NEDBANK CAPITAl - Nedbank Group Limited

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