currency translation losses (372) (1 416)Gross operating income 15 392 13 345Impairment of advances 1 416 2 063Income after impairment of advances 13 976 11 282Total expenses 11 736 10 703Operating expenses 11 041 10 305Fees due to alliance partners 70 4Recovery programme expenses 379Merger expenses 246 394Profit from operations before non-trading and capital 2 240 579itemsNon-trading and capital items (510) (1 693)Amortisation and impairment of goodwill (374) (1 803)(Loss)/Profit on sale of subsidiaries, investments and (23) 349property and equipmentNet impairment of investments, property and equipment, (113) (239)computer software and capitalised development costsProfit/(Loss) from operations 1 730 (1 114)Attributable earnings of associates and joint ventures 147 132Profit/(Loss) before taxation 1 877 (982)Taxation 576 390Taxation on non-trading and capital items (37) (38)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 shareholders 974 (1 600) * Restated Cash flow statementfor the year ended 31 December Reviewed AuditedRm 2004 2003Cash and short-term funds at beginning of year 12 227 16 607Cash flows from operating activities 5 723 5 643Net increase in operating funds (11 978) (14 124)Taxation paid (835) (616)Cash flows from investment activities 2 836 2 654Cash flows from financing activities 2 077 2 063Cash and short-term funds at end of year 10 050 12 227 AC133: Balance sheet classification offinancial instrumentsat 31 December 2004 2003 Reviewed Audited*Rm Assets Liabilities Assets LiabilitiesFair value 80 706 55 967 75 741 35 749Held for trading 77 551 55 967 73 774 35 749Available for sale 3 155 1 967Amortised cost 237 564 248 367 225 886 259 388Originated loans and 230 491 224 563receivablesHeld to maturity 7 073 1 323Non-trading liabilities 248 367 259 388Other assets and 8 968 1 318 11 486 2 875liabilitiesTotal shareholders' equity 21 586 15 101and minority shareholders'equity 327 238 327 238 313 113 313 113 * Restated Group balance sheetat 31 December Reviewed Audited*Rm 2004 2003AssetsCash and short-term funds 10 050 12 227Other short-term securities 16 310 10 610Government and other securities 26 224 21 333Derivative instruments 27 560 28 496Advances 221 128 210 096Sundry debtors 7 881 7 463Deferred-taxation asset 1 172 3 074Current taxation prepaid 196 256Investments in associate companies and joint ventures 1 043 1 627Other investments 3 456 3 788Insurance assets 3 109 5 152Property and equipment 2 740 2 684Computer software and capitalised development costs 1 419 1 710Goodwill 3 441 3 762Customers' indebtedness for acceptances 1 509 835Total assets 327 238 313 113Shareholders' equity and liabilitiesOrdinary share capital 394 275Ordinary share premium 9 892 4 801Reserves 7 809 6 571Ordinary shareholders' equity 18 095 11 647Minority shareholders' equity attributable to- preference shareholders 2 770 2 802- ordinary shareholders 721 652Total shareholders' equity and minority shareholders' 21 586 15 101equityDerivative instruments 28 055 28 206Deposits, current accounts and other liabilities 254 125 238 404Sundry creditors 10 054 12 454Deferred-taxation liabilities 1 125 2 731Current taxation liabilities 193 144Insurance funds 3 109 5 152Long-term debt instruments 7 482 10 086Liabilities under acceptances 1 509 835Total liabilities 305 652 298 012Total shareholders' equity and liabilities 327 238 313 113Guarantees on behalf of customers excluded from assets 10 770 12 403 * Restated Segmental analysisat 31 December 2004 2003 2004 Reviewed Total Total gross average average operating assets assets income Rbn Rbn RmNedbank Corporate 118 108 6 229Nedbank Capital 61 68 2 440Imperial Bank 15 10 836Nedbank Retail 76 73 7 662Shared Services 10 11 196Capital Management andCentral Funding 39 41 (1 583)Eliminations (20) (20) (388) Total 299 291 15 392 Segmental analysis (continued)at 31 December 2003 2004 2003 Audited gross Reviewed Audited* operating headline headline income earnings earnings Rm Rm RmNedbank Corporate 5 715 2 112 1 841Nedbank Capital 2 305 878 837Imperial Bank 786 83 116Nedbank Retail 7 145 641 455Shared Services (139) (751) (1 116)Capital Management andCentral Funding (2 125) (1 516) (2 078)Eliminations (342) Total 13 345 1 447 55 * Restated Geographical segmental analysisfor the year ended 31 December 2004 2003 2004 2003 Reviewed Audited Reviewed Audited Operating operating headline headlineRm Income income earnings earningsSouth Africa 14 236 11 961 1 216 (422)Business operations 14 236 11 961 2 242 1 447Merger and recovery programme (425) (320)expensesForeign currency translation (372) (1 416)lossesMinority interest income (229) (133)attributable to preferenceshareholdersRest of Africa 347 307 49 198Rest of world 809 1 077 182 279Business operations 809 1 077 196 279Merger and recovery programme (14)expenses 15 392 13 345 1 447 55 Segmental results have been restated to align with current management structuresand reporting methodologies. Statement of changes in shareholders' equity Ordinary Preference shareholders' shareholders'Rm equity equityBalance at 31 December 2002 as previously 17 046 1 987reportedImpairment of advances (1 700)Fair-value adjustment (1 177)Taxation 787Minority interest (4)Restated balance at 31 December 2002 14 952 1 987Net loss for the period (1 600) 133Dividends to shareholders (1 395) (133)Issue of shares (net of expenses) 380 815Shares sold by subsidiary (111)Release of reserves previously not available (357)Foreign currency translation reserve (181)movementAvailable-for-sale reserve movement (15)Other movements (26)Balance at 31 December 2003 11 647 2 802Net profit for the period 974 229Dividends to shareholders (269) (261)Issue of shares (net of expenses) 5 210Release of reserves previously not available (48)Foreign currency translation reserve (57)movementAvailable-for-sale reserve movement 621Other movements 17Balance at 31 December 2004 18 095 2 770 Statement of changes in shareholders' equity (continued) Minority shareholders'Rm equity TotalBalance at 31 December 2002 as previously reported 503 19 536Impairment of advances (1 700)Fair-value adjustment (1 177)Taxation 787Minority interest (4)Restated balance at 31 December 2002 503 17 442Net loss for the period 133 (1 334)Dividends to shareholders (1 528)Issue of shares (net of expenses) 1 195Shares sold by subsidiary (111)Release of reserves previously not available (357)Foreign currency translation reserve movement (181)Available-for-sale reserve movement (15)Other movements 16 (10)Balance at 31 December 2003 652 15 101Net profit for the period 135 1 338Dividends to shareholders (15) (545)Issue of shares (net of expenses) 5 210Release of reserves previously not available (48)Foreign currency translation reserve movement (11) (68)Available-for-sale reserve movement 621Other movements (40) (23)Balance at 31 December 2004 721 21 586 This and additional informationis available on our website:www.nedcor.com Lead sponsor to NedcorMerrill Lynch Sponsor to NedcorNedbank Capital This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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