the quest for positive "jaws"
TRANSCRIPT
The quest for positive "jaws"
2
Agenda
Key goal in longterm value creation
History of Nedbank Group “jaws” ratio
“Fixit” phase
“Consolidate” phase
“Growit” phase
In summary
3
Key longterm goal
Maximise ROE less cost of equity in a sustainable way
Maximise riskadjusted return on capital
(RAROC) minus cost of equity
• Under Basel I return on risk weighted assets (RWA) a proxy for RAROC
• Under Basel II measurement of RAROC becomes more accurate
• Economic capital measurement most appropriate
Shortterm goal: achieve 20% ROE in 2007 Longterm goal: maximise RAROC cost of equity & growth
Together with capital management drives ROE
4
ROE drivers – du Pont type analysis
23,25
15,69
1,45
67,28
48,44
3,36
3,87
0,99
3,07
2001
14,86
17,80
0,83
68,16
65,38
3,75
2,78
0,53
2,95
2002
0,39
22,21
0,02
72,40
77,51
4,48
2,83
0,89
2,95
2003
11,04
20,13
0,55
70,14
71,76
4,87
3,61
0,54
3,18
2004
1,15 0,93 Return on total assets
0,62 0,49 Impairments / IEA
H1 06 2005 % year / period ended
3,54 3,58 NIR / IEA
18,29 15,51 ROE
15,88
71,06
57,28
4,25
3,88
16,66 Gearing
70,64 IEA / Total assets
65,10 Efficiency ratio
4,64 Expenses / IEA
3,55 NII / IEA
Focus on “jaws” to increase ROA as currently the most important ratio to enable Nedbank Group to improve ROE
1,15
4,25
3,54
3,88
5
ROE over cost of equity
0
5
10
15
20
25
30
1999 2000 2001 2002 2003 2004 2005 H1 06
ROE COE
Nedbank share price
Banks index based to NED at 31 Dec 03
NED underperformed the market until ROE started exceeding COE
6
Profitability trend – other big 3 banks
2,74 2,44 2,16 Return on RWA
23,5
15,69
1,51
0,79
0,84
6,01
10,30
2003
3,11 “Jaws”
26,7 21,9 ROE
16,61 14,58 Gearing
1,62 1,51 ROA
0,52 1,04 Impairments / RWA
5,92 5,73 Expenses / RWA
10,4 9,76 Revenue / RWA
2005 2001 %
7
Profitability trend – Nedbank Group
1,44 0,03 2,55 Return on RWA
0,4
22,21
0,02
0,98
(52,25)
4,91
6,33
2003
13,61 20,56 “Jaws”
18,3 15,5 23,1 ROE
15,88 16,66 15,69 Gearing
1,15 0,93 1,48 ROA
(0,70) 0,54 1,14 Impairments / RWA
(4,79) 5,09 3,89 Expenses / RWA
8,35 7,82 8,03 Revenue / RWA
H1 06 2005 2001 %
“FIX IT” phase
Now “GROW IT”
8
“Jaws” ratio
-40
-30
-20
-10
0
10
20
2000 2001 2002 2003 2004 2005
Nedbank Other 3 NED before M&R costs
YoY income growth ahead / (behind) expense growth
9
2003 / 2004 problem definition
2003: ROE 0,38% Efficiency ratio 77,51% CAR 10,00%
Insufficient capital
Clear accountability
Complex structure
Interest rate & FX risk
Operational efficiency
Exacerbated by merger
Set targets for 2007
n ROE of 20%
n Efficiency ratio of 55%
“Jaws” ratio of 9% (with 2003 as a base) a means to achieve efficiency target
10
2004 / 2005 – “FIX IT” phase
n Appointed new EXCO team
n Raised new capital – created capital management unit
n Staff retrenchments – primarily back office n Completed the merger
n Operational reorganisation – moved staff out of T&O n Reduced brands & JVs
n Sold noncore assets
n Defined scope of ALCO & Executive Risk Committee Repatriated excess offshore capital Reduced interest rate risk Rebuilt positive endowment
n Initiated closer working relationship with Old Mutual
11
“FIXIT” phase outcomes
2003 – basic earnings per share loss 2004 – cost initiatives Staff morale worsened Internal focus leading to
Some client losses Slow asset growth Market share declines
BUT Galvanised management & staff into action Brought group close together & reduced silo mentality Reorganisation seen as extremely positive by staff
… inward focus
12
2005 / 2006 – “CONSOLIDATE” phase
Streamlined processes
Focused IT resources on client systems – not merger
Aligned MIS to business processes to enhance accountability
Refocused remuneration models (ROE based)
Added client facing staff
Adjusted pricing to improve competitiveness
Earnings, public profile, share price & bonuses improved
Staff morale also started to improve
Client service indices showed positive trends
… outward focus
13
2006 onwards “GROW IT” phase
Leading to a positive “jaws” ratio +
Active credit risk management =
Improving ROA +
Active capital management =
Improving ROE
Primary focus on revenue growth initiatives With particular focus on staff morale, client systems & customer service
But, continued focus on cost management While allowing investment & expending into identified longterm growth areas
14
An integrated investment banking business model ➭ providing comprehensive solutions to clients, leveraging marketleading service & research capabilities
Sectors / themes Resources
Diversified industrials Infrastructure & PPP
BEE Power / energy
TMT Cross border
• ECAs • Structured trade • Arbitrage
Origination
Top 200
corporates
parastatals
institutions
Conceptual isation Testing
Simulating
Customer centric
interaction
Equity research
Industry knowledge
Relationships
Economic trends
Execution (Product Areas)
• Balance sheet application
• Execution & advising
• Distribution • Maintenance +
Depth in
origination
& execution
capabilities
“GROWIT” phase integrated investment bank
… sector & industry expertise
• Collaborative model with
Nedbank
Corporate
15
2006 onwards – “GROW IT” phase strategies
Nedbank Capital n Improve trading
n Public sector focus
n Increase deal pipeline from the African continent
n London trading initiative
n Equity underwriting & placing
n Leverage BEE deal
n Forex pickup
n Interest rate derivative sales
16
Nedbank Capital progress to date
30,6 27,9 26,9 ROE (%)
1,1 1,2 1,2 ROA (%)
576 971 427 Headline earnings (Rm)
43,0 44,5 44,8 Efficiency ratio (%)
H1 06 2005 H1 05
… continued strong ROE
17
2006 onwards – “GROW IT” phase strategies
Nedbank Corporate Business Banking
n Performance focus improving service:
Decentralised accountability
Refined roles & responsibilities
n Effective expense control
Corporate Banking
n Improving primary banker profile
n Strong pipeline
n Brand awareness improving
n Increased sales capacity
n Corporate BEE scheme
n Transactional banking
Rollout of improved electronic channel
Continued development of products & solutions
n Client retention & crosssell
18
2006 onwards – “GROW IT” phase strategies
Nedbank Corporate
Property Finance
n Maintain strong market position
n Developing midmarket
n Rebuilding investment portfolio
Africa
n Building capacity
n Growing existing businesses
n Will consider selective acquisitions
n Brand awareness improving
n Corporate BEE scheme
n Client retention & crosssell
19
Nedbank Corporate progress to date
22,0 18,9 18,2 ROE (%)
1,8 1,5 1,4 ROA (%)
1 214 1 894 885 Headline earnings (Rm)
48,7 54,7 53,9 Efficiency ratio (%)
H1 06 2005 H1 05
… ROE now over 20%
20
2006 onwards – “GROW IT” phase strategies
Nedbank Retail n Home loan growth close to market levels
n Card performing well Acquiring market share stable
SAA cobrand tender won
Targeting 25% asset growth
n Segmentation approach overhauled
n Bancassurance pleasing growth & group support
n Building branch sales strategy & capability n Continued expansion of personal loans business
n Building primary clients
21
Nedbank Retail – investing for the future
n Pricing
R100 m (annualised) invested in 2006 transactional price cuts
More competitive fixed deposit & savings account pricing
Risk based pricing refined – enabled average 20bps reduction in new home loan rates in May 2006
But pressure on fees likely to remain
n Sales
Increase of over 1 000 sales staff last 18 months
Expanded direct activities & leads management
n Distribution
Step change in upgrading & extending distribution 2006 2008
… building for the long term
22
Nedbank Retail progress to date
24,2 17,6 17,5 ROE (%)
1,4 1,0 1,0 ROA (%)
711 896 419 Headline earnings (Rm)
65,0 71,7 71,0 Efficiency ratio (%)
H1 06 2005 H1 05
… significant improvement in ROE
23
R1 billion in distribution
n May refine as needs arise
n Focus Retail & Corporate
n Approx 40% new
n EPS no material impact
n Self funding by 2009
… building for the long term
Includes: Certain system upgrades ATM / SST / POS upgrades & replacements
Branches Personal loans branches OMB in OMSTA Nedbank in retailers Merchant kiosks
Focus primarily on main metropolitan & high density
urban areas
24
Survey results – top 10 values as perceived by staff
1. costconsciousness 2. accountability 3. clientdriven 4. client satisfaction 5. results orientation 6. performance driven 7. profit 8. bureaucracy 9. teamwork 10. community involvement
1. costconsciousness 2. profit 3. accountability 4. community involvement 5. clientdriven 6. processdriven 7. bureaucracy 8. results orientation 9. client satisfaction 10. silo mentality
2006 2005
“GROWIT” phase Barrett Survey results
… goal to be employer of choice
Positive trend
25
“GROWIT” phase IT resource allocation
September 2005
32%
26% 13%
29%
September 2006
13%
22% 29%
36%
Product innovation
Product innovation
Customer service
Customer service
Product enhancement
Product enhancement
Fix Fix
26
“GROWIT” phase Branding
Nedbank's "share of voice" for 2006 has remained at a
steady 20%
27
In summary
Financial performance remains on track
Strong capital base with ongoing capital management
Morale continues to improve
Outwardly focused
Investing for the future
Continued improvement of ROE, RAROC & earnings growth
55% Efficiency ratio
2007 targets
20% ROE
Building for sustainable growth
“There is no miracle moment. Small incremental wins in one common direction will
restore Nedbank Group to a highly rated & respected
financial institution.”
Questions?
Thank you