NEDBANK CAPITAl - Nedbank Group Limited

OPERATIONAL REVIEWNEDBANK corporateMfundo Nkuhlu (43)Group Managing Executive:Nedbank Corporate6 years’ serviceBA(Hons), Strategic Management inBanking (Insead Business School),AMP (Harvard Business School)Mfundo started his career in 1994 at the Department of Trade andIndustry as a consultant on southern African Trade Relations. He wasappointed Chief Director of Africa Trade Relations in 1996 and wascharged with the responsibility for managing trade, economic policyand programmes covering Africa and the Middle East, and the NewPartnership for Africa’s Development (NEPAD). He joined SA RevenueServices in 2004 as the General Manager for Strategy and Planningresponsible for corporate strategy, revenue and economic analysis.He joined Nedbank in 2005 as the Managing Executive for NedbankAfrica. He subsequently became the Managing Executive of NedbankCorporate Banking later in 2005, and was appointed ManagingExecutive of Nedbank Corporate in 2009.56NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWReview of 2009In the most challenging marketconditions Retail faced leadershipuncertainties, with the cluster havinga member of the Retail executiveteam acting in a caretaking capacityfrom April 2009 until Saks Ntombela’sappointment in August 2009.The immediate emphasis was onrebuilding the team at executive anddivisional levels, ensuring sufficientspan of control in the various roles tooptimise the new appointees’ ability todeliver on their responsibilities. Key inthe initial organisational redesign wasstrengthening the risk, client and peoplefunctions to support the turnaroundof Retail to a more client-centred andintegrated business, while enhancing thetransformation profile, managing themix of new appointees and continuingto hold existing leaders accountable fortheir business through the cycle.Nedbank Retail had a difficult year andreported a headline loss of R156 million(2008: R1 002 million profit) and aneconomic loss of R1 448 million for theperiod (2008: R291 million economicloss). These numbers include NedbankBancassurance and Wealth. The tougheconomic conditions experiencedthroughout 2009 and high levels ofconsumer indebtedness tested theeffectiveness of lending decisionsand risk-based pricing and collectionstrategies implemented prior to thecycle turning, and the results reflectthe consequences of these practices,especially in the Home Loans business.Net interest income was 6,4% lower,primarily as a result of reducedendowment income on capital and nonrate-sensitivedeposits, as well as thehigher cost of funding.Impairments increased by 35,7% toR4 925 million, with the credit lossratio (CLR) increasing to 3,08% (2008:2,47%), driven mainly by Home Loans,where the defaulted advances increasedby 58,5% on 2008. The slower propertymarket and debt counselling processesmake it more difficult to cure clientsin default. It is therefore taking longerthan initially anticipated to rehabilitateclients, notwithstanding the cashflowrelief from interest rate reductions.The CLR is substantially above Retail’sthrough-the-cycle target range of 0,95%to 1,50%.In response to the challengesexperienced in Home Loans a number ofsteps were taken to improve collectionefficiencies, differentiate sales inexecution based on value and ease ofsaleability, and improve the economicprofitability of new business written.Greater emphasis was placed on pricingfor risk, tightening the loan-to-value(LTV) ratios (which resulted in theweighted average LTV on new businessdropping from an average of 82,93%to 79,52% during the year), supportingour existing clients, increasing clientrates to reflect higher funding costs andreducing fees paid to originators. Assetmargins on new business have widenedand the underlying risk quality hasimproved; however, this will take sometime to be evidenced in the marginand advances risk profile, given the lowvolumes of new business currently beingwritten. New Home Loans businesswas also increased through Nedbank’sown channels (now at 55% from 45%previously) where the cost of originationis much less and the underlying riskexperience of better quality, a trendwhich is encouraged.Expense growth has been controlled at9,9% through curtailment of headcountgrowth in backoffice and support areas.The higher efficiency ratio of 64,9%(2008: 61,1%) arose mainly as a resultof lower endowment earnings.Retail’s segmental analysis highlightedthe impairment challenges with Homeloans generating a headline loss ofR1,16 billion on a R92 billion advancesportfolio.The vehicle and asset finance businessimproved its risk and operationalprocesses, which saw a rise in the qualityand quantum of new business written,leading to reduction in headline lossesto R117 million. The turnaround timesGROUP REPORTSOPERATIONAL REVIEWSManagement teamDavid Crewe-Brown (41)Executive Head: Finance, Projects andStrategy15 years’ service • BCom, BAcc, CA (SA)Anton de Wet (43)Managing Executive: Personal Banking andClient Value Management11 years’ service • BCom, MBA, AMP (InseadBusiness School)Brian Duguid (48)Managing Executive: Retail Banking Services28 years’ service • CAIB (SA), FIBSASydney Gericke (51)Managing Executive: Nedbank Card21 years’ service • BCom(Acc), BCom(Hons),MCom, CPA, SEP (Insead Business School)Millicent Lechaba (42)Executive Head: Human Resources4 years’ service (Imperial Bank) • BA(Hons),HRM, SAP – HRMSibongiseni Ngundze (40)Managing Executive: Small Business Services5 years’ service • BCom, SMDP, Credit Diploma,Global Executive Dev Prog (GIBS)Alfred Ramosedi (40)Managing Executive: Nedbank Private Bank15 years’ service • BCom, MBA, FCMAPhumla Ramphele (47)Executive Head: Retail Risk3 years’ service • CAIB (SA), BCom(Acc),Postgraduate Certificate in BusinessAdministrationSarel Rudd (54)Managing Executive: Nedbank PersonalLoans6 years’ service • BCom(Acc), BCompt(Hons),CA (SA)Clive van Horen (43)Managing Executive: Retail Secured Lending10 years’ service • CA (SA), PhD(Econ)69NEDBANK GROUP ANNUAL REPORT 2009GOVERNANCE

nedbank Retail ... continuedand service delivery are now comparablewith the best in the industry.The unsecured lending of Card andPersonal Loans fared well in 2009,generating headline earnings ofR362 million and R263 millionrespectively and growth on last year, atgood returns on risk-adjusted capital.The earnings reduction in PrivateBanking, Small Business Services andTransactional and Investment Productsis largely as a consequence of lowerendowment income of R412 millionfrom declining interest rates andR124 million from higher impairments,largely home loans.The network and product offering ofRetail is an important generator ofnew business for Bancassurance andWealth, and these important links willbe maintained.The profile of Nedbank Retail earningshighlights the challenge of havinginsufficient transactional income andclients to cushion the high level ofimpairments in a very sizeable advancesportfolio.Notwithstanding these challenges, itis important to remain relevant to ourclients’ needs and continually enhancetheir experience and access to Nedbank.Key investments in 2009 include:• 58 new staffed outlets coveringtraditional branches, personal loansand kiosks in retailers. Nedbank nowhas 109 non-cash outlets that canbe run at lower cost, given differentsecurity requirements.• 270 new automated teller machines(ATMs), with a net of 127 as lessprofitablesites were closed. Insupport of our bank-for-all strategy,65% of new ATMs were deployedin typical mass-market areas. Thiswas complemented by consumereducation projects.• A state-of-the-art client contactcentre opened in Sugar Mill, which isthe home of the great conversationswith Nedbank.• Extending our AskOnce servicepromise to help clients movetransactional accounts hassle-free.• Rolling out new NetBankfunctionality, with internet users/transactions growing at 15%. Highgrowth rates were also noted in ourcellphone banking channel.Our core activity levels evidenced a25% increase in sales of transactionalproducts, with our people being our keydifferentiator.Other key areas of focus are summarisedbelow.Client growthWe have made steady progress ingrowing our client base, attracting some108 000 net new primary clients for theyear (2008: 130 000). Primary clientsnow total 1,3 million, with about 15%being Mzansi clients.Client serviceNedbank Retail has made good stridesover the years in the journey towardsdelivering worldclass service, bothin our internal measure using theCustomer Management AssessmentTool and as evidenced in externalsurveys. During 2009 Nedbank achieveda rating of 66,19 in the Ask Afrika pollof service excellence, the Orange Index,registering an improvement of 0,55 overthe past 12 months. However, whileNedbank made modest improvementsin the latest survey, our competitorshave closed on the previous gaps,leaving us in the fourth position inthe banking industry. Although thecurrent differential between us and ourcompetitors is marginal, we will focus onimproving client experience, especially inrespect of promptness, products suitedto client needs and professionalism.Having held the position of top bank inservice delivery for the past two years,Nedbank Retail is even more focused onimproving its service-related attributesand building on the improvements noted,including its rating of best-in-class channelrating for cellphone banking and delightedclients. Nedbank Group was awarded atop accolade at the 2009 Ombudsmanfor Banking Services Awards for excellingahead of its peers on client disputemanagement and resolution.We are still fully committed to ourAskOnce promise campaign, which isour guarantee to clients that we willcontinuously enhance their bankingexperience with us. During 2009 wesaw the extension of the propositionto include a specific service promise forclients wishing to switch their currentaccounts to Nedbank, with Nedbankundertaking to move their debit ordersfree of charge and hassle-free.Enhanced productivity andexecutionProject Client Information System focusedon improving our data managementcapabilities. We aligned the entire dataplatform infrastructure and created aninterface with the rest of our key productsystems in 2009. We will continueenhancing our data platform with valueaddingservices to improve our datamanagement capabilities.Project Siyakha is focused on deliveringa step change in the systems with whichour sales and service staff interact withclients ultimately to improve service andstaff efficiency. Siyakha is a four-yearphased programme, which began in 2007.The result will be one frontend for sales, inaddition to streamlined and reengineeredprocesses to minimise the impact on bothclients and bankers.Project Hassle-free Move focused ondelivering an efficient solution forswitching clients from other banks toNedbank, which has translated into70NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWincreases in the acquisition of newprimary clients.We have also improved clientcommunication on transactionalproducts by introducing electronicalerts in order to reduce losses as aresult of fraudulent transactions androlling out eStatements across cardand transactional products.Accelerating transformationTransformation remains a key focusarea and business imperative forNedbank Retail, with sustainabletransformation achieved throughimproved dialogue aroundtransformation issues. Employmentequity targets were achieveddespite internal restrictions onheadcount growth, which significantlyreduced staff turnoveropportunities. Retail hasachieved its headcounttargets for total blackand black female staffat senior, middle andjunior management levels.The challenge remains toachieve African targets at alllevels.Winning the war fortalentThe Barrett Survey has shownconsistent improvement andincreased participation levels, with10 290 Nedbank Retail staffmembersparticiping (a 47% increase from 2008).The Nedbank Retail entropy scoreimproved from 13% in 2008 to 12% inGROUP REPORTSRetail Makes Things Happen for thecommunities we serve• The Boxer Project – arranges logisticsaround providing consumer educationto Boxer stores and facilitates stafftraining.• In-Civil Project – follows up on leadsprovided or referred by channels,educates staff and assists consumer salesteams and Nedbank@work to acquirenew business and to cross-sell.• In-Workplace Project – trains peoplein the place where they work and usesconsumer education to complementskills development in the workplace.• In-Community Project – trains peoplein the community and empowers thegeneral public by providing criticalliteracy skills required for managingdaily financial needs.• Community Integration Project –establishes and maintains strategicrelationships in communities withkey and influential stakeholders,ie government and municipalofficials, organised labour and otherrelevant structures, to facilitate andidentify mutually beneficial businessopportunities, including consumereducation.• Special Projects – includes TeachChildren to Save (TCTS) that teacheschildren to save through fosteringa culture of saving and promotingvolunteerism. TCTS SA highlights theimportant role that volunteer bankers/financial sector professionals can play ineducating our nation’s youth to becomelifelong savers. TCTS SA is supportedby the Department of Basic Educationand is integrated with the EconomicManagement Science learning area ofthe school curriculum.OPERATIONAL REVIEWSGOVERNANCE71NEDBANK GROUP ANNUAL REPORT 2009

nedbank Retail ... continuedWe are fully committedto our AskOncepromise campaign,which is our guaranteeto clients that wewill continuouslyenhance their bankingexperience with us.2009 (a lower percentage represents animproved score in this assessment).The Nedbank Staff Survey for Retail alsoimproved across all dimensions with theoverall score improving from 72% in2008 to 76% in 2009.Prospects and strategyThe high levels of consumer indebtednessand fragile economic recovery meansdefaulted clients will take longer tocure. This requires a strong focus on riskmanagement and further strengtheningof Retail’s capabilities, especially asimpairments remain well outside thepreferred risk appetite and proposed newtarget ranges.Looking forward, as Retail shifts to amore client-centred and integratedbusiness, the focus will be on noninterestrevenue (NIR) growth anddelivering economic profit using risk asan enabler. In managing the businessthrough the current challengingeconomic cycle, fewer focus areas havebeen prioritised, balancing short- andlong-term impact. These include:• Focusing on NIR growth throughprimary-client acquisition, qualitysales, driving cross-selling andreducing attrition.• Creating a focus on reducingeconomic losses through effectivecollection and risk managementpractices while emphasisingselective asset growth, capitaloptimisation and retaining andgrowing liabilities, especially savingsaccounts.• Developing a client segmentationstrategy to drive retention,efficiencies, acquisition andpenetration across the business.• Developing a comprehensivetechnology roadmap to ensure thattechnology investment is focused onaddressing core client needs.• Defining and investing in the threelevels of a competency-based cultureto equip staff with appropriate skillsand improve the efficiency andeffectiveness of human resourcesfunctions.These focus areas will be underpinnedby a culture of disciplined execution anddifferentiated client service.72NEDBANK GROUP ANNUAL REPORT 2009

GOVERNANCEOPERATIONAL REVIEWSGROUP REPORTSOVERVIEW73NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWimperial bankRené van Wyk (53)Chief Executive: Imperial Bank Ltd16 years’ serviceRené joined Nedbank Limited in 1993 after being a partner at KPMGfor five years. He was responsible for Corporate and InternationalCredit and in 1999 he took on the role of Executive Director: Risk forNedcor Investment Bank. In 2002 he returned to Nedbank as GeneralManager: Enterprisewide Risk and in 2004 was appointed ChiefExecutive of Imperial Bank.74NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWReview of 2009The difficult trading conditionsexperienced in the latter stages of 2008continued into the first half of 2009.However, trading conditions started toimprove in the second half of the year.The environment of lower interest ratesresulted in an improvement in retailaccounts in arrears and a reductionin the high level of impairmentsexperienced in the first half of the year,enabling Imperial Bank to increase netprofit after tax by 19,3% toR430,8 million. Return on equity was13,2% and the efficiency ratio at 28,0%was similar to that achieved in theprevious year. Loans and advances grew12,8% from R44,7 billion toR50,4 billion as Imperial Bankcontinued to attract good-quality newbusiness. The credit loss ratio at 1,97%(2008: 1,71%) is expected to decreaseas recoveries and accounts in arrearscontinue to improve.Motor Finance Corporation (MFC)performed well and increased netprofit after tax by 92,5% fromR164,5 million to R316,6 million, whileloans and advances grew 16,1% fromR28,0 billion to R32,5 billion. MFC wasable to continue generating goodqualitybusiness, predominantly in theused-car market at appropriate pricing,while maintaining strong risk controlsand a lean operating environment.As anticipated, Property Finance hashad a difficult year owing to the lackof demand for residential developmentfinance. As a result, loans and advancesgrew 11,3% from R8,0 billion toR8,9 billion. This change in business mixaway from residential developmentfinance resulted in lower net interestincome, which dropped 25,9%from R328,1 million last year toR243,2 million for the current year. This,combined with an increase of 218% inimpairments from R13,3 million lastyear to R42,3 million for the currentyear, resulted in net profit after taxdeclining 36,7% from R164,0 million for2008 to R103,8 million for 2009.Professional Finance had a muchimproved year with net profit after taxincreasing 42,7% from R17,8 millionlast year to R25,4 million for the currentyear. This was largely attributableto improved margins, excellent costmanagement and a slight reduction inimpairments, which were down 3,4%from R26,7 million in 2008 toR25,8 million for the year under review.Loans and advances increased 16,3%from R4,9 billion last year to R5,7 billionfor the current year.Supplier Asset Finance had adisappointing year, with the divisionbeing badly affected by the pooreconomic environment. The divisionincurred a loss of R12,7 million for theyear compared with a profit after tax ofR37,3 million last year. This was mainlydue to impairments that increased201,7% from R29,2 million last year toR88,1 million for the current year. Inline with the strategy to consider newbusiness selectively loans and advancesdeclined from R3,7 billion at31 December 2008 to R3,3 billion at31 December 2009.ProspectsThe improved trading conditionsexperienced during the second halfof the year are expected to continueinto 2010. However, the economicrecovery is fragile and there is continueduncertainty that could negatively impacton the business and particularly thecorporate and commercial businesses.Since the initial announcements ofthe merger of Imperial Bank, thegroup has invested significantly in theplanning of the integration to ensurea smooth transition in line with ourvalues and guided by legislation and fairemployment practices.GOVERNANCEGROUP REPORTSOPERATIONAL REVIEWS75NEDBANK GROUP ANNUAL REPORT 2009

nedbank bancassurance and wealth ...continued£7,7 million in 2009. Advice-based salesthrough Nedbank Financial Planningincreased 36% to R6,9 billion, mainly intothe low-risk and money market funds.BoE Private Clients was rated No 1 inService and Advice in an independent surveyby SMRC Marketing Solutions (Pty) Limitedand Fairbairn Private Bank voted BestInternational Wealth Manager 2009.Prospects for 2010Bancassurance and Wealth is a key focusarea in the strategy of driving the growth inNIR and EP for the group. In 2010 we willfocus on• Opportunities to increase penetration ofthe existing Nedbank client base.• Expanding our short-term and life productrange.• Aligning of our high-net-worth businessand proposition.• Incorporating Imperial ProfessionalFinance.• Penetrating the Imperial Motor FinanceCorporation base with short-term andcredit life insurance.• Building a single asset managementdivision.Our businessBancassurance and Wealth comprises four divisions:Bancassurance• Nedgroup Life Assurance Company – provides credit life protection for death, disabilityand retrenchment as well as simple savings and investment products.• Nedbank Group Insurance Brokers – facilitates and brokers a variety of short-terminsurance products into the Nedbank client base.• Nedgroup Insurance Company – provides short-term insurance, including homeowner’sinsurance and personal accident cover.Asset Management• Nedgroup Investments – supplies a range of SA and offshore best-of-breed unit trustsand investment solutions.• BoE Private Clients and Fairbairn Private Bank – provides both active asset managementand investment solutions to the high-net-worth market.Wealth Management (Africa)• BoE Private Clients – offers a fully integrated spectrum of services, including investmentmanagement, financial and retirement planning, private lending facilities, call, notice andfixed-term deposits, tax and estate planning, and transactional banking.• Fiduciary and trust services – provides high-net-worth trust and fiduciary services.• Nedbank Financial Planning – provides professional advice on financial and assuranceproducts.Wealth Management (Europe and Middle East)• Fairbairn Private Bank – offers private banking, investment and corporate services, withoffices in the United Kingdom and Middle East, on the Isle of Man andJersey, and in SouthAfrica.• International Fiduciary and Trust Services – provides trust management services for the OldMutual Group, the high-net-worth segment and the independent financial adviser market.78NEDBANK GROUP ANNUAL REPORT 2009

GOVERNANCEOPERATIONAL REVIEWSGROUP REPORTSOVERVIEW79NEDBANK GROUP ANNUAL REPORT 2009

chief operatingofficer’s report‘The central functions housed within the portfolio of the Chief OperatingOfficer have a key role to play by operating in a coordinated way to enablethe frontline business clusters to be well-positioned and supported in order tocompete strongly in the markets in which they operate.’Graham Dempster (54)Chief Operating OfficerBCom (CTA), CA (SA), AMP(Harvard Business School)29 years’ serviceGraham joined the group in 1980 in the Corporate FinanceDivision of UAL Merchant Bank. He was appointed GeneralManager of the division in 1987 and as Joint Head of theSpecial Finance Division in 1989. In 1992 he was transferredto Nedbank, initially in a general management role in respectof strategy, and was appointed as Head of the InternationalDivision in 1998. He assumed responsibility for the CorporateBanking Division in 1999 and Nedbank Corporate in late 2003.Graham was appointed Chief Operating Officer in August 2009.80NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWIn August 2009 Nedbank Groupannounced a new structure for the GroupExecutive Committee. As part of thenew structure Graham was appointedto the newly created position of ChiefOperating Officer (COO) and as anexecutive director of both NedbankGroup Limited and Nedbank Limited.In his role as COO Graham has overallaccountability for several of the centralfunctions in Nedbank Group, namelyNedbank Group Finance, Balance SheetManagement, Information Technology,Human Resources, Marketing,Communications and Corporate Affairs,and Strategic Planning, as well asresponsibility for managing the alliancewith our Pan-African banking partnerEcobank.Business approachOver the past six years Nedbank Grouphas focused on addressing the basics ofbanking and building the performanceof the bank for the next phase of growththat it is now able to embark upon.The central functions housed within theCOO portfolio have a key role to playby operating in a coordinated way toenable the frontline business clustersto be well-positioned and supportedin order to compete strongly in themarkets in which they operate.In this regard it is critical that,through the strategic planningprocesses undertaken each year, thegroup determines its key strategicchange thrusts to achieve its growthobjectives, and that we ensure thatthe scarce resources required in termsof appropriate allocation of economiccapital, technology projects, specialistpeople skills and the marketing ofthe brand are aligned in an efficientand effective manner to support thefrontline business in order to achieve thegroup’s key strategic change thrusts.Transition from NedbankCorporate‘Over the past six years it was agreat privilege to head NedbankCorporate and be involved in thebuilding of the businesses with asuperb cluster executive team whoare valued friends and colleagues.It has been wonderful to see manyexecutives in the cluster achieveoutstanding results both in theircareers and personally. I will alwaystreasure this as a very special time inmy career and thank my colleagueson the Nedbank Corporate ExecutiveCommittee over those years formaking it such a special journey. Toeach member of staff I thank you formaking a very important contributionto the growth of the businesses andwish you all the best in the future.I am delighted that Mfundo Nkuhluwas appointed to head NedbankCorporate and I know he will be anexcellent leader of the cluster.’GROUP REPORTSOPERATIONAL REVIEWSManagement teamTrevor Adams (47)Group Executive: Balance Sheet Management14 years’ serviceBCom(Hons), CA (SA)John Bestbier (54)Group Executive: Strategic Planning.14 years’ serviceBBusSc (Actuarial); CA (SA)Smit Crouse (33)Executive Head: Ecobank Alliance2 years’ serviceLLB, LLMRaisibe Morathi (40)Chief Financial Officer3 years’ serviceBCompt(Hons), CA (SA), H Dip Tax, AMP(Insead Business School)Fred Swanepoel (46)Chief Information Officer13 years’ serviceBCom(Hons), MBA, SEPSA (Harvard and WitsBusiness School), AMP (Harvard BusinessSchool, USA)Ciko Thomas (40)Group Executive: Group Marketing,Communications and Corporate AffairsJoined 18 January 2010BSc, MBAShirley Zinn (48)Group Executive: Human Resources5 years’ service.DEd (Harvard)GOVERNANCE81NEDBANK GROUP ANNUAL REPORT 2009

CHIEF operating OFFICER’S REPORT ... continuedFinancial targetsMedium-to-long-term targets2010 outlookReturn on equity (excl goodwill) 5% above monthly weighted-average Improving, but below target.cost of ordinary shareholders’ equityEfficiency ratio < 50,0% Worsening, remaining above target.NIR-to-expenses ratio > 85% Improving, but below target.Growth in diluted headline earningsper shareImpairments charge(credit loss ratio)At least consumer price index + grossdomestic product growth + 5%Between 0,6% and 1,0% of averageadvancesImproving, forecast to exceed target.Improving, but above target.Basel II core Tier 1 capital adequacy ratio 7,5% to 9,0% Improving, above top end of range.Basel II Tier 1 capital adequacy ratio 8,5% to 10,0% Improving, above top end of range.Basel II total capital adequacy ratio 11,5% to 13,0% Improving, above top end of range.Economic capitalCapitalised to 99,93% confidence interval A including 10% buffer.on economic capital basis (target debtrating A including 10% buffer)Dividend cover policy 2,25 to 2,75 times 2,25 to 2,75 times.Initial areas of focus include:• A three-year stategy and planningprocess for 2010 to 2012 that soughtto align future economic capitalallocation more closely to economicprofit generation in order to enhanceshareholder value creation.• An intensive project prioritisationprocess to agree which technologydevelopments to undertake and toincrease the level of project spendwith an emphasis on high clientimpact and financial return criteria.• A refinement of our economic capitalallocation methodologies moreaccurately to reflect the risk profile ofthe individual clusters to assess anddrive the returns on capital – this willbe implemented in the first halfof 2010.• A formulation of overall bank andcluster risk loss ranges to provide theline businesses with a clear directivein terms of risk propensity in which torun their business.• The establishment of a non-interestrevenue (NIR) project to drivethe organisation to improve theNIR:expense ratio following thesetting of the medium-to-long termtarget ratio at > 85%.• A cross-cluster process of talentdevelopment and successionplanning to identify and support thedevelopment of our key executives.• The continued focus and commitmentto achieving Nedbank Group’saspiration of being a leader intransformation and the introductionof a dynamic target-setting processthat aligns our employmentequity targets in terms of both theEmployment Equity Act and theDepartment of Trade and IndustryCodes,• A review of the progress made inthe building of the brand and thecommencement of a more detailedassessment of the strength of thebrand in the wholesale bankingmarket in which Nedbank Group has astrong position and market presence.• Managing the alliance relationshipwith Ecobank to ensure the deliveryof a seamless one-bank experienceacross 33 countries in Africa, providingclients with access to banking servicesacross the largest geographic coveragebanking network on the continent.Operational reviews for each of thesecentral functions for 2009 follow thisoverview.82NEDBANK GROUP ANNUAL REPORT 2009

Description of functionsGroup FinanceGroup finance is responsible for thecontrol and governance of the group’saccounting policies and disclosurerequirements for both financial andmanagement reporting, as well as thepreparation and communication of thegroup financial results. This includesproactively managing the tax affairsof the group, together with budgeting,modelling and forecasting, target settingand ongoing tracking and maintenanceof the group’s financial affairs. TheGroup Shared Services Centre withinGroup Finance provides, among others,centralised processing, procurement andproperty services.Balance Sheet ManagementBalance Sheet Management is responsiblefor managing the group’s regulatory,economic and statutory capital consistentwith the current and planned levelsof business activity, risk appetite andrequired/desired level of capital adequacy(including its target debt rating). BalanceSheet Management is mandated toensure that capital is employed efficientlyacross the group based on an economiccapital allocation and risk-adjustedperformance measurement model toensure that an optimal level of capitalfor the group and its subsidiaries ismaintained. Balance Sheet Managementoptimises the risk profile of the balancesheet through risk portfolio and valuebasedmanagement principles, risk-basedstrategic planning, and management ofcapital buffers, integrated with stress andscenario testing and risk appetite. Formore details refer to the Risk and BalanceSheet Management Report on pages 126to 187.Group TechnologyGroup Technology is Nedbank’scentralised technology unit withresponsibility for all components ofthe group’s technology processing,development and systems support.The group’s information technology(IT) systems, databases, technologyinfrastructure, software development andIT project/programme management arecentrally managed to provide economiesof scale and to facilitate a cohesivegroupwide service-orientated architecturetechnology strategy.Human ResourcesHuman Resources is esponsible for theoverall integrity and operation of thehuman resources function for the group,which includes an integrated approach tobuilding a unique culture for competitiveadvantage, accelerating transformation,learning and growth, talent management,rewards management and building humanresources capability and excellence.Group Marketing, Communicationsand Corporate AffairsThe Group Marketing, Communicationsand Corporate Affairs team has overallstewardship of the Nedbank brand, ofexternal and internal communicationsto the full spectrum of the group’sstakeholders, and of the group’soverall corporate social responsibilityprogramme, and is also responsible formonitoring the group’s transformationprogramme.Strategic PlanningStrategic Planning coordinates thestrategic planning activities across thegroup and assists in the implementationof its plans. The team also coordinatescorporate actions such as acquisitionsand disposals, and formulates the group’sviews on macro- and microeconomicissues. These views are used internally bythe group to inform its banking processesand are provided as a service to NedbankGroup clients in the form of researchreports and presentations. Membersof the team also serve on a number ofindustry advisory boards.Ecobank allianceThe Ecobank Nedbank alliance is a groupinitiative through which Nedbank Groupclients have access to the largestbanking network in Africa across33 countries in West, Central, East andsouthern Africa. The alliance’s centraloffice is in Johannesburg and serves toprovide support and facilitate variouscollaboration initiatives between thetwo organisations, cutting across allthe clusters. LocalKnowledgeAfrica, thealliance centre of excellence, focuseson assisting clients in expanding andgrowing business across Africa, andthrough local in-country and sectorintelligence overcomes some of the majorcomplexities of doing business in Africa.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW83NEDBANK GROUP ANNUAL REPORT 2009

chief financiALOFFICER’s REPORT‘A key feature of our performance was the strengthening of the group’scapital ratios, which are now comfortably above our target ranges.Strengthening the balance sheet remains a major focus and we continued togrow the net asset value.’84NEDBANK GROUP ANNUAL REPORT 2009Raisibe Morathi (40)Chief Financial Officer

IntroductionThe performance of Nedbank Groupover the past year should be evaluatedin the context of one of the toughestperiods experienced by the bankingsector locally and globally in manydecades.While the performance is down on2008, the results are in line withmanagement’s expectations and theguidance provided to the market inthe third quarter trading update. Itis therefore pleasing to report thatNedbank Group has remained solidlyprofitable, strengthened its capitalposition and, importantly, continued toincrease tangible net asset value.The global and domestic bankingconditions, as well as Nedbank Group’sresponse to the challenges over thepast year, have been outlined in theChairman’s and Chief Executive’sReports respectively.Financial targetsThe group achieved three of its sevenmedium-to-long-term financial targets,notably the capital adequacy ratio,economic capital and dividend coverlevels.The return on ordinary shareholders’equity (ROE) decreased as a resultof increasing retail impairment levelsand the negative impact from lowerendowment earnings that reducedthe return on assets, togetherwith strengthened capital levelsas shareholders’ equity growth farexceeded growth in total assets.Reporting changesNedbank Business Banking is a highgrowtharea for the group and becauseof its strategic importance was madea separate cluster in 2009, havinghistorically been a division of NedbankCorporate.The acquisition of the remaining sharesin Nedgroup Life Assurance Company(NedLife), BoE Private Clients andFairbairn Private Bank (the previous jointventures with Old Mutual) has beenpositive for the group. These assets,previously accounted for as associates,together with other insurance andwealth management businesses, led tothe creation of a Bancassurance andWealth business cluster in August 2009.This cluster will report separately from2010, and its seven-month performancein 2009 is included in Nedbank Retail.Imperial Bank is reported on separatelyfor the last time in the current period,as the remaining 49,9% shareholdingwas acquired by the group and thetransaction approved in February 2010.This business will be fully consolidatedand integrated into the Nedbank Retail,Nedbank Business Banking, NedbankCorporate and Nedbank Bancassuranceand Wealth clusters respectively.During the year the group commenceda project known as the Financial ControlInitiative (FCI), which forms part ofthe group initiatives of Old Mutualplc. FCI aims to promote a soundfinancial reporting culture throughan effectively managed financial riskand control environment. FCI enablesrisk management to become part ofeveryone’s role and purpose, withstaff and managers able to explainand show on a consistent basis howthey effectively use controls in theirbusiness to mitigate the risk of materialmisstatement of financial information.This initiative fulfils regulatory andgovernance requirements aroundfinancial reporting and controls asrequired by King III and the newCompanies Act, among others.Financial reportingNedbank Group continues to strivefor best-practice communication withthe investor community. This wasacknowledged when the group wasranked as the overall winner and first inthe banks/financial services category inthe Investment Analysts Society Awardsfor best reporting and communication.The Nedbank Group Annual Reportimproved its ranking to third out of thetop 100 companies listed on JSE Limitedat Ernst & Young’s 2009 Excellencein Corporate Reporting Awards. Thisranking is adjudicated by the accountingdepartment of the University of CapeTown in conjunction with Ernst & Young.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW85NEDBANK GROUP ANNUAL REPORT 2009

CHIEF FINANCIAL OFFICER’S REPORT ... continuedReturn on equity driversfor the year ended 31 December2009 2008Net interest income (NII) 16 306 16 170 NII/average interest-earning bankingassetsImpairment of loans and advances (6 634) (4 822) Impairments/average interest-earningbanking assetsNon-interest revenue (NIR) 11 906 10 729 NIR/average interest-earning bankingassetsIncome from normal operations 21 578 22 077Total operating expenses (15 100) (13 741) Total expenses/average interest-earningbanking assetsShare of profits of associates and jointventures55 154 Associate income/average interestearningbanking assetsNet profit before taxation 6 533 8 490Indirect taxation (438) (374)Direct taxation (1 232) (1 757) 1 – effective taxation rateNet profit after taxation 4 863 6 359Non-controlling interest (586) (594) Income attributable to minoritiesHeadline earnings 4 277 5 765 Headline earningsDaily average interest-earningbanking assets*481 378 441 713Daily average total assets* 522 234 483 419 Interest-earning banking assets/dailyaverage total assetsSimple average total assets 568 863 527 940 Return on total assetsSimple average shareholders’ funds 37 281 32 553 Gearing* Average calculated on a 365/366-day basis.ROEROE (excluding goodwill)86NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEW2009 20083,39%3,66%lessImpairments/NIIlessImpairments/NII1,38%4,48% 40,7%1,09%5,00% 29,8%addNIR/ExpensesaddNIR/Expenses2,47% 78,8% 2,43% 78,1%less Efficiency ratio less Efficiency ratio3,14%53,5% 3,11%51,1%GROUP REPORTSadd0,01% 0,03%add1,35% 1,92%multiplymultiply0,74 0,75multiplymultiply0,88 0,910,88% 1,31%OPERATIONAL REVIEWSmultiply84,6%=0,75%multiply15,26=11,5%13,0%multiply83,7%=1,09%multiply16,22=17,7%20,1%87NEDBANK GROUP ANNUAL REPORT 2009GOVERNANCE

CHIEF FINANCIAL OFFICER’S REPORT ... continuedFinancial performanceHeadline earnings decreased by 25,8%from R5 765 million toR4 277 million. Basic earnings declinedby 24,7% to R4 826 million (2008:R6 410 million).Diluted headline earnings per share(EPS) decreased by 29,8% from 1 401cents to 983 cents. Diluted basic EPSdeclined by 28,8% from 1 558 centsto 1 109 cents. These results are in linewith the guidance given in the thirdquartertrading update.A key feature of the year’s performancewas the strengthening of thegroup’s capital ratios, which are nowcomfortably above our target ranges.The core Tier 1 capital adequacy ratioincreased from 8,2% to 9,9%, the Tier1 capital adequacy ratio from 9,6% to11,5% and the total ratio from 12,4%to 14,9%.The group’s ROE, excluding goodwill,decreased from 20,1% to 13,0%.ROE decreased from 17,7% to 11,5%for the year. These declines weredriven primarily by increasing retailimpairment levels and the negativeimpact from lower endowment earningsthat reduced the return on assets,together with strengthened capitallevels as shareholders’ equity growth farexceeded growth in total assets.Strengthening the balance sheet remainsa major focus and we continued to growthe net asset value (NAV) and tangibleNAV per share.An interim dividend of 210 cents pershare and a final dividend of 230 centsper share were declared, maintaining thedividend cover at 2,29 times similar levelsas last year.The interest margin was compressed by27 basis points to 3,39%, which wasslightly better than the 30 to 35 basispoints expected.We saw the credit loss ratio peak inthe first quarter at 167 basis pointsand decrease to 147 basis pointsfor the year-end. Although interestrates decreased by 450 basis pointsduring 2009, unemployment and theweak housing market exacerbatedcredit stress. Nedbank Retail’s creditquality deteriorated, with impairmentsworsening significantly, although the rateof new defaults slowed in the second half.Business banking and wholesale bankingimpairments ended the year at betterlevels than originally anticipated.Preprovisioning operating profit, ameasure that shows the underlyingstrength of the franchise beforeimpairments, decreased by 1,6% toR12,1 billion. This shows the significanceof the impact from the higherimpairments and loss of endowment, butdemonstrates the underlying strength ofour business.The NIR/expenses ratio is a new ratio weare tracking. A key focus for the group isto grow NIR as this is an important areawhere we lag our peers.We have therefore set a medium-tolong-termtarget for NIR/expenses ofgreater than 85% and are using thistarget to ensure clusters focus on thismeasure.The efficiency ratio deteriorated to53,5%, mostly as a result of lower NII.Assets under management grew by11,0% to R93,6 billion, primarily throughour domestic asset managementbusiness, which experienced strong netinflows of R7,2 billion on the back ofgood fund performance.Strong growth in the value of newbusiness supported growth of 40,5% inembedded value in Nedgroup Life, dueto good growth in credit life and funeralproducts, as well as improved sales intothe retail home loan base.EP is a measure of earnings afterdeducting the cost of capital. The grouphas increased surplus capital throughthese challenging economic timeseven though it has been impactedby the higher impairments and lowerinterest rates. Overall this led to a smalleconomic loss of R74 million.The bank’s funding and liquidity levelshave remained sound as a resultof an ongoing focus on increasingand strengthening liquidity buffers,lengthening the funding profile,maintaining a low reliance on interbank,foreign and capital markets, as well asrobust balance sheet management. Astrong, broad-based deposit franchisealso provides the group with diversefunding sources.88NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWKey financial indicatorsFor the year ended 31 December % change 2009 2008Headline earnings (Rm) (25,8) 4 277 5 765Diluted headline EPS (cents) (29,8) 983 1 401Diluted basic EPS (cents) (28,8) 1 109 1 558Core Tier 1 capital adequacy* (%) 9,9 8,2Tier 1 capital adequacy* (%) 11,5 9,6Total Basel II capital adequacy* (%) 14,9 12,4ROE (%) 11,5 17,7ROE (excluding goodwill) (%) 13,0 20,1Return on assets (ROA) (%) 0,75 1,09NAV per share (cents) 6,8 9 100 8 522Tangible NAV per share (cents) 3,1 7 398 7 179Dividend per share (cents) (29,0) 440 620Margin (%) 3,39 3,66Credit loss ratio (%) 1,47 1,17Preprovisioning operating profit** (Rm) (1,6) 12 143 12 344NIR/expenses ratio (%) 78,8 78,1Efficiency ratio (%) 53,5 51,1Assets under management (Rm) 11,0 93 625 84 381Life assurance embedded value*** (Rm) 40,5 795 566Life assurance value of new business*** (Rm) 54,5 187 121Headline economic (loss)/profit (

CHIEF FINANCIAL OFFICER’S REPORT ... continuedImpairments charge on loans and advancesThe credit loss ratio of 1,47% for 2009 (2008: 1,17%) showedsigns of improvement after having peaked at 1,67% at31 March 2009. This ratio is higher than the internal targetrange of 60 to 100 basis points. The wholesale ratios, althoughhigher than in 2008, are within their through-the-cycle targets,while Retail remains challenging. The target ratio changedduring the year, from the previous range of 55 – 85 basis pointsto 60 – 100 basis points. This is due to a reassessment of theranges within each cluster and the projected change in mixbetween secured and unsecured products in Retail. Unsecuredretail products tend to have higher credit loss ratios, resultingin an increase in Nedbank Group’s target credit loss ratio range.The credit cycle has to date largely impacted consumers andsmaller businesses, as reflected in the continued deteriorationof retail credit loss ratios. High levels of unemployment, lowercollateral values due to weak housing and vehicle markets, anddelays in recoveries resulting from the debt counselling processhave all played a part in the increase in defaulted advances inretail secured loans.Credit loss ratio (%) 2009 2008Nedbank Capital 0,26 0,06Nedbank Corporate 0,24 0,12Nedbank Business Banking 0,52 0,59Nedbank Retail 3,08 2,47Imperial Bank 1,97 1,71Nedbank Group 1,47 1,17Defaulted advances increased by 56,3% from R17 301 millionto R27 045 million and represent 5,9% of total advances. Totalimpairment provisions increased by 24,7% from R7 859 millionto R9 798 million. Although early arrears have improved for thelast seven consecutive months of the year, defaulted advanceshave continued increasing, albeit at a slower rate.Defaulted advances/impairment provision/credit loss ratioRm30 0001,67%1,57%1,47%%1,6025 0001,4020 00015 00010 0000,96% 1,17%1,201,000,800,600,40Targetcredit lossratio rangeDefaulted advancesImpairment provisionCredit loss ratio5 0000,200June 08 Dec 08 Mar 09 June 09 Dec 090,0090NEDBANK GROUP ANNUAL REPORT 2009

NIRNIR, including the consolidation of the Bancassurance andWealth joint ventures, grew by 11,0% to R11 906 million(2008: R10 729 million). Like-for-like NIR increased by 6,1%,driven by good growth in commission and fee income andtrading income, offset to an extent by fair-value gains, whichdropped from R368 million in 2008 to R44 million. The dropin fair-value gains is mainly the result of the group reporting,in 2008, fair-value gains of R207 million from the mark-tomarketof its own debt, which we mentioned were unlikely tobe repeated and were highlighted as poor-quality income andnot attributed to capital. In 2009 fair-value gains on the group’sdebt amounted to R6 million.Commission and fee income was 13,1% higher, largely fromvolume growth in retail transactional banking and increases infees charged across the bank.Trading income increased by 18,6% from R1 553 million in2008 to R1 841 million in 2009, reflecting robust tradingactivity in treasury, investment banking and the global marketbusinesses.Private equity income remained broadly flat for the year.However, underlying contributions were mixed with therecovery in the Nedbank Capital private equity portfolio beingoffset by the Nedbank Corporate property private equityportfolio having a lower unrealised gain.NIR from private equity (Rm) 2009 2008Nedbank Capital 269 127Nedbank Corporate property 35 176Total NIR from private equity 304 303Bancassurance and Wealth NIR increased by 61,7% toR1 518 million for the year, driven primarily from theconsolidation of the joint ventures for seven months and withgood performances from the asset management, financialplanning and life insurance businesses. On a like-for-like basisNIR for Bancassurance and Wealth increased by 4,7%, withgood growth in the SA businesses, but pressure on NIR in theinternational businesses due to the challenging economicenvironment.GROUP REPORTSNIR% changeexcl jointventures%change 2009 2008Commission and fees 8,9 13,1 8 583 7 588Trading income 18,6 18,6 1 841 1 553Private equity income 0,1 0,1 304 303Insurance income 27,6 91,0 615 322Fair-value adjustment on bonds/swaps (44,3) (44,3) 162 291Credit spread 6 207Basis 156 84Other fair-value adjustments (>100) (>100) (118) 77Other investment income (82,6) (81,2) 13 69Rental income 5,3 2,0 52 51Sundry income (4,4) (4,4) 454 475Tando 204 227Other 250 248OPERATIONAL REVIEWSTotal NIR 6,1 11,0 11 906 10 729GOVERNANCEOVERVIEW91NEDBANK GROUP ANNUAL REPORT 2009

CHIEF FINANCIAL OFFICER’S REPORT ... continuedExpensesNedbank Group continued to maintain tight control overdiscretionary spending, while investing in strategic areas ofthe business. Expenses increased by 9,9% to R15 100 million(2008: R13 741 million). This increase was impacted by theconsolidation of the Bancassurance and Wealth joint-ventureacquisitions with effect from June 2009.On a like-for-like basis, excluding the joint-venture acquisitions,expenses increased by 7,7%.Staff expenses grew by 12,2%, driven by an average salaryincrease of 10,2% in April 2009 (comprising higher increasesto lower-paid staff) and the inclusion of the abovementionedjoint-venture acquisitions from 1 June 2009. Staff headcountand temporary staff decreased by 1,9% and 12,3% respectively.• Marketing costs were restricted to an increase of 1,4%.• Information technology costs increased by 8,3% andrelated mainly to project-based software development andprocessing costs.• Occupation and accommodation costs increased by 12,5%as a result of branch and office rent increases, renovations,lease cancellation costs and office relocations.• Other expenses have increased due to the amortisation ofintangible assets arising from the joint-venture acquisitions,higher property-in-possession costs and fraud-related costs.%changeexcl JVs%change 2009 2008Staff costs 9,9 12,2 7 898 7 040Computer processing 6,5 8,3 1 993 1 841Communication andtravel (1,9) (0,5) 633 636Accommodation 11,0 12,5 1 262 1 122Marketing and publicrelations 0,7 1,4 889 877Fees and insurance 4,3 6,1 1 407 1 326Other 19,2 26,5 892 705Operating expenses 8,3 10,5 14 974 13 547Black economicempowerment (34,9) (35,1) 126 194Total expenses 7,7 9,9 15 100 13 741Associate incomeAssociate income decreased to R55 million in 2009(2008: R154 million) as a result of the BoE Private Clients andNedLife joint-venture acquisitions previously being accountedfor as associates and now being consolidated for the last sevenmonths of the current period.TaxationThe taxation charge (excluding taxation on non-trading andcapital items) decreased by 29,9% from R1 757 million in 2008to R1 232 million. The effective tax rate decreased from 21,6%in 2008 to 20,2% as a result of the following factors:• A reduced secondary tax on companies charge due to lowerdividend declarations in 2009 compared with 2008 and,92NEDBANK GROUP ANNUAL REPORT 2009additionally, the interim dividend in 2008 being a full cashdividend with no scrip offer.• AC102 adjustments as well as the release of tax riskprovisions no longer required at December 2009.Non-trading and capital itemsIncome after taxation from non-trading and capital itemsdecreased to R549 million for the year (2008: R645 million).The main contribution in 2009 came from the accountingrevaluation of the joint ventures immediately prior to theiracquisition, while in the previous year the main contributor wasR622 million after-tax profit from the sale of Visa shares.Statement of financial positionTotal assetsTotal assets increased by 0,6% to R571 billion (2008:R567 billion). During the year:• cash and securities declined by 8,2% mainly from thematuring of R10 billion of additional liquid assets. This wasoffset by the purchase of replacement government bonds ofR4 billion to hedge long-term debt instruments; and• the group showed lower trading and derivative balancesmainly arising from foreign exchange movements.This was balanced by:• growth in intangible assets related to the Bancassurance andWealth joint-venture acquisitions;• growth in investments from the first-time consolidation ofNedLife; and• a 3,7% increase in advances.With effect from December 2009 we have reconsolidated theZimbabwean subsidiary, MBCA, following a capital injection andthe dollarisation of the currency. This had a small positive impacton the 2009 numbers, but no effect on income.AdvancesAdvances increased by 3,7% to R450 billion, reflecting:• ongoing growth in Nedbank Capital and Imperial Bank;• slower growth in Nedbank Corporate and Nedbank Retail; and• reduced advances in Nedbank Business Banking due to aslowdown in client demand for credit and a reduction ofsingle-product loans in line with the drive to reduce higher riskexposures and focus on primary clients.Growth in advances took place across a number of categories,including personal loans, mortgage loans, preference shares,deposits placed under reverse repurchase agreements and otherloans, offset by a decrease in low-margin overnight loans. Overallmarket share increased by 1,4%.Advances (Rm)(%)change 2009 2008Nedbank Capital 16,0 55 315 47 686Nedbank Corporate 0,7 137 173 136 222Nedbank Business Banking (9,4) 50 115 55 321Nedbank Retail 4,9 157 500 150 107Imperial Bank 12,8 50 451 44 734Other (>100,0) (253) 163Total 3,7 450 301 434 233

CHIEF FINANCIAL OFFICER’S REPORT ... continuedDepositsThe group retained a strong ratio of advances to deposits of95,9%. Deposits grew in line with the requirement to fundthe growth in balance sheet assets, with deposits increasingby 0,5% to R469,4 billion (2008: R466,9 billion). In the retaildeposit market, current and savings account balances remain atlow levels as consumers continue to reduce debt levels. In thewholesale deposit market current and savings accounts as wellas fixed deposits have increased, partially offset by a reduction inother term deposits.Optimising and diversifying the funding mix and lengtheningthe profile continued to be a key management focus. Despiteintense competition in the local deposit market, the grouphas maintained its strong deposit franchise and continues tohold the second largest share of household deposits at 24,2%.During the year a number of innovative retail deposit productswere successfully introduced, including Nedbank’s Equity-linkedDeposit, EasyAccess Deposit and Platinum Park-It.CapitalNedbank Group remains focused on optimising andstrengthening its capital ratios. During 2009 these ratios haveincreased significantly and continue to be maintained above thegroup’s target ratios. The group holds a surplus ofR13,5 billion above its minimum total regulatory capitaladequacy requirements.Capital adequacy*2009ratio2008ratioCore Tier 1 ratio 9,9% 8,2%Tier 1 ratio 11,5% 9,6%Totalcapital ratio 14,9% 12,4%TargetrangeRegulatoryminimum7,5%to 9,0% 5,25%8,5%to 10,0% 7,00%11,5%to 13,0% 9,75%*Capital adequacy ratios include unappropriated profit at the year-end.Regulatory capital adequacy ratios increased mainly due tothe retention of earnings and a key focus on the optimisationof capital and risk-weighted assets, enabled by enhancing dataquality and more selective asset growth using our economicprofit-basedmanaging for value philosophy. This resulted inrisk-weighted assets decreasing by 8,1%, which is well belowoverall balance sheet growth of 0,6%. The group was also ableto maintain its dividend cover at 2,30 times while increasingcapital.Group regulatory capital adequacy – five-year historyRegulatory surplus:Core Tier 1 R15,3 bnTier 1 R14,8 bnTotal R13,5 bnDec 07Jun 08Dec 087,2%7,6%8,2%8,6%9,9%8,2%8,9%9,6%10,0%11,5%11,4%11,9%12,4%13,2%14,9%Jun 09Dec 09Core Tier 1 Tier 1 Total capital adequacy ratioTo increase conservatism the group increased its targetdebt rating (solvency standard) from A- to A for internaleconomic capital requirements in line with the higher targetratios for regulatory capital announced early in 2009. A moreconservative definition of available financial resources to coverthe economic capital requirements was also introduced.The group currently holds a surplus of R11,8 billion against itseconomic capital requirements. This is calibrated to the new Adebt rating including a 10% buffer, which is assessed againstcomprehensive stress and scenario testing.94NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWGROUP ECONOMIC CAPITALGroup economic capital40353025SurplusR9,6bn10% bufferR2,6bnTier B(non-core)R9,9bnSurplusR16,1bn10% bufferR2,4bnTier B(non-core)R9,0bnSurplusR11,8bn10% bufferR2,6bnTier B(non-core)R5,2bnRbn20151050MinimumrequirementR26,0bnRequiredeconomiccapital2007Tier A(core capital)R28,3bnMinimumrequirementR24,2bnOld method at 99,9% (A-)AvailablefinancialresourcesRequiredeconomiccapitalTier A(core capital)R33,7bnAvailablefinancialresources2009MinimumrequirementR25,8bnTier A(core capital)R34,9bnNew method at 99,93% (A)RequiredeconomiccapitalAvailablefinancialresourcesGROUP REPORTSThe group’s leverage ratio (total assets to ordinaryshareholders’ equity) at 14,4 times (2008: 16,2 times) isconservative by international standards and in line with thelocal peer group.In response to the global financial crisis the Basel Committeeon Banking Supervision has released far-reaching newrequirements and proposals related to capital, liquidity, riskmanagement and accounting provisioning aimed at creatinga more resilient global banking sector. Currently these have atargeted implementation date of the end of 2012. The impacton capital is, at this early stage, anticipated to be moderate forthe major SA banks, but remains subject to a comprehensivequantitative impact study in the first half of 2010 andfinalisation of the proposals by the end of 2010. The impactof the liquidity proposals would be significant on SA banksif implemented as is, but we anticipate modifications andchanges appropriate for South Africa. No liquidity issues wereexperienced in South Africa during the global financial crisis.Funding and liquidityThe group’s liquidity position remains sound, with a loan-todepositratio of 95,9%. Management continues to focus ondiversifying the funding base, lengthening the funding profileand further strengthening and increasing the liquidity buffers.In addition to the strong deposit franchise across NedbankRetail, Nedbank Business Banking and Nedbank Corporateproviding a diverse funding mix, the bank successfully increasedthe size of its liquidity buffer in 2009 and lengthened theoverall funding profile in order to achieve improved asset-toliabilitymatching. Increased focus on capital market issuanceunder the domestic medium-term note programme, theintroduction of innovative fixed-deposit products for retailclients and a broader offering of money market products werethe primary drivers behind the lengthening of the fundingprofile.During the year the following programmes were undertakento diversify the funding base and lengthen the bank’s existingfunding profile:• the issuing of R5,6 billion of senior unsecured debt, whichwas five times oversubscribed;• the raising of R153 million in perpetual preference shares;• obtaining a $100 million credit line from a foreigndevelopment bank; and• focusing on the retail deposit base through innovativeproducts.Nedbank Group maintains a low reliance on interbank, capitalmarket and foreign funding. The group’s small proportionof foreign funding at just over 1,0% is driven by the group’sregional focus where 91,4% of the group’s asset base is inSouth Africa. Low historic reliance in the abovementionedmarkets creates diversification opportunities subject to pricing.Nedbank Group continues to adopt a strategy of applyingbest international practice, with the Basel principles on soundliquidity management having been further embedded duringthis financial period.95NEDBANK GROUP ANNUAL REPORT 2009OPERATIONAL REVIEWSGOVERNANCE

CHIEF FINANCIAL OFFICER’S REPORT ... continuedSix-year reviewNAV and ROEcents12 00010 00018,9%22,1%24,8%21,4%20,1%%2520Net asset value per shareTangible NAV8 0006 0004 00014,3%11,0%15,5%18,6%17,7%11,5%13,0%1510ROEROE, excluding goodwill2 0004 6543 7215 5974 6806 3635 4277 5136 5438 5227 1799 1007 398502004 2005 2006 2007 2008 20090In summary, if one reflects on a six-year history of ROE andNAV, it is evident that, while the challenging market conditionshave impacted ROEs in recent years, the underlying NAV ofthe group has continued a steady upward trend, albeit lately atslower growth rates.While ROE metrics peaked in 2007, ahead of the challengingeconomic times, before falling again the group sustained acompound average growth in NAV of over 14%.OutlookThe economic environment remains fragile, presenting forecastrisk.Nedbank Group’s performance in 2010 is likely to reflect thefollowing:• Advances growth in the mid single digits.• Pressure on interest margins remaining as a result of acontinued negative endowment effect and anticipated to becompressed by a further 10 to 20 basis points.• Lower double-digit expense growth, the increase beingimpacted by the consolidation of the Bancassurance andWealth joint-venture acquisitions.• A further strengthening of capital adequacy ratios and focuson funding and liquidity.• A focus on extracting value from acquisitions madein 2009.AcknowledgementsI would like to thank my predecessor, Mike Brown, andGraham Dempster, the Chief Operating Officer, for theirsupport and guidance following my appointment duringthe financial year. The finance teams within Nedbank haveagain shown outstanding commitment to enhancing thestandard of financial reporting and producing timeous, qualityfinancial information. The investment community locally andinternationally is a critical stakeholder of Nedbank Group andwe acknowledge the support and interaction during this mostdifficult period in the banking sector.• Continued improvement of the group credit loss ratio, butremaining above our target range.• Mid double-digit NIR growth, the increase being impacted bythe consolidation of the Bancassurance and Wealth jointventureacquisitions for the full period in 2010, comparedwith seven months in 2009.Raisibe MorathiChief Financial Officer24 February 201096NEDBANK GROUP ANNUAL REPORT 2009

GOVERNANCEOPERATIONAL REVIEWSGROUP REPORTSOVERVIEW97NEDBANK GROUP ANNUAL REPORT 2009

shareholders’ analysisfor the year ended 31 DecemberRegister date: 31 December 2009Authorised share capital: 600 000 000 sharesIssued share capital: 498 671 016 sharesShareholder spreadNumber ofshareholdings %Number ofshares %1 – 1 000 shares 13 860 79,27 3 066 761 0,621 001 – 10 000 shares 2 766 15,82 7 360 029 1,4810 001 – 100 000 shares 650 3,72 21 265 747 4,26100 001 – 1 000 000 shares 173 0,99 47 428 707 9,511 000 001 shares and over 36 0,20 419 549 772 84,13Total 17 485 100,00 498 671 016 100,00Distribution of shareholdersBanks 166 0,95 61 831 731 12,40Close corporations 114 0,65 238 418 0,04Empowerment 41 0,23 40 336 284 8,09Endowment funds 85 0,49 946 208 0,19Individuals 13 977 79,94 8 531 907 1,71Insurance companies 69 0,39 7 696 545 1,54Investment companies 56 0,32 4 114 928 0,82Medical aid schemes 23 0,13 284 262 0,06Mutual funds 325 1,86 27 701 751 5,56Nominees and trusts 1 879 10,74 6 673 420 1,34Old Mutual Life Assurance Company (South Africa) Limited and associates 47 0,27 260 336 704 52,21Other corporations 73 0,42 511 505 0,10Private companies 235 1,34 981 082 0,20Public companies 24 0,14 317 062 0,06Retirement funds 361 2,07 55 650 998 11,16Share trusts* 8 0,05 7 523 470 1,51Treasury shares 2 0,01 14 994 741 3,01Total 17 485 100,00 498 671 016 100,00Public/Non-public shareholdersNon-public shareholders 133 0,76 324 570 832 65,09Directors and associates of the company** 12 0,07 1 084 465 0,22Old Mutual Life Assurance Company (South Africa) Limited and associates 47 0,27 260 336 704 52,21Treasury shares 2 0,01 14 994 741 3,01Nedbank/Nedbank Group pension funds 6 0,03 233 873 0,05Nedbank Group Limited and associates (share trusts)* 8 0,05 7 523 470 1,50Nedbank Group Limited and associates (mutual funds) 17 0,10 327 495 0,07Nedbank Group black economic empowerment trusts – South Africa* 16 0,09 39 312 738 7,88Nedbank Group black economic empowerment trusts – Namibia 25 0,14 757 346 0,15Public shareholders 17 352 99,24 174 100 184 34,91Total 17 485 100,00 498 671 016 100,00* Excludes shares held by directors in share trusts (executive directors only) and Eyethu schemes. Refer to page 236.** Includes shares held by directors in share trusts (executive directors only) and Eyethu schemes.98NEDBANK GROUP ANNUAL REPORT 2009

Major shareholders/managersNumberof shares2009% holding2008% holdingOld Mutual Life Assurance Company (South Africa) Limited and associates 260 336 704 52,21 54,30Nedbank Group treasury shares (SA) 62 937 839 12,63 12,63Black economic empowerment trusts:– Eyethu Scheme – Nedbank South Africa 39 578 938 7,94 8,78– Omufima Scheme – Nedbank Namibia 757 346 0,15 0,14Nedbank Group (2005) Share Option, Matched and Restricted Share Scheme 7 606 814 1,53 0,52Nedbank Group Limited and associates (Capital Management) 14 715 049 2,95 3,14Nedbank Namibia Limited 47 512 0,01NES Investments (Pty) Limited 232 180 0,05 0,05Lazard Asset Management (US) 29 913 320 6,00 5,02Public Investment Corporation (SA) 28 817 152 5,78 3,14Coronation Fund Managers (SA) 14 007 444 2,81 2,94Sanlam Investment Management (SA) 10 955 128 2,20 2,01BlackRock Inc (US and UK) 5 960 039 1,20 1,16Prudential Portfolio Managers (SA) 5 102 506 1,02 1,12GROUP REPORTSBeneficial shareholders holding of 5% or moreOld Mutual Life Assurance Company (South Africa) Limited and associates 260 336 704 52,21 53,89Public Investment Corporation (SA) 37 005 824 7,42 6,49Geographical distribution of shareholdersDomestic 430 936 928 86,42 87,80– South Africa 424 740 361 85,17 86,41– Namibia 3 320 058 0,67 0,66– Unclassified 2 876 509 0,58 0,73Foreign 67 734 088 13,58 12,20– United States of America 48 552 928 9,74 8,92– United Kingdom and Ireland 5 505 506 1,10 0,88– Europe 5 489 128 1,10 0,42– Other countries 8 186 526 1,64 1,98OPERATIONAL REVIEWS498 671 016 100,00 100,00GOVERNANCEOVERVIEW99NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWgroup technologyFred Swanepoel (46)Chief Information OfficerFred has more than 20 years’ experience in finance, banking andinformation technology (IT). He joined Nedbank in 1996 as AssistantGeneral Manager of Western Cape Operations. Since 2004 Fred hasgained experience at the highest levels of Nedbank’s Operations andTechnology cluster, holding the position of Divisional Director forFinance, Risk and Compliance; Projects and Programme Management;and Group Software Services. Fred was appointed to his current rolein November 2008.100NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWOverviewGroup Technology is Nedbank Group’scentralised technology unit withresponsibility for all components ofthe group’s technology processing,development and systems support.The group’s IT systems, databases,technology infrastructure, softwaredevelopment and IT project/programmemanagement are centrally managed toprovide economies of scale and facilitatea cohesive groupwide service-orientedarchitecture (SOA) technology strategy.2009 in reviewWith the global and local recessiontaking full effect during 2009, GroupTechnology faced very different businessrequirements (eg flexible and stabledebt collection processes and systems)and constrained innovation budgets tomaintain service levels to the businessclusters while servicing demand forinfrastructure improvement andinnovation projects. This increased thescale and complexity of the group’s ITenvironment.In terms of IT Infrastructure andOperations the following volumesand services were supported by GroupTechnology during 2009:• Group Technology processedon average 5,6 million financialtransactions daily across429 systems in its mainframeand UNIX environments. Over33 500 online and batch programswere run daily.• Efforts to arrest Microsoft servergrowth have been successful, resultingin the decommissioning of nearly300 servers, leading to the first yearof net negative server growth sincethe inception of Microsoft servertechnology.• A total of 28 900 personalcomputers, 11 700 printers,52 500 voice devices and/or portsand 75 600 data connectionswere supported. In the self-serviceenvironment 1 874 automated tellermachines, 379 self-service terminalsand 42 500 point-of-sale devices weresupported.• The operational quality of service wasimproved for the fourth consecutiveyear. Serious outages and servicedisruptions decreased in number by33% and in time impact by 39%over 2008.These improvementswere achieved despite deploying asignificant amount of change intoan increasingly complex technologylandscape.• No environmental issues wereexperienced due to power outagesat our primary and secondary datacentres throughout the year.• Benchmarks conducted during theyear in the mainframe, midrange,Wintel server, storage, end-usercomputing and other infrastructuralareas continued to reflect GroupTechnology as a cost-effective serviceprovider compared with local andinternational companies.Compliance, risk and fraud containmentremained a key focus, and it is expectedthat the demands for improvedinnovation in these areas will continueto rise. In 2009 the market experienceda continued increase in internet fraudattempts, primarily through phishingattacks. A well-defined phishingresponse process remained effective,ensuring that Nedbank’s losses werewell-contained.Top projectsThe following projects were launchedin 2009:• The Siyakha Programme in NedbankRetail, which is a top-priorityprogramme to take care of thetechnical transition from multiple,disparate architectural frontendsystems to a single, stable, flexiblefrontend system based on theNedbank Channel Framework for allbanking platforms.• The Channel Convergence Programme(commonly known as NetBankBusiness) in Nedbank Corporateand Business Banking, which is acombined effort between theseclusters and Group Technology toconsolidate Nedbank Group’s multipleelectronic banking channels andsystems. This project will ensure thatNedbank Group retains its marketshare and grows in line with themarket, while simultaneously realisinginvestment benefits by rationalisingsystems and optimising operations.The project will also reduce theongoing system implementation costof meeting compliance and regulatoryrequirements.• The Wallstreet Programme inNedbank Capital focused on thedevelopment of an integratedplatform to supply high-volumetrade processing and volume growthby delivering high-performancestraight-through processing and lowtransaction costs. It will help improveproductivity, reduce operational risk,and facilitate client retention and newbusiness opportunities.Africa IT initiativesHaving started in 2008, the AfricaProgramme made significant progressin 2009. The programme consists of thefollowing initiatives:• Africa 1 (crisis), which sought toresolve high-client-impact issuessuch as month-ends, statementmismatches and balance mismatches.The majority of these have beenresolved, as indicated by the reducednumber of incidents and severities.• Africa 2 (stabilisation), which wasimplemented in 2009 and dealtGROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE101NEDBANK GROUP ANNUAL REPORT 2009

GROUP TECHNOLOGY ... continuedmostly with improvement of theinfrastructure. This project wascompleted on time and withinbudget. The budget to improvethe environments for each of theAfrica subsidiaries further has beenapproved.• Africa 3 (core banking systemupgrade), which was started in thelast quarter of 2009 with the aim ofupgrading Zimbabwe and thereafterNamibia to Globus T24.The cooperation between Nedbank Groupand Ecobank IT has also been improved,facilitating a strong working relationshipto the benefit of both organisations.Other initiativesGroup Technology remains convincedthat the combination of the adoptionof best-of-breed solutions and reuse ofexisting legacy applications representsthe right and most cost-effectivecompetitive strategy for Nedbank Group.To this end the following progress wasmade:• The SOA Centre of Excellence wasestablished. Patterns, processes andguidelines were defined, resultingin the first phase of common andreusable services being developed,deployed and reused. The GroupTechnology IT vision is based on SOA,which promotes business agility andflexibility.• Initial hardware and softwarewere procured, implemented andconfigured for the Home Loans GrantsPilot Project.• The Retail self-service internetchannels were comprehensivelyrefreshed to enhance delivery.• An upgrade of the client informationsystem (including service enablement)was implemented to provide anenhanced view of client informationin Nedbank’s move towards clientcentricity.• The strategy and technology choicefor the replacement of staff-assistedchannels was ratified. Phase 1 andPhase II are on schedule and budget.• A reporting portal was created forthe automation of various manuallyproduced reports as well as variousnew reports.• Various automated finance andeconomic BA returns were submittedto the SA Reserve Bank (SARB) toreplace the previously manuallyproduced returns.• Nedbank will meet the SARB deadlineof June 2010 for reporting on the‘correct days in arrears’ methodology.• The previously manual processof home loans policy productconversions was automated, savingthe business more than 100 hours amonth and eliminating capture errors.• The Wholesale Banking TechnologyDivision managed 56 project releasesand implementations in 2009.102NEDBANK GROUP ANNUAL REPORT 2009

Group Technology fully supports andcontributes to Nedbank Group’s visionof being a responsible corporate citizen.Green IT projects have significantlyreduced paper and electricityconsumption in data and office campuscentres, and travel has been limitedthrough innovative use of multimediatechnology. A coordinated strategyhas been shaped to build on successesthroughout the next three years.In 2009 Group Technology establisheda Vendor Management Office (VMO)under best-practice guidelines. This hasbeen extremely successful in its first yearof operation, yielding more thanR70 million in direct and indirect savingsby tightening up on vendor management.Equally pleasing has been the positivefeedback from Group Technology andthe vendors themselves in the morestructured and professional approachthat the VMO has introduced, and weexpect this positive trend in savings andrelationships with our strategic vendorsto continue.More than 50 significant projects weresuccessfully delivered in 2009, withthe number implemented on timeand budget well within the industrybenchmark of top-quartile performance.Productivity benchmarks in theinnovation business continue to reflectimprovements in cost and time deliveryof function points. The capacity buildupover the past three years, as well asproductivity improvements, has ensuredthat all the innovation requirements ofthe group were serviced during the year.Nedbank Group continued successfullyto deliver on its Swisscard contractualobligations in 2009. The executionof operational deliverables againstcontracted service levels remains atthe highest standard, with all criticalservice levels consistently being met andthe financial performance for the yearbeing very good and exceeding forecastprofitability.Nedbank Group’s contract with Swisscardexpires at the end of 2010. Both partiesare working constructively together toensure a smooth migration to Swisscard’sfuture processing platform.Finally, a client satisfaction surveyconducted with the help of over5 000 employees in Nedbank Groupshowed a positive increase in theoverall satisfaction rating from 71%to 72%. Strategies have been put inplace not only to focus on areas ofunderperformance in clients’ perception,but also to build on areas where GroupTechnology has become strong indelivering good service.Prospects for 2010Group Technology will continue onits path to become the businessclusters’ preferred technology partnerand outperforming relevant industrybenchmarks. The Group Technologybusiness strategy for 2010 throughto 2012 has been shaped to drivesignificant improvements in:• Closer alignment with businessdivisions and clusters to ensuregreater end-to-end accountability byfunctions in Group Technology andimproved agility in delivering servicesand innovation projects.• Project prioritisation directly to reflectnot only positive business cases, butalso meeting group strategic targetsin the longer term and ensuringadvancement of the technologyarchitecture.• Group Technology’s performancein 10 key areas through a StrategicImprovement Programme (SIP).SIP will consist of around30 subprojects aimed at measurablyand significantly improving GroupTechnology’s performance in areasthat further its mandate and groupneeds.At the same time Group Technologywill continue to build Nedbank Group’sfuture IT landscape, guiding threeyeartechnology and business-alignedroadmaps. This will assist GroupTechnology in its continuous quest toprovide flexible and cost-effective ITsolutions that evolve quickly and easilyto suit the requirements of NedbankGroup’s business clusters.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW103NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWGROUP STRAtegy ANDCORPORATE AFFAIRS104NEDBANK GROUP ANNUAL REPORT 2009

GROUP REPORTSOVERVIEWOverviewHistorically, Group Strategy andCorporate Affairs (GSCA) has beenresponsible for leading the managementof the group’s image and reputation aswell as the strategic planning process.GSCA review of the year2009The group’s marketing programmesin support of building the Nedbankbrand were successful in 2009. Theimproving brand equity growth trendof recent years was continued andindeed accelerated, and the gapbetween Nedbank and its competitorscontinued to narrow. Nedbank’s majorsponsorships continued to play animportant role in the profiling andbuilding of the brand and consumerengagement. The new soccersponsorship property – the NedbankCup – surpassed all expectations in itssecond year, and independent researchrevealed it to be the most impactfulsoccer sponsorship of the year inSouth Africa. Our ‘green’ positioningprogramme was given a high profile,and succeeded in retaining the highground in this domain for Nedbank. TheNedbank Affinity Programme proved tobe resilient in extremely tough marketconditions, showing above-averagegrowth relative to non-affinity products.Nedbank Group concentrated on thedeliverables in terms of the Departmentof Trade and Industry (dti) Codes bypublishing its verified black economicempowerment scorecard. This is a firstin the financial industry. In addition,Nedbank Group has continued todrive the agreed targets for 2016 in allelements of the scorecard in conjunctionwith all areas of the business.In the light of the deterioratingglobal and local landscape, economiccomment, insight and advice continuedto be sought by both internal andexternal stakeholders.GSCA continued to refine the groupstrategy, with specific emphasis onscenario planning with the NedbankGroup board in the uncertainenvironment.The Nedbank Foundation won theNational Business CSI/SED Award 2009and Nedbank was recognised as theSocial Responsibility Bank of the Year2009 in the African Banker Awards.This acknowledged Nedbank for itscommitment to the communitiesit serves. Nedbank Group’s totalfinancial contribution to socioeconomicdevelopment amounts to R59,5 millionfor the period under review.OutlookA decision was made to split the clusterinto two separate clusters, effectiveJanuary 2010:• Group Marketing, Communicationsand Corporate Affairs; and• Group Strategic Planning.OPERATIONAL REVIEWSGOVERNANCE105NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWGROUP marketing,communications andcorporate affairsCiko Thomas (40)Group Executive: GroupMarketing, Communications andCorporate AffairsCiko joined the group with effect from 18 January 2010 as GroupExecutive: Group Marketing, Communications and Corporate Affairs.Ciko has wide-ranging marketing and business experience in financialservices and in the consumer goods and motor industries. He joinedNedbank from Barloworld where he was the Group Marketing Directorof the Automotive Division. Ciko was previously General Manager ofRetail Banking Marketing at ABSA Group. Before 2003 he held variousmanagement positions at SA Breweries, Unilever, British AmericanTobacco and M-Net.106NEDBANK GROUP ANNUAL REPORT 2009

Group Marketing,Communications andCorporate Affairs prospectsfor 2010The Nedbank brand-building programmewill build on the very successfulstrategy of recent years, but with addedemphasis on certain selected marketsegments and increased focus on thebrand’s direct client value proposition.Careful campaign management andmarketing communications coordinationin the context of the 2010 FIFA WorldCup schedule will ensure optimisationof the bank’s presence and consumerrelevance in a unique and challengingyear.The 20th anniversary of The Green Trustwill provide a platform for the continuedprojection of Nedbank’s environmentaland community leadership aspirations.Internal and external stakeholderengagement and media relations will beoptimised.Nedbank Group is committed to theinstitution and promulgation of anindustry/sector code to replace theFinancial Sector Charter. Nedbank Groupis also committed to delivery on allareas that form part of the FinancialSector Charter but are not included inthe Department of Trade and Industry(dti) Codes of Good Practice.The set targets will continue toserve as a minimum guideline forour transformation activities acrossall elements of the dti Codes, whileengaging fully with all stakeholders toensure sustainable transformation in allareas of the business.We will continue to leverage thestrong relationship with our blackbusiness partners, the Wiphold andBrimstone consortia, and our blackdevelopment partner, Aka Capital.Our partners add value in areas ofcommon strategic initiatives andwill continue to provide insight intotransforming our business.In the Nedbank Foundation we willcontinue to improve our processesto enhance turnaround on requests,implement the concept of holisticcommunities that will enable us,together with various partners, to makea significant sustainable difference in allthe communities in which we operate,and continue to expand our efforts tomake a real difference in all areas ofinvolvement.GOVERNANCEOPERATIONAL REVIEWSGROUP REPORTSOVERVIEW107NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWstrategic planningJohn Bestbier (54)Group Executive: Strategic PlanningJohn was appointed to the Group Executive on 1 January 2010 asGroup Executive: Strategic Planning. John is an investment banker withextensive experience in the financial services industry, having led anumber of corporate actions.108NEDBANK GROUP ANNUAL REPORT 2009

Strategic Planning prospectsfor 2010The Nedbank Group strategy andstrategic planning process will continueto evolve and be improved throughconcise articulation of strategy at agroup and cluster level.Strategic Planning’s Economic Unitis highly regarded for the quality ofindependent economic insights andresearch that it consistently providesto both Nedbank Group and its clients.Research provided by the EconomicUnit forms an integral part of NedbankGroup’s strategic planning processreferred to below.Strategic planning in 2010 willbe centred on the challenges andopportunities for Nedbank Group,including:• improving the profitability of theNedbank Retail cluster;• improving Nedbank’s non-interestrevenue, particularly throughNedbank’s bancassurance activitiesand improved cross-selling in otherareas;• increasing the number of newprimary clients across all clustersand maintaining existing primaryclients through improved value-addedservices;• building on Nedbank’s inherentstrengths and substantive marketshare in the wholesale and businessbanking sectors;• responding to opportunities arisingfrom increased broadband and mobilebanking accessibility and seekinginnovative ways to expand NedbankRetail’s distribution network;• optimising the allocation of capitalto business activities through thebusiness cycle in order to growbusinesses with high forecasteconomic profits and anticipateactivities that are vulnerable to largecyclical impairments;• utilising international expansionopportunities within the SouthernAfrican Development Community andthe rest of Africa within acceptablerisk limits; and• building on Nedbank’s leadershipin the transformation, corporatesocial investment and environmentalspheres.GOVERNANCEGROUP REPORTSOPERATIONAL REVIEWSOVERVIEW109NEDBANK GROUP ANNUAL REPORT 2009

group humanresources andemployment equityProf Shirley Zinn (48)Group Executive: HumanResourcesIn July 2005 Shirley was appointed Human Resources (HR) Director of NedbankGroup, prior to which she was General Manager, HR, at the SA Revenue Service(SARS). Before joining SARS, she was Regional HR Director responsible for Africaand the Middle East for Reckitt Benckiser. Her other positions included GroupExecutive, Equity, for Computer Configurations Holdings and Director, SpecialProgrammes, for the Department of Public Service and Administration. Shirleyis the immediate past Chairperson of the Institute of Bankers and serves on theBANKSETA Board.110NEDBANK GROUP ANNUAL REPORT 2009

group human resources andemployment equity ... continuedStaff Survey 2009 ReportDimensions 2009 vs 2007 – 2009 n = 7423; 2008 n = 5585; 2007 n = 3358Reward, recogniotion andperformance management (+4,4*)Diversity(+4,4*)Policies and procedures(+4,2*)Relationships and trust(+2,7*)74,174,873,9Training and development(+4,5*)77,969,1Organisational culture and values(+4,5*)78,7Nedbank Staff Survey overall78,8 (+3,7*)Ethics90,2 (+4,2*)Strategic direction88,4 (+5,7*)79,980,92009 2008 200783,882,6Leadership(+3,8*)Communication(+3,0*)Management style(+2,4*)Change and transformation(+4,5*)% respondents (agree) 2009 2008 2007Nedbank Staff Survey overall 78,8 75,1 71,5Ethics 90,2 86,0 83,0Strategic direction 88,1 82,4 78,3Leadership 83,8 80,0 75,7Communication 82,6 79,6 75,3Management style 80,9 78,5 77,8Change and transformation 79,9 75,4 72,8Organisational culture and values 78,7 74,5 70,9Training and development 77,9 75,3 73,0Relationships and trust 74,8 72,1 69,3Diversity 73,9 69,5 63,9Rewards, recognition andperformance management69,1 64,7 62,4Comparative: Shift in current cultural values2006 2007 2008 2009IROS (P) = 0-2-1 I IROS (L) = 0-0-1-0 IROS (P) = 1-1-7-1 I IROS (L) = 0-0-0-0 IROS (P) = 1-2-6-1 I IROS (L) = 0-0-0-0 IROS (P) = 1-3-5-1 I IROS (L) = 0-0-0-012345678910CCV* – DCV**matchescost-consciousnessaccountabilityclient-drivenclient satisfactionresults orientaionperformance drivenprofitbureaucracyteamworkcommunity involvement6375524994624314304304003933793(O)4(R)6(O)2(O)3(O)3(O)1(O)3(O)4(R)6(S)12345678910client-drivenaccountabilityclient satisfactioncost-consciousnesscommunity involvementperformance drivenprofitachievementbeing the bestresults orientation9679468257607236456436385685606(O)4(R)2(O)3(O)6(S)3(O)1(O)3(I)3(O)3(O)12345678910accountabilityclient-drivenclient satisfactioncommunity involvementachievementcost-consciousnessteamworkperformance drivenbeing the bestdelivery19361874166714001251123611971181109410254(R)6(O)2(O)6(S)3(I)3(O)4(R)3(O)3(O)3(O)12345678910accountabilityclient-drivenclient satisfactioncost-consciousnesscommunity involvementachievementteamworkemployee recognitionbeing the bestperformance-driven4 matches 4 matches 5 matches 6 matches23011926177813831262118511841070102510004(R)6(O)2(O)3(O)6(S)3(I)4(R)2(R)3(O)3(O)* Current culture values** Desired culture values112NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWin years to come and is a core partof our strategy. We need to deliveron our dti targets, as we move fromhaving caught up to our peers toleading in transformation.Objectives for 2010 andbeyondStaff: A great place to work, creating acommunity of leaders, and living ourvalues.• Accelerate transformation to meet EEtargets (keep our status of being themost transformed bank).• Embed talent management, therebyenhancing the employee valueproposition (EVP) and raising the ‘stayfactor’ in engagement.• Implement the ‘learn and grow’employee initiative to enablesuperior delivery to clients and createopportunities for career advancement.• Reduce group entropy further(towards below 10%) and increaseadditional matches between currentand ideal culture values (currentlythere are six matches).• Expand, develop and attain anintegrated culture.• Review group values and associatedbehaviour to build a high-performingculture and support enablement ofour strategy.• Ensure further alignment of the totalreward strategy with Nedbank Grouppeople practices.• Enable HR capability and excellence(and deliver on the HR 2010programme).A rigourous bankwide participativeprocess was undertaken to appointexecutives to head each of the centresof excellence to ensure that the overallorganisation supports the services to beprovided by Group HR.Organisational DevelopmentOrganisational Development fulfils anew function and will be responsiblefor ensuring that Nedbank Group is agreat place to work, and will concentrateon the focus area of building a uniqueculture for competitive advantage. Inaddition to this, OD will be responsiblefor employee wellbeing, diversitymanagement, change management,employee engagement and HRcommunication.Industrial Relations,OrganisationalTransformation andHR ComplianceThis centre of excellence will beresponsible for industrial relations,transformation, HR compliance andadvisory services and will primarily focuson accelerating transformation.For more details on the Nedbank Grouptransformation progress please see theEE section.Rewards ManagementRewards Management will ensure thatthe group’s performance management,total remuneration, recognition andfunds management are relevant andcompetitive and make a significantcontribution to the group as being agreat place to work. The main focus areaof this centre of excellence is to ensurefurther alignment of the total rewardstrategy with Nedbank Group peoplepractices.For more information please read theRemuneration Report in this annualreport.Talent ManagementWe firmly believe that great things beginwith great people and that it is throughour people that we are able to deliveron our brand promise to Make ThingsHappen. Our talent attraction andretention efforts for 2009 were thereforefocused on attracting and retainingbest-fit talent – high performers whosubscribe to the Nedbank Group valuesand have the drive and the passion toMake Things Happen for themselves, thebank, the communities within which weoperate and the country at large.The Talent Management centre ofexcellence includes organisationaldesign, attraction and recruitment,assessments and retention andsuccession planning, all with the mainaim of embedding talent management.For more information please see thesection on retaining our talent in thisannual report.People DevelopmentNedbank Group as an organisationfocuses learning on achieving anoptimum value for the employeeand the organisation. Learning isultimately about development of theemployee, resulting in portable skillsand sustainability for the organisation.The intersection of value is createdwhen both the employee and theorganisation experience a positive shiftin performance.More information on Nedbank Groupdevelopment efforts can be found in thesection on learning and growth.Office of the HR GroupExecutiveThis centre of excellence is primarilyresponsible for HR strategic planningand enabling HR capability, and forensuring the seamless delivery of valueaddedHR services to the organisationand enhancing service excellence andquality while managing costs effectively.The year 2009 has seen many changesand challenges. However, we believethat the restructuring has resulted in afirm foundation on which to continuebuilding our capability to attract, retainand develop our people, to create aunique culture in order to develop acompetitive advantage and to ensurethat Nedbank Group is a great placeto work.GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE113NEDBANK GROUP ANNUAL REPORT 2009

group human resources andemployment equity ... continuedEmployment equityEmployment Equity PlanNedbank Group continues to measurethe implementation of its EE Plan thatwas submitted to the Departmentof Labour early last year. In this planprovision was made for the revisionof targets on an annual basis toensure that the group reaches thetargets it set for itself for 2016. At thebeginning of 2009 the targets wererevised based on the December 2008performance. Good progress has beenmade in transforming the managementprofile of the group, with the juniormanagementtarget being exceededand a small shortfall on our senior- andmiddle-management targets that weremade more challenging by the lowerrecessionary attrition and recruitmentratios. However, Nedbank Groupremains committed to creating anenvironment that promotes meaningfuland sustainable transformation.EE remains a major component ofeffecting transformation in the group.2009 (Black and African target shortfalls)LevelSeniormanagementMiddlemanagementJuniormanagementBlack (inclAfrican African)2,7% 2,3%1,7% 0,1%0,1% + 1%(exceededtarget)Compared with 2008 all focus areas inthe Nedbank Group workforce profileshowed an improvement in 2009.Nedbank employment equity forumsThe Nedbank Employment EquityForum (NEEF), which was created aspart of existing governance processesand structures, in accordance with therequirements of the EE Act, continuesto function well. At the beginning ofthis year NEEF successfully completed aprocess of appointing and inauguratinga new chairperson, Graham Dempster,the current Chief Operating Officerof Nedbank Group. Graham has beenreelected as Chairperson for 2010.NEEF serves to monitor and consult withstaff across the group on EE and skillsdevelopment matters. To facilitate thisconsultative process NEEF is constitutedof trade union representatives,chairpersons of the various EE forums,cluster EE managers, as well as theNedbank Group EE manager. The Peoplewith Disabilities (PWD) and Women’sForums are also represented at NEEF.This year most cluster EE forums werereconstituted and new chairpersonselected in compliance with the clusterEE forum charters and governancestructures.NEEF has also signed off the 2009/2010Workplace Skills Plan (WSP) andImplementation Report that wassubmitted to BANKSETA at the end ofJune. This process ensures that there aresynergies and links between the skillsdevelopment of staff and the group’sEE initiatives.During the year NEEF was also involvedin the preparation and signoff of the2009 Employment Equity Report thatwas submitted to the Department ofLabour on 1 October 2009.To ensure proper governance structuresfor effective implementation of EE inthe group NEEF developed and signedoff a governance framework documenthighlighting the various governancestructures, such as the Transformationand Human Resources Committee, thatare involved in the implementation oftransformation.114NEDBANK GROUP ANNUAL REPORT 2009

employment equity reportOVERVIEWEmployment equity progress – based on the EE ActThe table below reflects the current demographic profile of the group, based on the EE Act’s definition of occupational levels at31 December 2009:Occupational levels Male Female Foreign nationalsA C I W A C I W Male Female TotalTop management 4 11 1 1 1 18Senior management 47 15 40 308 32 10 23 86 24 11 596Professionally qualified 604 345 566 1 662 573 412 570 1 644 86 85 6 547Skilled technical 1 351 642 642 645 2 387 1 591 1 283 1 945 35 94 10 615Semiskilled 740 291 153 103 1 552 786 392 616 4 22 4 659Unskilled –Exceptions – permanent staff not matched 1 1 1 1 4Total permanent 2 747 1 293 1 401 2 730 4 546 2 800 2 268 4 293 149 212 22 439Temporary employees 377 99 85 343 691 163 86 239 38 39 2 160Grand total 3 124 1 392 1 486 3 073 5 237 2 963 2 354 4 532 187 251 24 599Occupational levels (%) Male Female Foreign nationalsA C I W A C I W Male Female TotalTop management 22 61 6 6 6 100Senior management 8 3 7 52 5 2 4 14 4 2 100Professionally qualified 9 5 9 25 9 6 9 25 1 1 100Skilled technical 13 6 6 6 22 15 12 18 1 100Semiskilled 16 6 3 2 33 17 8 13 100UnskilledExceptions – permanent staff not matched 25 25 25 25 100Total permanent 12 6 6 12 20 12 10 19 1 1 100Temporary employees 17 5 4 16 32 8 4 11 2 2 100Grand total 13 6 6 12 21 12 10 18 1 1 100GROUP REPORTSOPERATIONAL REVIEWSReconciliation of headcountReporting periodThe figures contained in the Employment Equity Report submitted to the Department of Labour on 1 October 2009 werefor the period 1 July 2008 to 30 June 2009. However, the figures used in the annual report cover the financial year from1 January to 31 December 2009.Staff categoriesThe figures contained in the 2009 Employment Equity Report include permanent staff, payroll contractors and commission-basedstaff. Temporary staff accounted for in the report are those who have been with the group for three months or less, as per thedefinition of temporary employees in the amended EE Act.The headcount figures in the annual report include all the Department of Labour staff categories, as defined above, as well asinternational secondees, other secondees, staff of external entities and temporary staff who fall outside the Department of Labourdefinition.GOVERNANCE115NEDBANK GROUP ANNUAL REPORT 2009

employment equity report ... continuedNedbank Group continues its drive to becoming a totally disability-competent organisation. This year the bank became a memberof the African Employers’ Forum on Disability and embarked on roadshows to raise awareness of legislative requirements regardingthe accommodation of people with disabilities (PWD), the correct definitions of what constitutes a disability, and capacity-buildingworkshops for line HR as well as the PWD Forum members.The following table provides a breakdown of the demographic profile of PWD:Occupational levels Male Female Foreign nationalsA C I W A C I W Male Female TotalTop managementSenior management 1 7 4 12Professionally qualified 7 5 10 52 6 1 5 23 109Skilled technical 19 7 6 23 33 13 14 67 182Semiskilled 20 4 4 8 29 7 7 34 113UnskilledExceptions – permanent staff not matchedTotal permanent 47 16 20 90 68 21 26 128 416Temporary employees 1 3 1 2 3 10Grand total 47 17 20 93 69 23 26 131 426Occupational levels (%) Male Female Foreign nationalsA C I W A C I W Male Female TotalTop management 100Senior management 8 58 33 100Professionally qualified 6 5 9 48 6 1 5 21 100Skilled technical 10 4 3 13 18 7 8 37 100Semiskilled 18 4 4 7 26 6 6 30 100UnskilledExceptions – permanent staff not matchedTotal permanent 11 4 5 22 16 5 6 31 100Temporary employees 10 30 10 20 30 100Grand total 11 4 5 22 16 5 6 31 100116NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWEE – based on dti Codes (at 31 December 2009)Occupational levels Designated male Non-designated Designated femaleA C I W foreign national A C I WNon-designatedforeign nationalTop management 4 8 1 1 1 15Senior management 47 15 40 311 24 32 10 23 86 11 599Professionally qualified 604 345 566 1 662 86 573 412 570 1 644 85 6 547Skilled technical 1 351 642 642 645 35 2 387 1 591 1 283 1 945 94 10 615Total management 2 006 1 002 1 248 2 626 145 2 993 2 014 1 876 3 676 190 17 776Semiskilled 740 291 153 103 4 1 552 786 392 616 22 4 659UnskilledPermanent staff not matched 1 1 1 1 4Total permanent 2 747 1 293 1 401 2 730 149 4 546 2 800 2 268 4 293 212 22 439Temporary employees 377 99 85 343 38 691 163 86 239 39 2 160Total dti 3 124 1 392 1 486 3 073 187 5 237 2 963 2 354 4 532 251 24 599Occupational levels (%)BlackpeopleBlackfemale African Included for reconciliation purposes TotalTop management 40,00 13,33 33,33 Total dti 24 599Senior management 27,88 10,85 13,19 Add secondees 23Professionally qualified 46,89 23,75 17,98 Add international 1 646Skilled technical 74,39 49,56 35,21 Add external entities (Imperial) 1 153Total management 62,66 38,72 28,12 Less payroll temps headcount 384Semiskilled 84.01 58,60 49,20 Number of employees 27 037Unskilled 0,00 0,00 0,00 Add payroll temps (FTE*) 371Permanent staff not matched 50,00 25,00 50,00 Add non-payroll (FTE*) 1 547Total permanent 67,09 42,85 32,50 Nedbank Group total (HCD**) 28 955Temporary employees 69,49 43,52 49,44 * Full-time equivalent.Total dti 67,30 42,90 33,99** Human capital development.TotalGROUP REPORTSOPERATIONAL REVIEWSRetaining our talentIn 2009 the Nedbank Group EVP and employer brand were promoted by means of conference presentations, branded recruitmentadvertising, publishing of editorials in employer branding and graduate publications and participation in career expos and campuscareer days. To reduce recruitment costs recruitment efforts for the year were focused on utilising the Nedbank careers website, thee-recruitment system as well as employee referrals as a first point of reference when recruiting.In total 427 positions were advertised on the external e-recruitment system, and 3 027 positions were advertised on the internale-recruitment system. The external talent database had 40 370 curricula vitae of interested candidates registered. A total ofR249 000 was paid to Nedbank Group employees for employee referrals. In 2009 over 7 686 applications were received for the2010 Nedbank Graduate Development Programme (NGDP) recruitment campaign following eight campus visits. These applicationsresulted in 88 graduates being accepted onto the 2010 NGDP.Flexible work practices (FWP) were introduced in 2008 with the aim of enhancing the EVP and taking into account the effect ofwork practices on productivity and a balanced lifestyle. In 2009 the FWP offering was enhanced by implementing two-, three- andfour-day workweek options. To date 483 staffmembers formally applied for FWP.GOVERNANCE117NEDBANK GROUP ANNUAL REPORT 2009

Skills development reportNedbank Group is passionate aboutcreating an environment in which allemployees can thrive and to assist newemployees to adjust to their new roleand environment within an optimaltimeframe new onboarding processes,procedures and tools were implementedduring 2009. In addition, the CareerManagement website was enhanced. Thiswebsite provides employees with relevantinformation and tools that enable themto take charge of managing their careers.To learn and growWe believe that the opportunity fordevelopment is key to attracting andretaining the right people at NedbankGroup, and this forms a significant partof our value proposition to current andfuture employees. In 2009, at the entrylevel, the drive to develop learners for thefinancial services industry resulted in210 learners participating in the Kuyasaand Letsema Learnership Programmes,240 on other learnerships, 25 graduateson the Training Outside of Public PracticeProgramme for accountants, and104 graduates on the NGDP. All learnersand graduates undergo intensive onthe-jobtraining and following successfulcompletion of the programme, areready to be placed. We have beenvery successful in placing the majorityof students on completion of theprogrammes and are pleased by theirprogress.The External Bursary Programmesaw 384 bursaries being awarded toundergraduate students studying towardsbank-related qualifications. Furthermore,internal bursaries were awarded to665 employees for further academicstudy at graduate and postgraduate leveland study grant assistance was providedto 283 employees for the education oftheir children.The Management DevelopmentProgramme is aimed at establishing acommon values-based managementapproach within our organisation and theOld Mutual Group. To this end9 897 (10 867 including Africa) of ourstaff have attended the role orientationworkshops this year and are nowembarking on practical application of skillslearnt at these workshops. Business andacademic development for successivelevels of our management are cateredfor in our applied academic programmes.In 2009 altogether 37 senior managersattended the executive educationprogrammes, locally and internationally,and 484 managers attended businesseducation programmes at some of thetop business schools in South Africa.Skills development is regarded as a keypillar to achieving our transformationstrategy. In support of the transformationstrategy the WSP was completed asstipulated by the Skills Development Act.The primary source of information forthis plan is the personal developmentplans completed online by employeesannually, following the annualperformance discussions that are heldbetween employees and their managers.These discussions focus on increasingcompetence in employees’ currentroles and preparing them for futureopportunities linked to our broader talentmanagement plans.Nedbank Group has spent R258 millionon training in 2009, which is 4,32% ofbasic payroll. Of this, 2,97% of basicpayroll was spent on black staff afterimplementing adjusted recognition forgender.At Nedbank Group learning and growthis sustained by a learning culture,which not only fulfils the variousregulatory requirements that governskills development, but also provides themomentum for sustainable organisationalperformance.1 Training expenditure1.1 Training expenditure in terms of dti CodesBlack skills development spend 2009 2008Total basic payroll R5 983 113 R5 945 444Total training spend R258 383 R263 841Training spend as percentage of basic payroll 4,32% 4,44%Training spend on black staff, using adjusted recognition for gender R177 598 R170 775Training spend on black PWD, using adjusted recognition for gender R2 192 R1 400Training spend on black staff as percentage of basic payroll 2,97% 2,87%Training spend on black PWD as percentage of basic payroll 0,04% 0,02%Nedbank Group qualifies for 10,38 points out of 15 points allocated to skills development as per the dti generic scorecard.Altogether 58,05% of the total training spend on black staff was spent on black female staff.118NEDBANK GROUP ANNUAL REPORT 2009

2 Category B, C and D programmesTitleTotalintake2009 2008 2007TotalblackTotalintakeTotalblackTotalintakeJunior Management Development Programme 188 146 216 162 190 136Middle Management Development Programme 144 97 143 91 126 86Senior Management Development Programme 92 43 87 36 45 20Letsema (matriculants) 181 181 125 124 232 229Kuyasa (graduates) 29 29 35 35 41 41Business Analysis (certificate level) 25 16 27 16Business Analysis (diploma level) 18 10Credit Learnership 20 18 20 18 21 16Education, Training and Development Practices 17 15 3 3 20 15Forex 20 19 20 19IT Business Learnership Programme 16 15 4 4 4 2Risk 3 3Systems Support 23 23 6 6 4 4Vehicle and Asset Finance 11 11Business Administration 17 17Contact Centre 46 41Corporate Asset-based Finance 7 7Nedbank Graduate Programme 104 91Property Finance 74 41Training Outside of Public Practice Programmes 25 7 9 1 20 10Eyethu Programmes (ABET) 62 61Boston Programme (disabled learners)Total 1 003 790 787 600 730 575Black trainees as a percentage of total 79% 76% 79%TotalblackGOVERNANCEOVERVIEWGROUP REPORTSOPERATIONAL REVIEWS119NEDBANK GROUP ANNUAL REPORT 2009

3 Executive developmentTitleTotalintake2009 2008 2007TotalblackWits Business School Executive Development Programme 1 1TotalintakeTotalblackTotalintakeGordon Institute of Business Science ExecutiveDevelopment Programme 11 4 13 6 22 11Harvard Advanced Management Programme 1 2 2 2Harvard Women’s Programme 2 1 1 1INSEAD Advanced Management Programme 5 5INSEAD International Executive Programme 2 1 4 13 4INSEAD Strategic Management in Banking 2 1 2 2Stanford Strategic Programme 1Manager of Business 3BANKSETA International Executive DevelopmentProgramme Netherlands 3 1Meridian 1 1INSEAD Managing Partnerships and Strategic Alliances 1BANKSETA International Executive DevelopmentProgramme UK 4 3Total 37 13 27 11 37 15Black executives as a percentage of total 35% 41% 41%4 Other programmesTitleTotalintake2009 2008 2007TotalblackTotalintakeTotalblackTotalintakeNedbank Graduate Programme (The programme changedto category B, C and D in 2009) 68 63 42 35Junior and Middle Management Programme 60 43Total 60 43 68 63 42 35Black trainees as a percentage of total 72% 93% 83%Note:During 2009 the Nedbank Graduate Programme became an accredited programme and it is now reflected as part of thecategory B, C and D programmes.TotalblackTotalblack120NEDBANK GROUP ANNUAL REPORT 2009

5 BursariesTitleTotalintake2009 2008 2007TotalblackTotalintakeTotalblackTotalintakeInhouse bursaries 665 496 949 710 1574 1081External bursaries 384 359 465 445Total 1 049 855 1 414 1 155 1 574 1 081Black bursars as a percentage of total 82% 82% 69%Totalblack6 Study grants/Education Assistance FundTitleTotalintake2009 2008 2007TotalblackTotalintakeTotalblackTotalintakeStudy grants (taxable at marginal tax rate and for childrenof staffmembers attending university) 283 143 305 147 297 147Education Assistance Fund (applicable to staffmemberswhose taxable remuneration is R100 000 or less for theirchildren who attend school from Grade 1 through toGrade 12) 876 751 227 211 692 499Total 1159 894 532 358 989 646Black people as a percentage of total 77% 67% 65%Note:There are 15 retired staffmembers who received study grants and have been included in the total number; however, demographicinformation is not available for these pensioners.TotalblackGROUP REPORTSOPERATIONAL REVIEWSGOVERNANCEOVERVIEW121NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWbalance sheetmanagementDuring 2009 Trevor was appointed to the Group Executive Committee.As Group Executive of Balance Sheet Management (BSM), he directsthe group’s portfolio risk management, liquidity and funding, assetand liability management (ALM), capital management and risk-basedfinancial performance measurement.Trevor Adams (47)Group Managing Executive:Balance Sheet ManagementA highlight in 2008 and 2009 has been the significant strengthening ofthe group’s capital ratios under Trevor’s leadership.Trevor was a partner at Deloitte & Touche before joining the bankingindustry in 1996, starting with NBS, BoE and ultimately Nedbank Group.122NEDBANK GROUP ANNUAL REPORT 2009

Trevor performed the leadershiprole in the group’s successful BaselII implementation, the introductionof several key concepts such asmanaging for value, economic capital,economic profit (EP), enterprisewiderisk management, risk appetite andstress testing, and generally hasbeen responsible for the significantenhancement of risk, capital andshareholder value-based managementacross the group.OverviewEstablished as a separate cluster inAugust 2009, BSM helps to optimisethe financial performance, strategyand sustainability of Nedbank Groupthrough proactive management of allmaterial components of the balancesheet.Since the business of banking isfundamentally about measuring,managing and optimising risk, BSM, inaddition to supporting the vision ofmaking Nedbank Group a great placeto invest, also champions the group’sdeep green aspiration to be worldclass atmanaging risk and its three core objectivesfor successful enterprisewide riskmanagement, namely management of:• Risk as a THREATTo minimise and protect againstdownside risk, protect against materialunforeseen losses and maximise longrunsustainability.• Risk as UNCERTAINTYTo eliminate excessive earningsvolatility and minimise materialnegative surprises.• Risk as OPPORTUNITYTo maximise financial and share priceperformance upside via applicationof superior business intelligence,management science and shareholdervalue-add economics, while optimisingbusiness opportunities, risk, capital andliquidity ultimately to differentiateagainst competitors. A core objectivewithin BSM’s role is thus leadershipin the application groupwide, ofbest practice and integrated risk,funding, ALM, capital and shareholdervalue-based management, withinan acceptable risk appetite andwith a strong qualitative overlay ofexperience and common sense.The BSM cluster is the centralconsolidation point of risk, capitaland liquidity across the group, andtherefore its role includes groupportfolio risk management, recognisingthat optimising risk, funding, capital,financial performance and sustainabilityof the group is not just about a simpleaggregation of the client-facing businessclusters.The detailed Risk and Balance SheetManagement Report follows onpages 126 to 187.GROUP REPORTSKey components of Nedbank’s balance sheet managementPortfolio riskmanagementShareholdervalue-add(risk-based)Asset and liabilitymanagementCapitalmanagement(and Leveraging)GOVERNANCEOPERATIONAL REVIEWSOVERVIEW123NEDBANK GROUP ANNUAL REPORT 2009

OPERATIONAL REVIEWgroup riskPhilip Wessels has held the position of Chief Risk Officer for NedbankGroup over the past six years. Through Philip’s leadership, together with thecommitment and support from management and staff within the group,Nedbank has become well-recognised and highly regarded for its effective riskmanagement processes and governance principles.Philip Wessels (51)Chief Risk Officer15 years’ serviceBCom, CTA, CA (SA), Diploma inAdvanced Banking Law, Instituteof Stockbrokers124NEDBANK GROUP ANNUAL REPORT 2009Prior to his appointment as Chief Risk Officer in 2004, Philip was a divisionaldirector in Nedbank Business Banking and Nedbank Corporate. In addition,he was an executive director of BoE Limited, Managing Director of BoESecurities, Chief Executive of BoE International (London) and Managing Directorof BoE Bank, Business Banking and Boland Bank between 1995 and 2003. Philipwas also a former partner at Deloitte & Touche between 1989 and 1995.

OVERVIEWAs the Chief Risk Officer of the groupPhilip heads the Group Risk function,ensuring that risk is embedded andembraced throughout the organisation,thus providing assurance that the bankis well-managed. Policy setting, riskframeworks, governance structures androbust risk reporting all contribute toachieving Nedbank Group’s aspiration ofworldclass risk management.Review of the past yearDespite unprecedented global volatility,the SA banking industry has remainedstructurally sound. Although banks haveexperienced cyclical financial stressas a result of the economic downturn,Nedbank Group has proven resilience.Risk management, more than everbefore, has become a focal point toavert risk exposure and to manageand sustain business better. With thisrealisation the important role that riskmanagement has to play is reinforced.In response to the economic instabilitymanagement significantly reducedthe risk profile of the group to ensuresustainability and increased proactiverisk management. This resulted in tightercredit lending criteria within the Retailand Business Banking sector of thebusiness, more stringent risk acceptancecriteria, stronger emphasis on improvingcollections efficiency as well asincreased affordability buffers. Similarly,the strategy for the Nedbank Corporatecluster included active management ofclients with large exposures, tighteningof controls on international trade andtransactions, and a review of high-riskindustries to identify specific areas ofstress so as to develop early warningsignals and prompt proactive clientengagement in affected industries. Inaddition, stress testing on share-basedexposures in order to manage securitylevels formed part of this deriskingstrategy.As testament to Nedbank Group’seffective risk management programmethe group was recognised at the recentInstitute of Risk Management SouthAfrica awards as a runnerup for the mosteffective risk management programmefor 2009, having been the winner in theprevious two years.OutlookThrough the annual strategic businessplanning exercise Group Risk identifiedeight focus areas for the year ahead asaligned with the strategic focus areas forNedbank Group:• Manage for value through the cycle– This will be achieved through acontinued focus on sound capital andliquidity management and managingcredit through the challenging creditcycle.• Step change in non-interest revenuegrowth – During this period wherebusiness is required to focus onincreased innovation to achievegrowth of non-interest revenuesound risk principles will be strictlymaintained.• Become client-driven – As anenabler to business, one of theongoing objectives of the centralrisk function is to embrace new andexisting legislation and internaliseand operationalise regulationsin the course of normal businessoperations. During this processmaintaining strong relationships withkey stakeholders, including the board,regulators and shareholders, is ofparamount importance in preservingthe reputation of Nedbank Group.• Manage risk as an enabler –Improving on forward-looking analysiswill ensure that the group is wellpositionedproactively to identifyand manage risks within the ongoinguncertain and volatile environment.• Enhance productivity and execution– Business process engineering will beinitiated to identify early recognitionof potential threats with the aim ofimplementing new and appropriatecontrols further to enhance thestrategy of proactive and dynamic riskmanagement.• Maintain strong risk managementculture for competitive advantage– Maintaining a strong oversightof the group’s EnterprisewideRisk Management Framework willcontinue to place a strong emphasison accountability for managing thegroup’s identified risk universe.• Accelerate transformation –Managing transformation risk, whichforms part of the Nedbank Grouprisk universe, remains an area ofpriority in developing a black talentpipeline to meet future growthrequirements and ensuring thatNedbank Group contributes positivelyto the wider context of South Africa’stransformation.• Lead as a corporate citizen – Allbusiness undertakings will continueto be aligned with Nedbank Group’sposition to remain a leader incorporate social responsibility anduphold the ‘green’ risk managementstrategy.The detailed Risk and Balance SheetManagement Report follows onpages 126 to 187.GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE125NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportEXECUTIVE SUMMARYSA banking system and financial systemcontinues to remain structurally sound, liquid andstrongly capitalised• Financial soundness of banking system improved from 15th to 6thplace in World Economic Forum Global Competitiveness Report.Capital adequacyincreased significantly again in 2009Regulatory capital• Core Tier 1 – from 7,2% (2007) to 8,2% (2008) to 9,9% (2009).• Tier 1 – from 8,2% (2007) to 9,6% (2008) to 11,5% (2009).• Total – from 11,4% (2007) to 12,4% (2008) to 14,9% (2009).Economic capital• In 2009 the group’s internal target solvency standard increasedfrom A- (99,9%) to A (99,93%) while a more conservative definitionof available financial resources (AFR), which covers the economiccapital requirements, was also introduced.• AFR surplus (after 10% capital buffer)– increased from R9,6 billion (2008) to R16,1 billion (2009),based on the old basis; and– amounts to R11,8 billion (2009), based on the new, moreconservative basis.Leverage ratio• Low at 14,4 times (2008: 16,2 times), compared with internationallevels.Stress and scenario testing• Best-practice framework and process followed to confirmthe robustness of the group’s capital adequacy and to assistin derisking the bank in appropriate segments ahead of theglobal financial crisis.Liquidityremains sound• Lengthened funding profile, including successful R5,4 billion seniordebtissue in September 2009.• Strengthened liquidity buffers.• Well-diversified funding mix (ie retail vs wholesale deposit reliance).• Strong deposit franchise (across Retail, Business Banking andCorporate Banking businesses).• Low reliance on interbank, foreign and capital markets.Risk and capital management systemsprove consistently effective• Enterprisewide Risk Management Framework (ERMF) and CapitalManagement Framework remain effective and well-embeddedacross the group.• Sound risk governance prevails.• Prudent risk appetite followed.• Risk-based remuneration practices applied since 2008.• With the exception of the retail asset classes whereimpairments remain challenging, wholesale credit asset classesremained within target credit loss ratios throughout the globalfinancial crisis and local recession.Global regulatory developmentscomprehensive response to global financialcrisis is in progress• Significant new international regulatory requirements and proposals(‘Basel III’) related to capital, liquidity, risk management andaccounting provisioning, aimed at a more resilient global bankingsector, are currently due for implementation end 2012.• Comprehensive quantitative impact study and finalisation of theproposals are due end 2010.• Impact of the liquidity proposals would be pervasive if implementedas is, but we anticipate modifications and changes appropriate forSouth Africa and its various structural issues.• Impact on capital and all other proposals for Nedbank Group areinitially anticipated to be moderate, not significant.Balance sheet managementa new balance sheet management cluster wasestablished in 2009126NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWBackgroundIn 2009 the local banking industry continued to experience atough and volatile year as a result of the impact of the ongoingglobal recession, combined with cyclical credit stresses in thedomestic economy. In response to the global financial crisis,during 2009 Nedbank continued its focus on proactive riskmanagement and strengthening of capital ratios as well as furtherdiversifying the funding base, lengthening the funding profile andincreasing liquidity buffers. Although underlying conditions in thebanking industry are expected to remain challenging for 2010, theSA economy is expected to grow by around 2,2%, which shouldtranslate into a better year for banking.The landscape of banking is changing rapidly following theglobal financial crisis and the significant international regulatoryresponse that is underway. Much of this change relates toand impacts the measurement and management of risk, thebalance sheet (in particular, capital and liquidity) and financialperformance, as well as the associated remuneration practices ofbanks.South Africa’s banking industry has remained structurally soundand weathered the global financial crisis and local recessionextremely well due to factors that include:• Sound and proactive regulation of financial services, especiallyin the banking sector.• Strong risk and capital management in the SA bankingindustry.• Basel II being successfully implemented and embraced inSouth Africa.• The National Credit Act being successfully implemented inSouth Africa to help minimise irresponsible lending practices,overgearing and excessive consumer debt.• Fiscal authorities in South Africa never allowing interest ratesto fall as low and for as long as in the United States, wherethis resulted in excessive borrowing and untenable levels ofhousehold debt. South Africa has not had negative realinterest rates.• Exchange controls preventing large flows of funds from localinstitutions out of the country.• Rand liquidity remaining stable, with the interbank marketoperating normally.• The ‘originate and sell’ business model and complex creditderivatives, which resulted in excessive leverage in someforeign banks, not being implemented and used in South Africato the same extent.• Lessons learned from the 2002/3 SA banking crisis.In South Africa our banking regulator has consistently beeneffective, and this has played a significant role in preventing anylocal fallout from the global financial crisis. However, South Africadoes operate in a globally regulated market and the significantresponse to the crisis by international regulators, in particular theBasel Committee on Banking Supervision (Basel Committee), willhave an effect on the local banking industry.Nedbank Group anticipates that the impact on the group ofthe proposed international regulatory changes will be moderaterather than pervasive, with one potential exception (see below).This view is substantiated by the sound positioning of theSA banking industry throughout the global financial crisis,successful Basel II implementation in 2008 and, in particular,Nedbank Group’s prudent risk appetite, sound governanceand strong risk culture, which is evidence of Nedbank Group’s‘business benefits’-based approach to the implementation ofBasel II, where our emphasis was not only to comply withBasel II, but also to elevate the group’s risk, capital and balancesheet management to best-practice standards.The possible exception to the moderate impact discussed abovewill be the new international regulatory liquidity proposals forwhich the impact would be pervasive if implemented as theystand, but we anticipate modifications and changes appropriatefor South Africa and its various structural issues. SA banks arewell-funded and liquid, and remained so throughout the globalfinancial crisis mainly due to the sound, small and closed natureof the local funding system.The new Group Executive Committee structure, which wascompleted in January 2010, also includes the creation of aspecialist Balance Sheet Management cluster. This recognisesthe importance of managing risk on a portfolio basis andintegrating the management of risk with liquidity and funding,capital management, shareholder value-add optimisationand reward practices. The creation of this new cluster is alsoacknowledgement that portfolio optimisation is an essentialcomponent of optimising the financial returns and long-termsustainability of the group.Regulation 43 of the regulations relating to banks in SouthAfrica requires disclosure to the public of reliable, relevant andtimely qualitative and quantitative information that enablesusers of that information, among other things, to make anaccurate assessment of a bank’s financial condition, including itscapital adequacy, financial performance, business activities, riskprofile and risk management practices. Nedbank Group is fullycommitted to regulation 43.The requirements of regulation 43 are aligned with InternationalFinancial Reporting Standards but significantly extend the publicdisclosure requirements. This extension of disclosure is embodiedin what is commonly known as ‘Pillar 3’ of the Basel II Accord.A copy of the unabridged Pillar 3 Report may be found on thegroup’s website at www.nedbankgroup.co.za.127NEDBANK GROUP ANNUAL REPORT 2009GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE

isk and BALANCE SHEET management reportGlobal regulatory developments and thechanging landscape of bankingThe measures taken by the Basel Committee in July 2009 tostrengthen the international Basel II framework, as well as thefar-reaching proposals released in December 2009, are thecommittee’s comprehensive response, under the mandate ofthe group of 20 leading economies, to address the lessons of theglobal financial crisis.The Basel Committee’s proposals aim to strengthen global capitaland liquidity regulations with the goal of promoting a moreresilient banking sector. The objective of the reform package is toimprove the banking sector’s ability to absorb shocks arising fromfinancial and economic stress, whatever the source, thus reducingthe risk of spillover from the financial sector to the real economy.Through its reform package the Basel Committee also aims toimprove risk management and governance as well as strengthenbanks’ transparency and disclosures. Moreover, the reformpackage also includes the committee’s efforts to strengthen theresolution of systemically significant crossborder banks and thefinancial regulatory system.The new Basel requirements and proposals are discussed in moredetail below.The first response package was released in July 2009 andincluded improvements to Basel II’s Pillars 1, 2 and 3.• Enhancements to Pillar 1− Securitisation (implementation end 2009).− Market trading risk (implementation end 2010).• Enhancements to Pillar 2 Internal Capital Adequacy AssessmentProcess (ICAAP) (implementation July 2009)− Bankwide governance and risk management.− Principles for sound liquidity risk management.− Principles for risk concentrations.− Sound remuneration practices (risk-based).− Valuation and liquidity risks of financial instrument fair-valuepractices.− Principles for sound stress-testing practices.− Off-balance-sheet exposures and securitisation activities.− Reputational risk and implicit support.• Enhancements to Pillar 3 (public disclosure/market discipline)− Securitisation exposures (implementation end 2009).The second response package, which includes only proposals atthis stage, was released in December 2009. The objectives of theproposals in this package are as follows:• Raising the quality, consistency and transparency of the capitalbase, while also harmonising the other elements of a bank’scapital structure.• Strengthening risk coverage.In addition to the trading book and securitisation reformsannounced in July 2009, the new proposals includestrengthening of the capital requirements for counterpartycredit risk exposures arising from derivatives, repurchaseagreements (repos) and securities financing activities. Thestrengthened counterparty credit risk capital requirements willalso increase incentives to move over-the-counter derivativeexposures to central counterparties and exchanges, andgenerally improve counterparty credit risk management. Theinterconnectivity of large financial institutions is also a keyfocus area as reflected by, for example, introducing a multiplier(1,25) to the asset value correlation for these exposures heldby banks.• Introducing a leverage ratio as a supplementary measure to theBasel II risk-based framework.The leverage ratio will help contain the buildup of excessiveleverage in the banking system. To ensure comparability thedetails of the leverage ratio will be harmonised internationally,fully adjusting for any remaining differences in accounting.• Reducing procyclicality and promoting countercyclical capitalbuffers.The key objectives are:− Dampen any excess cyclicality of the minimum capitalrequirement.− Promote more forward-looking credit provisions basedon ‘expected losses’, rather than the current ‘incurredloss’ provisioning model under the International FinancialReporting Standards.− Conserve capital to build buffers that can be used in stressby the introduction of a framework linking the amount ofearnings a bank is allowed to distribute to shareholders tothe bank’s capital ratios.− Protect the banking sector from periods of excess creditgrowth by requiring banks further to increase capital buffersavailable when selected macroeconomic indicators suggestthat credit volumes have grown excessively.• Introducing a global liquidity framework.This would consist of a stressed liquidity coverage ratio, alonger-term structural stable funding ratio and a common setof monitoring metrics to assist in identifying and analysingliquidity risk trends. These complement the Basel Committee’s‘Principles for sound liquidity risk management and supervision’issued in September 2008.128NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEW• Addressing systemic risk and banks’ interconnectedness.More specific proposals are expected to be developed in the firsthalf of 2010.The Basel Committee is mindful of the need to introduce thesemeasures in a manner that raises the resilience of the globalbanking sector over the longer term, while avoiding negativeeffects on bank lending activity that could impair the economicrecovery. To this end the committee is initiating a comprehensiveimpact assessment of the capital and liquidity standard proposalsand has highlighted that ‘decisions on the final proposals andtheir calibration will be made only after a thorough analysisof the impact assessment and the comments received onthe consultative documents. The committee will ensure thatimplementation of the new standards is consistent with financialmarket stability and sustainable economic growth’.The key timelines are as follows:• Consultation period for the December 2009 proposals until16 April 2010.• Undertaking of a comprehensive impact assessment during thefirst half of 2010.• Development of a fully calibrated set of standards by end 2010.• Targeted implementation by end 2012 (including phase-inmeasures and grandfathering arrangements beyond 2012).The complexity of the Basel Committee’s proposals, the risks ofunintended consequences and the interaction between theseand other developments place a strong burden on the bankingindustry to assess the impacts carefully and ensure that the rightbalance is achieved between risk management and economicwellbeing.In conclusion, most of these new developments are still atthe proposal stage and changes are expected following thequantitative impact study, calibrations and consultative process.The exact impact remains uncertain, however, and the issue is not‘if’, but ‘how much?’.Impact of the international regulatory developmentson Nedbank GroupNedbank Group is supportive of the recent internationalregulatory developments. While some details and clarity are stillsought and refinement needed before they are finalised, theprinciples behind most of the proposals are appropriate, prudentand necessary.The proposed changes will have an impact on the SA bankingindustry, although this will only come into effect after a minimumof three years following finalisation by the Basel Committee,as discussed above, and after the SA Reserve Bank (SARB) hasdetermined exactly what will be adopted and/or modified asappropriate for the SA banking industry.At this early stage Nedbank Group’s expectation is thatthe impact of these proposals will be moderate, both onimplementation requirements, strategy and financial performancereturns, with the possible exception of the liquidity proposals.In summary, our reasons for this view are as follows:• South Africa fully embraced its Basel II implementationsuccessfully completed two years ago, which involved a verystrong collaborative approach among the regulator (SARB) andthe banking industry.Nedbank Group’s approach since 2004, which at all timesembraced the true spirit of Basel II, involved implementing,inter alia, best-practice enterprisewide risk management acrossthe group. We have invested significantly in advanced risk andcapital management capabilities, as well as human resourcesand systems, and transformed these using our comprehensiveBasel II programme as the main catalyst. Additionally, welaunched the SMART Programme in H1 2009 to respondproactively to the global financial crisis.Many of the global issues around poor risk, capital andbalance sheet management were a matter of implementation,governance and risk cultures, and risk management lessonsthat needed relearning. A significant portion of the new Baselproposals are about enforcing what was already requiredand/or expected, albeit in principles that are now more detailedand specific. The new proposals comprehensively formalisethese requirements and therefore reduce opportunities forregulatory arbitrage. It’s mostly the environment in whichbanks operate that has changed materially.• As far as the proposed new capital requirements are concerned,SA banks’ regulatory capital rules are already considerablymore conservative than the Basel II international rules. The Tier1 minimum ratio is 7% in South Africa, compared with 4% inBasel II, while the core Tier 1 minimum at 5,25% is more thandouble the minimum 2% of Basel II. In addition, all the majorSA banks are currently operating at capital ratios significantlyabove the minimum regulatory ratios required in South Africa.All the major SA banks have also completed comprehensiveICAAPs in both 2008 and 2009. These are required to besigned off by the board of directors of each bank and then besubjected to a supervisory review and evaluation process bySARB.In view of the above we do not foresee a change for SA banksin the minimum capital requirements.129NEDBANK GROUP ANNUAL REPORT 2009GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE

isk and BALANCE SHEET management reportThe new Basel proposals have, however, significantly increasedthe focus on, and quality of, core Tier 1 capital (with ordinaryshareholders’ equity and retained earnings by far thepredominant form of Tier 1 capital).In view of Nedbank Group’s significantly strengthened capitalratios over the past two years to levels well beyond ourtarget regulatory capital ratios (see page 175) and expectedfurther strengthening over our current 2010 – 2012 businessplan as a result of our ongoing Risk-weighted Asset CapitalOptimisation Programme, SMART Programme, managing forvalue strategic focus area and internal generation of capitalfrom projected retained earnings, Nedbank Group does notanticipate the need to raise additional capital in responseto these global developments, notwithstanding the list ofadditional regulatory deductions being proposed.The global financial crisis has highlighted that the appropriatelevel of capital for a bank is a direct function of its riskappetite, strategy and existing risk profile. This aligns directlywith one of the key objectives of Basel II and that is todifferentiate capital requirements, and adequacy of capitalbuffers above the regulatory minimum, to reflect the uniquerisk profile on a bank-by-bank basis, rather than the one-sizefits-allapproach among all banks that Basel I engendered. TheBasel Committee confirmed this again in 2009.• Concerning the finalised (ie July 2009) and proposed(ie December 2009) new risk coverage requirements,Nedbank Group’s trading book is small in relation to itstotal bank operations, securitisation exposure/activitiesare low and counterparty credit risk, including repurchasetransactions and securities financing, is mostly restricted tolow-risk, non-complex transactions, with credit derivativesactivities restricted to single-name trades of SA exposuresand biased towards providing risk mitigation. We thereforedo not envisage a significant overall increase in minimumcapital requirements related to these new requirements andproposals.• With regard to the proposed new leverage ratio, at 14,4 times,excluding off-balance-sheet exposure (2008: 16,2 times),this requirement will not be an issue of concern for NedbankGroup. The risk appetite target approved by the board ofdirectors is 18 times, well below the international average.• With reference to the procyclicality and countercyclicalcapital framework proposals, the intended dampening ofprocyclicality via potentially more conservative through-thecycleor downturn probabilities of default (the regulationsalready require the use of downturn loss given defaults) usedin the Internal Ratings-based Credit Approach may have amarginal impact on Nedbank Group’s minimum credit capitalrequirements.Nedbank Group agrees with the objectives of theNovember 2009 exposure draft (ED) released by theInternational Accounting Standards Board on the proposedmove to an ‘expected loss’ approach to credit provisioningrather than the current ‘incurred loss’ model. However, muchstill needs to be worked out in this ED over the consultativeperiod, such as whether it in fact would adequately reduceprocyclicality, as well as the practicality of the implementationof the ED. At this stage it is too early to comment on theexpected impact of the ED.The other capital conservation and capital buffer proposalsgenerally align with current Nedbank Group practices and ourtarget capital ratios that are validated by the group’s ICAAPand extensive stress and scenario testing.• As far as the new liquidity risk proposals are concerned, whileour liquidity risk management aligns closely with best practice,the proposed new Basel liquidity ratios as they stand are apotential pervasive issue for the SA banking industry, as thelocal industry, compared with other first-world countries,has certain structural differences. These include, by way ofexample:− South Africa not being aligned with other jurisdictions interms of deposit insurance schemes.− SA savings levels being low partly due to the lack of a largemiddle class, which typically generates significant pools ofstable retail deposits.− SA banks having been disintermediated by money marketfunds, which account for nearly a third of total funding.This has resulted in more expensive funding (due to thewholesale nature) as well as a shorter liquidity profile.− Almost 90% of assets being corporate and mortgage loans,which typically have a long duration.− Small and less liquid local capital markets limiting theSA banks’ ability to bolster liquidity buffers and/or lengthentheir funding profiles.It is also important to recognise various positive structuraldifferences between the SA and international financial marketsthat are currently not taken into account in the new Baselproposals. SARB may well consider adapting the new proposalsto meet SA requirements.Some items that may be considered in modifying theproposals include:− Changes to some definitions (eg apply look-throughprinciple to money market funding and classify as retail).− Lengthening the implementation period to makecompliance practically achievable for the SA banks andimportantly also to allow SARB adequate time to interactwith government and the National Treasury to addresssome of the structural issues.130NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEW− Reducing the minimum target ratio; maintaining globalcomparability of calculations, but modifying for SouthAfrica’s structural issues.− Adjusting for South Africa not being aligned with otherjurisdictions in terms of deposit insurance schemes.− Clarifying whether cash reserves and liquid assets will beallowed to qualify as part of the stock of highly liquidassets. Currently only 25% of liquid assets and 0% of cashreserves qualify (the Basel paper suggests that 100% ofsovereign paper and 100% of cash reserves could qualify).− The closed nature of SA money markets, mainly resultingfrom exchange controls, which means that rands are more‘sticky’ for SA banks in the rand system than for euro- ordollar-denominated banks in their respective systems thatare more open.− SA asset managers having four large banks for depositingfunds. In Europe and the United States there aresignificantly more major banks for depositing funds,meaning wholesale funding is less ‘sticky’ compared withSouth Africa.− Given that liquidity risk is a consequential risk, legislationsuch as the National Credit Act (NCA) reduces systemicrisk and so the need for oversized liquidity buffers. Manydeveloped economies do not have the safety net of NCAtypelegislation yet.These are some of the SA structural issues that we anticipateare likely to be addressed collectively by government, SARBand the financial services industry for SA banks practically toalign with the proposed liquidity ratios.• On the banking industry systemic risk proposals, further workis ongoing on the proposals by the Basel Committee, but inSouth Africa a unique Pillar 2(a) 1,5% and Pillar 2(b) add-on,additional to the minimum Basel II 8% ratio requirement, arealready in place.As regards the emphasis on risk-based remuneration practices,Nedbank Group is positioned very well and has only a fewminor gaps to close given our risk-based approach alreadyimplemented in recent years (see the Remuneration Report inthis annual report).In summary Nedbank Group recognises that to becomeworldclass at managing risk is a journey, not a destination.We believe we have made excellent progress over the pastfive years and that overall our risk, capital and balance sheetmanagement, and ICAAP, align closely with best practice. Thispositioned the group to be resilient through the global financialcrisis and local economic recession. However, there is alwaysroom for improvement, and as the bar has been raised with thenew international regulatory proposals, we will continue withour endeavours strongly focused on continuously enhancingthe group’s risk, capital and balance sheet managementprocesses and systems.Key internal developments in 2009The following is a summary of key enhancements made toNedbank Group’s Internal Capital Adequacy AssessmentProcess (ICAAP) during 2009:• Significantly strengthened capital adequacy ratios, onthe back of our Risk-weighted Asset Capital OptimisationProgramme, and set higher target capital adequacy ratioranges.• Significantly strengthened liquidity buffers and lengthenedthe funding profile, including the successful R5,4 billionsenior-debt issue in September 2009.• Introduced more conservatism into the group’s economiccapital framework that is used for ICAAP:− Increased the target debt solvency standard from A-(99,9%) (the same as Basel II) to A (99,93%). This alignswith the targeted standard of our parent company, OldMutual plc.− Refined the definition of ‘available financial resources’ tocover the economic capital requirements.o The ‘50% of next year’s earnings’ are no longer included(even though business risk economic capital is stillincluded).o A Tier A and Tier B category were created, withTier A to cover at least the minimum economic capitalrequirements at the new, more conservative A rating.DefinitionsTier A = core Tier 1 regulatory capital and qualifyingreserves*Tier B = perpetual preference shares and hybrid debtcapital(*In ‘qualifying reserves’ we now include a sharebasedpayments reserve, foreign currency translationreserve and available-for-sale reserve, as we believethis to be correct and appropriate for economic capitalcalculations. These are currently excluded for regulatorycapital purposes.)• Elevated stress and scenario testing to yet a new height inline with new best practice developing over the past year onthe back of the global financial crisis.• Appointed a head for the newly established GroupData Management Office to champion groupwide datagovernance and data quality, following the launch of theGroup Data Project.• Further embedded our economic profit and managing forvalue approaches in the 2010 – 2012 updated business plans131NEDBANK GROUP ANNUAL REPORT 2009GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE

isk and BALANCE SHEET management reportand day-to-day operational management. Completed thesecond full year of using economic profit driven off riskbasedeconomic capital allocation to determine bonuses(short-term incentives) across the group’s businesses.• Delivered comprehensive, best-practice Pillar 3 publicdisclosure reports and were awarded two prizes at theannual Investment Analysts Society (IAS) Reporting andCommunication Awards. The IAS is the society that most ofthe SA buy- and sell-side analysts and fund managers belongto, and their 2 000 members vote on the awards. The awardscover the 2008 year and are these analysts’ view on theinvestor reporting Nedbank Group disclosed last year.Our awards were:− Award for best reporting and communication.− Overall Best Reporting and Communication Award, whichis the main award (all the winners in each JSE Limitedcategory competed).• Enhanced and cascaded the group-level risk appetite metricsdown to business clusters (see page 135).• Completed, with the assistance of international consultants,‘deep dives’ into the potential risks inherent in:− Commercial real estate portfolio (Property Finance).− Mortgage/home loans portfolio (Nedbank Retail).− Specialised lending portfolio (Nedbank Capital).− Motor vehicle finance (Nedbank Retail and Imperial Bank).• Enhanced the incorporation of risk in the group’s three-yearbusiness planning process for the 2010 – 2012 period via amore formal and comprehensive requirement for each majorbusiness to produce a risk strategy component, integratedwith their business strategy. This is in addition to the grouplevelrisk and capital strategy document produced.• Addressed the Basel Committee’s first response packageto the G20’s eight-point plan released in January 2009,following the meeting in November 2008, benchmarkingthese points against Nedbank Group’s current practice andincorporating any gaps into the SMART Programme.• Despite the difficult international markets, successfully raisedTier 2 subordinated debt in March 2009 in the amount ofUS$100 million and at acceptable pricing levels (LondonInterbank Offered Rate + 150 basis points).• Implementation of new Quantitative Risk Managementsoftware for our asset and liability management process isprogressing well and is due for completion in early 2010.• Ongoing refinement and enhancement of Nedbank Group’sAdvanced Internal Ratings-based credit system and relatedcredit modelling.• And finally, after having invested significantly in a worldclassBasel II risk and capital management environment, weembarked on our programme of managing for value to extractsignificant value for the group from this investment, whileensuring that we continue to improve the underlying data thatdrives financial and non-financial information. This initiativehas further been supported by the implementation of anenhanced financial reporting architecture, which has improvedour target-setting processes, financial management activitiesand external reporting capabilities.In addition there are a number of economic capital allocationmethodology enhancements that will be implemented for 2010,which are expected to have a significant impact on the allocationof capital across the group’s business clusters. The impact of thechanges by business cluster will be disclosed with the30 June 2010 results. The following is a summary of the keyenhancements being implemented for 2010:• Full alignment of the group’s actual book capital with theaggregate amount allocated to the various business clustersusing bottomup economic capital.• Updating of the credit portfolio modelling correlations andcredit economic capital allocation methodology taking intoaccount recent global developments (including downturnyears) and the new regulatory thinking in line with the newBasel III proposals discussed earlier.• Measurement of operational risk for economic capitalpurposes using the Advanced Measurement Approach insteadof the Standardised Approach. We submitted our applicationto use this approach to the SA Reserve Bank in January 2010and await its feedback.Risk appetiteRisk appetite is an articulation and allocation of the risk capacityor quantum of risk Nedbank Group is willing to accept in pursuitof its strategy, duly set and monitored by the Group ExecutiveCommittee and the board, and integrated into our strategy,business, risk and capital plans.We measure and express risk appetite qualitatively and in termsof quantitative risk metrics. The quantitative metrics includeearnings at risk (or earnings volatility) and, related to this, thechance of regulatory insolvency, chance of experiencing a lossand economic capital adequacy. These comprise our group-levelrisk appetite metrics. In addition, a large variety of risk limits,triggers, ratios, mandates, targets and guidelines are in place forall the financial risks (eg credit, market and asset and liabilitymanagement risks).In 2009 we sought to enhance the consolidation, focus andreporting of the key financial risk appetite metrics, and thecascade from group level down to cluster, business unit andmonoline level.132NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWAccordingly we established an enhanced suite of basecase [through-the-cycle (TTC)] risk appetite metrics andincorporated these within the 2010 – 2012 business plans atboth group and business cluster levels (see page 135). Stressed(extreme event) risk appetite metrics, linked to our stress- andscenario-testing programme, will be finalised in H1 2010.Nedbank Group has cultivated and embedded a prudent andconservative risk appetite, focused on the basics and coreactivities of banking. This is illustrated by reference to thefollowing:• No direct exposure to US subprime credit assets norassociated credit derivative transactions.• Conservative credit underwriting practices that haveculminated in a high-quality well-collateralised wholesalebook and further tightening of our retail book since 2007 inanticipation of the economic downturn and introduction ofthe National Credit Act.• Reasonable credit concentration risk levels:− Large individual or single-name exposure risk is low. Referto page 152 for details.− Geographic exposure risk is high (refer to page 154 thathighlights that 94% of the group’s loans and advancesoriginate in South Africa), but in reality this concentrationhas been positive for Nedbank Group, given the globalinternational crisis, and reflects focus on an area of corecompetence.− Industry exposure risk is reasonably well-diversified. Referto page 154 for details.− At first sight our property exposure appears high, but thisis in line with our domestic peer group and most banksworldwide. As a result of this perceived risk, we undertooka more detailed analysis, assisted by international riskconsultants, of our commercial property exposures.The conclusions and recommendations that resulted fromthis detailed analysis were:o Potential credit losses in a stressed scenario wouldremain within Nedbank Group’s risk appetite.o The portfolio is well-balanced, and higher risk loans areclosely monitored.o The most appropriate business strategy is one ofselective origination, sacrificing business volumes andmarket share growth for risk-based pricing, economicprofit and margin management. This is broadly in linewith our risk appetite over the past few years.o The commercial property portfolio is largely focused ondeveloped properties with a track record of predictablecashflows from rentals over the medium term.Stemming from this detailed analysis were several usefulbenchmarks derived from the experience that internationalbanks had, where we compare favourably.The analysis has been useful not only from the businessperspective of shaping our commercial property loanorigination and deal-pricing approach for the future, butalso from the credit risk management perspective ofproviding us with additional relevant benchmarks againstwhich to monitor our commercial property exposures andof highlighting risky exposures on which to focus increasedrisk management.• Counterparty credit risk almost exclusively restricted to noncomplexbanking transactions. There is continued emphasison the use of credit mitigation strategies, such as netting andcollateralisation of exposures.Credit derivative activities have been restricted to singlenametrades of SA exposures and biased towards providingrisk mitigation. Refer to page 155 for further details on ourrelatively low counterparty credit risk exposure.• A strong, well-diversified funding deposit base and a lowreliance on offshore funding. Additionally, Nedbank Group’sreliance on its top 10 depositors is not unduly concentrated.Refer to page 169 onwards for our analysis in support of thisand our prudent liquidity risk management.• Low level of securitisation exposure.Refer to page 158 for summary detail on this exposure.• Low leverage ratio (total assets to shareholders’ equity) of14,4 times (16,2 times: 2008), which compares veryfavourably on an international benchmarking basis.• Low risk of assets and liabilities exposed to the volatility ofInternational Financial Reporting Standards fair-value mark-tomarketaccounting. Refer to page 282 ‘Consolidated statementof financial position – categories of financial instruments’ andpage 93 ‘Consolidated statement of financial position banking/trading categorisation’ for details.• Small market trading (proprietary) risk in relation to totalbank operations (economic capital held is only 1,8% of totaland is conservatively based on limits rather than utilisation,plus a 10% capital buffer). Although proprietary tradingactivities are small, they play an essential role in facilitatingclient trades.The risk appetite within the trading business has remainedlargely unchanged over the past two years. Trading activities133NEDBANK GROUP ANNUAL REPORT 2009GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE

isk and BALANCE SHEET management reporthave focused on the domestic market with a bias towardslocal interest rate and forex products.The overall performance of the trading business in 2009 wassound, an indication that the impacts from the credit crunchand difficult equity markets were successfully navigated,and our risk systems sound. In addition, over the past yearNedbank Capital proactively managed and reduced therisk pertaining to single-stock futures and contracts fordifference, and the forfaiting business was closed with theexisting exposure being managed over the maturity of thebook.Refer to page 160 for more details.• Low interest rate risk in the banking book, as reflected by thesensitivity analysis provided on page 174.• Low equity (investment) risk, including private equity,exposure. The total equity risk exposure, including our privateequity business, is R3,9 billion, comprising only 0,7% oftotal assets. Further, within this a wide range of individualinvestments exist and many are linked to a wider clientrelationship.Refer to page 164 for further details.• Immaterial assets non-core to the business of banking.• Low foreign currency translation risk to the rand’s volatility,which is in line with Nedbank Group’s appropriate offshorecapital structure.Refer to page 174 for more details.• Well-diversified earnings streams. Most of the group’searnings are generated by traditional, vanilla, annuity-basedincome in wholesale and retail banking, and specialisedfinance.• Well-diversified subordinated debt and non-core Tier 1profile. Despite the difficult international markets, NedbankGroup successfully raised Tier 2 subordinated debt inMarch 2009 in the amount of US$100 million and atacceptable pricing levels (ie LIBOR + 150 basis points). Referto page 179 for details.• Comprehensive stress and scenario testing to confirmthe adequacy and robustness of our capital ratios andaccompanying capital buffers.134NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWRisk appetite – enhanced suite of metrics finalised in 2009Group target (board-approved)Credit risk profileCredit loss ratio (%) 0,60% – 1,0%Credit risk-weighted assets (RWA): Loans and advances (%) 52% – 58%Credit property exposure: Loans and advances (%) < 45%Properties in possession (PIPs): Loans and advances (%) < 0,1%Average probability of default (PD) (%) – performing book (TTC) < 3%Average loss given default (LGD) (%) – performing book (TTC) 18% – 22%Average expected loss (EL) (%) – performing book (TTC) 0,6% – 0,7%Defaulted exposure of default (EAD): Total EAD (%) < 2%EAD: Exposure (%) < 120%Counterparty risk (derivatives) profileCounterparty credit risk (CCR) EAD: Total EAD (%) < 2%CCR economic capital (Ecap): Total Ecap (%) < 0,5%Securitisation risk profileSecuritisation RWA: Total RWA (%) < 0,4%Trading market risk profileValue at risk (99%, three-day) < 127Stress trigger (Rm) < 846Trading Ecap: Total Ecap (%) < 3%Equity (investment) risk profileExposure: Total assets < 2%Equity investment Ecap: Total Ecap (%) < 7%Asset and liability management (ALM) risk profile – liquidityShort-term (0 to 31 days) funding: Total funding (%) 58% (tolerable deviation +5%)Medium-term (32 to 180 days) funding: Total funding (%) 18% (tolerable deviation +7%)Long-term (> 180 days) funding: Total funding (%) 24% (tolerable deviation -7%)Contractual maturity mismatch (0 to 31 days): Total funding (%) 38% (tolerable deviation +5%)Net interbank reliance: Total funding (%) < 1,5% (tolerable deviation +1%)ALM risk profile – interest rate risk in the banking bookNet interest income (NII) interest sensitivity: Equity (%) < 2,5%NII interest sensitivity: 12-month NII (%) < 7,5%NII interest sensitivity: Interest-earning assets (basis points) < 25 bpsEconomic value of equity: Equity (%) < 5%ALM risk profile – foreign currency translation riskCurrency equity/Total equity < 5%Group risk appetite metricsEarnings at risk < 100%Chance of a loss (1 in x years) > 10Chance of regulatory insolvency (1 in x years) > 50Available financial resources: Ecap (A solvency target) > 110%Total RWA: Total assets (%) 55% – 57%Leverage ratio< 18 timesGroup capital adequacyCore Tier 1 (in current environment target above top end of range) 7,5% – 9%Tier 1 (in current environment target above top end of range) 8,5% – 10%Total (in current environment target above top end of range) 11,5% – 13%GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE135NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportIndividual risk appetite targets, as relevant to the approved business activities, have been approved and cascaded down from grouplevel for each business cluster, major business unit and the monolines in Nedbank Retail.One of the risk appetite metrics that we are currently in excess of due to the retail asset classes and the current economicenvironment, and which is in line with our peer group, is the group’s target credit loss ratio range, details of which may be found onpage 145. We currently expect to remain outside the target range in 2010, but addressing this is a key component of the2010 – 2012 business plans. The reversals of provisions in the balance sheet is expected to take longer as defaulted advancescontinue to increase, albeit at a slower rate. The group remains cautious about impairments.In conclusion, Nedbank Group has a strong risk culture and a conservative risk appetite, which is well-formalised, managed andmonitored on an ongoing basis, bearing the board’s ultimate approval and oversight.Overview of the Internal Capital Adequacy Assessment ProcessIn line with the four key principles contained in Pillar 2 of Basel II, the SA regulations relating to banks set out in regulation 39the Internal Capital Adequacy Assessment Process (ICAAP) requirements of banks and related Supervisory Review and EvaluationProcess (SREP) requirements of the SA Reserve Bank (SARB). A summary of this is depicted below.In addition, SARB have provided further guidance on the 12 ICAAP principles.Summary of the ICAAP and SREP requirementsICAAP Principle 1Every bank shouldhave an ICAAPICAAP Principle 2Ultimate responsibilityfor a bank’sICAAP is the boardICAAP Principle 3Written recordof ICAAPRequirements of the banksICAAP.Principle 1• Banks to have an ICAAP within which itsstrategy is to be linked with risk appetiteand capital levels.Requirements of the regulatorSREP.Principle 2• Regulators to review and evaluate bank’s ICAAP.• Regulators able to take action if not satisfiedwith a bank’s ICAAP.ICAAP Principle 7ICAAP to beforward-lookingICAAP Principle 8ICAAP to be riskbasedICAAP Principle 9Importance of stresstesting and scenarioanalysisICAAP Principle 4ICAAP to be anintegral part ofmanagement anddecisionmakingculture of a bankICAAP Principle 5Proportionality tosize and complexityof operationsICAAP Principle 6Regularindependent reviewof ICAAPPrinciple 3• Banks expected to hold capital in excess ofthe regulatory minimum.• Regulators with power to enforce.Board andmanagementoversightComprehensiverisk assessmentand management(to address ALLmaterial risks)Main ICAAP componentsIntegrated capitalassessment andmanagementPrinciple 4• Regulators to intervene early to preventcapital falling below required minimumlevels.Monitoring andreportingInternal controlreviewICAAP Principle 10Diversification andconcentration risk tobe well-consideredICAAP Principle 11Credit concentrationrisk to bewell-consideredICAAP Principle 12Adequacy andintegrity of ICAAPmodelsICAAP is primarily concerned with Nedbank Group’s comprehensive approach, assessment, coverage and management of risk andcapital from an internal perspective, that is over and above the minimum regulatory rules and capital requirements of Basel II.ICAAPs have first been completed in South Africa in 2008, are approved by the board and then submitted to SARB for review.136NEDBANK GROUP ANNUAL REPORT 2009

Risk managementSummary of perspectives on Nedbank Group’s riskprofile and risk strategyThe key highlights for 2009 are as follows:• Risk management systems− Continuously proving effective.− Enterprisewide Risk Management Framework remainssound and well-embedded.• Competition Commission inquiry into banks− Await National Treasury response to the commission’srecommendations.• Group structure− Board/Management structureso New board members, Chief Executive Officer, GroupExecutive Committee and business clusters’ Excos havebeen finalised.− Management of Old Mutual/Nedbank Group strategy isongoing.• Risk appetite− Prudent risk appetite prevails.− In Retail, increased appetite for unsecured lending whilesecured, asset-backed lending now has a much strongeremphasis on managing for value.• Profitability− Resilient performance in challenging environment.− Earnings volatility too high in secured lending businessesin Retail; being addressed.− Wholesale risk profile remains sound.o Successful stress-testing strategy implemented inBusiness Banking in 2008.o Black economic empowerment (BEE) exposurecontained and regularly stress-tested.− Consistent, well-managed earnings growth in NedbankCapital (the investment bank).− Non-interest revenue subscale bankwide (and this impactsearnings volatility of group); key strategic focus area.• Market risk− Risk appetite remained largely unchanged over the pasttwo years; low proprietary trading risk.− Focused on the domestic market with a bias towards localinterest rate and equity products.− Risk appetite for complex equity derivatives significantlycurtailed in 2007.− Equity trading risko Mainly in Nedbank Group’s securities companies.o Risk appetite and limits remain low.o Low exposure to illiquid instruments.− Overall performance of the trading business has beensound.o Proactively managed and reduced the risk pertaining tosingle-stock futures and contracts for difference, andclosed the forfait book.o Significant investment in risk management systemscontinues.• Credit risk− Strong credit risk management framework.− Strengthening risk management in Retail.− Worsening group credit loss ratio from 1,17%(December 2008) to 1,47% (December 2009), on theback of retail impairments that remain challenging.− No large corporate defaults, but credit risk remainsrelatively high amid local recession.− Business Banking particularly resilient.• Operational risk− Advanced Measurement Approach (AMA) applicationsubmitted to SA Reserve Bank in January 2010; to beadopted for economic capital in 2010.• Imperial Bank− Nedbank has received section 37 approval from SARB forthe acquisition of the minority shareholding in ImperialBank, and its full integration into Nedbank Group will be akey focus in 2010.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW137NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportCredit riskLoans and advances and Basel II exposureDemand for credit grew at historically low rates and retail impairments increased dramatically as consumers came under severepressure from falling income, job losses, declining asset prices and record high debt burdens. By the end of 2009 growth in assetfinance had slowed to 1,0% year-on-year. Interest rates were reduced by 450 basis points to cushion the effects of a rapidly slowingeconomy and increasing unemployment.Corporate demand for credit initially held up but lost momentum due to weak global and local demand, which eroded corporateprofits through weaker pricing power, lower commodity prices and a strong rand. Support came from construction projects andincreased government spending, boosted primarily by the public sector’s infrastructure drive and preparations for the 2010 FIFAWorld Cup.Net loans and advances after impairments are R450 billion, 3,7% up on the previous year. Gross loans and advances increased by4,1% to R460 billion. The gross loans and advances by business cluster are as follows:Gross loans and advances by business cluster380 03652 97836 2237,0%25,7%13,3%442 09255 69845 546154 572(9,5%)13,4%5,7%460 09951 33551 640163 395136 42551 617102 577(6,8%)33,6%48 119136 99615,8%0,9%55 699138 285(25%)(>100%)216* 161* (255)*200720082009* These relate to eliminations passed through Central Management.The 4,1% increase in gross loans and advances reflects:• Ongoing growth in Nedbank Capital and Imperial Bank.• Slower growth in Nedbank Corporate and Nedbank Retail.• Reduced advances in Nedbank Business Banking due to a slowdown in client demand for credit and a reduction of single-productloans in line with the drive to reduce higher risk exposures and focus on primary clients.Growth in advances took place across a number of products, including personal loans, mortgage loans, preference shares, depositsplaced under reverse repurchase agreements and other loans, offset by an ongoing decrease in overnight loans.138NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWThe group has focused on selective asset growth while improving margins, resulting in banking advances growth and lower levels ofadvances in the trading portfolio. Details of advances growth by division are as follows:Loans and advances by business clusterRm % change 2009 2008Nedbank Capital 16,0 55 315 47 686Nedbank Corporate 0,7 137 173 136 222Nedbank Business Banking (9,4) 50 115 55 321Nedbank Retail 4,9 157 500 150 107Imperial Bank 12,8 50 451 44 734Other (>100,0) (253) 163Net loans and advances 3,7 450 301 434 233Summary of loans and advances by productRm % change 2009 2008Home loans 4,1 149 229 143 342Commercial mortgages 4,6 76 364 73 031Properties in possession 12,1 887 791Term loans 6,5 68 321 64 144Credit cards 1,2 7 334 7 248Overnight loans (21,2) 12 420 15 760Overdrafts (11,0) 11 093 12 461Other loans to clients 1,8 45 382 44 581Leases and instalment sales 4,5 64 128 61 362Preference shares and debentures 6,2 16 633 15 667Trade and other bills (73,8) 282 1 075Reverse repurchase agreements >100 8 026 2 630Gross loans and advances 4,1 460 099 442 092Impairment of loans and advances 24,7 (9 798) (7 859)Net loans and advances 3,7 450 301 434 233Basel II on-balance-sheet exposure at December 2009 is R528,6 billion. The reconciliation of the Basel II exposure to the gross loansand advances of R460,1 billion is shown below.Reconciliation of on-balance-sheet exposure to gross loans and advances528 561 (13 569) (35 635) (11 816) (3 667) (20) (3 755) 460 099GROUP REPORTSOPERATIONAL REVIEWS500 000Home loans (R149 229m)Commercial mortgages (R76 364m)400 000Properties in possession (R887m)RmTerm loans (R68 321m)300 000200 000Credit cards (R7 334m)Overnight loans (R12 420m)Overdrafts (R11 093m)Other loans to clients (R45 382m)Leases and instalment sales (R64 128m)100 000Basel II onbalance-sheetDerivativesexposureGovernmentstock andother datedsecuritiesShort-termsecuritiesOtherOtherassets netof fair-valueadjustmentsSetoffaccountswithin IFRSgross loansand advancesGross loansand advancesPreference shares and debentures (R16 633m)Trade and other bills (R282m)Reverse repurchase agreements (R8 026m)GOVERNANCE139NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportBalance sheet credit exposure 3 by Basel II asset class and business clusterRmNedbankBusinessBankingNedbank NedbankCorporate 2 Capital 2NedbankRetail 2ImperialBankCentralManagement2009 2008Advanced Internal Ratings-basedApproach (AIRB) 52 013 129 510 69 124 150 414 – 22 270 423 331 469 860Corporate 6 303 62 565 22 656 1 91 525 136 101Specialised lending – high-volatilitycommercial real estate 7 442 7 442 8 301Specialised lending – incomeproducingreal estate 2 211 39 998 42 209 38 507Specialised lending – object finance 439 439 449Specialised lending – commoditiesfinance 55 55 62Specialised lending – project finance 4 811 4 811 2 897Small and medium enterprises (SME)– corporate 19 390 4 096 186 23 672 23 798Public sector entities 2 10 642 3 262 1 499 15 405 12 705Local governments and municipalities 298 4 357 516 5 171 2 444Sovereign 5 795 20 771 26 566 27 653Banks 1 377 30 338 30 716 43 326Securities firms 5 866 871 2 091Retail mortgages 4 314 4 119 293 123 611 119 853Retail revolving credit 7 028 7 028 6 832Retail – other 2 580 1 6 20 654 23 241 23 520SME – retail 16 914 27 190 3 209 20 340 21 091Securitisation exposure 229 229 230Standardised Approach – 9 859 – 10 500 54 319 – 74 678 67 692Corporate 2 649 1 557 4 206 1 628SME – corporate 1 034 12 552 13 586 12 729Public sector entities 24 6 30 21Local government and municipalities 28 2 550 2 578 26Sovereign 855 115 970 2 245Banks 929 7 640 8 569 10 456Securities firms 302 302 303Retail mortgages 2 338 1 922 2 988 7 248 3 286Retail – other 1 499 938 30 951 33 388 30 678SME – retail 201 3 301 3 502 3 677Securitisation exposure 299 299 283Other 2 360Properties in possession 9 2 – 876 – – 887 791Non-regulated entities 68 8 411 14 894 6 156 – 136 29 665 30 481140NEDBANK GROUP ANNUAL REPORT 2009

Balance sheet credit exposure 3 by Basel II asset class and business cluster ... continuedRmNedbankBusinessBankingNedbank NedbankCorporate 2 Capital 2NedbankRetail 2ImperialBankCentralManagement2009 2008On-balance-sheet exposure(Basel II) 52 090 147 782 84 018 167 946 54 319 22 406 528 561 568 824Less assets included in Basel II assetclasses (281) (6 217) (28 319) (4 550) (2 679) (22 661) (64 707) (87 224)Derivatives (79) (13 222) (141) (127) (13 569) (25 218)Government stock and other datedsecurities (3 701) (7 114) (2 550) (22 270) (35 635) (34 105)Short-term securities (949) (7 842) (3 025) (11 816) (13 969)Call money 4 (648) (291) (935) (1 524)Deposits with monetary institutions (620) (2 220) (2 840) (2 232)GROUP REPORTSRemittances in transit 1 76 31 108 207Other assets net of fair-valueadjustments (282) (948) 2 727 (1 124) (2) (391) (20) (10 383)Setoff of accounts within IFRS totalgross loans and advances 1 (475) (3 280) (3 755) (39 508)Gross loans and advances 51 334 138 285 55 699 163 396 51 640 (255) 460 099 442 0921The setoff as shown for December 2008 mainly relates to the corporate asset class within Nedbank Corporate in respect of cash management accounts.This was changed in 2009 to incorporate cash management setoff within the gross on-balance-sheet exposure. This change has caused the decrease inAIRB Approach corporate asset class exposure and the decrease in the ‘setoff of account within International Financial Reporting Standards (IFRS) totalgross loans and advances’.2Nedbank Corporate, Capital and Retail include London branch exposure (AIRB Approach).3Balance sheet exposure includes on-balance-sheet exposure and derivatives.OPERATIONAL REVIEWSGOVERNANCEOVERVIEW141NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportAIRB Approach for Nedbank LimitedAll credit exposure and asset classes in Nedbank Limited are covered by the Basel II AIRB Approach.Summary of the AIRB Approach for Nedbank Limited**Basel II credit exposures by business cluster and asset class2009AIRB onbalancesheetexposureAIRB offbalancesheetexposureRepurchaseand resaleexposureDerivativeexposureTotal credit Exposure atextended* defaultDownturnexpectedloss(performing)Best estimateof expectedloss (nonperforming)RmNedbank Business Banking 52 013 19 201 – – 71 214 69 546 454 819Corporate 6 303 2 784 9 087 8 348 67 4Specialised lending – incomeproducingreal estate 2 211 189 2 400 2 450 8 7SME – corporate 19 390 7 805 27 195 26 528 154 202Public sector entities 2 3 5 3Local government and municipalities 298 25 323 333 1Banks 1 88 89 88Retail mortgages 4 314 1 272 5 586 5 454 35 99Retail – other 2 580 227 2 807 2 857 34 162SME – retail 16 914 6 808 23 722 23 485 155 345Nedbank Corporate 129 191 58 907 – – 188 098 171 536 394 417Corporate 62 251 49 564 111 815 96 279 204 75Specialised lending – high-volatilitycommercial real estate 7 442 629 8 071 8 231 58 61Specialised lending – incomeproducingreal estate 39 998 2 080 42 078 43 447 103 259SME – corporate 4 096 995 5 091 4 987 25 22Public sector entities 10 642 3 377 14 019 13 221 2Local government and municipalities 4 357 322 4 679 4 767 1Banks 377 1 940 2 317 575Retail – other 1 1 1SME – retail 27 27 28 1Nedbank Capital 46 657 7 783 8 026 12 976 75 441 60 833 140 29Corporate 14 753 316 875 3 326 19 270 18 814 123 20Specialised lending – object finance 439 439 457 2Specialised lending – commoditiesfinance 55 55 57Specialised lending – project finance 4 811 4 811 4 989 9SME – corporate 2 186 188 234 1Public sector entities 2 561 467 702 3 729 3 480Local government and municipalities 417 451 99 967 474Sovereign 5 302 5 302 5 303 9Banks 18 283 98 6 198 7 646 32 225 21 148 4Securities firms 35 854 889 858Retail mortgages 4 4 4Retail – other 6 6 7SME – retail 36 153 189 222 1Securitisation exposure 7 367 7 367 4 786142NEDBANK GROUP ANNUAL REPORT 2009

Summary of the AIRB Approach for Nedbank LimitedBasel II credit exposures by business cluster and asset class continued2009AIRB onbalancesheetexposureAIRB offbalancesheetexposureRepurchaseand resaleexposureDerivativeexposureTotal credit Exposure atextended* defaultDownturnexpectedloss(performing)Best estimateof expectedloss (nonperforming)RmNedbank Retail 150 414 43 219 – – 193 633 187 412 2 421 4 970Corporate 1 214 215 215 5 9Retail mortgages 119 293 20 062 139 355 144 648 1 046 2 754Retail revolving credit 7 028 17 189 24 217 11 844 457 479Retail – other 20 654 4 517 25 171 25 614 816 1 371SME – retail 3 209 1 237 4 446 4 862 97 357Securitisation exposure 229 229 229Central Management 22 270 – – – 22 270 22 270 1 –Public sector entities 1 499 1 499 1 499Sovereign 20 771 20 771 20 771 1Intercompany 73 935 6 265 – 206 80 406 75 075 80 –Total 474 480 135 375 8 026 13 182 631 062 586 672 3 490 6 235* Total credit extended is AIRB on-balance-sheet exposure, derivatives and off-balance-sheet exposures (includes unutilised facilities).** Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.Downturn expected loss (AIRB Approach) 9 725IFRS impairment on loans and advances 8 003Excess of downturn expected loss over eligible provisions 1 722GOVERNANCEOPERATIONAL REVIEWSGROUP REPORTSOVERVIEW143NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportImpairments and defaulted loans and advancesCredit quality deteriorated further in 2009, with NedbankRetail’s impairments worsening significantly, although the rateof deterioration of new defaults slowed in the second half, whilethe business banking and wholesale-banking impairments endedthe year at better levels than originally anticipated. Althoughthe SA economy emerged from recession in the third quarter of2009 and has begun to recover, some segments of the economyare still under significant strain. In the short term the recoveryis expected to be hampered by high unemployment and highhousehold debt levels.The group’s credit loss ratio of 1,47% for 2009 (2008: 1,17%)showed signs of improvement after peaking at 1,67% at31 March 2009. Defaulted advances increased by 56,3% fromR17 301 million to R27 045 million and total impairmentprovisions increased by 24,7% from R7 859 million toR9 798 million over the past year.The impact of the credit cycle has to date largely impactedconsumers and smaller businesses as reflected in the continueddeterioration of retail credit loss ratios. High levels ofunemployment, lower collateral values due to weak house andvehicle markets, and delays in recoveries resulting from debtcounselling have all played a part in the increase in defaultedadvances in retail secured loans. However, the 450 basis pointinterest rate cuts in 2009 have reduced the financial pressure onconsumers, as reflected in a slightly slower rate at which retailimpairments are increasing as well as the improvement in earlystagearrears for seven consecutive months during the year.Wholesale banking has performed resiliently, even at the peakof the interest rate cycle, and credit loss ratios have improvedsince June 2009, remaining at better-than-anticipated levels forthe current economic cycle. On the whole credit quality in thebooks of Capital, Corporate and Business Banking has remainedwithin acceptable levels, although in this volatile economicenvironment the risk of corporate default remains high. ImperialBank’s impairments improved during the second half of the yearas reflected in its lower credit loss ratio of 1,97% (June 2009:2,50%). This was largely due to the improvement in recoveriesand accounts in arrears in Motor Finance Corporation (MFC).Management has maintained a strong focus on risk managementand improving asset quality, particularly in retail home loans. Inaddition, increased attention has been given to improving thecollection processes in Retail. In 2010 retail advances growthis expected to be flat to lower single digits, with wholesaleadvances growing at a similar rate to that of 2009.Most of the group’s exposure to BEE and other loans andadvances secured by shares continue to be within their defaultcover ratios. Loans and advances that are below these coverratios continue to service their debts and are considered to haveappropriate impairment provisions.The tables on the following pages summarise Nedbank Group’sdefaulted portfolio and the level of impairments. The policies,principles and definitions relating to the defaulted portfolio andimpairments are well-articulated in the group’s credit policy.The key definitions relating to the following section are includedbelow:• Past dueA loan or advance is considered past due when it exceeds itslimit (fluctuating types of advances) or is in arrears (lineartypes of advances).• Defaulted loans and advancesAny advance or group of loans and advances that has triggeredthe Basel II definition of default criteria and which is in linewith the revised SA banking regulations. For retail portfoliosthis is product-centric and therefore a default would be specificto a client or borrower account (a specific advance). For allother portfolios except project-based financing, it is client- orborrower-centric, meaning that, should any transaction withina borrowing group default, then all transactions within theborrowing group would be treated as defaulted.At a minimum a default is deemed to have occurred where,for example, a specific impairment is raised against a creditexposure due to a significant perceived decline in the creditquality, a material obligation is past due for more than 90 daysor an obligor has exceeded an advised limit for more than90 days.• Impaired loans and advancesImpaired loans and advances are defined as loans and advancesin respect of which the bank has raised a specific impairment(International Accounting Standard 39 definition).• Specific impairmentA specific impairment is raised in respect of an asset that hastriggered a loss event where the discounted collateral heldagainst the advance is insufficient to cover the total expectedlosses. Such a loss event may be, for example, significantfinancial difficulty of the issuer or obligor, a breach of contract,such as a default or delinquency in interest or principalpayments, with ageing arrears as the primary driver.• Portfolio impairmentThe standard portfolio represents all the loans and advancesthat have not been impaired. These loans and advances havenot yet individually evidenced a loss event, but loans andadvances exist within the standard portfolio that may have animpairment without the bank yet being aware of it.A period of time will elapse between the occurrence of animpairment event and objective evidence of the impairmentbecoming evident. This period is generally known as theemergence period. For each standard portfolio an emergenceperiod is estimated as well as the probability of the loss triggerand the loss given events occurring. These estimates are appliedto the total exposures of the standard portfolio to calculate theportfolio impairment.144NEDBANK GROUP ANNUAL REPORT 2009

Summary of impairments, defaulted loans and advances and credit loss ratios%NedbankBusinessBankingNedbank NedbankCorporate CapitalNedbankRetailImperialBank 2009 2008Impairments to gross loans and advances 2,38 0,80 0,69 3,61 2,30 2,13 1,78Specific impairments 1,59 0,43 0,56 3,18 1,78 1,70 1,26Portfolio impairments 0,79 0,37 0,13 0,43 0,52 0,43 0,52Impairments charge as a % of net interest income 10,48 11,02 12,69 70,20 47,07 40,68 29,82Credit loss ratio 0,52 0,24 0,26 3,08 1,97 1,47 1,17Credit loss ratio – specific 0,82 0,29 0,22 3,17 1,93 1,54 1,09Credit loss ratio – portfolio (0,30) (0,05) 0,04 (0,09) 0,04 (0,07) 0,08Defaulted loans and advances to gross loansand advances 5,45 2,19 1,41 11,51 3,14 5,88 3,91Properties in possession to gross loans andadvances 0,02 – – 0,54 – 0,19 0,18GROUP REPORTSAs discussed previously, 2009 saw Nedbank Group enhance theconsolidation, focus and reporting of key financial risk appetitemetrics. Business-cluster-specific credit loss ratio targets wereformalised for the first time in 2009, after taking into accounthistoric, through-the-cycle, sustainable performance as well asdesired risk appetite. In addition to this, the group’s credit lossratio target was reviewed separately but in conjunction withthe consolidated business cluster targets.Following this, and integrated with the group’s 2010 – 2012business plans, the targeted credit loss ratio was increased from0,55% – 0,85% to 0,60% – 1,00%. The decision to increase thetarget range was largely due to the projected change in mixbetween secured and unsecured products in Retail. This willhelp to lessen the volatility of Retail’s financial performance,which is generally associated with the current concentrationof secured lending in its portfolio, particularly residentialmortgages. As the unsecured Retail products tend to havehigher credit loss ratios, this results in an increase in NedbankGroup’s target credit loss ratio range.Nedbank Group also intends to update its methodology forcalculating the credit loss ratio in H1 2010, appropriatelyremoving the trading assets from loans and advances.Impairments are not raised against trading assets as these aredesignated at fair value through profit or loss, and thereforeany losses are realised through a decrease in non-interestrevenue. This is not expected to have a material impact onNedbank Group’s credit loss ratio.Nedbank Group’s current credit loss ratio, at 1,47%, is outsidethe targeted credit loss ratio range of 0,6% – 1,0%, andaddressing this is a key component of Retail’s 2010 – 2012business plans. The reversals of provisions in the balance sheetis expected to take longer as defaulted advances continue toincrease, albeit at a slower rate. The group remains cautiousabout impairments.GOVERNANCEOPERATIONAL REVIEWSOVERVIEW145NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportCredit loss ratio vs target range1,801,671,601,571,47 1,471,401,201,17Percentage1,000,800,600,400,961,02Old upper bound(group credit loss ratio target) 0,85Old lower bound(group credit loss ratio target) 0,55Basel II expected loss (EL)% through-the-cycle range (0,6 – 0,7)New upper bound(group credit loss ratio target)1,00New lower bound(group credit loss ratio target)0,60Group (credit loss ratio)Upper bound(group credit loss ratio target)Lower bound(group credit loss ratio target)Basel II expected loss %through-the-cycle range (0,6 – 0,7)0,20Nedbank Group credit loss ratio target range was changed from 0,55% – 0,85% to 0,60% – 1,00% in 20090,0Jun 2008 Sep 2008 Dec 2008 Mar 2009 June 2009 Sep 2009 Dec 2009The business clusters credit loss ratios over time are also shown below.Business clusters credit loss ratio trends3,503,003,143,003,023,082,662,502,472,502,37Percentage2,001,501,000,500,002,001,750,340,120,052,171,74Old upper bound(group credit loss ratio target) 0,85Old lower bound(group credit loss ratio target) 0,550,420,070,051,710,590,120,061,010,630,260,790,440,250,241,97New upper bound(group credit loss ratio target)1,00New lower bound(group credit loss ratio target)0,600,520,470,260,23 0,24Nedbank Business BankingNedbank CorporateNedbank CapitalNedbank RetailImperial BankUpper bound(group credit lossratio target)Lower bound(group credit lossratio target)Jun 2008 Sep 2008 Dec 2008 Mar 2009 June 2009 Sep 2009 Dec 2009A summary of the impairments movements over the past year is shown on the next page.146NEDBANK GROUP ANNUAL REPORT 2009

Summary of impairmentsRmNedbankBusinessBankingNedbankCorporateNedbankCapitalNedbankRetailImperialBankCentralManagement2009 2008Opening balance 1 377 774 433 4 465 812 (2) 7 859 6 078Specific impairments 791 191 381 3 614 565 5 542 4 063Specific impairments, excludingdiscounts 595 105 381 3 013 472 4 566 3 384Specific impairments fordiscounted cashflow losses 196 86 601 93 976 679Portfolio impairments 586 583 52 851 247 (2) 2 317 2 015Income statement impairmentscharge (net of recoveries) 284 327 141 4 925 957 – 6 634 4 822Specific impairments 398 289 113 5 054 944 6 798 4 209Net increase/(decrease) in impairmentsfor discounted cashflow losses 48 107 4 14 (9) 164 297Portfolio impairments (162) (69) 24 (143) 22 (328) 316Recoveries 40 38 – 328 51 – 457 379Amounts written off/other transfers (481) (27) (190) (3 823) (631) – (5 152) (3 420)Specific impairments (463) (33) (188) (3 816) (631) (5 131) (3 406)Portfolio impairments (18) 6 (2) (7) (21) (14)Total impairments 1 220 1 112 384 5 895 1 189 (2) 9 798 7 859Specific impairments 814 592 310 5 194 920 7 830 5 542Specific impairments, excludingdiscounts 570 399 306 4 579 836 6 690 4 566Specific impairments fordiscounted cashflow losses 244 193 4 615 84 1 140 976Portfolio impairments 406 520 74 701 269 (2) 1 968 2 317Total loans and advances 51 335 138 285 55 699 163 395 51 640 (255) 460 099 442 092Total average loans and advances 54 187 136 676 53 498 160 034 48 593 (243) 451 096 411 063GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCEOVERVIEW147NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportDefaulted loans and advances increased by 56,3% to R27 045 million, while specific impairments increased to R7 830 million for thesame period. This resulted in a decrease in the coverage ratio from 32,0% in 2008 to 29,0% in 2009 as shown below.Defaulted loans and advances, specific impairments and coverage ratio30 00034,025 00032,027 04532,020 00030,0Rm17 30129,0Defaulted loans and advances15 00028,0PercentageSpecific impairments10 00026,0Coverage ratio (%)7 8305 0005 54224,02008 200922,0The coverage ratio is the amount of specific impairments thathave been raised for the total defaulted loans and advances.This is effectively the inverse of the expected recoveries ratio.The expected recoveries are equal to the defaulted loans andadvances less the specific impairments, as specific impairmentsare raised for any shortfall that would arise after all recoveriesare taken into account.The expected recoveries of defaulted loans and advancesinclude recoveries as a result of liquidation of security orcollateral, as well as recoveries as a result of a client curing orpartial client repayments.The absolute value of expected recoveries of defaultedaccounts (which includes security values) will increase as thenumber of defaults increase. The expected recovery amountwill in most instances be less than the total defaulted exposure,as it is seldom the case that 100% of the defaulted loan wouldbe written off.A decrease in the coverage ratio (or increase in the expectedrecoveries ratio) may arise as a result of the following:• Expected recoveries improving due to higher recoveries beingrealised in the loss given default (LGD) calculation.• A change in the defaulted product mix, with a greaterpercentage of products that have a higher security value(and therefore a lower specific impairment), such as securedproducts (home loans and commercial real estate).• An increase in the collateral value, which is an input into theLGD calculation and would result in a decrease in the LGD(and decrease in specific impairments).• A change in the mix of new versus older defaults as, in mostproducts, the recoveries expected from defaulted clientsdecrease over time.• A change in the writeoff policy, such as extending the periodprior to writing off a deal that will result in a longer period inwhich recoveries can be realised.The decrease in the group’s coverage ratio is due largely tothe change in the defaulted-product mix arising from the highamount of residential mortgage defaults in Nedbank Retail,as well as a higher amount of commercial mortgage anddevelopment loan defaults in Nedbank Property Finance.The total defaulted loans and advances increased by R9,7billion from 2008 to 2009. Residential mortgages accountfor 61% of this increase. Defaulted residential mortgagescontributed 57,6% to the total defaulted loans and advancesin 2008 and this increased to 59,0% in 2009. Residentialmortgages have lower coverage ratios than most other assetclasses due to the high amount of security generally held andtherefore higher expected recoveries.Similarly, defaulted commercial mortgages and developmentloans increased by R2,6 billion from 2008 to 2009 andcontributed 5,1% of the total defaulted loans and advancesin 2008, increasing to 13,0% in 2009. The majority of theexposures that defaulted were fully secured and thereforespecific impairments increased by only R216 million from 2008to 2009.148NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWDefaulted loans and advances by product30 00027 04525 0002 4948871 22250420 00017 3012 4693 513Rm15 00010 0005 0002 1957911 0355831 8398899 96915 956Residential mortgageCommercial mortgageLease and instalment debtorsCredit card balancesPersonal loansProperties in possessionOther loans and advancesGROUP REPORTSTotal defaulted loans and advances2008 2009Defaulted loans and advances and related security and impairments by business cluster and asset classNedbankBusinessBankingNedbankCorporateNedbankCapitalNedbankRetailImperialBankCentralManagement2009 2008RmAdvanced Internal Ratings-basedApproach 2 787 2 781 305 17 873 – – 23 746 14 710Corporate 23 184 261 468 263Specialised lending – high-volatilitycommercial real estate 1 647 1 647 202Specialised lending – incomeproducingreal estate 56 906 962 335SME – corporate 897 43 940 468Sovereign 44 44Retail mortgages 406 14 731 15 137 8 573Retail revolving credit 483 483 427Retail – other 421 1 2 216 2 638 2 343SME – retail 984 443 1 427 2 099OPERATIONAL REVIEWSStandardised Approach – – – – 1 623 – 1 623 918Corporate 42 42SME – corporate 595 595 142Retail mortgages 65 65 36Retail other 789 789 632SME – retail 132 132 108Other regulated entities – 152 – – – – 152 225Properties in possession 9 2 – 876 – – 887 791Non-regulated entities – 97 478 62 – – 637 657Total defaulted loans andadvances 2 796 3 032 783 18 811 1 623 – 27 045 17 301GOVERNANCE149NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportThe coverage ratio and expected recovery ratio by business cluster and by product is shown in detail in the table below.Summary of impairments and defaulted loans and advancesDefaultedloans andadvancesRmExpectedrecoveriesRmNetuncoveredpositionafterdiscountingRmTotalspecificimpairmentsRmSpecificimpairmentson defaultedloans andadvancesRmSpecificimpairmentsfordiscountedcashflowlossesRmCoverageratio%Expectedrecoveryratio%2009Nedbank Business Banking 2 796 1 982 814 814 570 244 29,1 70,9Residential mortgages 1 165 916 249 249 164 85 21,4 78,6Commercial mortgages 399 329 70 70 6 64 17,5 82,5Lease and instalment debtors 573 358 215 215 179 36 37,5 62,5Credit card balances 4 1 3 3 2 1 75,0 25,0Properties in possession 9 9 0,0 100,0Other loans and advances 646 369 277 277 219 58 42,9 57,1Nedbank Corporate 3 032 2 440 592 592 399 193 19,5 80,5Residential mortgages 44 27 17 17 16 1 38,6 61,4Commercial mortgages 2 551 2 177 374 374 236 138 14,7 85,3Lease and instalment debtors 40 32 8 8 4 4 20,0 80,0Personal loans 25 12 13 13 12 1 52,0 48,0Properties in possession 2 2 0,0 100,0Other loans and advances 370 190 180 180 131 49 48,6 51,4Nedbank Capital 783 473 310 310 306 4 39,6 60,4Other loans and advances 783 473 310 310 306 4 39,6 60,4Nedbank Retail 18 811 13 617 5 194 5 194 4 579 615 27,6 72,4Residential mortgages 14 677 11 962 2 715 2 715 2 435 280 18,5 81,5Commercial mortgages 54 23 31 31 28 3 57,4 42,6Lease and instalment debtors 840 320 520 520 491 29 61,9 38,1Credit card balances 500 500 500 497 3 100,0 0,0Personal loans 1 169 514 655 655 360 295 56,0 44,0Properties in possession 876 708 168 168 168 19,2 80,8Other loans and advances 695 90 605 605 600 5 87,1 12,9Imperial Bank 1 623 703 920 920 836 84 56,7 43,3Residential mortgages 70 46 24 24 12 12 34,3 65,7Commercial mortgages 509 435 74 74 64 10 14,5 85,5Lease and instalment debtors 1 016 205 811 811 749 62 79,8 20,2Personal loans 28 17 11 11 11 39,3 60,7Group 27 045 19 215 7 830 7 830 6 690 1 140 29,0 71,0Residential mortgages 15 956 12 951 3 005 3 005 2 627 378 18,8 81,2Commercial mortgages 3 513 2 964 549 549 334 215 15,6 84,4Lease and instalment debtors 2 469 915 1 554 1 554 1 423 131 62,9 37,1Credit card balances 504 1 503 503 499 4 99,8 0,2Personal loans 1 222 543 679 679 383 296 55,6 44,4Properties in possession 887 719 168 168 168 18,9 81,1Other loans and advances 2 494 1 122 1 372 1 372 1 256 116 55,0 45,0150NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWSummary of impairments and defaulted loans and advances continuedDefaultedloans andadvancesRmExpectedrecoveriesRmNetuncoveredpositionafterdiscountingRmTotalspecificimpairmentsRmSpecificimpairmentson defaultedloans andadvancesRmSpecificimpairmentsfordiscountedcashflowlossesRmCoverageratio%Expectedrecoveryratio%2008Group 17 301 11 759 5 542 5 542 4 566 976 32,0 68,0Residential mortgages 9 969 8 220 1 749 1 749 1 300 449 17,5 82,5Commercial mortgages 889 556 333 333 240 93 37,5 62,5Lease and instalment debtors 1 839 770 1 069 1 069 924 145 58,1 41,9Credit card balances 583 38 545 545 541 4 93,5 6,5Personal loans 1 035 422 613 613 411 202 59,2 40,8Properties in possession 791 664 127 127 127 16,1 83,9Other loans and advances 2 195 1 089 1 106 1 106 1 023 83 50,4 49,6GROUP REPORTSProperties in possessionRmNedbankBusinessBankingNedbankCorporateNedbankCapitalNedbankRetailImperialBankCentralManagement 2009 2008Balance at the beginning of the period 18 3 770 791 308Disposal/Writedowns/Revaluations (13) (1) (566) (580) (76)Properties in possession acquiredduring the period 4 672 676 559Balance at the end of the period 9 2 – 876 – – 887 791Unsold 3 2 560 565 655Sold awaiting transfer 6 316 322 136Properties in possession (PIPs) reconciliationOPERATIONAL REVIEWS900887800791700136322Rm600500400559 (580)676Awaiting transferUnsold300200308109(76)655565Total100199Disposal/ PIPsDisposal/ PIPs2007 Writedown/ acquired 2008 Writedown/ acquired 2009Revaluation during periodRevaluation during periodGOVERNANCE151NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportCredit concentration riskSingle-name credit concentrationOur top-20-exposure analysis, in particular the ‘percentage of total group credit economic capital’, confirms that Nedbank Groupdoes not have undue single-name credit concentration risk. Nedbank Group’s credit concentration risk measurement incorporatesthe asset size of obligors/borrowers into its calculation of credit economic capital. Single-name concentration is monitored at allcredit committees, which includes the applicable regulatory and economic capital per exposure.Nedbank Group also conducts stress testing of single-name large exposures, and their potential impact on capital ratios, in ourstress and scenario testing in assessing the capital adequacy buffers.Top 20 Nedbank Group exposures (excluding banks and government exposure)2009NoInternal NedbankGroup Rating (NGR)(probability ofdefault) ratingExposure at defaultRm% of total groupcredit economic capital1 NGR04 4 871 0,022 NGR04 4 396 0,173 NGR03 3 896 0,024 NGR08 3 383 0,235 NGR04 3 148 0,106 NGR09 3 245 0,247 NGR03 3 125 0,028 NGR04 2 701 0,019 NGR16 2 646 0,3510 NGR03 2 628 0,0011 NGR04 2 389 0,0212 NGR07 2 368 0,0813 NGR03 2 293 0,0114 NGR08 2 280 0,1415 NGR15 2 258 0,6416 NGR06 2 239 0,1017 NGR10 2 119 0,0518 NGR12 2 058 0,2819 NGR14 2 042 0,5920 NGR08 1 797 0,12Total of top 20 exposures 55 882 3,19Total group 597 411152NEDBANK GROUP ANNUAL REPORT 2009

Top 20 Nedbank Group exposures (banks)2009NoInternal NGR(probability ofdefault) ratingExposure at defaultRm% of total groupcredit economic capital1 NGR05 5 606 0,102 NGR05 3 868 0,073 NGR05 3 777 0,074 NGR05 1 872 0,075 NGR04 1 185 0,046 NGR05 1 005 0,047 NGR06 975 0,058 NGR05 917 0,049 NGR05 709 0,0310 NGR05 629 0,0211 NGR04 627 0,0212 NGR06 607 0,0313 NGR06 565 0,0314 NGR06 556 0,0315 NGR07 512 0,0416 NGR07 512 0,0417 NGR04 512 0,0218 NGR08 506 0,0519 NGR04 398 0,0220 NGR04 392 0,02Total of top 20 exposures 25 730 0,83Total group 597 411GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCEOVERVIEW153NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportGeographic concentration riskGeographically, almost all of Nedbank Group’s credit exposure originates in South Africa (non-SA exposure is approximately 6%).Geographical split of loans and advances2009 20082% 4%1% 5%South AfricaRest of Africa94%Rest of world94%Industry concentration riskIndustry split by exposure2009 Retail other20088%Basic industries9%26%8%Cyclical goods26%9%2%Cyclical services2%10%Finance and insurance8%3%15%10%Non-cyclicalOtherReal estate3%12%10%4% 14%ResourcesRetail Mortgages mortgages7% 14%Our credit portfolio modelling combines the industry segmentation of the portfolio and, as part of its calculation of the crediteconomic capital, accounts for any sectoral concentration inherent in the portfolio.We conclude that credit concentration risk is adequately measured, managed, controlled and ultimately capitalised. There is noundue single-name concentration. Nedbank Group is also a well-diversified banking group in the SA context, split across its fivemajor business clusters.154NEDBANK GROUP ANNUAL REPORT 2009

Counterparty credit riskCounterparty credit limits are set at an individual counterparty level and approved within the Group Credit Risk ManagementFramework. Counterparty credit exposures are reported and monitored at both a business unit and group level. To ensure thatappropriate limits are allocated to large transactions, scenario analysis is performed within a specialised counterparty risk unit.Based on the outcome of such analysis, proposals regarding potential risk-mitigating structures are made prior to final limitapproval. Limits for our Corporate and Business Banking businesses favour a nominal limit to facilitate monitoring.There is continued emphasis on the use of credit risk mitigation strategies, such as netting and collateralisation of exposures.Nedbank Group and its large bank counterparties have International Swaps and Derivatives Association (ISDA) and InternationalSecurities Market Association (ISMA) master agreements as well as credit support (collateral) agreements in place to supportbilateral margining of exposures. Limits and appropriate collateral are determined on a risk-centred basis.Netting is applied only to underlying exposures where supportive legal opinion is obtained as to the enforceability of the relevantnetting agreement in the particular jurisdiction. Margining and collateral arrangements are entered into in order to mitigatecounterparty credit risk. Haircuts, appropriate for the specific collateral type, are applied to determine collateral value. Marginingagreements are pursued with interbank trading counterparties on a proactive basis. Margining thresholds constitute unsecuredexposure to the counterparty and are assessed as such. To deal with a potential deterioration of counterparty credit risk over the lifeof transactions thresholds are typically linked to the counterparty external credit rating.Nedbank Group applies the Basel II Current Exposure Method (CEM) for counterparty credit risk. Economic capital calculations alsocurrently utilise the Basel II CEM results as input in the determination of credit economic capital.Over-the-counter (OTC) derivatives for Nedbank Limited and London branchGROUP REPORTSOTC derivative products2009 2008RmNotionalvalueGross positivefair valueNotionalvalueGross positivefair valueCredit default swaps 2 272 8 2 104 2Equities 1 155 4 497 778Forex and gold 189 601 6 437 215 724 14 807Interest rates 358 738 5 470 324 480 8 598Other commodities 45 302 13 599Precious metals except gold 2 56 4 36Total 550 658 13 428 546 822 24 820OTC derivative productsNettedcurrent creditexposure(premitigation)Nettedcurrent creditexposure(postmitigation)RmGrosspositivefair valueCurrentnettingbenefitsCollateralamountExposure-atdefaultvalueRisk-weightedexposure2009 13 428 7 028 6 963 779 6 443 9 566 3 0182008 24 820 13 272 10 581 1 796 8 996 12 861 3 138OPERATIONAL REVIEWSGOVERNANCEOVERVIEW155NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportOTC derivatives per NGR (probability of default) bandRmNotionalvalue2009 2008Gross positivefair valueExposure-atdefaultvalueNotionalvalueGross positivefair valueExposure-atdefaultvalueNGR 03* 16 774 718 922 12 741 241 236NGR 04 76 202 1 377 1 735 187 234 8 198 2 187NGR 05 217 937 4 792 2 261 239 191 10 601 5 114NGR 06 106 964 2 011 585 33 544 1 885 990NGR 07 51 229 1 406 611 23 213 896 968NGR 08 19 377 297 316 2 846 123 142NGR 09 8 464 610 645 4 216 163 181NGR 10 3 859 100 158 10 093 909 994NGR 11 5 953 137 162 4 154 162 178NGR 12 8 141 152 201 1 878 108 121NGR 13 3 003 94 127 2 561 145 116NGR 14 2 283 100 117 2 955 142 168NGR 15 10 320 296 372 3 566 123 143NGR 16 1 087 195 124 5 861 109 201NGR 17 930 31 38 1 546 58 74NGR 18 875 67 35 797 15 19NGR 19 192 8 10 135 6 7NGR 20 16 460 306 434 9 506 367 444NGR 21 264 596 599 144 3 5NGR 22 29 1 1 72 539 539NGR 23 148 6 7 190 15 17NGR 24 1 319 2 6NGR 25 123 99 2NP 166 5 7 58 10 11Total 550 658 13 428 9 566 546 822 24 820 12 861* Nedbank rating scale is from NGR01 to NGR25. Currently there are no NGR01 and NGR02 exposures.156NEDBANK GROUP ANNUAL REPORT 2009

Securities financing transactions (SFTs) for Nedbank Limited and London branchSFTsRmGrosspositivefair valueCollateralvalue afterhaircutNettedcurrentcreditexposure(postmitigation)Exposure-atdefaultvalueRiskweightedexposure2009Repurchase agreements 8 026 7 557 469 469 40Securities lending 8 567 9 208 415 415 27Total 16 593 16 765 884 884 672008Repurchase agreements 2 630 2 529 101 101 8Securities lending 4 686 4 672 14 14 1Total 7 316 7 201 115 115 9GROUP REPORTSSFTs per NGR (probability of default) band2009 2008RmGrossexposureExposure-atdefaultvalueGrossexposureExposure-atdefaultvalueNGR03 467 36 725 27NGR04 1 831 213 185 6NGR05 9 182 293 5 155 41NGR06 2 261 145 729 21NGR07 1 157 96 430 13NGR08 1 656 98 10NGR11 35 2 82 7NGR20 4 1Total 16 593 884 7 316 115OPERATIONAL REVIEWSGOVERNANCEOVERVIEW157NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportSecuritisation riskNedbank Group entered the securitisation market during 2004 and currently has three securitisation transactions, Synthesis FundingLimited (Synthesis), an asset-backed commercial paper programme (ABCP) launched during 2004, Octane ABS 1 (Pty) Limited (Octane),a securitisation of motor vehicle loans advanced by Imperial Bank Limited through its subsidiary MFC that was launched in July 2007, andGreenHouse Funding (Pty) Limited (‘GreenHouse’), a residential mortgage-backed securitisation programme (‘RMBS Programme’) launchedin December 2007.Nedbank Group has used securitisation primarily as a funding diversification tool and has an established inhouse securitisation team withinNedbank Capital.The contraction in the local and international securitisation markets experienced in 2008 continued in 2009. As a result the group did notimplement new securitisations as an alternative source of funding over this period. Amidst the difficult external environment, althoughcredit quality deteriorated, all securitisation vehicles continued to perform well and the ratings of the various transactions have beenaffirmed by the rating agencies and remain stable.During the last quarter of 2009 arrears levels in GreenHouse exceeded the arrears trigger as a result of the deterioration in underlying assetperformance. In the event that the arrears levels continue to exceed the arrears trigger at the first determination date in 2010, no furtherhome loans (other than servicing redraws – ie access facilities on existing GreenHouse loans) can be acquired for as long as the arrears levelremains above the arrears trigger level, and all capital repayments will be directed to the noteholders. However, Nedbank Group decided, inthe interest of the noteholders, to exercise its discretion and not make further loans available for purchase by GreenHouse from December2009, rather than waiting until the first determining date in 2010.With regard to Octane, the transaction has started to repay investors in the normal course, as envisaged in the transaction documents.The group’s securitisation initiatives are overseen by the Group Asset and Liability Committee (ALCO) and Executive Risk Committee. Allsecuritisation transactions are also subject to the stringent SA Regulatory Securitisation Framework.From an IFRS accounting perspective the assets transferred to GreenHouse and Octane vehicles continue to be recognised and consolidatedin the balance sheet of the group. Synthesis is also consolidated into Nedbank Group.On-balance-sheet securitisation exposureTransactionRmYearinitiatedGreenHouse 2007RatingagencyMoody’sand FitchTransactiontypeTraditionalsecuritisationAssettypeAssetssecuritised2009 2008AssetsoutstandingAmountretained/purchasedAssetssecuritisedAssetsoutstandingAmountretained/purchasedRetailmortgages 2 000 1 973 226 2 000 1 972 226TraditionalOctane 2007 Fitchsecuritisation Auto loans 1 852 1 672 312 2 000 1 781 312Total 3 852 3 645 538 4 000 3 753 538Off-balance-sheet securitisation exposureTransactionRm Transaction type Exposure typeOwn transactionsExposure2009 2008Synthesis ABCP conduit Liquidity facility 5 824 7 806Third partiesPrivate Residential Mortgages (Pty) Limited Securitisation Liquidity facility 100 100Private Mortgages 2 (Pty) Limited Securitisation Liquidity facility 40 40Private Mortgages 2 (Pty) Limited Securitisation Redraw facility 428 436Total 6 392 8 382158NEDBANK GROUP ANNUAL REPORT 2009

The table below contains a summary of Synthesis.TransactionRmYearinitiatedRatingagencyTransactiontypeAssettypeProgrammesizeConduit size2009 2008Asset-backed securities,Synthesis 2004Moody’s andFitch ABCP conduitcorporate term loansand bonds 15 000 5 820 7 801Total 15 000 5 820 7 801The various roles fulfilled by Nedbank Group in the securitisation transactions mentioned above are indicated in the table below.Transaction Originator Investor ServicerLiquidityproviderCreditenhancement Swapprovider counterpartyGreenHouse ✓ ✓ ✓ ✓ ✓Octane ✓ ✓ ✓ ✓ ✓Synthesis ✓ ✓ ✓ ✓Private Residential Mortgages (Pty)LimitedPrivate Mortgages 2 (Pty) LimitedThe table below shows the Basel II internal ratings-based consolidated group capital charges per risk band for securitised exposuresretained or purchased by Nedbank Group.Capital chargeRm 2009 2008AAA or A1/P1 3,9 3,9AA+ to AA- 1,1 1,1A+ 2,9 1,0A or A2/P2A- 5,8 5,7BBB+BBB or A3/P3 7,2 7,2BBB- 9,4 9,4BB+ 15,7 15,9BBBB-UnratedUnrated liquidity facilities to ABCP 39,8 44,4Total 85,8 88,6✓✓GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCEOVERVIEW159NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportTrading market riskTrading market risk is the potential for changes in the marketvalue of the trading book resulting from changes in the marketrisk factors over a defined period. The trading book is defined aspositions in financial instruments and commodities, includingderivative products and other off-balance-sheet instrumentsthat are held with trading intent or used to hedge otherelements of the trading book.Categories of trading market risk include exposure to interestrates, equity prices, currency rates and credit spreads.A description of each market risk factor category is set outbelow:• Interest rate risk primarily results from exposure to changesin the level, slope and curvature of the yield curve and thevolatility of interest rates.• Equity price risk results from exposure to changes in pricesand volatilities of individual equities and equity indices.• Currency rate risk results from exposure to changes in spotprices, forward prices and volatilities of currency rates.• Credit spread risk results from exposure to changes in therate that reflects the spread investors receive for bearingcredit risk.• Commodity price risk results from exposures to changes inspot prices, forward prices and volatilities of commodityproducts such as energy, agricultural products and preciousand base metals.Most of Nedbank Group’s trading activity is executed fromNedbank Capital. During 2009 it included market-making andfacilitation of client business and proprietary trading in thecommodity, equity, credit, interest rate and currency markets.Nedbank Capital primarily focuses on client activities in thesemarkets.In addition to applying business judgement, seniormanagement uses a number of quantitative measures tomanage the exposure to market risk. These measures include:• risk limits based on a portfolio measure of market riskexposure referred to as value at risk (VaR), including expectedtail loss; and• scenario analyses, stress tests and other analytical toolsthat measure the potential effects on the trading revenue ofvarious market events.The material risks identified by these processes are summarisedin reports produced by the Market Risk Department and whichare circulated to, and discussed with, senior management.VaR is the potential loss in pretax profit due to adverse marketmovements over a defined holding period with a specifiedconfidence level. The one-day 99% VaR number used byNedbank Group reflects at a 99% confidence level that thedaily loss will not exceed the reported VaR and therefore thatthe daily losses exceeding the VaR figure are likely to occur, onaverage, once in every 100 business days. The VaR methodologyis a statistically defined, probability-based approach that takesinto account market volatilities as well as risk diversificationby recognising offsetting positions and correlations betweenproducts and markets. VaR facilitates the consistentmeasurement of risk across all markets and products, and riskmeasures can be aggregated to arrive at a single risk number.Nedbank Group uses historical data to estimate VaR. Oneyear of historical data is used in the calculation. Some ofthe considerations that should be taken into account whenreviewing the VaR numbers are the following:• The assumed one-day holding period will not fully capturethe market risk of positions that cannot be liquidated oroffset with hedges within one day.• The historical VaR assumes that the past is a goodrepresentation of the future, which may not always be thecase.• The 99% confidence level does not indicate the potentialloss beyond this interval.While VaR captures Nedbank Group’s exposure under normalmarket conditions, sensitivity and stress-and-scenario analyses(and in particular stress testing) are used to add insight intothe possible outcomes under abnormal market conditions.160NEDBANK GROUP ANNUAL REPORT 2009

Trading market risk profileThe tables below reflect the VaR statistics for the Nedbank Group trading book activities for 2008 and 2009.Group trading book VaR for 2009 (i)Historical VaR (99%, one-day) by risk typeRisk categoriesRm Average Minimum (ii) Maximum (ii) Year-endForeign exchange 4,1 1,0 10,3 3,7Interest rate 16,9 7,2 28,7 7,4Equity 6,3 2,5 13,3 3,8Credit 6,0 2,5 10,9 3,2Commodity 0,5 2,4 1,2Diversification (iii) (12,5) (6,0)Total VaR exposure 21,3 9,9 33,1 13,3GROUP REPORTSGroup trading book VaR for 2008 (i)Risk categoriesRmHistorical VaR (99%, one-day) by risk typeAverage Minimum (ii) Maximum (ii) Year-endForeign exchange 6,1 2,3 20,1 3,4Interest rate 13,8 7,4 25,0 19,3Equity 7,8 3,3 21,2 6,5Credit 6,2 3,4 8,7 6,6Diversification (iii) (14,2) (11,8)Total VaR exposure 19,7 10,3 36,5 24,0(i) Certain positions are illiquid and VaR may not always be the most appropriate measure of risk (a summary of the ‘other market risk measures’applied to mitigate this will follow).(ii) The maximum and minimum VaR values reported for each of the different risk factors did not necessarily occur on the same day. As a result adiversification number for the maximum and minimum values have been omitted from the table.(iii) Diversification benefit is the difference between the aggregate VaR and the sum of VaRs for the four risk categories. This benefit arises because thesimulated 99%/one-day loss for each of the four primary market risk categories occurs on different days.Nedbank Group’s trading market risk exposure expressed as average daily VaR increased by 8,1% from R19,7 million toR21,3 million. The increase was mainly due to an increase in exposure to the interest rate markets in 2009.The graph overleaf illustrates the daily VaR for the period 1 January 2009 to 31 December 2009. Nedbank Group remained withinthe approved risk appetite and the VaR limits allocated by the board. The daily VaR for the second half of 2009 decreased as thefinancial markets stabilised.OPERATIONAL REVIEWSGOVERNANCEOVERVIEW161NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportVaR utilisation for 2009 (99%, one-day VaR)VaR RmOne-day VaRAverage VaR 2009The risk appetite within all the risk factors remained largely unchanged, with foreign exchange and interest rate activities againproducing consistent revenue.VaR is an important measurement tool and the performance of the model is regularly assessed. The approach to assessing whetherthe model is performing adequately is known as backtesting. Backtesting is simply a historical test of the accuracy of the VaRmodel. To conduct a backtest the bank reviews its actual daily VaR over one year (about 250 trading days) and compares the actualdaily trading revenue (including net interest but excluding commissions and primary revenue) outcomes with its VaR estimate andcounts the number of times the trading loss exceeds the VaR estimate.Nedbank Group used a holding period of one day with a confidence level of 99%, and had no backtesting exceptions for 2009. Thissuggests that VaR, as currently implemented, has been a conservative measure of the potential net revenue variability on the dailytrading activities.VaR profit and loss for 2009Profit and lossVaR RmVaR162NEDBANK GROUP ANNUAL REPORT 2009

The following histogram illustrates the distribution of daily revenue during 2009 for Nedbank Group’s trading businesses (includingnet interest, commissions and primary revenue credited to Nedbank Group’s trading businesses). The distribution is skewed to theprofit side and the graph shows that trading revenue was realised on 205 days out of a total of 250 days in the trading businesses.The average daily trading revenue generated for 2009 was R6,7 million.807060Analysis of trading revenue for 2009Number of trading days5040302010035Trading income (Rm)Trading market risk stress testingNedbank Capital uses a number of stress scenarios to measure the impact on portfolio values of extreme moves in markets, basedon historical experience as well as hypothetical scenarios. The stress-testing methodology assumes that all market factors moveadversely at the same time and that no actions are taken during the stress events to mitigate risk, reflecting the decreased liquiditythat frequently accompanies market shocks. In the case where certain positions are illiquid and VaR may not be the most appropriatemeasure of risk, stress tests are used to supplement VaR and more rigorous stress tests are used to calculate the potential exposure.Stress test results are reported daily to senior management and monthly to the Trading Risk Committee and Group ALCO.Risk factorsRm Average High Low Year-endForeign exchange stress 15 60 2 19Interest rate stress 113 233 46 104Equity position stress 129 351 15 281Credit spread stress 24 59 2 48Commodity stress 1 2 1Overall 282 535 128 453The high and low stress values reported for each of the different risk factors did not necessarily occur on the same day. As a resultthe high and low risk factor stress exposures are not additive.In addition, other risk measures are used to monitor the individual trading desks and these include performance triggers, approvedtrading products, concentration of exposures, maximum tenor limits and market liquidity constraints. Market risk is governed bya number of policies that cover management, identification, measurement and monitoring. In addition, all market risk models aresubject to periodic independent validation in terms of the Group Market Risk Management Framework. Market risk reports areavailable at a variety of levels and detail, ranging from individual trader level right through to a group level view.OPERATIONAL REVIEWSGOVERNANCE163NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportRisk factors for 2009Equity stressInterest rate stressCredit stressForex stressCommodity stressRevisions to the Basel II frameworkIn the Revisions to the Basel II Framework published by the Basel Committee in July 2009, a guideline for calculating stressed VaRwas provided. Stressed VaR is calculated using market data taken over a ‘period through which the relevant market factors wereexperiencing stress’. Nedbank Group used historical data from the period 26 March 2008 to 12 March 2009. This period capturessignificant volatility in the SA market.The information in the table below is the comparison of VaR, using three different calculations at 31 December 2009. The threedifferent calculations are historical VaR, extreme tail loss (measures the expected losses in the tail of the distribution) and stressedVaR, using a volatile historical data period. A 99% confidence level and one-day holding period was used for all the calculations.Comparison of trading VaR2009Historical VaR99% (one-day)RmExtreme tail loss99% (one-day)RmStress VaR99% (one-day)RmForeign exchange 3,7 4,2 4,5Interest rates 7,4 12,1 12,5Equities 3,8 5,7 6,5Credit 3,2 3,7 3,8Commodities 1,2 1,3 1,6Diversification (6,0) (10,8) (9,5)Total VaR exposure 13,3 16,2 19,4Equity risk (investment risk) in the banking bookThe total equity portfolio for investment risk is R3 901 million (2008: R3 779 million). R2 947 million (2008: R2 716 million) is heldfor capital gain, while the rest is mainly strategic investments.Equity investments held for capital gain are generally classified as fair value through profit and loss, with fair-value gains and lossesreported in non-interest revenue. Strategic investments are generally classified as available for sale, with fair-value gains and lossesrecognised directly in equity.164NEDBANK GROUP ANNUAL REPORT 2009

InvestmentsRmPublicly listed Privately held Total2009 2008 2009 2008 2009 2008Fair value disclosed in balance sheet(excluding associates and joint ventures) 485 525 2 491 2 087 2 976 2 612Fair value disclosed in balance sheet(including associates and joint ventures) 485 525 3 416 3 254 3 901 3 779Operational riskNedbank Group has approval from SARB to use the Standardised Approach for operational risk for Basel II regulatory capital.Nedbank Group has applied to SARB in January 2010 for the use of AMA. The AMA Operational Risk Management Framework wasapproved by the board’s Group Risk and Capital Management Committee in April 2009. The AMA methodologies are already rolledout and running in parallel in the businesses, and Nedbank Group will change to using AMA for economic capital purposes for 2010.Major concentration risks and off-balance-sheet risksCredit concentration risk is addressed on page 152. Property concentration risk was discussed on page 133, in particular the ‘deepdive’ into the Property Finance Division in 2008, and is incorporated in the quantification of credit economic capital.The one other potential major concentration risk in Nedbank Group is liquidity risk. The management of this, includingdiversification of the funding base, contingency planning of sources of funding, related governance, etc is covered on page 169.Concentration risk is also a key feature of Nedbank Group’s Group Market Risk Framework. However, undue concentration risk is notconsidered to prevail in the group’s trading, interest rate risk in the banking book, forex and equity risk portfolios (evident in the lowpercentage contributions to group economic capital, see page 183), nor in assets and liabilities, subject to mark-to-market fair-valueaccounting.As regard off-balance-sheet risks, there are only three ‘plain vanilla’ securitisation transactions, which have funding diversificationrather than risk transfer objectives, as well as no ‘exotic’ credit derivative instruments or any risky off-balance-sheet special-purposevehicles.Economic capitalEconomic capital is a sophisticated, consistent measurement and comparison of risk across business units, risk types and individualproducts or transactions. This enables a focus on both downside risk (risk protection) and upside potential (earnings growth).Nedbank Group assesses the internal requirements for capital using its proprietary economic capital methodology, which modelsand assigns economic capital within nine quantifiable risk categories.The total average economic capital required by the group, as determined by the quantitative risk models and after incorporatingthe group’s estimated portfolio effects, is supplemented by a capital buffer of 10% to cater for any residual cyclicality and stressedscenarios. The total requirement is then compared with available financial resources.GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW165NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportNedbank Group’s economic capital model and target capital adequacy (used for ICAAP)Credit risksBasel II AIRB credit methodology integrated with sophisticated credit portfolio modelling(incorporating credit concentration risk and intra-risk diversification, counterparty credit risk and securitisation risk)+Transfer risk(closely related to credit risk but arises due to sovereign default and so separately modelled and quantified)Similar to AIRB credit methodology but dependent on probability and the extent of a transfer event (ie sovereign default)+Market risksTrading (position) riskIRRBB riskEquity (investment) and property risksForex translation risksVaR scaled to one year usingVaR limits (board-approved).Simulated modelling of NII;economic value of equity (EVE)also done.300% and 400% risk weightings in linewith Basel II equity risk; PD/LGDApproach for Property Finance.Multiple of exposure, based on randvolatility measures.+Operational riskBasel II Standardised Approach used+Business riskEaR methodology used+Other assets(100% risk-weighted)=Minimum economic capital requirement(after inter-risk diversification benefits)+Capital buffer(10% buffer for procyclicality, stressed scenarios, etc)=Total economic capital requirementMeasurement period/time horizon: one year (same as Basel II)Confidence interval (solvency standard): 99,93% (A) (ie more conservative than Basel II)vsAvailable financial resourcesComprisesTier A = core Tier 1 regulatory capital and qualifying reservesTier B = perpetual preference shares and hybrid debt capital166NEDBANK GROUP ANNUAL REPORT 2009

Balance sheet managementEstablished as a separate cluster in 2009, the Balance Sheet Management (BSM) cluster helps to optimise the financial performance,strategy and sustainability of Nedbank Group through proactive management of all material components of the balance sheet.Key components of balance sheet managementPortfolio riskmanagementShareholdervalue-add(risk-based)Capitalmanagement(and leveraging)Asset and liabilitymanagementGROUP REPORTSSummary of perspectives on Nedbank Group’s balance sheet profileThe key highlights are as follows:Capital adequacy overall• Best-practice Internal Capital Adequacy Assessment Process (ICAAP) in place since 2008.• Major focus over past 24 months, resulting in significantly strengthened capital levels, well above top end of the target ranges (inview of current external environment).– Successful execution of Risk-weighted Asset (RWA) Capital Optimisation Programme.Regulatory capital adequacy (including unappropriated profits)Target(revised January 2009) Nedbank Group Nedbank LimitedCore Tier 1 7,5% to 9,0% 7,2% (Dec 2007) to 8,2% (Dec 2008)to 9,9% (Dec 2009)6,8% (Dec 2007) to 8,0% (Dec 2008)to 9,6% (Dec 2009)OPERATIONAL REVIEWSTier 1 8,5% to 10,0% 8,2% (Dec 2007) to 9,6% (Dec 2008)to 11,5% (Dec 2009)Total 11,5% to 13,0% 11,4% (Dec 2007) to 12,4% (Dec 2008)to 14,9% (Dec 2009)7,9% (Dec 2007) to 9,8% (Dec 2008)to 11,7% (Dec 2009)11,4% (Dec 2007) to 13,1% (Dec 2008)to 15,6% (Dec 2009)GOVERNANCEOVERVIEW167NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportEconomic capital adequacy (used for ICAAP)• In 2009 Nedbank Group increased (ie made moreconservative) the group’s target solvency standard fromA- (99,9%) to A (99,93%), while also introducing a moreconservative definition of available financial resources (AFR),which covers the economic capital requirement.• AFR surplus (after 10% capital buffer):– R16,1 billion for group; R13,5 billion for bank (based on old,less conservative basis).– R11,8 billion for group; R8,3 billion for bank (based on new,more conservative basis).Stress and scenario testing• Best-practice framework and process followed to stresstest and confirm the robustness of the group’s capitaladequacy, including the capital buffers. Recent internationaldevelopments incorporated.Leverage ratio is low at 14,4 times, compared withinternational levelsConcentration risk is well-contained• Large individual (single-name) credit exposure risk is low.– The credit economic capital of the top 20 exposures(excluding banks and SA government exposure) makes uponly 3,19% of total group economic capital.• Concerning geographic exposure, the significant focus onSouth Africa has been positive for Nedbank Group through theglobal financial crisis.• Industry/Sector exposure is appropriately well-diversified.• Property exposure is high but in line with our peer group andmost large banks internationally.– ‘Deep dive’ done of commercial property exposure andhome loans.• Counterparty credit risk is almost exclusively restricted to noncomplex,low-risk banking transactions.• Strong and well-diversified funding deposit base exists and lowreliance is placed on offshore funding.• Low level of securitisation exposure and off-balance-sheetactivities.• Low risk of assets and liabilities exposed to the volatility ofInternational Financial Reporting Standards (IFRS) fair-valuemark-to-market accounting.• Low equity (investment) risk exposure (0,7% of total assets),including private equity.• Non-core asset disposal strategy successfully executed by 2007.• Low foreign currency translation risk to the rand’s volatility.• Well-diversified earnings streams across five major businessclusters.• Well-diversified subordinated-debt profile.Liquidity risk• Overall remains sound and has been a major focus over pasttwo years through the global financial crisis.– Successfully lengthened the funding profile during 2009,including the successful (largest ever in South Africa) R5,4billion issue of senior unsecured debt in September 2009.• The R5,6 billion debt issue also positively contributed todiversify the funding base further.• Nedbank Group’s funding mix remains sound (ie retail vswholesale deposits reliance).• Nedbank Group continues to maintain a dominant marketshare in household deposits.• All liquidity risk measurement and management assumptions,principles and methodologies have been independentlyreviewed and align with best practice.• Key areas of focus for 2010 – 2012:– Continue to lengthen the funding profile.– Continue to diversify Nedbank Group’s funding base inorder to reduce reliance on wholesale funding.o Expanding domestic and international capital marketissuance programmes, subject to price and appetite.o Continuing aggressively to pursue strong growth in retailand commercial deposits.– Work with government, the SA Reserve Bank and thebanking industry to address the financial services structuralissues around funding and liquidity to facilitate positivelypositioning South Africa around the new Basel III liquidityproposals.Interest rate risk in the banking book (IRRBB)• Main components of IRRBB include endowment on equity andnon-repricing transactional deposits, offset by the fixed-rateliquid asset hedge and working capital plus reset (basis) risk.Reset risk is caused by advances pricing immediately for ratechanges, due to being prime-rate-linked, versus term depositsrepricing to three-month Johannesburg Interbank Agreed Rate(JIBAR), following hedging of IRRBB.• Banking book interest rate sensitivity is currently 1,30% oftotal equity or R584 million (for a 1% move in rates).• This is within the board-approved IRRBB limit of 2,5% ofcapital, with no limit breaches having been experienced in2009.• The strategic attention of the Group Asset and LiabilityCommittee has shifted to positioning the balance sheet forthe anticipated bottoming of the current interest rate cycle.168NEDBANK GROUP ANNUAL REPORT 2009

Asset and liability managementAsset and liability management addresses two of the 17 keyrisk types in the group’s Enterprisewide Risk ManagementFramework, namely liquidity risk and market risk in the bankingbook, which in turn includes interest rate risk in the bankingbook and foreign currency translation risk on foreign-basedcapital, investments, loans and/or borrowings.Liquidity riskThere are two types of liquidity risk, namely funding liquidityrisk and market liquidity risk. Funding liquidity risk is the risk13%3%5%Sources of quick liquidity19%that Nedbank Group is unable to meet its payment obligationsas they fall due. These payment obligations could emanatefrom depositor withdrawals, the inability to roll over maturingdebt or contractual commitments to lend. Market liquidity riskis the risk that the group will be unable to sell assets, withoutincurring an unacceptable loss, in order to generate cashrequired to meet payment obligations under a stress liquidityevent.Liquidity risk management is a vital risk management functionin all entities across all jurisdictions and currencies, and is a keyfocus of the Nedbank Group.Other bank paper and unutilised bankcredit linesMarketable securitiesGROUP REPORTS25%16%Price-sensitive overnight loansSurplus liquid assets, notes and coinsPrudential liquid assetsCash reservesCorporate bonds and listed equities9%10%OtherOPERATIONAL REVIEWSGOVERNANCEOVERVIEW169NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportThe tables below show the expected profile of cashflows under a contractual and business-as-usual (BaU) scenario.Nedbank Group contractual liquidity gap at year-endRm3 months6 months1 year5 yearsCash and cash equivalents (includingmandatory reserve deposits with centralbank) 16 382 65 1 928 18 375Other short-term securities 13 715 1 261 1 501 2 073 18 550Derivative financial instruments 3 569 834 2 070 3 792 2 445 12 710Government and other securities 537 2 020 7 607 18 660 7 159 35 983Loans and advances 83 758 16 463 31 070 153 354 165 656 450 301Other assets 2 261 32 523 34 784Assets 120 222 20 578 42 248 177 944 175 260 34 451 570 703Total equity 44 984 44 984Derivative financial instruments 2 917 898 1 103 3 037 3 596 11 551Amounts owed to depositors 338 632 50 084 57 810 19 888 2 941 469 355Other liabilities 8 780 15 949 24 729Long-term debt instruments 500 9 184 10 400 20 084Liabilities and equity 350 329 50 982 59 413 32 109 16 937 60 933 570 703Net liquidity gap (230 107) (30 404) (17 165) 145 835 158 323 (26 482)The contractual liquidity gap is adjusted with behavioural assumptions in order to determine the group’s BaU or anticipatedliquidity risk profile. These adjustments result largely in a lengthening of deposit cashflows due to behavioural assumptions throughwhich contractually maturing short-term deposits have longer profiles under normal market conditions.Nedbank Group BaU liquidity gap at year-endRm3 months6 months1 year5 yearsNondeterminedNondeterminedCash and cash equivalents (includingmandatory reserve deposits with centralbank) 18 375 18 375Other short-term securities 13 715 1 261 1 501 2 073 18 550Derivative financial instruments 3 569 834 2 070 3 792 2 445 12 710Government and other securities 35 983 35 983Loans and advances 35 575 23 867 45 677 296 872 48 310 450 301Other assets 34 784 34 784Assets 52 859 25 962 49 248 302 737 105 113 34 784 570 703Total equity 44 984 44 984Derivative financial instruments 2 917 898 1 103 3 037 3 596 11 551Amounts owed to depositors 87 915 64 499 79 712 235 676 1 553 469 355Other liabilities 24 729 24 729Long-term debt instruments 500 9 401 10 183 20 084Liabilities and equity 90 832 65 397 81 315 248 114 15 332 69 713 570 703Net liquidity gap (37 973) (39 435) (32 067) 54 623 89 781 (34 929)Note: BaU assumptions include rollover assumptions on term maturities. No management actions are assumed in terms of realisingcash through the sale of liquid assets or other marketable securities.TotalTotal170NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWThe additional disclosure below depicts the contractual and BaU liquidity mismatches in respect of Nedbank Limited, and highlightsthe split of total deposits into stable and more volatile. Based on the behaviour of the bank’s clients, it is estimated that in excess of83% of the total deposit base is stable in nature.Nedbank Limited* contractual balance sheet mismatch at year-endMore thanRm Total Next day 2 to 7 days8 days to1 month1 monthto 2 monthsContractual maturity of assets 509 150 47 759 5 921 31 156 11 496Loans and advances 398 899 29 810 2 445 18 590 6 682Trading, hedging and other investment instruments 71 295 4 930 3 243 11 011 4 542Other assets 38 956 13 019 233 1 555 272Contractual maturity of liabilities 509 150 161 943 19 629 74 292 29 018Stable deposits 348 378 139 898 10 470 55 617 22 474Volatile deposits 72 197 14 982 1 537 9 236 5 575Trading and hedging instruments 50 240 7 063 7 622 9 439 969Other liabilities 38 335On-balance-sheet contractual mismatch (114 184) (13 708) (43 136) (17 522)Cumulative on-balance-sheet contractualmismatch (114 184) (127 892) (171 028) (188 550)GROUP REPORTSThe BaU table below shows the expected liquidity mismatch under normal market conditions after taking into account the behaviouralattributes of Nedbank Limited’s stable deposits, savings and investment products.Nedbank Limited* BaU balance sheet mismatch at year-endMore than1 monthto 2 monthsRm Total Next day 2 to 7 days8 days to1 monthBaU maturity of assets 509 150 27 358 2 667 14 263 10 031Loans and advances 398 899 6 861 2 327 9 299 8 365Trading, hedging and other investment instruments 71 295 20 497 340 3 410 1 394Other assets 38 956 1 554 272BaU maturity of liabilities 509 150 17 788 10 813 31 567 20 900Stable deposits 348 378 444 1 158 7 989 14 356Volatile deposits 72 197 1 705 5 030 19 083 5 575Trading and hedging instruments 50 240 15 639 4 625 4 495 969Other liabilities 38 335On-balance-sheet BaU mismatch 9 570 (8 146) (17 304) (10 869)9 570 1 424 (15 880) (26 749)Cumulative on-balance-sheet BaUmismatchOPERATIONAL REVIEWS* Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.As per the table above Nedbank Limited’s BaU inflows exceed outflows overnight to one week, taking into account behaviouralassumptions, including rollover assumptions associated with term deals and excluding BaU management actions.As per the graph below the improved BaU maturity mismatch in 2009, when compared with 2008, can be attributed to thefollowing: Previously Nedbank Limited adopted a very conservative approach when estimating the BaU mismatch, which meansthat Nedbank Limited previously assumed that no term deposits were refinanced and that they resulted in a cash outflow onmaturity of the deposit. As this does not reflect reality under normal market conditions, refinancing assumptions (having beenstatistically derived) have now been applied to term funding, thus yielding a more realistic BaU mismatch.GOVERNANCE171NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportNedbank Limited behavioural liquidity mismatchPercentage420-2-4-6-8-10-12-14Next day2 to 7 days8 days to 1 month1 to 2 months2 to 3 months3 to 6 months20092008(Expressed on total assets and based on maturity assumptions before rollovers and risk management)Note: The improvement in the 2009 profile is mainly due to refinements to the refinancing assumptions as detailed above.Interest rate risk in the banking bookNedbank Group is exposed to IRRBB primarily because:• the bank writes a quantum of prime-linked advances;• funding is prudently raised across the curve at fixed-term deposit rates that reprice only on maturity;• three-month JIBAR-linked swaps and forward rate agreements are typically used in the risk management of term deposits andfixed-rate advances;• short-term demand funding products reprice to different short-end base rates;• certain non-repricing transactional deposit accounts are non-rate-sensitive; and• the bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds that do not reprice for interest ratechanges.IRRBB comprises:• Repricing risk (mismatch risk) – timing difference in the maturity (for fixed rate) and repricing (for floating rate) of bank assets,liabilities and off-balance-sheet positions.• Reset or basis risk – imperfect correlation in the adjustment of the rates earned and paid on different instruments with otherwisesimilar repricing characteristics.• Yield curve risk – changes in the shape and slope of the yield curve.• Embedded optionality – the risk pertaining to interest-related options embedded in bank products.Nedbank Group interest rate repricing profile at year-endBetween3 and6 monthsBetween6 and12 months > 1 yearWithinNon-rate-Rm3 monthssensitiveNet repricing profile before hedging 65 358 (27 622) (32 210) 31 335 (36 861)Net repricing profile after hedging 33 999 (1 017) (2 726) 6 605 (36 861)Cumulative repricing gap after hedging 33 999 32 982 30 256 36 861172NEDBANK GROUP ANNUAL REPORT 2009

Interest rate repricing profile80 00060 000Rm40 00020 0000Net pricing profilebefore hedgingNet repricing profileafter hedging(20 000)(40 000)(60 000)Within3 monthsBetween 3and 6 monthsBetween 6and 12 months> 1 yearNon-ratesensitiveGROUP REPORTSAt 2009 the group’s earnings-at-risk sensitivity of the banking book for a 1% parallel reduction in interest rates was 1,30%of total group equity (2008: 1,25%), well within the approved risk limit of 2,5%. This exposes the group to a decrease in netinterest income (NII) of R584 million should interest rates fall by 1%, measured over a 12-month period, which translates into anapproximate reduction in margin of 12 basis points or an absolute reduction of approximately 3,6% of this year’s NII.The group’s level of interest rate sensitivity is managed in conjunction with credit impairment sensitivity and is benchmarkedregularly against the peer group.Nedbank Limited’s economic value of equity, measured for a 1% parallel decrease in interest rates, is a loss of R225 million (2008:gain of R155 million).GOVERNANCEOPERATIONAL REVIEWSOVERVIEW173NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportThe table below highlights the group’s and bank’s exposure to IRRBB measured for normal and stressed interest rate changes:2009RmNedbankLimitedOther groupcompaniesNedbankGroupNoteNet interest income sensitivity 11% instantaneous decline in interest rates (444) (140) (584)2% instantaneous decline in interest rates (887) (281) (1 168)Linear path space 2Lognormal interest rate sensitivity (273)Basis interest rate risk sensitivity 30,25% narrowing of prime/call differential (168) (51) (219)Economic value of equity sensitivity 41% instantaneous decline in interest rates (225)2% instantaneous decline in interest rates (461)Stress testingNet interest income sensitivityInstantaneous stress shock 5 (1 996)Linear path space 2Absolute-return interest rate sensitivity (1 386)Notes1 Net interest income sensitivity, as currently modelled, exhibits very little convexity. In certain cases the comparative figures have been estimatedassuming a linear risk relationship to the interest rate moves.2 Linear path space is a stochastic method used to generate random interest rate paths. These paths are then modelled and a probabilistic impactof interest rate changes on NII is derived. The ‘Lognormal interest rate sensitivity’ uses two years of interest rate movements to derive interest ratevolatility. The stress scenario ‘Absolute-return interest rate sensitivity’ is based on the volatility of interest rates over nine years.3 Basis interest rate risk sensitivity is quantified using a narrowing in the prime/call interest rate differential of 0,25% and is an indication of thesensitivity of the margin to a squeeze in short-term interest rates.4 Economic value of equity sensitivity is calculated as the net present value of asset cashflows less the net present value of liability cashflows.5 The instantaneous stress shock is derived from the principles espoused in the Basel Committee paper Principles for the Management and Supervisionof Interest Rate Risk.Foreign currency translation risk in the banking bookForeign currency translation risk arises as a result of Nedbank Group’s investments in foreign companies that have issued foreignequity. This foreign equity is translated into rand for domestic reporting purposes, recording a profit where the rand exchange rate hasdeteriorated between periods and a loss where the rand exchange rate has strengthened between periods.Foreign currency translation risk remains relatively low and currently aligns with an appropriate offshore capital structure. Risk limits arebased on the expected level of currency-sensitive foreign capital and the exposure was approximately US$241 million at year-end.Offshore capital split by functional currencyUS dollar equivalent ($ millions) Total$mEquityForexsensitiveNon-forexsensitive2009 2008US dollar 108 108 108 88Pound sterling 113 113 113 94Swiss franc 13 13 13 6Malawi kwatcha 7 7 7 5Other 436 436 391Total 241 241 436 677 584174NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWForex-sensitive portion of offshore capital$m 2009Forex-sensitive portion of offshore capital 241Limit 250The effective average capitalisation rate of the foreign-denominated business is 26% (2008: 25%). The total foreign RWA as apercentage of the Nedbank Group total is low at 2% (R5,7 billion out of the total group RWA of R326 billion). Therefore, any foreignexchange rate movement will have a minimal effect on Nedbank Group’s capital adequacy ratio.High rand volatility has a minimal effect on capital adequacy as a 10% depreciation in the rand, for example, will only decreasecapital adequacy by 0,02%.Capital managementNedbank Group’s Capital Management Framework reflects the integration of risk, capital, strategy and performance measurement(and incentives) across the group. This contributes significantly to successful enterprisewide risk management.The board-approved Solvency and Capital Management policy document requires Nedbank Group to be capitalised at the greaterof Basel II regulatory capital and economic capital.Importantly though, one should not see Nedbank Group’s economic capital as divorced from Basel II regulatory capital – quite thecontrary, since our economic capital is an extension of the Basel II Pillar 1 requirements to incorporate Pillar 2, together with a fewother key refinements tailored to Nedbank Group and South Africa, and to incorporate the Rating Agency perspective (eg Tier 2regulatory capital does not qualify for our economic capital definition of AFR).Regulatory capital adequacyGROUP REPORTSBasel II regulatory capital adequacy**Nedbank GroupPercentage16,014,012,010,08,06,0*6 427*3 988*5 588*10 285*9 100*9 484*15 296*14 820*13 4872009TargetrangesTotal ratioTier 1 ratioCore Tier 1Tier 1TotalOPERATIONAL REVIEWS4,07,2% 8,2% 11,4%8,2% 9,6%12,4%9,9% 11,5% 14,9%Reg min total (9,75%)2,0Reg min Tier 1 (7,0%)** includes unappropriated 0,0 profitsReg min core Tier 1 (5,25%)200720082009* = Surplus in RmNedbank Group Limited has again strengthened its regulatory capital ratios in 2009, with a Tier 1 capital adequacy ratio of 11,5%(2008: 9,6%) and a total capital adequacy ratio of 14,9% (2008: 12,4%). The core Tier 1 capital adequacy ratio was 9,9% (2008: 8,2%).Nedbank Limited has also strengthened regulatory capital ratios, with a Tier 1 capital adequacy ratio of 11,7% (2008: 9,8%) and a totalcapital adequacy ratio of 15,6% (2008: 13,1%). The core Tier 1 capital adequacy ratio was 9,6% (2008: 8,0%).All capital adequacy ratios are now well above the group’s target ranges, including core Tier 1. They include unappropriated profits atthe year-end to the extent that these are not expected to reverse and are expected to be appropriated subsequent to the year-end.GOVERNANCE175NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportNedbank Group’s capital adequacy ratios increased significantly over the past two years due to a strong focus on the optimisationof risk-weighted assets (capital), enabled by enhancing data quality and more selective asset growth using our economic-profitbasedphilosophy of managing for value, the retention of earnings, the profits made on the disposal of Visa shares in 2008 and theissuing of some non-core Tier 1 capital instruments.The group’s leverage ratio (total assets to ordinary shareholders’ equity, excluding off-balance-sheet items) at 14,4 times is alsoconservative by international standards and in line with the local peer group.Consolidation of entities for regulatory purposes is performed in accordance with the requirements of Basel II, the Banks Act andaccompanying regulations. Some differences exist in the basis of consolidation for accounting and regulatory purposes. Theseinclude the exclusion of certain accounting reserves [eg the foreign currency translation (FCT) reserve, share-based payments (SBP)reserve and available-for-sale (AFS) reserve], the deduction of insurance entities and the exclusion of trusts that are consolidated interms of IFRS but are not subject to regulatory consolidation.The FCT, SBP and AFS reserves that arise in the consolidation of entities in terms of IFRS amounted to R1,2 billion at year-end andare excluded from qualifying regulatory capital. Restrictions on the transfer of funds and regulatory capital within the group are nota material factor. These restrictions mainly relate to those entities that operate in countries other than South Africa where there areexchange control restrictions in place.Against the background of the group’s conservative risk appetite and sound risk management discussed earlier, the group believesthat its capital levels (both regulatory capital and its internal capital assessment, economic capital) and provisioning for creditimpairments are appropriate and conservative, and that the group and its subsidiaries are strongly capitalised relative to ourbusiness activities, strategy, risk appetite, risk profile and the external environment in which we operate. Additionally, the group iscurrently not holding excess capital for major acquisitions.Summary of risk-weighted assets (by risk type and business cluster)Credit risk 246 099 75,4 285 457 80,4Nedbank Corporate 67 427 20,7 75 887* 21,4Nedbank Business Banking 33 616 10,3 44 467 12,4Nedbank Capital 25 389 7,8 34 672* 9,8Nedbank Retail (including Bancassurance and Wealth) 78 958 24,2 94 138* 26,5Imperial Bank 39 914 12,2 35 377 10,0Central Management and Shared Services 795 0,2 916* 0,3Equity risk 13 396 4,1 13 035 3,7Market risk 5 718 1,8 7 049 2,0Operational risk 47 222 14,4 36 497 10,2Other assets 14 031 4,3 13 197 3,7Total risk-weighted assets 326 466 100 355 235 100* 2008 restated to include Africa and the United Kingdom in appropriate business clusters and to separate Nedbank Business Banking from the NedbankCorporate cluster.Total risk-weighted assets decreased by R28,8 billion during 2009. The decrease was largely due to credit risk, which decreased byR39,4 billion as a result of the optimisation of risk-weighted assets, enabled by data quality enhancements and the reduction ofexcess conservatism, and selective asset growth under the group’s managing for value strategic theme.2009RmMix%2008RmMix%176NEDBANK GROUP ANNUAL REPORT 2009

These decreases were offset by an increase in operational-risk-weighted assets of R8 billion due to the inclusion of the ‘most recentyear of gross income’ data in the calculation under the Standardised Approach (TSA).Summary of risk-weighted assets (by risk type) and capital adequacy positionNedbank Group Nedbank Limited***Risk type2009Rm2008Rm2009Rm2008RmCredit risk 246 099 285 457 184 472 221 969Credit portfolios subject to Advanced Internal Ratings-basedApproach (ie Nedbank Limited) 192 842 238 480 180 968 218 142Corporate, sovereign, bank (including small and mediumenterprises) 105 669 131 955 95 274 114 050Residential mortgage 51 023 70 401 49 543 67 968Qualifying revolving retail 7 385 6 554 7 386 6 554Other retail 28 765 29 570 28 765 29 570Credit portfolios subject to Standardised Approach 49 344 42 829Corporate, sovereign, bank 19 534 16 849Retail exposures 29 810 25 980Counterparty credit risk 3 057 3 169 2 908 3 109Securitisation exposures (Internal Ratings-based Approach) 856 979 596 718Equity risk (market-based Simple Risk Weight Approach) 13 396 13 035 10 781 10 190– Listed (300% risk weighting) 1 447 1 574 1 447 1 471– Unlisted (400% risk weighting) 11 949 11 461 9 334 8 719Market risk (Standardised Approach) 5 718 7 049 4 455 5 445Operational risk (Standardised Approach) 47 222 36 497 39 025 30 559Other assets (100% risk weighting) 14 031 13 197 10 429 10 170Total risk-weighted assets 326 466 355 235 249 162 278 333Total minimum regulatory capital requirements* 35 097 34 635 27 560 27 137Qualifying capital and reserves** 48 584 44 119 38 939 36 577Total surplus capital over minimum requirements 13 487 9 484 11 379 9 440Analysis of total surplus capital**Core Tier 1 capital 15 296 10 285 10 816 7 695Tier 1 capital 14 820 9 100 11 691 7 699Total capital 13 487 9 484 11 379 9 440GROUP REPORTSOPERATIONAL REVIEWS* Includes Basel II capital floor since February 2009.** Includes unappropriated profits.*** Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.GOVERNANCEOVERVIEW177NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportSummary of qualifying capital and reservesExcluding unappropriated profitsNedbank Group Nedbank LimitedRm2009 2008 2009 2008Tier 1 capital (primary) 36 627 33 458 28 600 27 031Core Tier 1 capital 31 389 28 427 23 365 22 156Ordinary share capital 436 410 27 27Ordinary share premium 13 728 11 370 14 434 14 434Reserves 25 485 23 133 15 610 14 298Minority interest: ordinary shareholders 1 849 1 881Deductions (10 109) (8 367) (6 706) (6 602)Impairments (8) (6) (3 430) (3 608)Goodwill (4 981) (3 894) (1 126) (1 126)Excess of expected loss over eligible provisions (50%) (780) (588) (861) (588)Unappropriated profits (1 312) (658) (798) (300)Foreign currency translation reserves (223) (545) (9) (9)Share-based payment reserves (875) (949) 206 (281)Property revaluation reserves (1002) (951) (666) (668)Surplus capital held in insurance entities (50%) (489) (387)Other regulatory differences (439) (389) (22) (22)Non-core Tier 1 capital 5 238 5 031 5 235 4 874Preference share capital and premium 3 486 3 279 3 483 3 122Hybrid debt capital instruments 1 752 1 752 1 752 1 752Tier 2 capital (secondary) 10 911 10 153 9 807 9 395Long-term debt instruments 11 500 10 464 10 848 9 812Revaluation reserves (50%) 501 476 333 334Deductions (1 090) (787) (1 374) (751)Surplus capital held in insurance and financial entities (50%) (489) (387)Excess of expected loss over eligible provisions (50%) (780) (588) (861) (588)General allowance for credit impairment 212 212Other regulatory differences (33) (24) (513) (163)Tier 3 capital (tertiary) – – – –Total 47 538 43 611 38 407 36 426Including unappropriated profitsNedbank Group Nedbank LimitedRm2009 2008 2009 2008Core Tier 1 capital 32 435 28 935 23 897 22 307Tier 1 capital 37 673 33 966 29 132 27 182Total capital 48 584 44 119 38 939 36 577178NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWNedbank’s subordinated debt, non-core Tier 1 and senior-notes maturity profileSubordinateddebtHybriddebtSenior notes5 0004 5004 0003 500Rm3 0002 5002 0001 5001 00050002009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024GROUP REPORTSDividend coverThe group has a dividend cover policy range of 2,25 to 2,75, covered by headline earnings per share. Historically the effective coverhas been higher as a result of takeup under a scrip dividend alternative and also the reinvestment of dividend proceeds by blackeconomic empowerment (BEE) shareholder trusts.Summary of regulatory capital adequacy of all banking subsidiaries of Nedbank GroupA summary of all the group’s banking subsidiaries’ Basel II regulatory capital positions is provided below:RiskweightedassetsRm2009 2008RiskweightedBasel IIcapital ratio%assetsRmBasel IIcapital ratio%BankNedbank Limited 249 162 15,6* 278 333 13,1*Imperial Bank Limited 43 887 11,2 38 074 11,1Nedbank (Namibia) Limited 3 864 14,6 3 264 13,9Fairbairn Private Bank (IOM) Limited 2 327 15,9 2 526 16,1Fairbairn Private Bank Limited 1 697 14,2 1 722 14,5Nedbank (Swaziland) Limited 1 374 15,7 619 17,4Nedbank (Lesotho) Limited 905 18,8 320 23,3Nedbank (Malawi) Limited 98 50,1 80 23,0Note: The capital ratios for the African subsidiaries shown above are on a pro forma basis and contribute to Nedbank Group ratios, as Basel II is still to beimplemented in these jurisdictions.* Includes unappropriated profit.We conclude that the capitalisation of all these banking entities is adequate, all with conservative risk profiles and being wellmanagedand monitored within the group’s enterprisewide risk management and the ICAAP. Nedbank Group has approval toacquire 100% of Imperial Bank’s shares and plans to integrate it fully into Nedbank Group in 2010, subject only to regulatoryapproval in terms of section 54.Capital impact of Nedbank Group’s outright purchase of joint ventures with Old Mutual and 100% Imperial Bank Limited buyoutThe capital impact on Nedbank Group of these transactions is not material. The transaction with Old Mutual was effective1 June 2009 and is included in these results. The transaction with Imperial Holdings was still pending at 31 December 2009. DuringFebruary 2010 final regulatory approvals were received and Nedbank Limited acquired 100% of the ordinary and preference sharesin Imperial Bank.OPERATIONAL REVIEWSGOVERNANCE179NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportEconomic capital adequacyNedbank Group’s economic capital methodology has been summarised on page 166. Set out below is a summary of the group’seconomic capital adequacy and capital allocation to the business clusters:Nedbank Group summary of economic capital adequacyRm45 00040 00035 00030 00025 0005 771 8 234Surplus2 45210% buffer32 744Tier A(non-corecapital)38 2169 610 9 880SurplusTier A(non-corecapital)2 60110% buffer11 783 16 104 5 238 9 045Tier A(non-coreSurpluscapital)2 5792 42540 14742 78020 00010%buffer15 00010 000MinimumrequirementvsTier A(core capital)24 521 24 510MinimumrequirementvsTier A(core capital)26 005 28 336Minimumrequirement25 785 24 251vsTier A(core capital)34 909 33 7355 0000RequirementAvailablefinancial resourcesRequirementAvailablefinancial resourcesNew basis99,93%Old basis99,9%RequirementNew defn Old defnAvailablefinancial resources200720082009The following changes were made to the group’s 2008 economic capital model (used for ICAAP), which introduce even moreconservatism around the group’s target solvency standard:• Increased the target debt solvency standard from A- (99,9%) (same as Basel II) to A (99,93%).• Excluded ‘50% of next year’s earnings’ from the definition of AFR (even though business risk economic capital is still included).• Created a Tier A and Tier B category for AFR, with Tier A having to cover at least the minimum economic capital requirement at anA rating.Definitions:Tier A = core Tier 1 regulatory capital and qualifying reserves*Tier B = perpetual preference shares and hybrid debt capital(* In Tier A we include SBP, FCT and AFS reserves, as we deem this as correct and appropriate.)The effect of the changes on required economic capital and AFR for 2009 is shown by comparing it with the required and availablecapital prior to and after these changes.180NEDBANK GROUP ANNUAL REPORT 2009

The impact of these changes at 2009 (with pro forma data) is highlighted in the tables below:Available surplus at year-endRmNew basis(99,93%)Old basis(99,90%)Economic capital requirement 25 785 24 25110% capital buffer 2 579 2 425Economic capital requirement including capital buffer 28 364 26 676AFR 40 147 42 780Available surplus (after 10% capital buffer) 11 783 16 104Economic capital by risk type at year-endRmNew basis(99,93%)Old basis(99,90%)Credit risk 14 515 13 541Transfer risk 142 134Trading risk 442 428IRRBB risk 39 39Business risk 4 254 4 133Operational risk 2 855 2 548Property risk 1 158 1 121Investment risk 1 734 1 679Forex translation risk 33 33Other assets risk 613 595Total economic capital requirement 25 785 24 25110% capital buffer 2 579 2 425Economic capital requirement including 10% capital buffer 28 364 26 676GROUP REPORTSGOVERNANCEOPERATIONAL REVIEWSOVERVIEW181NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportEconomic capital available financial resources at year-endRmNewdefinitionOlddefinitionTier A capital 34 909 33 735Ordinary share capital and premium 14 164 14 164Minority interest: ordinary shareholders 1 849 1 849Reserves 25 485 24 311Retained income (excluding unappropriated profits) 14 130 14 130Unappropriated profits 1 309 1 309Distributable reserves 7 697 7 697Non-distributable reserves 173 173Foreign currency translation reserves 224 Not InShare-based payment reserves 875 Not InAvailable-for-sale reserves 76 Not InProperty revaluation reserves 1 002 1 002Deductions (7 827) (7 827)Impairments (8) (8)Goodwill (4 981) (4 981)Subordinated-debt portion of unappropriated profits (266) (266)First loss credit enhancement iro securitisation scheme (50%) (33) (33)Surplus capital held in insurance entities (50%) (489) (489)Holsboer and Chairman’s Fund (330) (330)Minority interest in Imperial Bank (1 720) (1 720)Excess of IFRS provisions over expected loss (100%) 1 238 1 238Tier B capital* 5 238 9 045Total AFR 40 147 42 780* Includes preference shares, hybrid debt capital instruments and other.Nedbank Group’s ICAAP confirms that the group is capitalised above its new, more conservative A or 99,93% target debt rating(solvency standard) in terms of its proprietary economic capital methodology set out on page 165. This includes a 10% capitalbuffer, the incorporation of the group’s risk appetite approved by the board and the application of comprehensive stress andscenario testing.182NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWEconomic capital requirements and available financial resources (by risk type)Rm2009 2008New basis Old basis Old basisCredit risk* 14 515 13 541 15 605Transfer risk 142 134 166Market risk 3 406 3 300 3 066Trading risk 442 428 352IRRBB risk 39 39 33Property risk 1 158 1 121 1 019Investment risk 1 734 1 679 1 635Forex translation risk 33 33 27Operational risk 2 855 2 548 1 682Business risk 4 254 4 133 4 798Other assets risk 613 595 689Minimum economic capital requirement 25 785 24 251 26 005+ Capital buffer (10%) 2 579 2 425 2 601= Total economic capital requirement 28 364 26 676 28 606vs AFR 40 147 42 780 38 216Tier A capital (shareholders’ equity) 34 909 33 735 28 336Tier B capital (non-core Tier 1-type capital) 5 238 9 045 9 880= Surplus available after capital buffer 11 783 16 104 9 610* Credit risk economic capital incorporates counterparty credit risk and securitisation risk.** New basis includes the new solvency standard (99,93%) and the new definition of AFR.10,5%2,4%Economic capital requirements (by risk type)2009 2008Credit risk6,6%3,0%GROUP REPORTSOPERATIONAL REVIEWSTransfer (sovereign) risk17,1%Trading riskIRRBB risk18,0%0,1%6,9%4,6%0,2%1,8% 0,6%55,8%Property riskInvestment riskForex translation riskBusiness riskOperational riskOther assets risk0,1%6,3%3,9%0,1%1,4%0,6%60,0%The total economic capital (including 10% buffer) decreased by R1,9 billion from R28,6 billion in 2008 to R26,7 billion in 2009 (oldbasis), owing mainly to a decrease in credit risk economic capital and business risk economic capital. The decrease in business risk isas a result of parameter updates as well as the lower projected growth, compared with the previous year.GOVERNANCE183NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportCredit risk economic capital decreased from R15,6 billion to R13,5 billion (old basis) over the period. Both credit risk economic andregulatory capital decreased as a result of the optimisation of risk-weighted assets.These decreases were offset by increases in property and operational risk. Property risk has increased as a result of the increase inproperties in possession due to the worsening economic conditions. Operational risk increased due to the inclusion of the ‘mostrecent year of gross income’ data in the calculation under TSA.In conclusion, Nedbank Group’s economic capital adequacy is strong at its new A (99,93%) target debt rating (solvency standard),with surpluses at group level of R11,8 billion (R16,1 billion on the old basis at an A- target rating). This is after providing for a 10%economic capital buffer, which is subject to sophisticated stress testing.• Capital allocation (risk-based) to business clustersA summary of economic capital requirement at year-end by business cluster (on the old basis)* is presented below:Risk typeRmNedbankGroupNedbankCorporateNedbankBusiness BankingNedbankCapitalNedbankRetailImperialBankBSM/Other2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008Credit risk 13 541 15 605 3 472 3 897 1 780 3 182 816 934 5 925 6 122 1 536 1 450 12 20Transfer (sovereign)risk 134 166 39 64 95 102Market risk 3 300 3 066 601 520 3 6 1 281 1 216 450 399 32 13 933 912Trading risk 428 352 428 352IRRBB risk 39 33 39 33Property risk 1 121 1 019 37 34 3 5 257 212 32 13 792 755Investment risk 1 679 1 635 560 484 1 841 853 178 174 100 123Forex translation risk 33 27 4 2 12 11 15 13 2 1Operational risk 2 548 1 682 438 284 407 275 299 251 1 279 803 101 51 24 18Business risk 4 133 4 798 702 745 616 676 627 1 241 2 031 2 009 157 127Other assets risk 595 689 44 176 35 19 21 177 174 25 1 330 282Total 24 251 26 005 5 296 5 686 2 806 4 174 3 137 3 765 9 862 9 507 1 851 1 642 1 299 1 232* (On old economic capital basis, as the new basis is effective for capital allocation purposes only from 2010.)The target debt solvency change will be effective for risk-adjusted performance measurement from 2010 and, as a result, isnot effective in the business cluster results above. In addition, there are a number of economic capital allocation methodologyenhancements that will be implemented for 2010, which are expected to have a significant impact on the allocation of capital acrossthe group’s business clusters. The impact of the changes by business cluster will be disclosed with the 2010 interim results. Thefollowing is a summary of the key enhancements being implemented for 2010:– Full alignment of the group’s actual book capital, with the aggregate amount allocated to the various business clusters usingbottomup economic capital.– Updating of the credit portfolio modelling correlations and revising the credit economic capital allocation methodology takinginto account recent global developments (including downturn years) and the new regulatory thinking in line with the new Basel IIIproposals discussed earlier.– Measurement of operational risk for economic capital purposes using the Advanced Measurement Approach instead of TSA.184NEDBANK GROUP ANNUAL REPORT 2009

Cost of equityFollowing a shift in the constituents of the cost of equity calculated using the Capital Asset Pricing Model, Nedbank Group revisedits cost of equity up to 14,15% at the beginning of 2010. The main driver of the increase in the cost of equity was an increase in the10-year risk-free rate, which resulted from a change in expectations for the 10-year RSA government yield on the back of globaland local economic developments. The cost-of-equity figure of 14,15% is roughly in line with analyst expectations and peer groupcomparatives.Capital Asset Pricing ModelRisk-free rate(R157)%BetaEquity riskpremium%After-tax costof ordinaryshares%2007 7,73 1,02 5,30 13,142008 8,43 1,00 5,44 13,872009 7,75 1,00 5,50 13,252010 9,17 0,90 5,50 14,15GROUP REPORTSExternal credit ratingsExternal credit ratings across the banking industry were moved downwards, reflecting the effect of the global financial crisis on thebanking sector. Notwithstanding strengthened capital and liquidity positions, and the much less significant impact of the globalfinancial crisis on South Africa, local banks were all generally downgraded by the rating agencies.• Moody’s Investors ServiceIn November 2009 Moody’s Investors Service (Moody’s) took a number of rating actions on the major SA banks, including theratings of Nedbank Limited, the 100%-owned subsidiary of Nedbank Group Limited (Nedbank Group).According to Moody’s these rating actions were triggered by the following factors:– The deteriorating operating and macroeconomic conditions and the resultant challenges for the SA banking sector that has ledto Moody’s downgrading the bank financial strength rating (BFSR) by one notch to C-, while changing the outlook on the BFSRfrom negative to stable.– At the same time the Global Local Currency (GLC) deposit rating was also downgraded one notch to A2, with an associatedchange in outlook from negative to stable.The specific impact on Nedbank Group’s ratings is as follows:Nedbank LimitedThe foreign currency deposit ratings: remain unchanged at A3/P-2.Nedbank Limited’s euro medium-term note programme: rating for senior unsecured debt downgraded to A2 (stable outlook) fromA1 (negative outlook) and rating for subordinated notes downgraded to A3 (stable outlook) from A2 (negative outlook).Nedbank Limited’s BFSR rating: downgraded to C-; outlook revised from negative to stable.Nedbank Limited’s GLC deposit rating: downgraded 1 notch to A2; outlook changed from negative to stable.Nedbank Limited’s national scale debt ratings (relating to the domestic medium-term note programme): downgraded to Aa2.za(stable outlook) from Aa1.za for senior unsecured debt and to Aa3.za (stable outlook) from Aa2.za for subordinated notes.Nedbank Limited’s national scale rating: downgraded to Aa2.za; outlook revised from negative to stable.OPERATIONAL REVIEWSGOVERNANCEOVERVIEW185NEDBANK GROUP ANNUAL REPORT 2009

isk and BALANCE SHEET management reportMoody’s current ratings for Nedbank Limited after the ratings actions:Nedbank Limited2009BFSR C-Outlook – financial-strength ratingStableGlobal local currency – long-term depositsA2Global local currency – short-term depositsPrime-1Foreign currency – long-term bank depositsA3Foreign currency – short-term bank depositsPrime-2Outlook – foreign current deposit ratingStableNational scale rating – long-term depositsAa2.zaNational scale rating – short-term depositsPrime-1.zaOutlook – national scale ratingStableDefinitions:BFSRC = Banks rated C possess good intrinsic financial strength. Typically, they will be institutions with valuable and defensiblebusiness franchises. These banks will demonstrate either acceptable financial fundamentals within a stable operatingenvironment, or better-than-average financial fundamentals within an unstable operating environment.Where appropriate, a ‘+’ modifier is appended to ratings below the ‘A’ category and a ‘-’ modifier will be appended to ratings abovethe ‘E’ category to distinguish those banks that fall in intermediate categories.Long-term (capped by sovereign rating)AAa= Obligations rated A are subject to low credit risk and considered upper-medium grade.= Obligations rated Aa are subject to very low credit risk and considered high-quality grade.Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicatesthat the obligation ranks in the higher end of its generic rating category.Short-termP-1 = Issuers rated Prime-1 have a superior ability to repay short-term debt obligations.P-2 = Issuers rated Prime-2 have a strong ability to repay short-term debt obligations.• Fitch RatingsFitch Ratings (Fitch) also revised its ratings for Nedbank Group in July 2009.Fitch affirmed Nedbank Group’s long-term foreign and local currency Issuer Default Rating (IDR) at BBB and national long-termrating at AA-(zaf) respectively. The short-term foreign currency IDR was upgraded to F2 from F3. The outlook for all three ratingswas revised to stable from negative.Fitch downgraded Nedbank Limited’s long-term foreign and local currency IDR to BBB from BBB+ and the national long-termrating to AA-(zaf) from AA(zaf) respectively. The outlook for the three ratings was revised upward to stable from negative.In aligning Nedbank Limited’s ratings with those of Nedbank Group, Fitch also reviewed the level of integration between theholding company and its bank subsidiary, and believes there is very little difference between the credit quality of the two entities.The agency considers the overall levels of integration between the two entities to be high, with insignificant external obligationswithin the holding company and intergroup obligations interest-free and without repayment dates.186NEDBANK GROUP ANNUAL REPORT 2009

OVERVIEWThe rating actions are summarised as follows:Nedbank GroupLong-term foreign currency IDR: affirmed at BBB; outlook revised to stable from negative.Long-term local currency IDR: affirmed at BBB; outlook revised to stable from negative.Short-term foreign currency IDR: upgraded to F2 from F3.National long-term rating: affirmed at AA-(zaf); outlook revised to stable from negative.National short-term rating: affirmed at F1+(zaf).Individual rating: affirmed at C.Support rating: affirmed at 2.Nedbank LimitedLong-term foreign currency IDR: downgraded to BBB from BBB+; outlook revised to stable from negative.Long-term local currency IDR: downgraded to BBB from BBB+; outlook revised to stable from negative.Short-term foreign currency IDR: affirmed at F2.National long-term rating: downgraded to AA-(zaf) from AA(zaf); outlook revised to stable from negative.National short-term rating: affirmed at F1+(zaf).Individual rating: affirmed at C.Support rating: affirmed at 2.Latest Fitch ratings for Nedbank Group companies:Fitch ratings Nedbank Group Nedbank Limited Imperial Bank LimitedDecember 2009 December 2009 December 2009Individual C CSupport 2 2 2Foreign currencyShort-term F2 F2Long-term BBB BBBLong-term rating outlook Stable StableLocal currencyLong-term senior BBB BBBLong-term rating outlook Stable StableNationalShort-term F1+ (zaf) F1+ (zaf) F1 (zaf)Long-term AA- (zaf AA- (zaf) A+ (zaf)Long-term rating outlook Stable Stable PositiveDefinitions:Individual and supportC = An adequate bank that, however, possesses one or more troublesome aspects.2 = A bank for which there is a high probability of external support and the potential provider of support is highly rated in its ownright.Foreign and local currency (capped by sovereign risk limits of BBB+ for foreign long-term, F2 for foreign short-term and A for locallong-term)F2 = Good credit quality. The capacity for timely payment of financial commitments is satisfactory.BBB = Good credit quality. Indicates that there is currently a low expectation of credit risk. The capacity for timely payment offinancial commitments is considered adequate.The modifiers ‘+’ or ‘-’ denote relative status within major categories.NationalF1 = Indicates the strongest capacity for timely payment of financial commitments relative to other issuers or issues in thesame country.A = Denotes a strong credit risk relative to other issuers or issues in the same country.AA = Denotes a very strong credit risk relative to other issuers or issues in the same country.The modifiers ‘+’ or ‘-’ denote relative status within major categories.GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE187NEDBANK GROUP ANNUAL REPORT 2009