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! HALF YEAR 30 JUNE 2010






NEDBANK GROUP’S RISK UNIVERSE ............................................................................................................................. 30
CREDIT RISK .............................................................................................................................................................. 31
COUNTERPARTY CREDIT RISK ...................................................................................................................................... 75
CREDIT CONCENTRATION RISK..................................................................................................................................... 77
SECURITISATION RISK ................................................................................................................................................. 79
MARKET RISK ............................................................................................................................................................. 82
EQUITY RISK (INVESTMENT RISK) IN THE BANKING BOOK ................................................................................................ 90
ASSET AND LIABILITY MANAGEMENT ............................................................................................................................. 90
OPERATIONAL RISK ................................................................................................................................................... 102
BUSINESS RISK ......................................................................................................................................................... 104
ACCOUNTING AND TAXATION RISKS ............................................................................................................................ 105
TECHNOLOGY RISK ................................................................................................................................................... 105
HUMAN RESOURCES (OR PEOPLE) RISK ...................................................................................................................... 107
MAJOR CONCENTRATION RISKS AND OFF-BALANCE-SHEET RISKS................................................................................. 108
REGULATORY CAPITAL ADEQUACY ............................................................................................................................. 116
ECONOMIC CAPITAL ADEQUACY ................................................................................................................................. 125



– Increase in quantum of economic capital allocated to businesses for risk adjusted performance measurement
and segmental analysis, due to methodology enhancements and alignment with the higher group regulatory
core Tier 1 capital level.
– Change in calculation from simple average to daily averages and exclusion of trading assets.

x Nedbank Group is in a privileged position as its balance sheet in 2010 is significantly stronger than at the beginning
of the global financial crisis two to three years ago, and as such the group is well-placed to navigate successfully
any further economic storms.
x Nedbank Group continues to remain solidly profitable in a challenging environment, which contributes to its ongoing
balance sheet strength.
– Annual group ICAAP completed and signed off by the board in July 2010.
– The group believes that its capital levels, liquidity and funding positions and provisioning for credit impairments
are appropriate and conservative relative to its business activities, strategy, risk appetite, actual risk profile and
the current external environment in which it operates.
– In July 2010, Moody’s Investor Service reaffirmed Nedbank Limited’s financial strength rating at C- and its
global local currency rating at A2. The outlook for all ratings was also maintained at stable.
– In July 2010, Fitch Ratings reaffirmed Nedbank Group’s long-term foreign and local currency Issuer Default
Rating (IDR) at BBB, and national long-term rating at AA-(zaf), respectively. The short-term foreign currency
IDR was maintained at F2. The outlook for all three ratings was also maintained at stable.
– In August 2010, Fitch Ratings placed Nedbank Group and Nedbank Limited’s long-term issuer default ratings
(IDRs), short-term IDRs, support and national long-term ratings on Rating Watch Positive.

5,6 9,5 13,5 :7^'


4,0 9,1 14,8 :7^:

6,4 10,3 15,3 :7^_






7,2 8,2 9,9 9^9 8,2 9,6 11,5 ::^7 11,4 12,4 14,9 :=^?



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x Internal capital resources were used in February 2010 to settle the Imperial Bank buy out of the minority interest
shareholding (impact was approximately 0,5% reduction on core Tier 1 ratio). The regulatory capital ratios
nevertheless strengthened back to the levels commensurate with year end, being 9,9% core Tier 1; 11,5% Tier 1;
14,8% Total at the half year.


x Available Financial Resources: Economic Capital ratio 148% (December 2009: 154%).
x In 2010 the group implemented several refinements to the calculation and allocation of economic capital.

45 000
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Surplus Tier B Surplus Tier B
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Surplus Tier B capital)
35 000 capital)

30 000
;!=<' ;!'`: 10% buffer
25 000 10% buffer 10% buffer

20 000

15 000 Minimum Tier A Minimum Tier A Minimum Tier A

requirement (core capital) requirement (core capital) requirement (core capital)
;=!<;_ [P ';!'`` ;'!`<9 [P '=!9<9 ;7!_7< [P '_!'?=
10 000

5 000

Requirement Available Available Requirement Available
financial financial financial
resources resources resources

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* Includes unappropriated profits.


x Low at 14,1 times (December 2009: 14,4 times), compared with international levels.
x Best-practice framework and process followed to confirm the robustness of the group's capital adequacy and
assisted in successfully derisking the bank in appropriate segments ahead of the global financial crisis.
x SA Reserve Bank’s (SARB) conclusion, following their 3 day on-site stress testing review of Nedbank Group in
December 2009, was “ we have no material concerns”.!

x Lengthened the long-term funding ratio from 18% in December 2009 to 24% in June 2010, including successfully
issuing R6,3 billion senior unreserved debt.
x Sound loan to deposit ratio of 96%.
x Further strengthened liquidity buffers.
x Well-diversified funding mix (ie retail vs wholesale deposit reliance).
x Strong deposit franchise (across Retail, Business Banking and Corporate Banking businesses).
x Low reliance on interbank and foreign markets.
x Internal Liquidity Adequacy Assessment Process (ILAAP) introduced, a similar concept to ICAAP.

x Enterprisewide Risk Management, Capital and Liquidity Management frameworks remain effective.
x Sound risk governance prevails.
x Prudent risk appetite followed, with group metrics cascaded down into business units.
x Risk-based remuneration practices applied since 2008.

x Significant new regulatory proposals (‘Basel III’) related to capital, liquidity, risk management and accounting
provisioning, aimed at a more resilient global banking sector, are still being debated internationally.
x Implementation of Basel III regulations was initially proposed for the end of 2012, however some of the
implementation thereof has been pushed out considerably regarding certain proposals.
x Impact of the capital proposals for Nedbank Group is anticipated to be manageable.
x The impact of the liquidity proposals would be pervasive if implemented as is. A softening of these was announced
by the Basel committee on the 26 July 2010, and further announcements are anticipated looking forward.


The economy continued to recover in the first half of 2010. However, the upswing comes off a very low base and
remains fragile. Household spending has been slow to recover with high personal debt levels, restrictive credit
conditions and increasing unemployment hampering consumption. The underlying trend in the private sector
remains weak given low capacity utilisation levels and continuing uncertainty over global and local prospects.
Lower interest rates have benefited impairments as the downward trend in early arrears remained intact. However,
improvements in retail defaulted advances have taken longer to come through compared to past cycles. The delay
has been exacerbated by challenges experienced in the debt counselling process. Recent agreements on improving
the process are expected to have a positive impact.
Nedbank Group’s risk management processes are proving to be effective in these tough economic conditions,
having been ‘back-tested’ by the global financial crisis and local recession.
Strong balance sheet management has resulted in the capital ratios remaining well above the group’s internal
targets at levels similar to December 2009, even after including the impact of the acquisition of the minority
shareholding in Imperial Bank. As reported at the end of the first quarter, the acquisition resulted in approximately
0,5% decrease in the group’s capital adequacy ratios as the full purchase consideration was settled in cash.
Nedbank Group’s liquidity position remains sound. The group remains focused on diversifying the funding base,
lengthening the funding profile and further strengthening of the liquidity buffers.

In light of the continuing global economic concerns, we address below the following key questions that could arise
with respect to Nedbank Group’s balance sheet:
Nedbank Group has the largest market share of commercial mortgages in South Africa. Wholesale defaults
typically lag retail defaults, with the potential risk being a significant increase in the former going forward.
Nedbank Group is satisfied that this risk has been well managed due to a highly experienced management team
that, despite our dominant market position, did not chase further market share growth in the boom years pre the
global crisis and local recession.
In addition, Nedbank Group with the assistance of leading consultants undertook a detailed analysis of the
commercial property portfolio in the Property Finance division during 2008, in order to assess the level of
economic risk in the portfolio in light of concerns stemming from the perceived high risk of devaluation in
commercial property in several countries, and with a view not only to improving our risk management practices
but also our strategic business planning and loan origination.
The conclusions from this detailed analysis were:
– Potential credit losses in a stressed scenario would remain within Nedbank Group's risk appetite.
– The portfolio is well balanced, but there were certain higher risk loans that require closer monitoring.
– The most appropriate business strategy was one of selective, ‘smart’ origination, sacrificing business
volumes and market share growth for value-based growth determined by client value management,
economic profit and sound margin management. This is broadly in line with our approach over the last few
Stemming from this detailed analysis were several useful international benchmarks against which Nedbank
Group compared favourably.
The analysis was useful not only from the business perspective of shaping the commercial property loan
origination and deal pricing approach for the future, but also from the credit risk management perspective of
helping to ensure that established risk appetite targets would not be breached.


Also led by an experienced management team, Business Banking developed and successfully executed a
comprehensive stress scenario back in 2007/8.
This, together with consistent strong risk management, has helped to contain credit losses during the recession
and beyond, to within the cluster’s through-the-cycle credit loss ratio range.
Secured lending [Home Loans and Vehicle and Asset Finance (VAF)] have been Nedbank Group’s Achilles
heel. These books are well provided against in the form of credit impairments and are actively managed.
Historically the issue here has been the quality of strategic risk management and origination driven by sound
economics, and this is now addressed via:
– A comprehensive new Retail strategy, including a strong emphasis on a client-centric business approach
and differentiated strategy for Home Loans, with the focussed integration of Motor Finance Corporation
(MFC) from Imperial Bank taking care of VAF.
– Significant and highly experienced new senior appointments in Retail.
Nedbank Group has minimal direct exposure to the current Euro crisis, in particular the so called PIIGS
A summary of Nedbank Group’s exposure to the PIIGS is provided below:
– Portugal - total exposure amounts to R19,8 million.

– Italy - total exposure amounts to R1,0 billion.

– Ireland - total exposure amounts to R24,4 million.

– Greece - Nedbank Group has no exposure, nor lines to Greek banks.

– Spain - total exposure amounts to R103,4 million.

A comprehensive stress and scenario testing framework and process is followed to stress the base case projections,
in order to assess and conclude upon the adequacy of Nedbank Group’s capital buffers, capital adequacy ratios
and, ultimately, the group’s ICAAP.
The group’s strategic planning process, rolling forecasts and integrated capital planning includes three year
projections of expected (base case) financial performance, Basel II and economic capital risk parameters and capital
requirements which are compared to projected available financial resources and approved risk appetite metrics.
The three year projections and base case capital planning are derived from the group’s three year business plans
which are revised quarterly during the year.
The base case already incorporates the significantly deteriorated economic conditions and so the stress scenarios
are particularly harsh with the severe stress scenario more severe than a 1 in 25 year event. We expect the current
economic downturn to improve slightly towards the end of 2010 and to improve more significantly in 2011 and 2012,
although remaining below average economic conditions similar to a mild economic stress event. However, the
conditions could be a lot worse if we are to experience a ‘W’ shaped global economic recovery. This is addressed as
one of our additional stress scenarios.
Nedbank Group’s strategy and approach to comprehensively cover stress and scenario testing comprises five main
levels. This strategy, including arriving at the ‘additional stress scenarios’ on the following page, is agreed at an
executive management level by the Group Asset and Liability and Executive Risk Committee (Group ALCO) and
then the Group Credit Committee and Group Risk and Capital Management Committee, being sub-committees of
the board of directors.


The five levels are:
The macro-economic scenarios cover:

– Mild Stress (at least a 1 in 4 chance event scenario).

– High Stress (at least a 1 in 10 chance event scenario).

– Severe Stress (at least a 1 in 25 chance event scenario).

– Positive Stress (1 in 4 year positive scenario better than the base case).

The following are some of the additional stress scenarios that are considered:

– Liquidity crisis.

– ‘W’ shaped global recovery (deflation type severe stress event).

– Political event (covered by the macro-economic severe stress event).

– Property price crash (covered by the macro-economic severe stress event).

– Stress testing of share covered deals, including BEE exposures.

– Financial markets shutdown, incorporating a derivative market meltdown.

– Equity risk in the banking book.

– Interest rate risk in the banking book.

– Major operational risk event.

x &G[GQPG!PKQGPP!KGPKJCS!(ie what would ‘break the bank’)!

Our conclusion from this comprehensive stress testing process, and as used for the group’s ICAAP, is that Nedbank
Group’s current capital planning and base case projected regulatory and economic capital levels, ratios, targets and
buffers, incorporating the results and impacts of the stress and scenario testing applied, are sound and don’t require

The measures taken by the Basel Committee in July 2009 to strengthen the international Basel II framework, as well
as the far-reaching Basel III proposals released in December 2009, are the committee's comprehensive response,
under the mandate of the group of 20 leading economies, to address the lessons from the global financial crisis.
The Basel Committee's proposals aim to strengthen global capital and liquidity regulations with the goal of promoting
a more resilient banking sector. The objective of the reform package is to improve the banking sector's ability to
absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover
from the financial sector to the real economy.
We have summarised the Basel III proposals in our previous reporting to the market, and highlight that they are still
being debated internationally. The initially proposed timelines for Basel III of end 2012 implementation have been
pushed out considerably regarding certain proposals.
The impact of the current draft of proposals on Nedbank Group’s capital levels is anticipated to be moderate, not
significant and so, manageable. The impact of the liquidity proposals would be pervasive if implemented as is,
however a softening of these was announced by the Basel Committee on 26 July 2010.

Remuneration principles
With regards to the remuneration guidance issued by King III, Financial Services Board (FSB), Financial Services
Authority (FSA) and Basel, Nedbank Group’s Remuneration Committee (RemCo) has undertaken a comprehensive
review of all Nedbank Group remuneration schemes and arrangements to assess the current level of compliance
with the codes of good remuneration practices.
The findings indicated a high level of compliance with all of the recommended practices. Certain areas were
identified as requiring further investigation, namely:
x The structure and timing of adjustments to non-executive director’s fees.
x The use of vesting corporate performance targets in the long term incentive (LTI) schemes.
x Additional remuneration disclosure requirements, other than those currently required for executive directors.

Nedbank Group has also performed a gap analysis based on the ‘Compensation Principles and Standards
Assessment Methodology’ which was released by the Basel Committee in January 2010. The gap analysis shows
that overall Nedbank Group is already largely compliant with the requirements. The only significant gap is regarding
the compensation and independence of staff engaged in financial and risk control as the bonuses for finance and
risk executives are funded from the business cluster in which they reside.
In order to address the issue for the 2009 bonus process the Chief Risk Officer (CRO) ensured that he had provided
sufficient oversight and governance of all variable compensation awards to risk staff and communicated this to the
RemCo. In addition, to ensure independence of the Group Risk and Group Finance functions, the RemCo paid
particular attention to the total rewards of senior staff members in these functions in order to ensure that their own
individual performance significantly impacts the determination of their overall package.
From FY2010 there will be a formal review by the CRO of all variable compensation proposed awards to senior risk
staff across the bank and he will issue an annual report to the RemCo of the findings and proposed amendments. A
similar process will be implemented for Finance, Information Technology (IT) and Human Resources (HR) and this
process will be chaired by the relevant Group Exco member to ensure cross-cluster consistency.

Looking forward
A critical factor driving growth in earnings will be our ability to manage impairments. This includes managing the
defaulted loans book within Nedbank Retail and minimising surprises in the wholesale businesses. In this
environment of fragile recovery the group aims to continue to increase net asset value and further strengthen capital
and liquidity positions in preparation for the possible introduction of Basel III at the end of 2012. Other priorities in
the year ahead are to complete the integration of Imperial Bank and to implement a more client-centric focused
model with strong strategic risk management for Nedbank Retail.
The trend of viewing a bank’s operations purely by product and/or business line in the past, combined with a lack of
integration in the management of risk, value and strategy on a holistic basis, has negatively impacted the
sustainability and financial performance of many international financial institutions, and is a wake-up call for the
industry to revisit its approach, focus, prioritisation and management of the balance sheet.
Post the global financial crisis the landscape of banking has changed and recent developments on the regulatory
and accounting fronts, in particular Basel III and IFRS 9 (impairments), make it critical that banks obtain a very
strong handle on the holistic management of their balance sheet – in particular:
x Active portfolio management.
x Smart allocation of capital and liquidity/funding (‘optimisation’ being the name of the game).
x Balancing the focus on deposits vs assets.
x Managing for value (not volume), and emphasising economic profit growth.
x Superior business intelligence and data (quality data being the raw material of business intelligence).


In the new Basel III world, with much higher capital and liquidity costs materially impacting ROEs in an already highly
competitive industry, a critical success factor to competitive differentiation and out-performance will be superior
balance sheet management and business intelligence.

Nedbank Group has a strong risk management culture that is embedded in the group’s strategic framework and day-
to-day operations.
Some of the other key elements of the risk management embedded in the way we run the group include our strong
focus on:
x Economic capital and economic profit (EP)

Economic capital is a sophisticated, consistent measurement and comparison of risk across business units,
risk types and individual products 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 models and assigns economic capital
within ten quantifiable risk categories, as summarised on page 109.
All of Nedbank Group’s quantifiable risks, as measured by our economic capital, are then allocated back to
the businesses in the form of an economic capital allocation to where the assets or risk positions
Economic capital not only facilitates an apples-to-apples measurement and comparison of risk across
businesses but, by incorporating it into performance measurement we are able to measure and compare the
performance of each business on an absolute basis using EP and relative percentage return basis, namely
return on risk-adjusted capital (RORAC) and risk adjusted return on capital (RAROC), by comparing these
measures against the group’s cost of capital.
Currently EP and RORAC are used interchangeably as the primary measure for performance measurement
at Nedbank Group. In the calculation of RORAC the capital is calculated on a risk-adjusted basis (economic
capital), however, the return is not risk-adjusted as IFRS earnings are used. This is shown in the diagram on
the following page.
The RAROC measure is calculated using both return and risk-adjusted capital, and is also reported internally
as a secondary performance measure. In order to derive the risk adjusted earnings, impairments are
replaced with expected loss. Impairments represent an accounting charge that is cyclical in nature and
volatile over the economic cycle, whereas the expected loss charge is a through-the-economic-cycle
measure that is more aligned to long-run business profitability and sound management decision making.
Globally, following the financial crisis, there has been a move towards using through-the-cycle measures of
return that provide a longer-term view and incentivisation of profitability.


*"!!!!!h!!!!!#0&)!GEQCJCSP!! ! &.&%,!!! #0&)!GEQCJCSP!WMQ!QJPd!EHiOPKGH!IQM\JKX!j!,EIJKEL!

x Value is created if EP >0 x Value is created if RAROC > hurdle rate

x EP is a core metric for shareholder value-add x If capital is scarce, businesses with the highest RORAC or
x If capital is unconstrained, all business with EP > 0 should RAROC (ie highest marginal return per rand of economic
be grown subject to established hurdle ranges capital) should be prioritised
x No information on the marginal percentage return on x No information on magnitude of value being created for
economic capital which RORAC or RAROC provides shareholders which EP provides

To align the group’s current short-term incentive scheme (STI scheme) with the shareholder value drivers
the STI scheme has been designed to incentivise appropriately a combination of profitable returns, risk and
growth. It is driven from an EP and headline earnings basis, using risk-based economic capital allocation as
discussed above. Risk is thus an integral component of capital allocation and performance measurement
(and reward) in Nedbank Group.
Economic capital, EP, RORAC and RAROC and other important metrics are included in performance
scorecards across the group. The KPI is economic profit driven off risk-based economic capital, while other
measures such as RAROC are used as important secondary measures.
Risk is thus an integral component of capital allocation and performance measurement (and reward) in
Nedbank Group.
x Risk-based remuneration practices
Economic capital and EP is comprehensively in use across the group, embedded within businesses on a
day-to-day basis, and in performance measurement and reward schemes as discussed above. This risk-
adjusted performance measurement (RAPM) has been applied across the group for some years now and
helped ensure that excessive risk-taking never arose in the group.
The global financial crisis also precipitated a number of initiatives aimed at improving the governance and
management of remuneration. The recommendations, guidance and practice notes are primarily aimed at
the remuneration of executive directors, but the underlying principles and statements of good practice can
be applied to most incentive arrangements for the majority of staff members. There are minor gaps to be
closed in our remuneration practices when benchmarked against the latest principles, practices and codes
released in 2009 such as King III, FSB, FSA, EU Commission and the Basel Committee.
For further detail refer to page 8.
x Risk Appetite Framework
A comprehensive risk appetite framework was originally approved by the board of directors in 2006 and
further refined during 2009 as explained from page 15.
x Stress and Scenario Testing Framework
A comprehensive stress and scenario testing framework was also originally implemented in 2006 as
described from page 132 and this was further enhanced in 2009. Stress testing has been an integral part of
the group’s ICAAP in 2008 and 2009, and contributed to the proactive risk management that has facilitated
the group’s resilience through the global financial crisis and the local recession.
x Enterprisewide Risk Management Framework (ERMF)
The backbone of the group’s strong risk management culture and risk governance has been and continues
to be the group’s ERMF, first developed and rolled out in 2004.
Enterprisewide risk management is a structured and disciplined approach to risk management, aligning
strategy, processes, people, technology and knowledge with the purpose of evaluating and managing the
opportunities, threats and uncertainties the group faces as it strives to create shareholder value. It involves
integrating risk and capital management effectively across the group’s risk universe, business units and
operating divisions, geographical locations and legal entities.


x Capital Management Framework

Our comprehensive Capital Management Framework is designed to meet our key external stakeholders’
needs, both those focused more on the adequacy of the group’s capital in relation to its risk profile (or risk vs
solvency) and those focused more on the return or profitability of the group relative to the risk assumed (or
risk vs return). The challenge for management and the board is to achieve an optimal balance between
these two important dimensions.
x Liquidity Risk Management Framework


Overall Nedbank Group is substantially compliant with the 13 principles issued in September 2008 by the Basel
Committee entitled ‘Principles for Sound Liquidity Risk Management and Supervision’ based on its own ongoing
internal assessment.

"QJCFJILG!: Robust liquidity risk management framework. 9!

"QJCFJILG!; Clearly articulated liquidity risk tolerance / appetite. 9!
Strategies, policies and practices to manage liquidity risk in accordance with the liquidity
risk appetite. 9!
Costs, benefits and risks of liquidity incorporated into product pricing and performance
management. 9!
"QJCFJILG!7 Processes to identify, measure, monitor and control liquidity risk. 9!
Management of liquidity risk exposure across legal entities, business lines and
currencies. 9!
"QJCFJILG!` Funding strategy designed to support funding diversification & liquidity objectives. 9!
"QJCFJILG!? Management of daily and intra-day liquidity positions. 9!
Management of collateral positions, differentiating between encumbered and
unencumbered assets. 9!
"QJCFJILG!:< Stress testing for institution specific and market wide stress scenarios. 9!
"QJCFJILG!:: Contingency funding and liquidity plan. 9!
"QJCFJILG!:; Cushion of high quality assets which can be used to meet stress funding requirements. 9!
Public disclosure of information which enables market participants to assess Nedbank
Group’s liquidity position. 9!

Fully compliant ‫܂܂ ܂‬ Non-compliant

Given the rapid pace at which benchmarks continue to evolve, refinement and development can be anticipated for
some time to come. No significant gaps were identified, but there are a few areas for refinement and enhancement.
An assessment of Nedbank Group’s liquidity risk management was independently performed by a well known
international firm of consultants:
‘Overall Nedbank Group is closely aligned with best practice’



‘After performing this detailed gap analysis we acknowledge that Nedbank Group already has strong
liquidity risk management capabilities. Nedbank Group also has the advantage with regard to
managing a bank through a liquidity crisis as many of its senior executives have invaluable firsthand
experience in dealing with a real-life liquidity crisis in the form of the BoE experience (2002).’
In conclusion, the group’s risk culture, risk and overall balance sheet management systems have been duly tested
and proven effective during the global financial crisis.


The following is a summary of key enhancements made to Nedbank Group’s ICAAP:
x Continued to strengthen capital adequacy ratios.
x Significantly strengthened liquidity buffers and lengthened the funding profile, including the R11,9 billion in
senior-debt issues since September 2009.
x Addressed the Basel Committee's first response package to the G20's eight-point plan released in January
2009, following the meeting in November 2008, benchmarking these points against Nedbank Group's current
practice and incorporating any gaps into the SMART programme.
x Enhanced the incorporation of risk in the group's three-year business planning process for the 2010 – 2012
period via a more formal and comprehensive requirement for each major business to produce a risk strategy
component, integrated in each business’s strategy. This is in addition to the group-level risk and capital
x Completed Nedbank Group’s ILAAP for the first time as discussed on page 91. The ILAAP involves an
ongoing and rigorous assessment of Nedbank Group’s liquidity self-sufficiency under a continuum of stress
liquidity scenarios, taking cognisance of the board approved risk appetite.
The ILAAP also involves an ongoing review and assessment of all components that collectively make up
and/or support the Liquidity Risk Management Framework. Liquidity risk management is a vital risk
management function in all entities across all jurisdictions and currencies, and is a key focus of the Nedbank
x Elevated stress and scenario testing to yet a new height in line with new best practice developing over the
past year on the back of the global financial crisis.
x Implementation of new QRM software for our asset and liability management (ALM) process is progressing
well and is on track for implementation in 2010.
x Introduced Qlikview, a tool to enable detailed analysis and review of financial and credit risk data.
x Enhanced and cascaded the group-level risk appetite metrics to business clusters (see page 19).
x Again delivered comprehensive, best-practice Pillar 3 public disclosure reports.
Nedbank Group was awarded two prizes at the annual Investment Analyst Society (IAS) Reporting and
Communication Awards for 2008 (received in 2009) and one prize for 2009 (received in 2010). The IAS is
the society that most of the SA buy- and sell-side analysts and fund managers belong to, and their 2 000
members vote on the awards. The awards are these analysts' view on the investor reporting Nedbank Group
disclosed for the year.
Our awards for the 2008 year were:
– Award for Best Reporting and Communication for the Banking Sector.
– Overall Best Reporting and Communication Award, which is the main award (all the winners in each
JSE category competed).
Our award for the 2009 year was:
– Award for Best Reporting and Communication for the Banking Sector.
x In June 2010 at the annual Financial Times Sustainable Banking Awards in London, Nedbank Group
received the award for Emerging Markets Sustainable Bank of the Year for Middle East and Africa. It is the
third time in four years that Nedbank Group has taken top honours in this category – first in 2007, again in
2008, and now in 2010.
This is especially pleasing as, for Nedbank Group, sustainability is ultimately about walking a path to a better
future, together with all its stakeholders.
x Nedbank Group has achieved a level-two contributor status to black economic empowerment (BEE)
according to the Department of Trade and Industry (dti) Codes of Good Practice on BEE. In 2009 Nedbank
Group was named as the first Empowered Bank/Insurance Company in South Africa, and the third overall
Most Empowered Company in South Africa in the Financial Mail Empowerdex Survey.


Capital Allocation
In general it is appropriate to continuously review all risk and capital methodologies and models, and implement
changes to ensure they remain in line with best practice, and/or industry and regulatory developments.
We advised in the 2009 results that a number of enhancements, related to allocating capital to our business clusters,
would be implemented in 2010.
The following is a summary of the key enhancements implemented:
x Introduced more conservatism into the group's economic capital framework that is used for ICAAP (was
already in place for ICAAP and Pillar 3 reporting purposes in 2009):
 Increased the target debt solvency standard from A- (99,9%) (the same as Basel II) to A (99,93%). This
aligns with the targeted standard of our parent company, Old Mutual plc.
 Refined the definition of available financial resources to cover the economic capital requirements.
ƒ The '50% of next year's earnings' are no longer included (even though business risk economic
capital is still included).
ƒ Tier A and Tier B categorise were created, with Tier A to cover at least the minimum economic
capital requirements at the new, more conservative A-rating.
Tier A = core Tier 1 regulatory capital and qualifying reserves*
Tier B = perpetual preference shares and hybrid debt capital
(*In 'qualifying reserves' we now include a share-based payments (SBP) reserve, foreign currency translation (FCT)
reserve and available-for-sale (AFS) reserve, as we believe this to be correct and appropriate for economic capital
calculations. These are currently excluded for regulatory capital purposes.)
x Updating of the credit portfolio modelling correlations and revising the credit economic capital allocation
methodology, taking into account recent global developments, and current thinking in line with some of the
new Basel III proposals.
Some of the themes include increased financial institutions asset correlations, a stronger focus on
counterparty credit risk and concentration risk measurement, tail risk and asset classes that contribute to
significant procyclicality.
x Refined and updated the parameters used in the business risk methodology:
– Based on more recent data.
– Imperial Bank included on a 100%-owned basis. At February 2010 Nedbank Group owns 100% of
Imperial Bank.
– Economic capital (ie additional 49,9%) will be held at the centre until section 54 approval has been
x Measurement of operational risk for economic capital purposes using the AMA instead of the Standardised
Approach This aligns with Nedbank Group’s application to SARB in January 2010 to change its approach for
operational risk for regulatory capital from TSA to AMA. The AMA calculations will be based on the diversified
economic capital figure at a 99,93% confidence interval.
x Added insurance risk as a separate risk type in the economic capital risk taxonomy:
– Following the acquisition of the remaining shares in Nedgroup Life Assurance Company (NedLife).
– The creation of the separate Nedbank Wealth business cluster in August 2009.
– Solvency II.
x Alignment of the group’s ordinary shareholders’ equity, which is driven by regulatory capital as it is higher
than economic capital and on which the group’s ROE and EP is based, with the aggregate amount allocated
to business clusters using bottom-up calculated economic capital via an allocation of a capital buffer (limited
to an effective 10% core Tier 1 regulatory ratio of the group).


Over time a significant gap had developed between ordinary shareholders’ equity and total economic capital
mainly due to the significant strengthening of the group’s regulatory capital position. We agreed in 2009 that
this gap would be closed for RAPM purposes in 2010. In line with this the segmental analysis for 2009 has
been restated.
The above has no impact on the group’s capital level but significantly increases the quantum of capital allocated to
each business cluster. This is summarised on page 128, with the 2009 segmental results restated to afford
comparability with the new 2010 methodology.

Credit Loss Ratio

Nedbank Group has enhanced the methodology for calculating its credit loss ratio by changing from a simple
average to daily averages and excluding trading assets.
The impact of this change on the group’s credit loss ratios is minimal (ranges between 0,03% - 0,06% over the past
two years). The new restated ratios are summarised on page 50.

Risk appetite is an articulation and allocation of the risk capacity or quantum of risk Nedbank Group is
willing to accept in pursuit of its strategy, duly set and monitored by the Group Executive Committee and
the board, and integrated into our strategy, business, risk and capital plans.
We measure and express risk appetite qualitatively and in terms of quantitative risk metrics. The quantitative metrics
include earnings at risk (EaR) (the ratio of earnings volatility and pre-tax earnings) and, related to this, the chance of
regulatory insolvency, chance of experiencing a loss and economic capital adequacy. These comprise our group-
level risk appetite metrics. In addition, a large variety of risk limits, triggers, ratios, mandates, targets and guidelines
are in place for all the financial risks (eg credit, market and ALM risks).
In 2009 we sought to enhance the consolidation, focus and reporting of the key financial risk appetite metrics, and
the cascade from group level down to cluster, business unit and monoline level.
Accordingly we established an enhanced suite of base case (through-the-cycle) risk appetite metrics and
incorporated these within the 2010 – 2012 business plans at both group and business cluster levels (see page 19).
Stressed (extreme event) risk appetite metrics, linked to our stress- and scenario-testing programme, will be
finalised during the 3-year planning process in September 2010.
Earnings volatility is the level of potential deviation from expected financial performance that the group is prepared to
sustain at relevant points on its risk profile. It is established with reference to the strategic objectives and business
plans of the group, including the achievement of financial targets, payment of dividends, funding of capital growth
and maintenance of target capital ratios.
Qualitatively, we also express risk appetite in terms of policies, procedures, statements and controls meant to limit
risks that may or may not be quantifiable.
Nedbank Group’s risk appetite is defined across five broad categories as set out in our board approved Risk
Appetite Framework, namely:
x Group-level risk appetite metrics. These are expanded upon in the table on the following page.
x Specific risk-type limit setting (which clarify across our businesses the mandate levels that are of an appropriate
scale relative to the risk and reward of the underlying activities so as to minimise concentrations and other risks
that could lead to unexpected losses of a disproportionate scale).
x Stakeholder targets (such as performance targets, regulatory capital targets and target debt rating for economic
capital adequacy, Ecap allocations to business clusters, dividend policy, target credit impairment ratios,
derisking the balance sheet of non-core assets, etc).
x Policies, procedures and controls.
x Zero-tolerance statements.


Earnings at Percentage pretax earnings Measured as a ratio of earnings EaR less 3
risk (EaR) potentially lost over a one-year volatility as a 1-in-10-year event than
period (ie 90% confidence level) and pretax 100%

Chance of Event in which Nedbank Group Utilises economic loss at different Better 3
experiencing a experiences an annual loss confidence intervals and comparing than 1 in
loss with expected profit over the next year 10 years

Chance of Event in which losses would Utilises economic loss at different Better 3
regulatory result in Nedbank Group being confidence intervals and compares than 1 in
insolvency undercapitalised relative to with capital buffer above regulatory 50 years
minimum total regulatory capital minimum – expressed as a 1-in-x-year
ratio chance of regulatory insolvency

Economic Nedbank Group adequately Measured by the ratio of available Greater 3

capital capitalised on an economic basis financial resources and required than an A
adequacy to its current international foreign economic capital at an A international rating
currency target debt rating foreign currency debt rating plus 10%

Our Risk Appetite Framework and modelling of the group level metrics are integrated with our economic capital
model and the ERMF. The two measures, EaR and economic capital, are methodologically very similar and differ
primarily in the confidence level used.
Both economic capital and EaR are calculated at granular levels and are key components of Nedbank Group’s Risk
Appetite Framework and Risk-adjusted Performance Measurement system (ie for RORAC, EP measures).
Nedbank Group has a system of cascading risk limits down to all business unit levels of the group and for all
financial risks, which is a core component of the implementation of the Risk Appetite Framework. The size of the
various limits is a direct reflection of the board’s risk appetite, given the business cycle, market environment,
business plans and strategy, and capital planning. Interest rate risk in the banking book (IRRBB) and foreign
currency translation risk is transferred to Balance Sheet Management who, in conjunction with Group ALCO, would
have primary responsibility for managing/hedging the risk.
Another key component of the ERMF is a comprehensive set of board-approved risk policies and procedures, which
are updated annually. The coordination and maintenance of this formal process rests with the head of ERMF, who
reports directly to the CRO.
Nedbank Group has cultivated and embedded a prudent and conservative risk appetite, focused on the basics and
core activities of banking. This is illustrated by reference to the following:
x No direct exposure to US sub-prime credit assets nor associated credit derivative transactions.
x Conservative and value-based credit underwriting practices that have culminated in a high-quality, well-
collateralised wholesale book and an emphasis on selective, value-based origination in the retail book since
x Reasonable credit concentration risk levels:
 Large individual or single-name exposure risk is low. Refer to page 77 for details.
 Geographic exposure risk is high (refer to page 78 that highlights that 95% of the group's loans and
advances originate in South Africa), however this concentration has been positive for Nedbank Group,
during the global international crisis, and reflects focus on an area of core competence.
 Industry exposure risk is reasonably well-diversified. Refer to page 79 for details.


 At first sight our property exposure appears high, but this is in line with our domestic peer group and most
banks worldwide. As a result of this perceived risk, we undertook a more detailed analysis, assisted by
international risk consultants, of our commercial property exposures.
The conclusions and recommendations that resulted from this detailed analysis were discussed earlier on
page 5.
x The exposure of Nedbank Group to the PIIGS is monitored on an ongoing basis and is fairly immaterial. The
Nedbank Group hold no sovereign bonds issued by these countries. Direct lines to banks in Italy and Spain are
restricted to systemically important banks.
x Counterparty credit risk almost exclusively restricted to non-complex banking transactions. There is continued
emphasis on the use of credit mitigation strategies, such as netting and collateralisation of exposures.
Credit derivative activities have been materially restricted to single-name trades of SA exposures and are
biased towards providing risk mitigation. Refer to page 75 for further details on our relatively low counterparty
credit risk exposure.
x A strong, well-diversified funding deposit base and a low reliance on offshore funding. Additionally, Nedbank
Group's reliance on its top 10 depositors is not unduly concentrated. Refer to page 90 onwards for our analysis
in support of this and our prudent liquidity risk management.
x Low level of securitisation exposure. Refer to page 79 for summary detail on this exposure.
x Low leverage ratio (total assets to shareholders’ equity) of 14,1 times (December 2009: 14,4 times), which
compares very favourably on an international benchmarking basis.
x Low risk of assets and liabilities exposed to the volatility of International Financial Reporting Standards (IFRS)
fair-value mark-to-market (MTM) when considered with the associated derivative hedges.
– Banking Book
In terms of IAS 39, an entity has the option to designate a financial instrument at fair value provided that
certain criteria are met, which Nedbank Group does.
The group has entered into a large number of fixed rate deals both for assets and liabilities. When a fixed
rate deal is entered into interest rate risk arises, which is hedged with an interest rate swap derivative.
This process is controlled and monitored by the Group ALCO.
In terms of IAS 39, all derivatives need to be carried at fair value and it is the mark-to-market of all these
hedging derivatives that causes an accounting mismatch. In order to eliminate the accounting mismatch,
the underlying financial instrument is designated fair value through profit and loss and subsequently fair-
valued. All fair-value adjustments in this regard are unrecognised profits and losses and are disclosed in
non-interest revenue.
It is important to note that these profits and losses will not be realised and will merely unwind over time as
the various financial instruments mature (assuming a perfect hedge relationship). The financial
instruments are effectively fully hedged on an interest rate risk basis. The present volatility that is being
seen in the income statement on the designated fair-value line is a result of the accounting mismatch
described above, basis risk and because IAS 39 requires an entity to fair-value its own credit at fair value
through profit and loss designated financial liabilities.
Nedbank Group also carries all its investment securities, both listed and unlisted, at fair value. There are
no material hedges in place for these investment securities and they are designated as at fair value
through profit and loss.
– Trading Book
The trading book is fair-valued and the impact taken through the income statement.
The improvement in the credit markets in 2009 have impacted on the South African sovereign credit
spreads and resulted in a positive impact on the value of certain assets within the trading portfolio.
Nedbank Group’s risk appetite for holding of foreign assets in the trading portfolio continues to be low


and consequently the portfolio was and remains relatively small with mainly shorter-dated assets with a
bias to financial institutions and large corporate exposures.
The trading portfolio has limited exposure to the credit derivatives market. This, coupled with our
conservative risk appetite, has restricted losses incurred in the portfolio during the current period.
x Immaterial market trading (proprietary) risk in relation to total bank operations (economic capital held is only
1,7% of total and is conservatively based on limits rather than utilisation, plus a 10% capital buffer). Although
proprietary trading activities are small, they play an essential role in facilitating client trades.
The risk appetite within the trading business has remained largely unchanged over the past two years. Trading
activities have focused on the domestic market with a bias towards local interest rate and forex products.
The overall performance of the trading business has been sound, an indication that the impacts from the credit
crunch and difficult equity markets were successfully navigated, and our risk systems are sound. Refer to page
85 for more details.
x Interest rate risk in the banking book in line with peer group, as reflected by the sensitivity analysis provided on
page 101.
x Low equity (investment) risk, including private equity exposure. The total equity risk exposure, including our
private equity business, is R3,9 billion, comprising only 0,7% of total assets. Further, within this a wide range of
individual investments exist and many are linked to a wider client relationship. Refer to page 90 for further
x Immaterial assets non-core to the business of banking.
x Low foreign currency translation risk to the rand's volatility, which is in line with Nedbank Group's appropriate
offshore capital structure. Refer to page 102 for more details.
x Well-diversified earnings streams. Most of the group's earnings are generated by traditional vanilla annuity-
based income products in wholesale and retail banking, and specialised finance.
x Well-diversified subordinated debt and non-core Tier 1 maturity profile. Refer to page 123 for details.
x Comprehensive stress and scenario testing to confirm the adequacy and robustness of our capital ratios and
accompanying capital buffers.
x A proactive response to the global financial crisis successfully executed, including a strong focus on and great
success in strengthening our capital ratios since end 2007 and through to June 2010 (as covered on page 117).
Individual risk appetite targets, as relevant to the approved business activities, have been approved and cascaded
down from group level for each business cluster, major business unit and the monolines in Nedbank Retail. This
was discussed in detail within the risk appetite section of Nedbank Group’s FY09 Pillar 3 report.


&#)8!%""*/#/*!R )+#/*!.0!3&.+"B$*5*$!>*/&#,)
,&*-#/!&#)8!"&.0#$*! !
Credit loss ratio (%) 0,60% – 1,0%
Credit RWA: Loans and advances (%) 52% – 58%
Credit property exposure: Loans and advances (%) < 45%
PIPs: Loans and advances (%) < 0,1%
Average PD (%) – performing book (TTC) < 3%
Average LGD (%) – performing book (TTC) 18% – 22%
Average EL (%) – performing book (TTC) 0,6% – 0,7%
Defaulted EAD: Total EAD (%) < 2%
EAD: Exposure (%) < 120%
,.+1/*&"%&/A!,&*-#/!&#)8!W-*&#5%/#5*)X!"&.0#$* !!
CCR EAD: Total EAD (%) < 2%
CCR Ecap: Total Ecap (%) < 0,5%
)*,+&#/#)%/#.1!&#)8!"&.0#$* !!
Securitisation RWA: Total RWA (%) < 0,4%
/&%-#13!>%&8*/!&#)8!"&.0#$* !!
VaR (99%, three-day) < 127
Stress trigger (Rm) < 846
Trading Ecap: Total Ecap (%) < 3%
*Z+#/A!W#15*)/>*1/X!&#)8!"&.0#$*! !!
Exposure: Total assets < 2%
Equity investment Ecap: Total Ecap (%) < 7%
%$>!&#)8!"&.0#$*!R!$#Z+#-#/A !!
Short-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%)
%$>!&#)8!"&.0#$*!R!#&&((! !!
NII interest sensitivity: Equity (%) < 2,5%
NII interest sensitivity: 12-month NII (%) < 7,5%
NII interest sensitivity: Interest earning assets (bps) < 25 bps
Economic value of equity sensitivity: Equity (%) < 5%
%$>!&#)8!"&.0#$*!R!0,/&! !!
Currency equity: Total equity < 5%
3&.+"!&#)8!%""*/#/*!>*/&#,) !!
Earnings at risk < 100%
Chance of a loss (1 in x years) > 10
Chance of regulatory insolvency (1 in x years) > 50
Available financial resources: Ecap (A solvency target) > 110%
Total RWA: Total assets (%) 55% – 57%
Leverage ratio < 18 times
$.13!/*&>!#1)+&%1,*!&#)8!"&.0#$*! !
Net claims ratio (% of gross premium, net of re-insurance) < 75%
Capital adequacy requirement cover (1 times is Statutory Requirement) > 2 times
Max loss per client after re-insurance R400k
)2.&/!/*&>!#1)+&%1,*!&#)8!"&.0#$*! !
Net claims ratio (% of gross premium, net of re-insurance) < 75%
Capital adequacy requirement cover (1 times is Statutory Requirement) > 1,5 times
Short term insurance Ecap : Total Ecap (%) < 15%
Net exposure after re-insurance : Total Exposure < 5%
%))*/!>%1%3*>*1/!&#)8!"&.0#$*! !
Asset mgt Ecap : Total Nedbank Wealth Ecap (%) < 25%!
3&.+"!,%"#/%$!%-*Z+%,A!W(%)*$!##X! !!
Core Tier 1 (in current environment target is above top end of range) 7,5% – 9%
Tier 1 (in current environment target is above top end of range) 8,5% – 10%
Total (in current environment target is above top end of range) 11,5% – 13%


%((&*5#%/#.1)! !!
RWA Risk-weighted assets
PiPs Properties in possession
PD Probability of default
LGD Loss given default
EL Expected loss
EAD Exposure at default
TTC Through-the-cycle
CCR Counterparty credit risk
Ecap Economic capital
NII Net interest income
IRRBB Interest rate risk in the banking book
FCTR Foreign currency translation risk

One of the risk appetite metrics that we are currently in excess of due to the retail asset classes and the current
economic environment, and which is in line with our peer group, is the group's target credit loss ratio range, details
of which may be found on page 49. We currently expect to remain outside the target range in 2010, but addressing
this is a key component of the 2010 – 2012 business plans. The reversal of provisions in the balance sheet is
expected to take longer as defaulted advances continue 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 and monitored on an ongoing basis, bearing the board's ultimate approval and oversight.

The business of banking is fundamentally about managing risk. As discussed earlier, Nedbank Group actively
strives to attain worldclass risk and capital management as integrated core competencies critical to the success and
sustainability of our business.
Nedbank Group sees strong risk governance applied pragmatically and consistently as the foundation for successful
risk and capital management.
The strong focus on risk governance is based on a three lines of defence concept, which is the backbone of the
group’s ERMF. The ERMF places a strong emphasis on accountability, responsibility, independence, reporting,
communication, and transparency, both internally and with regard to our key external stakeholders.
The three lines of defence, as well as the principal responsibilities that extend across the group, function as follows:



The 17 key risks that comprise Nedbank Group’s risk universe and their materiality are reassessed, reviewed and
challenged on a regular basis. The ERMF specifically allocates the 17 key risks (which individually also include
various subrisks) at each of three levels to:
x Board committees.
x Executive management committees (at Group Exco level and those within business clusters).
x Individual functions, roles and responsibilities (at group level and across all business clusters, as relevant).
In these various committees the 17 key risks are contained in formal terms of reference (or charters) and linked to
the agendas of meetings. Comprehensive reporting on the universe of risks thus occurs at least quarterly, where
their status, materiality and effective management are assessed, reviewed and challenged.
This process originates in the business clusters, proceeds based on materiality up to the group executive level and
then to the non-executive board level. The process is overlaid by our three lines of defence governance model set
out on the previous page, so that the assessment, review and challenge not only happens by management and the
board, but also by Group Risk and Group Compliance, and Group Internal Audit and the external auditors in the
second and third lines of defence.
Within this recurring ERM process, and additionally via the strategic/business planning process, new and/or
emerging risks are identified, captured and addressed within the ERMF and its associated process.
A residual heat map is used and helps the iterative reassessment of the 17 key risks. Escalation criteria have been
formalised and so significant risk issues and/or limit breaches are raised and included in the Key Issues Control Log,
which is a key feature of the ERMF and risk reporting across Nedbank Group.
Annually the process of corporate governance, including the risk management process, as contemplated in
regulation 39 of the Banks Act, is assessed against the existing internal control environment. Similarly, an
assessment of whether the bank can continue as a going concern, as required in terms of regulation 40, is carried
out with due regard to governance, risk management and long-term planning of the banking group.


The ERMF, fully embedded across Nedbank Group, is supplemented by individual frameworks such as those for
credit risk, market risk, liquidity risk, operational risk and capital risk, as well as a comprehensive set of risk policies
and limits. These also include the role of the board, which includes setting and monitoring the group’s risk appetite
(which includes risk limits) and oversight of the ERMF, duly assisted by its board committees. At executive
management level the Group Exco is also assisted with its risk, strategic and operational responsibilities by eight
The ERMF thus facilitates effective challenge and debate at executive management and board levels, and strong
interaction across the group between the businesses and central group services. This includes an ongoing process
of risk identification, review and assessment, including formal documentation of this, which is subjected to review by
external auditors.
A formal process is in place to review, at least annually, the full set of risk policies, limits and various frameworks
that comprise the ERMF.
An overview of Nedbank Group’s ERMF, including the 17 key risks that comprise the group’s risk universe and the
risk governance structures, is provided on the following page.
Further details on the group’s governance and various key committees are contained in the group’s annual report
under the section Enterprise Governance and Compliance.



In line with the four key principles contained in Pillar 2 of Basel II, the South African regulations relating to banks set
out in regulation 39 the ICAAP requirements of banks and related Supervisory Review and Evaluation Process
(SREP) requirements of the SARB. A summary of this is depicted below. In addition, SARB provided further guidance
in the form of Position Paper 230 (‘Implementation of the Basel II framework Pillar 2 requirements, with specific
reference to the Internal Capital Adequacy Assessment Process’), specifies 12 ‘ICAAP principles’.


ICAAP is primarily concerned with Nedbank Group's comprehensive approach, assessment, coverage and
management of risk and capital 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
To this end it is important to highlight that Nedbank Group has seven levels of capital and other components to be
measured and managed simultaneously:
x Basel II regulatory capital (risk-sensitive but with limitations/restrictions).
x Economic capital (risk-sensitive, more economic-based and tailored internally with less limitations/restrictions,
and used for Nedbank Group’s ICAAP).
x Rating agencies capital (their expectations of capital levels).
x Buffer capital (level of capital buffers to carry above minimum requirements).
x Actual book or statutory capital (based on greater of Basel II and economic capital requirements).
x Qualifying capital and reserves (to cover regulatory capital requirements).
x Available financial resources (to cover economic capital requirements).


These different levels illustrate the delicate and challenging balancing act involved in effective capital management.

Separate ICAAPs are required for each banking legal entity and for the consolidated Nedbank Group. Size and
materiality play a major role in the extent of each bank’s ICAAP.
Nedbank Group’s ICAAP has been embedded within our Capital Management Framework since it was first approved
by the board of directors in 2006.
Nedbank Group’s ICAAP blueprint on the next page sets out our ICAAP building blocks and overall process, and the
various frameworks underpinning this. This process is repeated regularly, which facilitates the continuous
assessment, management and monitoring of Nedbank Group’s capital adequacy in relation to its risk profile.



The foundations of Nedbank Group’s ICAAP, Capital Management Framework and ERMF are a strong and rigorous
governance structure and process as discussed earlier. The ERMF is actively maintained, updated and regularly
reported on up to board level, coordinated by the ERMF Division in Group Risk. This same governance process is
followed for Nedbank Group’s ICAAP and involves key participants from business, finance, risk, capital management
and internal audit, as well as the relevant Exco committees, board committees and the board.
Further details of the group’s capital management are covered from page 115.
The ultimate responsibility for the ICAAP rests with the board of directors. The risk and capital management
responsibilities of the board and Group Exco are incorporated in their respective terms of reference (charters)
contained in the ERMF. They are assisted in this regard, and in overseeing the group’s capital risk (defined in the
ERMF), by the board’s Group Risk and Capital Management Committee and the Group ALCO respectively.
Group ALCO, in turn, is assisted by the Balance Sheet Management cluster (see page 28) and the Balance Sheet
Management Committee (subcommittee of Group ALCO).




Established 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.
The creation of a specialist BSM cluster recognises the importance of managing risk on a portfolio basis and integrating
the management of risk with liquidity and funding, capital management, managing for value and risk-based financial
performance optimisation to help attain the ideal balance sheet shape via inter alia portfolio tilt, and to ensure the
group’s long-term sustainability and optimisation of shareholder value-add, within an acceptable risk appetite and with a
strong qualitative overlay of experience and common sense.
Since the business of banking is fundamentally about managing and optimising risk, BSM, in addition to supporting the
vision of making Nedbank Group a great place to invest, also champions the group's Deep Green aspiration to be world
class at managing risk and its three core objectives for successful enterprisewide risk management, namely the
management of:
x Risk as a THREAT
(ie to minimise and protect against downside risk, protect against material unforeseen losses and maximise long
run sustainability).
(ie to eliminate excessive earnings volatility and minimise material negative surprises).
(ie to maximise financial and share price performance upside via application of superior business intelligence,
management science and shareholder value-based economics, while optimising business opportunities, risk
and capital to ultimately differentiate against competitors. The effort involved in creating superior business
intelligence, enabled by world class data, greatly complements and assists in providing superior client service).
The BSM cluster is the central consolidation point for the portfolio management of risk, capital and liquidity across the

(Shareholder value-add)


Below is a list of the key risk areas and targets which are managed by Balance Sheet Management.



Group capital adequacy ratios (Basel II) - Core Tier 1 7,5%-9,0%

Group capital adequacy ratios (Basel II) - Tier 1 8,5%-10,0%

Group capital adequacy ratios (Basel II) - Total 11,5%-13,0%

Total RWA: Total assets (%) 55%-57%

Credit RWA: Loans and advances (%) 52%-58%


Target debt solvency standard 99,93% (or “A”)!


Leverage ratio ‹20 times


Short-term (0-31 days) funding: % of total funding 58% (tolerable deviation +5%)

Medium-term (32-180 days) funding: % of total funding 18% (tolerable deviation +5%)

Long-term (›180 days) funding: % of total funding 24% (tolerable deviation -7%)

Contractual maturity mismatch (0 to 31 days): % of total funding 38% (tolerable deviation +5%)

Business-as-usual maturity mismatch (0 to 31 days): % of total funding 5% (tolerable deviation +2%)

Liquidity buffer (surplus liquid assets in excess of regulatory requirement) Approximately R6bn

Liquidity stress event (minimum survival period): Days ›14 days (target 30 days)

Net interbank reliance: % of total funding ‹1,5% (tolerable deviation +1%)

Maximum call – Aggregate of the top 10 depositors ‹12% of total funding

Maximum balance due to any single asset manager (o/n to 1 week)* ‹R5bn
Maximum balance due to any single depositor other than asset managers (o/n to 1



NII interest sensitivity: Equity (%) ‹ 2,5%

NII interest sensitivity: 12-months NII (%) ‹ 7,5%

NII interest sensitivity: Interest-earning assets (bps) ‹ 25bps


Economic value of equity: Equity (%) ‹ 5%!

Note: No change in IRRBB risk appetite planned for next 3 years.
* Excess supported by marketable securities.


Nedbank Group’s ERMF enables us to identify, measure, manage, price and control our material risks and
risk appetite, and then relate these to capital requirements to help ensure our capital adequacy and
sustainability, and so promote sound business behaviour by then linking these with performance
measurement and remuneration practices.
Nedbank Group’s risk universe is defined, actively managed and monitored in terms of our ERMF, in conjunction with
the Capital Management Framework and its subframeworks, including economic capital, as discussed earlier.
A summary table of the key risk types impacting the group is provided below and highlights where the 17 key ERMF risk
types map to the quantitative risk types of the economic capital (and ICAAP) framework.
An overview of the key risks impacting Nedbank Group then follows.

,EIJKEL!QJPd! Capital risk Is the aggregation of all risk types (refer

page 115)
,QGHJK!QJPdP! Credit risk 9

x Underwriting (lending) risk 9 (integrated in ‘credit risk’)

x Transfer (sovereign) risk 9
x Counterparty credit risk 9 (integrated in ‘credit risk’)
x Securitisation risk 9 (integrated in ‘credit risk’)
$JTOJHJKU!QJPd! Liquidity risk WIP in respect of funding component

>EQdGK!QJPdP! Market risk in the trading book 9

Market risk in the banking book 9

x Interest rate risk in the banking book 9
x Foreign currency translation risk in the banking book 9
Investment risk 9
x Equity risk in the banking book 9
x Property risk 9
.IGQEKJMCEL!QJPdP! Operational risk 9

Accounting and Taxation risks 9 (covered by operational risk)

Compliance risk 9 (covered by operational risk)
Insurance and assurance risks 9 (covered by operational risk)
People risk 9 (covered by operational risk)
Information technology risk 9 (covered by operational risk)
(OPJCGPP!QJPdP! Transformation risk 9 (covered by business risk)

New business risk 9 (covered by business risk)

Reputational risk n/a (refer page 105)
Social and environmental risks 9 (covered by business risk)
Strategic risk 9 (covered by business risk)
People risk 9 (also covered by business risk)
Information technology risk 9 (also covered by business risk)
#CPOQECFG!QJPdP Insurance and assurance risks 9 (covered by insurance risk)

n/a = not applicable to economic capital

9 = included in Nedbank Group’s economic capital framework


Credit risk governance structures and strategy
Credit risk arises from lending and other financing activities that constitute the group’s core business. It is by far the
most significant risk type and accounts for over 60% of the group’s economic capital requirement and 75% of regulatory
One of Nedbank Group’s major investments in risk in recent years has been to elevate its credit risk management to
best practice. This, together with our strong client service focus, not only positioned Nedbank Group to achieve
appropriate growth and returns, but also to obtain approval from SARB for the Advanced Internal Ratings-based
Approach for credit risk, the most advanced approach offered by Basel II and the new South African banking
Nedbank Group’s credit risk governance structures are reflected in the following diagram:

Credit risk is managed across the group in terms of its board-approved Group Credit Risk Management Framework,
which encompasses selective credit policy, mandate limits and governance structures. It is a key component of the
group’s ERMF, Capital Management and Risk Appetite Frameworks discussed earlier.
The Group Credit Risk Management Framework, which covers the macrostructures for credit risk management,
monitoring and approval mandates, includes the Executive Credit Committee (ECC), its two AIRB technical forums and
a Group Credit Ad Hoc Ratings Committee.


The ECC is the designated committee appointed by the Group Credit Committee (GCC) to monitor, challenge and
ultimately approve all material aspects of the bank’s AIRB credit rating and risk estimation processes. The SARB
requires that the ECC is chaired by a non-executive director however the ECC also serves as the executive credit
oversight forum for the bank. Current membership includes two non-executive directors and three executive directors.
The ECC reports into the GCC which has overall responsibility for the bank’s AIRB credit rating system. In this regard
the board and its GCC are required by the banking regulations to have a general understanding of the AIRB credit
system and the related reports generated. They also need to ensure the independence of the bank’s credit risk
monitoring unit, Group Credit Risk Monitoring including the Credit Models Validation Unit (CMVU) and the effective
functioning of the ECC.
The technical understanding required of senior management is greater than that required at board level. Management
must have a detailed understanding of the AIRB credit system and the reports it generates.
Management needs to ensure the effective operation of the AIRB credit system assisted by the independent credit risk
control units.
Divisional credit committees (DCCs), with chairpersons independent of the business units, operate for all major
business units across the group. The DCCs are responsible for approving and recommending credit and credit policy,
as well as reviewing divisional-level credit portfolios, parameters, impairments, expected loss and credit capital levels.
An independent Group Credit Risk Monitoring (GCRM) Unit is part of Group Risk. It champions the ongoing
enhancement of credit risk management across the group, the Group Credit Risk Management Framework and AIRB
credit system, monitors credit portfolios and reports to executive management, DCCs, ECC and ultimately the board’s
GCC on a regular basis. GCRM together with BSM has overall responsibility for the ongoing championing of the Basel II
AIRB methodology across the group. GCRM also ensures consistency in the rating processes, and has ultimate
responsibility for independent model validation.
During 2009 the AIRB Framework for credit risk was enhanced by strengthening the governance process to ensure
effective challenge of credit model related issues. This included revising the minimum validation requirements. The
staffing compliment of CMVU was substantially increased to ensure the efficient functioning of the unit based on the
new validation requirements. Progress in terms of the new validation requirements is actively monitored and reported
through the governance process to the ECC.
In each of the five business clusters credit risk management functions operate independently of credit origination,
reporting into the cluster head of risk, who in turn reports to the cluster managing director. In line with the Basel II AIRB
methodology each cluster has implemented economic capital quantification and economic profit performance
measurement. Each cluster also has a cluster credit risk lab that is responsible for the ongoing expert design,
implementation, validation and performance of their business cluster’s internal rating systems, with independent
validation by CMVU.
Nedbank Wealth has historically been a part of Nedbank Retail, but from August 2009 Nedbank Wealth commenced
operating as a separate business cluster. Nedbank Wealth currently has its own risk management framework, and the
business cluster has been reported separately in this document.
Nedbank Group’s credit policy regarding lending to related parties is properly documented and approved by the GCC, a
committee of the board. The policy is also subject to an annual review by the GCC. Definitions used for related parties
are aligned with the definitions specified by SAICA (IAS 24) and compliance with the policy requires appropriate
processes and procedures for the approval monitoring and reporting by business units. In addition, the policy requires
that all related party loans are concluded at arm’s length and hence subject to normal credit criteria applicable to all
other lending. The re-pricing on all related party transactions requires sign-off by Group Taxation Department for advice
on tax consequences arising from funding or pricing issues.
The policy also stipulates that no person benefiting from a particular loan or exposure can be responsible for the
preparation, assessment or approval of the application whilst credit signatories are encouraged to escalate, to a higher
mandate for approval, any instances where they feel it is impossible to consider or agree the credit application on a
commercial arm’s length basis.


Nedbank Group’s credit risk measurement and methodology
Nedbank Group’s Basel II AIRB credit methodology is fully implemented across all its major credit portfolios.
Under this methodology credit risk is essentially measured by two key components, namely:
x Expected loss (EL), which is a 12-month estimate based on the long-run annual average level of credit losses
through a full credit cycle based on time series data history.
x Unexpected loss (UL), which is the annualised volatility of expected losses for credit risk.
Analytically, EL and UL are defined respectively as the average and one standard deviation from that average of the
distribution of potential losses inherent in the bank’s credit portfolio.
These statistically estimated losses are determined by the key Basel II AIRB credit risk parameters, namely probability
of default (PD), exposure at default (EAD), loss given default (LGD) and maturity (M). These, together with the Basel II
capital formulae, culminate in the Pillar 1 minimum regulatory capital requirements for credit risk.
The IFRS requirements for credit risk also form an integral part of Nedbank Group’s credit risk measurement and
management. Nedbank Group assesses the adequacy of impairments, in line with International Financial Reporting
Standards (IFRS) on a continuing basis. Specific impairments are created in respect of defaulted advances where there
is objective evidence that all amounts due will not be collected. Portfolio impairments are created in respect of
performing advances based on historical evidence and trends of losses in each component of the performing portfolio.
The generic methodological differences between EL estimation and IFRS impairment are summarised in the table
8GU!"EQEVGKGQP! (EPGL!##! #%)'9!
Intention of estimate x Conservative estimate of PD within next x Best estimate of likelihood and timing of credit
12 months losses over life of loan
Period of measurement x Long-run historical average over whole x Should reflect current economic conditions –
economic cycle – ‘TTC’ ‘PIT’
Intention of estimate x Conservative estimate of discounted x Conservative estimate of discounted value of
value of post-default recoveries post-default recoveries
Treatment of collection x Recoveries net of direct and indirect x Recoveries net of direct cash collection costs
costs collection costs only
Discount rate x Recoveries discounted using entity’s cost x Cash flows discounted using instrument’s
of capital original effective interest rate
Period of measurement x Reflects period of high credit losses x Should reflect current economic conditions –
x Downturn LGDs required ‘PIT’
Basis of exposure x Based on EAD, which includes unutilised x Based on actual exposure
facilities (on and off balance sheet)

The IASB released an exposure draft on impairments in November 2009. The comment period on the draft closed on
30 June 2010. The new requirements will be finalised in late 2010 with expected implementation for 2013 or later. The
IASB is proposing to move away from the incurred-loss methodology towards an expected-loss methodology of
calculating impairments. The objective of the expected-loss methodology is to create funds gradually over the life of the
asset, which can be used against future losses. The proposed changes would have a significant operational impact due
to additional data requirements and system changes needed.
As shown in the table above, IFRS impairments are determined using PIT metrics, which are used to estimate the
default expectations under the current economic cycle, whereas TTC metrics reflect a one-year forward estimate based
on a long-term average through an economic cycle and are used for the group’s regulatory and economic capital


Basel II also requires banks to base their LGD estimates for regulatory capital requirements on a downturn scenario
(ie downturn LGD), rather than an average TTC loss estimate. Downturn LGD thus represents what could be expected
in downturn economic conditions in the trough of a business cycle.
EL is a forward-looking measure, on a TTC basis (ie the long-run average) of the statistically estimated credit losses on
the performing portfolios for the forthcoming 12 months. For Nedbank Group’s active portfolio, portfolio impairments
estimated using the PIT methodology are based on emergence periods that are 12 months or less. Specific
impairments are estimated for the defaulted portfolio and added to portfolio impairments, which then constitute the total
impairments for the credit portfolio. The total EL and the total impairments are compared and should the total EL for the
AIRB credit portfolio be higher than the total impairments, the difference is subtracted from qualifying capital. Should the
total impairments be higher than the EL, the difference is added to qualifying capital up to a maximum of 0,6% of credit
risk-weighted assets.
In the case of the defaulted portfolio a best estimate of expected loss (BEEL) is calculated, which is in line with the
specific impairment for that exposure. The BEEL/specific impairment takes the current economic and business
conditions into regard as well as the counterparty’s current circumstances. It is typically a PIT estimate. The downturn
LGD estimation for the defaulted exposure is updated and compared with the BEEL. Normally no capital is held for
defaulted exposures due to the specific impairment that should provide for any possible losses. Where the downturn
LGD exceeds BEEL it is considered a UL and the difference is then the required capital for the defaulted portfolio.

Nedbank Group’s master credit rating scale

Nedbank Group uses two master rating scales for measuring credit risk. The first measures borrower risk without the
effect of collateral and any credit risk mitigation (ie PD only), while the second measures transaction risk (ie EL), which
incorporates the effect of collateral, any other credit risk mitigation and recovery rates.
All credit applications are required to carry the borrower PD rating [from the Nedbank Group Rating (NGR) master rating
scale], estimate of LGD and overall transaction rating [from the Nedbank Group Transaction Rating (NTR) master rating
1*-(%18!3&.+"e)!"-!>%)/*&!&%/#13!),%$*!W13&!&%/#13)X!R #1/*&1%/#.1%$!),%$*
W"-lX! W"-”X!
Performing NGR 01 0,010 0,000 0,012 AAA
NGR 02 0,014 0,012 0,017 AA+
NGR 03 0,020 0,017 0,024 AA
NGR 04 0,028 0,024 0,034 AA-
NGR 05 0,040 0,034 0,048 A+
NGR 06 0,057 0,048 0,067 A+ to A
NGR 07 0,080 0,067 0,095 A to A-
NGR 08 0,113 0,095 0,135 A- to BBB+
NGR 09 0,160 0,135 0,190 BBB+
NGR 10 0,226 0,190 0,269 BBB+ to BBB
NGR 11 0,320 0,269 0,381 BBB to BBB-
NGR 12 0,453 0,381 0,538 BBB-
NGR 13 0,640 0,538 0,761 BBB- to BB+
NGR 14 0,905 0,761 1,076 BB+ to BB
NGR 15 1,280 1,076 1,522 BB
NGR 16 1,810 1,522 2,153 BB to BB-
NGR 17 2,560 2,153 3,044 BB- to B+
NGR 18 3,620 3,044 4,305 B+
NGR 19 5,120 4,305 6,089 B+ to B
NGR 20 7,241 6,089 8,611 B to B-
NGR 21 10,240 8,611 12,177 B to B-
NGR 22 14,482 12,177 17,222 B- to CCC
NGR 23 20,480 17,222 24,355 CCC
NGR 24 28,963 24,355 34,443 CCC to C
NGR 25 40,960 34,443 100 CCC to C
Non-performing NP 1 100 100 100 D
(defaulted) NP 2 100 100 100 D
NP 3 100 100 100 D


The comprehensive PD rating scale, which is mapped to default probabilities and external rating agency rating scales,
enables the bank to rate all borrowers on a single scale, whether they are a low-risk corporate or high-risk individual
borrower. The principal benefit thereof is that comparisons can be made between the riskiness of borrowers making up
various portfolios. A brief explanation of the scale follows.
NGR01 to NGR20 reflect a profile of credit risk starting with very-low-risk borrowers with a PD as low as 0,01%, to risky
borrowers with a default probability as high as approximately 8%.
NGR21 to NGR25 represent very-high-risk borrowers with default probabilities of 10% or more. While many banks
would generally not knowingly expose themselves to this degree of risk, these rating grades exist for four reasons:
x Being an emerging market, there are times when local banks would be willing to take on this level of risk, while
pricing appropriately.
x There may be times when the consequences of not lending may be more severe than lending – for example, a
marginal going concern with existing loans but a strong business plan.
x They cater for borrowers that were healthy but have migrated down the rating scale to the point of being near
x From time to time the bank may grant facilities to very risky borrowers on the basis of significant collateral
offered. This particular rating scale measures only the likelihood of the borrower defaulting and does not
recognise that a very high level of default risk may well have been successfully mitigated with collateral.
The final ratings on the scale represent those borrowers that have defaulted. NP1 applies to recent defaults, NP2
represents those accounts in respect of which the bank is proceeding to legal recovery of moneys owing and NP3 is for
long-term legal cases, exceeding a period of 12 months.
Basel II specifically requires that AIRB banks maintain two ratings, one measuring the probability of the borrower
defaulting and the second considering facility characteristics. The NTR table below reflects EL as a percentage of EAD
and contains 10 rating bands – the first three bands representing facilities of low risk, the next three bands being for
facilities of average risk and the final four bands indicating facilities of high or very high risk.

NTR01 0,00 0,05

NTR02 0,05 0,10
NTR03 0,10 0,20
NTR04 0,20 0,40
NTR05 0,40 0,80
NTR06 0,80 1,60
NTR07 1,60 3,20
NTR08 3,20 6,40
NTR09 6,40 12,80
NTR10 12,80 100,00

The NTR scale measures the total or overall credit risk (ie EL) in individual exposures, thereby allowing credit officers to
consider the mitigating effect of collateral, other credit risk mitigation and recovery rates on borrower risk. This reflects
the true or complete measurement of credit risk, incorporating not only PD but, importantly, also LGD.
Credit risk reporting across the bank is, to a large extent, based on the twin rating scales discussed above. Business
units report on the distribution of their credit exposures across the various rating scales and explain any changes in
such distribution, including the migration of exposures between rating grades and underlying reasons therefore.


The development of credit rating models
The 3 measurements of risk that are used in an internal credit rating system are as follows:
x Probability of default (PD)
Probability of default measures the likelihood of a client defaulting on credit obligations within the next twelve
x Exposure at default (EAD)
Exposure at default quantifies the expected exposure on a particular facility at the time of default. EAD risk
measures consider the likelihood that a client would draw down against available facilities in the period leading up to
default and are based on Nedbank Group’s historical default experience in respect of similar clients and facilities.
x Loss given default (LGD)
Loss given default is a measure of the economic loss the banks expects to incur on a particular facility should the
client default. LGD risk measures are based on Nedbank Group’s historical recovery experience in respect of similar
clients and facilities and consider the quality and level of collateral held.
The Pillar 1 models that are used to develop the key measures of PD, EAD and LGD form the cornerstone of Nedbank
Group’s internal rating and economic capital systems.
The group decided at an early stage to develop its own expertise in this regard, rather than rely on the ongoing use of
consultants and external rating agencies. Each business cluster has developed a team of specialist quantitative
analysts who are responsible for creating and maintaining a range of rating models. A team of suitably qualified
individuals within GCRM, namely the CMVU, is responsible for the independent validation of all the models while
Nedbank Group’s Internal Audit Division performs a governance process audit.
Nedbank Group makes use of a range of modelling approaches, as illustrated in the following diagram:


An overview of the rating approaches adopted across the various asset classes is as follows:

Whenever possible, models are calibrated to long-term default and loss rates, thus ensuring that capital estimates are
appropriate. Where suitably robust loss rates are not available, for example in the case of low default portfolios, then
external data sources such as external ratings are included to ensure appropriate calibration.
LGD estimates are adjusted to those applicable during a downturn to meet regulatory requirements in this regard.
Nedbank Group is currently utilising the scaling factor developed by the US Federal Reserve Board of Governors to
convert its cycle-neutral LGD estimates to those applicable to downturn conditions, but it is expected that the group will
develop its own downturn estimates during 2010 and 2011, based on data collected during the economic downturn of
The risk estimates generated from Nedbank Group’s internal models are utilised across the credit process, as indicted
in the following diagram:


Group credit policy not only incorporates the minimum requirements stipulated in the revised South African banking
regulations, but also documents Nedbank Group’s aspiration to best-practice credit risk management. This policy is
implemented across the group with detailed and documented policies and procedures, suitably adapted for use by the
various business units, and forms the cornerstone for sound credit risk management as it provides a firm framework for
credit granting as well as the subsequent monitoring of credit risk exposures.

Credit risk approaches across the group

While Nedbank Group has adopted the AIRB Approach for all exposures across Nedbank Limited, the Standardised
Approach has been adopted across the other subsidiaries.
The use of internal rating models within these subsidiaries is encouraged as it is anticipated that a number of them will
migrate to the AIRB Approach once they have developed the data history required to adopt the approach for the
estimation of regulatory capital.
For the purpose of estimating internal economic capital, conservative AIRB credit benchmarks are applied for the
subsidiaries that are still utilising the Standardised Approach.
The distribution of approaches across Nedbank Group is reflected in the following diagram. These regulatory
approaches all carry formal approval from SARB:


Standardised Approach

Nedbank Limited (87%)

Imperial Bank Limited (9%)

Nedbank Namibia Limited (1%)

Nedbank (Swaziland) Limited (<1%)

Nedbank (Lesotho) Limited (<1%)

MBCA Bank Limited (<1%)

Nedbank (Malawi) Limited (<1%)

Fairbairn Private Bank (IOM) Limited (<1%)

Fairbairn Private Bank Limited (<1%)

Advanced Internal Ratings

Based Approach


Roadmap of Nedbank Group’s credit rating systems
The following diagrams provide an overview of the bank’s credit risk profile by business line and major Basel II asset class as at 30 June 2010.
The distribution of exposures across the various subsidiaries that are utilising the Standardised Approach is reflected in the diagram below:


The distribution of retail exposures that are measured by way of the AIRB Approach is reflected in the following diagram. Basel II AIRB credit exposure is
reported on the basis of EAD:!


The distribution of wholesale exposures that are measured by way of the AIRB Approach is similarly reflected in the following diagram on the basis of EAD:


Loans and advances and Basel II exposure
Total banks’ loans and advances extended to the private sector picked up marginally during the first half of 2010, trailing
the improvement in nominal gross domestic expenditure. Great caution continued to characterise the collective psyche
of both lenders and borrowers, with the recession having left a trail of impaired advances,increased vigilance regarding
credit quality and reduced confidence among borrowers, whose finances needed further consolidation.
Conditions during the remainder of the year will be heavily influenced by developments in the global economy. South
Africa has benefited so far in the recovery from rising commodity prices and improved capital inflows, but international
prospects remain uncertain. Domestic spending will continue to rise although some loss of momentum is probable after
the boost provided by the inventory cycle and the World Cup fades. Interest rates will remain low well into 2011 given
low inflation and below-trend economic growth.
Retail banking should fare better as household credit demand improves, house prices edge higher and bad debts
moderate. Wholesale banking areas will likely remain under pressure as fixed investment activity remains subdued, but
transactional volumes are expected to gradually improve and defaults should remain contained.
Nedbank Group’s net advances grew by 4,9% (annualised), increasing from R450 billion at December 2009 to R461
billion at June 2010. Gross loans and advances increased by 5,3% (annualised) to R472 billion. The fragility of the
global recovery, as highlighted by recent developments in Europe, has subdued wholesale demand, whilst retail clients
continue to deleverage from historically high levels of indebtedness.

3&.))!$.%1)!%1-!%-5%1,*)!(A!(+)#1*))!,$+)/*& !
500 000
450 000 10,5%
==:!<97 54 328
51 640
47 845
(17,9%) 17 535
400 000 19 246
21,7% 2,7%
17 350
Imperial Bank
350 000
Nedbank Wealth
146 045
144 149
300 000 142 016 Nedbank Retail**

&V Nedbank Business Banking

250 000 Nedbank Corporate

(9,1%) 53 308
51 335 Nedbank Capital
53 800
200 000

150 000

138 285 143 240

136 018
100 000

50 000 9,1%
55 699 58 210
44 325
(259)* (3,1%) (255)* 94,1% (374)*

June 2009 December 2009 June 2010

* These relate to eliminations passed through Central Management

** Comparatives restated to exclude Nedbank Wealth

In Nedbank Capital core banking advances, excluding foreign correspondents, overnight loans and trading advances,
grew by 0,6% (annualised) from December 2009. Nedbank Corporate and Nedbank Business Banking grew by 7,1%
and 7,7% respectively. In Nedbank Retail, personal loans performed well increasing by 37,1% (annualised). Retail cards
and vehicle asset finance grew moderately by 7,6% and 6,2% (annualised) respectively, and home loans decreased by
0,8% (annualised) in line with the differentiated, value-based strategies. There was a pleasing reduction of 25% in
properties in possession.


Annualised change in loans and advances by business cluster and by product are given in the tables which follow.

Annualised % change aOC! Jun Dec
&V! (Jun 2010 on Dec 2009) !;<:<! 2009 2009
Nedbank Capital 8,5 7` _'9! 43 897 55 315
Nedbank Corporate 7,1 :=;!<:<! 135 079 137 173
Nedbank Business Banking 7,7 7;!<'9! 52 354 50 115
Nedbank Retail 2,1 :'9!?_?! 136 916 138 411
Nedbank Wealth (18,1) :`!'`?! 17 190 19 089
Imperial Bank 9,2 7;!`=;! 46 772 50 451
Other 95,6 W'`'X! (255) (253)
1GK!LMECP!ECH!EH[ECFGP! 4,9 =_:!'<'! 431 953 450 301

Annualised % change aOC! Jun Dec
&V! (Jun 2010 on Dec 2009) !;<:<! 2009 2009
Home loans 1,4 :7<!;?9! 147 732 149 229
Commercial mortgages 7,8 `9!':7! 73 995 76 364
Properties in possession (25,0) ```! 941 887
Credit cards 7,8 `!_:`! 7 170 7 334
Overdrafts 6,8 ::!=_?! 13 317 11 093
Term loans 15,5 `'!7__! 64 752 68 321
Overnight loans (3,6) :;!:9`! 12 127 12 420
Other loans to clients (0,2) ='!:7=! 39 016 43 203
Leases and instalment sales 6,6 __!;:;! 61 930 64 128
Preference shares and debentures (3,2) :_!'_7! 16 593 16 633
Factoring accounts 52,1 ;!`=;! 333 2 179
Deposits placed under reverse repurchase agreements 9,5 ?!=<=! 2 756 8 026
Trade, other bills and bankers' acceptances (68,6) :?_! 433 282
Gross loans and advances 5,3 =`;!;9;! 441 095 460 099
Impairment of loans and advances 24,5 W:<!9?9X! (9 142) (9 798)
1GK!LMECP!ECH!EH[ECFGP! 4,9 =_:!'<'! 431 953 450 301
Basel II on-balance-sheet exposure at June 2010 is R552 billion. The reconciliation of the Basel II exposure to the gross
loans and advances of R472 billion is shown below.

600 000

77;!'?` W:'!;?;X

500 000 W;!?7:X
W:<!`_`X W;!9`7X =`;!;9;
Home loans (R 150 289m)

Commercial mortgages (R 79 315m)

400 000 Properties in possession (R 777m)

Credit cards (R 7 617m)

Overdafts (R 11 468m)
300 000
Term loans (R 73 566m)

Overnight loans (R 12 197m)

Other loans to clients (R 43 154m)
200 000
Lease and instalment sales (R 66 212m)

Preference shares and debentures (R 16 365m)

Factoring accounts (R 2 742m)

100 000
Deposits placed under reverse repurchase agreements (R8 404m)

Trade, other bills and bankers' acceptances (R186m)

Basel II on-balance Derivatives Government stock Short-term Other Other assets net of Set-off accounts Gross loans and
sheet exposure and other dated securities fair-value within IFRS gross advances
securities adjustments loans and


! ,EIJKELb! ,MQIMQEKGb! (OPJCGPP! &GKEJL! 6GELKD! (ECd! >ECESGVGCK! ;<:<! !;<<9! ;<<9!
&V! (ECdJCS!
%H[ECFGH!#CKGQCEL!&EKJCSBNEPGH!EIIQMEFD!W%#&(X! `=!;?;! :'7!9==! 7'!_7:! :=:!=':! ::!9'<! ! ;7!<7=! ==;!;9;! =';!?:_! =;'!'':!
Corporate 24 037 64 586 6 436 1 95 060 104 902 91 525
Specialised lending - high volatility commercial real estate 7 264 7 264 8 017 7 442
Specialised lending - income-producing real estate 41 039 2 252 43 291 40 154 42 209
Specialised lending - object finance 437 437 906 439
Specialised lending - commodities finance 73 73 60 55
Specialised lending - project finance 4 679 4 679 5 230 4 811
SME - corporate 262 4 923 24 144 29 329 23 937 23 672
Public sector entities 4 423 10 018 4 875 15 320 15 365 15 405
Local governments and municipalities 522 6 373 979 7 874 2 632 5 171
Sovereign 6 412 24 179 30 591 27 022 26 566
Banks 33 057 1 738 34 795 30 562 30 716
Securities firms 11 1 12 697 871
Retail mortgages 9 4 420 109 021 10 914 124 364 123 171 123 611
Retail revolving credit 8 568 66 8 634 6 822 7 028
Retail - other 7 1 1 879 20 417 950 23 254 21 567 23 241
SME - retail 48 1 13 537 3 195 16 781 21 543 20 340
Securitisation exposure 305 229 534 229 229

)KECHEQHJPGH!%IIQMEFD!W)%X! ! :'!_9:! ! ! :<!9;<! 7_!:='! ! ?<!`7=! _?!?7:! `=!_`?!

Corporate 3 579 22 3 601 4 055 4 206
SME - corporate 1 185 12 606 13 791 12 985 13 586
Public sector entities 33 33 20 30
Local government and municipalities 26 5 31 71 2 578
Sovereign 1 033 1 148 2 847 5 028 2 574 970
Banks 3 254 6 881 125 10 260 9 220 8 569
Securities firms 332 332 302 302
Retail mortgages 2 556 2 063 3 253 7 872 6 372 7 248
Retail - other 1 513 828 33 754 36 095 29 644 33 388
SME - retail 180 3 210 3 390 3 307 3 502
Securitisation exposure 321 321 301 299
"QMIGQKJGP!JC!IMPPGPPJMC! ! !;! !::! !`'_! !;?! ! ! !```! !9=:! !??`!
1MCBQGSOLEKGH!GCKJKJGP! :=!?;<! `!'97! !'';! 7!7=9! !===! ! !;=! ;?!7_=! ;9!<:?! ;9!__7!

.C!NELECFG!PDGGK!GYIMPOQG!W(EPGL!##X! ?9!:<;! :7`!<';! 7'!99=! :=`!`:_! ;'!';;! 7_!:='! ;7!<`?! 77;!'?`! 7':!_;_! 7;?!7_:!


&V! (ECdJCS! !

Less assets included in Basel II asset classes (30 892) (11 244) (259) (1 671) (5 787) (1 815) (25 452) W``!:;<X! W`:!;;'X! W_=!`<`X!
Derivatives (13 010) (16) (154) (102) (13 282) (19 601) (13 569)
Government stock and other dated securities (4 883) (4 126) (202) (25 054) (34 265) (33 886) (35 635)
Short term securities (10 581) (1 145) (4 229) (15 955) (15 441) (11 816)
Call Money (995) (218) (329) (1 542) ( 935)
Deposits with monetary institutions (816) (616) (1 432) (2 840)
Remittances in transit 90 9 24 123 108
Other assets net of fair value adjustments on assets (607) (5 213) (268) (1 695) (1075) (1 511) (398) (10 767) (2 295) ( 20)

Set-off of accounts within IFRS total gross loans and advances (2 548) (427) W;!9`7X! W:9!'<?X! W'!`77X!

3QMPP!LMECP!ECH!EH[ECFGP! 58 210 143 240 53 308 146 045 17 535 54 328 (374) =`;!;9;! ==:!<97! =_<!<99!

*Nedbank Corporate and Capital include London branch exposure (Advanced Internal Ratings-based Approach).


Advanced Internal Ratings-based Approach for Nedbank Limited

All credit exposure and asset classes in Nedbank Limited are covered by the Basel II Advanced Internal Ratings-based
Approach. Nedbank Limited’s exposures (by total credit extended) are 87% of the total group. The results shown below
exclude London branch exposure.
1GHNECd!,EIJKEL! 7<!'?<! _!9?<! ?!'`7! :;!`:=! `?!==9! _7!;?_! !:_7! !'<!
Corporate 14 942 590 1 495 3 796 20 823 19 876 146 21
Specialised lending - object finance 437 437 455 3
Specialised lending - commodities finance 73 73 76
Specialised lending - project finance 4 679 4 679 4 823 8
SME - corporate 20 242 262 284 1
Public sector entities 2 815 30 1 318 4 163 4 490
Local governments and municipalities 445 78 523 490
Sovereign 6 277 6 277 6 278 1 9
Banks 20 387 208 4 151 7 225 31 971 23 120 5
Securities firms 2 699 2 699 137
Retail - other 7 7 7
SME - retail 48 48 63 1
Securitisation exposure 305 6 182 6 487 5 187
1GHNECd!,MQIMQEKG! :'7!_77! 7`!'7=! !B! B! :9'!<<9! :`_!'`?! !=<_! !=99!
Corporate 64 298 46 582 110 880 96 776 212 17
Specialised lending - high volatility commercial real estate 7 264 468 7 732 7 872 50 137
Specialised lending - income producing real estate 41 039 1 892 42 931 44 250 110 268
SME - corporate 4 923 845 5 768 5 690 30 77
Public sector entities 10 018 3 433 13 451 12 581 2
Local governments and municipalities 6 373 612 6 985 7 008 1
Banks 1 738 3 514 5 252 2 192 1
Retail mortgages 1 1
Retail - other 1 1 1
SME - retail 1 7 8 8
1GHNECd!(OPJCGPP!(ECdJCS! 7'!_7:! :?!:;:! B!! B! `:!``;! _9!?`?! !==9! !9<<!
Corporate 6 436 2 664 9 100 8 204 55 6
Specialised lending - income producing real estate 2 252 184 2 436 2 478 8 6
SME - corporate 24 144 8 300 32 444 31 631 165 347
Public sector entities 4 17 21 13
Local governments and municipalities 979 11 990 1 028
Retail mortgages 4 420 1 238 5 658 5 515 35 101
Retail - other 1 879 90 1 969 1 964 18 184
SME - retail 13 537 5 617 19 154 19 045 168 256
1GHNECd!&GKEJL! :=:!=':! =:!<;?! B!! B! :?;!=79! :`'!=?;! ;!;9_! 7!=7;!
Corporate 1 218 219 220 5
Banks 85 85 85
Retail mortgages 109 021 17 626 126 647 130 172 813 3 060
Retail revolving credit 8 568 19 792 28 360 17 186 553 776
Retail - other 20 417 2 137 22 554 20 834 828 1 258
SME - retail 3 195 1 170 4 365 4 756 97 358
Securitisation exposure 229 229 229
1GHNECd!6GELKD! ::!9'<! '!<<<! B! B! :=!9'<! :_!7<`! !'9! !`9!
Retail mortgages 10 914 2 686 13 600 14 860 28 68
Retail revolving credit 66 199 265 517 3 1
Retail - other 950 115 1 065 1 130 8 10
,GCKQEL!>ECESGVGCK! ;7!<7=! B! B! B! ;7!<7=! ;7!<7=! !:! !
Public sector entities 875 875 875
Sovereign 24 179 24 179 24 179 1
#CKGQFMVIECU! `9!7<_! _!_::! - !_='! ?_!`_<! ?<!_;:! !_7! B!
/MKEL! =9`!_<`! :''!<9=! ?!'`7! :'!'7`! _7;!=''! _<`!;<_! '!=;:! _!9_<!
Downturn expected loss (AIRB approach) 10 381
IFRS impairment on loans and advances 8 675
*YFGPP!M\!HMfCKOQC!GYIGFKGH!LMPP!M[GQ!GLJSJNLG!IQM[JPJMCP ! !! !! !! !! !! !!!!!!!!!!!!!!!!!!!:!`<_!

* 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.


"-!NECHP! *YIMPOQG!W*%-X! *%-!fGJSDKGH! *%-!fGJSDKGH! H*$! *%-!fGJSDKGH!
At 30 June 2010 (Rm) (%) (%) (%) (%)
NGR 01* - - - - -
NGR 02* - - - - -
NGR 03 46 000 0,020 13,1 0,00 4
NGR 04 35 247 0,030 29,3 0,01 8
NGR 05 14 904 0,040 22,1 0,01 7
NGR 06 96 179 0,060 19,2 0,01 3
NGR 07 14 139 0,080 36,0 0,03 20
NGR 08 16 658 0,110 31,1 0,04 18
NGR 09 12 626 0,160 33,6 0,05 30
NGR 10 14 106 0,230 36,3 0,08 29
NGR 11 16 505 0,320 27,4 0,09 27
NGR 12 28 834 0,450 24,2 0,11 32
NGR 13 32 772 0,640 24,2 0,15 32
NGR 14 47 177 0,910 22,3 0,20 32
NGR 15 60 286 1,280 20,2 0,26 32
NGR 16 41 443 1,810 21,3 0,39 41
NGR 17 15 151 2,560 29,0 0,74 54
NGR 18 15 312 3,620 25,7 0,93 52
NGR 19 8 059 5,120 39,1 2,00 72
NGR 20 32 577 7,283 28,6 2,08 72
NGR 21 5 850 10,240 32,9 3,37 94
NGR 22 7 149 14,480 28,3 4,10 92
NGR 23 3 321 20,480 31,1 6,36 106
NGR 24 5 476 28,960 25,0 7,25 103
NGR 25 5 486 40,960 29,7 12,15 122
DEFAULT 23 516 100 23,6 29,60 41
Sub-total 598 773 6,00 23,9 1,73 30
Slotting Exposures 3 017
Securitisation 5 416
Total EAD 607 206
Intercompany balances 80 621
EAD net of intercompany 526 585

* There is no exposure to NGR01 and NGR02 due to the application of the South African sovereign floor although these NGR bands are used
internally in reporting of economic capital parameters.
** Supervisory slotting and securitisation exposures are not reported by NGR band in the BA200 return.
*** Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.


Impairments and defaulted loans and advances
Total impairments increased by 25% (annualised) to R10 989 million, although the rate of increase has slowed
dramatically compared to last year. 70% of the impairment growth came from Nedbank Retail and Imperial Bank, with
Nedbank Capital and Nedbank Corporate contributing 16% and 10% to the impairment growth respectively.
In the retail sector impairments for unsecured lending reduced as a result of improving arrears, quality of advances and
recoveries. Improved asset quality and higher levels of restructured loans and repayments have started to reduce
impairments in the secured lending categories.
Defaulted advances increased by 9,9% (annualised) to R28 367 million, from R27 045 million reported in December
Improving conditions have resulted in the credit loss ratio decreasing to 1,46% for June 2010, compared with 1,60%
(restated) for the same period in 2009. We remain cautious on the wholesale sector, although wholesale credit loss
ratios, with the exception of Nedbank Capital and commercial property finance within Nedbank Corporate, improved and
remain below expectations for this stage of the cycle.
The tables on the following pages summarise Nedbank Group's defaulted portfolio and the level of impairments. The
policies, principles and definitions relating to the defaulted portfolio and impairments are well articulated in the group's
credit policy.
The key definitions relating to the following section are included below:
x Past due
A loan or advance is considered past due when it exceeds its limit (fluctuating types of advances) or is in
arrears (linear types of advances).
x Defaulted loans and advances
Any advance or group of loans and advances that has triggered the Basel II definition of default criteria and
which is in line with the revised SA banking regulations. For retail portfolios this is product-centric and therefore
a default would be specific to a client or borrower account (a specific advance). For all other portfolios except
project-based financing, it is client or borrower-centric, meaning that should any transaction within a borrowing
group default, then all transactions within the borrowing 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 credit exposure due to a significant perceived decline in the credit quality, a material obligation is past due for
more than 90 days or an obligor has exceeded an advised limit for more than 90 days.
x Impaired loans and advances
Impaired loans and advances are defined as loans and advances in respect of which the bank has raised a
specific impairment [International Accounting Standard (IAS) 39 definition].
x Specific impairment
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments
carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash flows (excluding credit losses that have
not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate
computed at initial recognition).
x Portfolio impairment
The standard portfolio represents all the loans and advances that have not been impaired. These loans and
advances have not yet individually evidenced a loss event, but loans and advances exist within the standard
portfolio that may have impairment without the bank yet being aware of it.
A period of time will elapse between the occurrence of an impairment event and objective evidence of the
impairment becoming evident. This period is generally known as the emergence period. For each standard
portfolio an emergence period is estimated as well as the probability of the loss trigger and the loss given
events occurring. These estimates are applied to the total exposures of the standard portfolio to calculate the
portfolio impairment.

Nedbank Nedbank Nedbank Nedbank Nedbank Imperial aOC! Jun Dec
Capital Corporate Business Retail Wealth Bank ;<:<! 2009 2009
]! Banking
Impairments to gross loans and
0,98 0,85 2,38 4,23 0,90 2,92 ;^''! 2,07 2,13
Specific impairments 0,84 0,45 1,69 3,75 0,74 2,51 !:^9:! 1,61 1,70

Portfolio impairments 0,14 0,40 0,69 0,48 0,16 0,41 <^=;! 0,46 0,43

Impairment charge as a % of NII 29,33 11,04 6,81 65,65 11,05 56,27 =<^:=! 42,00 40,68

Credit loss ratio 0,80 0,23 0,32 3,00 0,24 2,48 :^=_! 1,60 1,52

Credit loss ratio – specific 0,55 0,14 0,46 2,98 0,22 2,62 :^=<! 1,72 1,59

Credit loss ratio – portfolio 0,25 0,09 (0,14) 0,02 0,02 (0,14) <^<_! (0,12) (0,07)

Defaulted loans and advances to gross

1,78 2,44 5,88 12,33 2,20 4,23 _^<:! 5,77 5,88
loans and advances

Properties in possession to gross loans

- - 0,02 0,50 0,16 - <^:_! 0,21 0,19
and advances

Nedbank Group has updated its methodology for calculating the credit loss ratio in Q2 2010, appropriately removing the
trading assets from loans and advances. Impairments are not raised against trading assets as these are designated at
fair value through profit or loss, and therefore any losses are realised through a decrease in non-interest revenue.
Additionally, Nedbank Group’s credit loss ratio is now based on a year-to-date daily average of loans and advances as
opposed to a simple average. These changes had a minimal impact on Nedbank Group's credit loss ratio (ie 0,03%-
0,06% over the past two years). The credit loss ratio as at June 2009 increased from 1,57% to 1,60% after incorporating
these changes, while June 2010 increased from 1,40% to 1,46%.
As discussed previously, 2009 saw Nedbank Group enhance the consolidation, focus and reporting of key financial risk
appetite metrics. Business cluster specific credit loss ratio targets were formalised for the first time, after taking into
account historic, through-the-cycle, sustainable performance as well as desired risk appetite. In addition to this, the
group's credit loss ratio target was reviewed separately but in conjunction with the consolidated business cluster targets.
Following this, and integrated with the group's 2010 – 2012 business plans, the targeted credit loss ratio was increased
from 0,55% – 0,85% to 0,60% – 1,00%. The decision to increase the target range was largely due to the projected
change in mix between secured and unsecured lending products in Retail. This will also help to lessen the volatility of
Retail's financial performance, which is generally associated with the current concentration of secured lending in its
portfolio, particularly residential mortgages. As unsecured Retail products tend to have higher credit loss ratios, it
resulted in an increase in Nedbank Group's target credit loss ratio range.




1,80 1,72

1,60 1,52 1,52 1,51


1,02 A&@ 344&567382 9%5734:5&2;<17==5$<;7<$5%&<> !?//

012344&5 67382 9%5734:5&2;<17==5$<;7<$5%&<> /?-*


@%1"0AA"B,"-/"# 0*11CDEF:/4)*+24Ͳ/4"Ͳ-G-0" )%&2"C78<Ͳ 78HF

A&@17@&567382 9%5734:5&2;<17==5$<;7<$5%&<> /?+/
01217@&567382 9%5734:5&2;<17==5$<;7<$5%&<> /?**

0,20 !"#$%&'()*+, -)"#./0*11)%/.*/%)2"/)%&2"3%1-4%&2"#

5)*67899:Ͳ 78;9:/*78<7:Ͳ =877:.&>77?

Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010 Jun 2010

Group (credit loss ratio) Lower bound (group credit loss ratio target)
Upper bound (group credit loss ratio target) Basel II expected loss (EL)% through-the-cycle target range (0,6% - 0,7%)

The business clusters credit loss ratios over time are also shown below.

3,50 3,40
3,29 3,32

3,00 3,00

2,69 2,70

2,50 2,36 2,41 2,39 2,48



1,77 1,73 1,71


1,01 A&@ 344&567382 9%5734 :5&2;<17==5$<;7<$5%&<> !?//
012344&5 67382 9%5734:5&2;<17==5$<;7<$5%&<> /?-*
0,91 0,79 0,80
01217@&567382 9%5734:5&2;<17==5$<;7 0,62 A&@17@&567382 9%5734:5&2;<17==5$<;7<$5%&<>/?+/
0,59 0,62
<$5%&<> /?** 0,59 0,52
0,50 0,47
0,43 0,44 0,47 0,43
0,34 0,42 0,31 0,36 0,32 0,32
0,24 0,24
0,26 0,28 0,23
0,10 0,25 0,23 0,24
0,05 0,11
Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010 Jun 2010

Nedbank Business Banking Nedbank Corporate Nedbank Capital

Nedbank Retail Nedbank Wealth Imperial Bank

Lower bound (group credit loss ratio target) Upper bound (group credit loss ratio target)


A summary of the impairments movements over the past year is shown below.
Nedbank Nedbank Nedbank Nedbank Nedbank Imperial Central aOC Jun Dec
Capital Corporate Business Retail Wealth Bank Management ;<:<! 2009 2009
&V! !! Banking

Opening balance 384 1 112 1 220 5 739 156 1 189 (2) 9!`9?! 7 859 7 859

Specific impairment 310 592 814 5 065 129 920 `!?'<! 5 542 5 542

Specific impairment, excluding discounts 306 399 570 4 450 129 836 _!_9<! 4 566 4 566
Specific impairment for discounted cashflow losses 4 193 244 615 84 :!:=<! 976 976

Portfolio impairment 74 520 406 674 27 269 (2) :!9_?! 2 317 2 317

Income statement impairment charge (net of recoveries) 166 160 81 2 173 21 642 1 '!;==! 3 435 6 634

Specific impairment 127 61 138 2 090 (43) 657 '!<'<! 3 558 6 798
Net increase/decrease in impairment for discounted cashflow losses 30 37 (21) 62 62 33 !;<'! 134 164
Portfolio impairment 9 62 (36) 21 2 (48) 1 !::! (257) (328)

Recoveries - 12 10 193 8 26 - !;=9! 198 457

Amounts written off/other transfers 21 (54) (42) (1 928) (28) (271) - W;!'<;X! (2 350) (5 152)

Specific impairments 20 (52) (41) (1 929) (27) (271) 1 W;!;99X! (2 320) (5 131)
Portfolio impairment 1 (2) (1) 1 (1) (1) W'X! (30) (21)

/MKEL!JVIEJQVGCKP! 571 1 230 1 269 6 177 157 1586 (1) :<!9?9! 9 142 9 798

Specific impairment 487 650 900 5 481 129 1365 1 9!<:'! 7 112 7 830

Specific impairment, excluding discounts 453 420 677 4 804 67 1 248 1 `!_`<! 6 002 6 690
Specific impairment for discounted cashflow losses 34 230 223 677 62 117 :!'='! 1 110 1 140

Portfolio impairment 84 580 369 696 28 221 (2) :!9`_! 2 030 1 968

/MKEL!LMECP!ECH!EH[ECFGP! !! 58 210 143 240 53 308 146 045 17 535 54 328 (374) =`;!;9;! 441 095 460 099

/MKEL!E[GQESG!LMECP!ECH!EH[ECFGP! !! 58 180 140 172 51 655 145 881 17 648 52 276 (243) =_7!7_?! 449 558 451 853


Defaulted loans and advances increased by 9,9% to R28 367 million, while specific impairments increased to R9 013
million in the first half of 2010.

30 000 34, 0
28 367
27 045

25 437
32, 0
25 000 ':^?

30, 0
20 000 ;9^<

28, 0

15 000
26, 0

10 000 9 013
7 830 24, 0
7 112

5 000
22, 0

20, 0
June 2009 December 2009 June 2010

Defaulted loans and advances Specific impairments Coverage ratio (%)


The coverage ratio is the amount of specific impairments that have 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 and advances less the specific impairments, as specific impairments are raised for any shortfall that
would arise after all recoveries are taken into account.
The expected recoveries of defaulted loans and advances include recoveries as a result of liquidation of security or
collateral, as well as recoveries as a result of a client curing or partial client repayments.
The absolute value of expected recoveries of defaulted accounts (which includes security values) will increase as the
number of defaults increase. The expected recovery amount will in most instances be less than the total defaulted
exposure, as it is seldom the case that 100% of the defaulted loan would be written off.
A decrease in the coverage ratio (or increase in the expected recoveries ratio) may arise as a result of the following:
x Expected recoveries improving due to higher recoveries being realised in the loss given default (LGD)
x A change in the defaulted product mix, with a greater percentage of products that have a higher security value
and therefore a lower specific impairment, such as secured products (home loans and commercial real estate).
x An increase in the collateral value, which is an input into the LGD calculation and would result in a decrease in
the LGD and decrease in specific impairments.
x A change in the mix of new versus older defaults as, in most products, the recoveries expected from defaulted
clients decrease over time.
x A change in the writeoff policy, such as extending the period prior to writing off a deal that will result in a longer
period in which recoveries can be realised.


The group’s coverage ratio increased to 31,8% at 30 June 2010 (December 2009: 29,0%) predominantly due to the
decrease in residential mortgage defaulted advances. Total defaulted advances have increased by 9,9%, the majority of
the increase was due to a R606 million (49,5%) increase in lease and instalment sale defaulted advances. However
residential mortgage defaulted advances have decreased by 1,9% in the first half of 2010. In addition to this, improved
client affordability combined with stabilising house prices has contributed towards the ongoing improvement of early
arrears in home loan advances. This has resulted in an increase in the coverage ratio for defaulted residential mortgage

30 000
35,3% 2 930
;7!='` 2 494
25 000 (25,0%) 777
3 056 887 1 206
(11,4%) 1 222 2,8%
941 1,5% 504 49,5%
(36,1%) 3 075
1 213 2 469
20 000 616 11,5%
2 334
>100% 3 513 4 063
1 900
15 000 7,5% (1,9%)


10 000

15 377 15 956 15 805

5 000

June 2009 December 2009 June 2010

Residential mortgages Commercial mortgages Lease and instalment debtors Credit card balances

Personal loans Properties in possession Other loans and advances


&V! Nedbank Nedbank Nedbank Nedbank Nedbank Imperial aOC! Jun Dec
Capital Corporate Business Retail Wealth Bank ;<:< 2009 2009
%H[ECFGH!#CKGQCEL!&EKJCSPBNEPGH!%IIQMEFD! 440 3 146 3 122 17 272 306 - ;=!;?_ 21 654 23 746
Corporate 352 106 117 !7`7 580 468
Specialised lending – high-volatility commercial real estate 1 924 :!9;= 444 1 647
Specialised lending – income-producing real estate 1 024 51 :!<`7 962
SME – corporate 91 1 312 :!=<' 657 940
Bank 46 !=_
Sovereign 42 !=; 736 44
Retail mortgages 503 14 094 298 :=!?97 14 622 15 137
Retail revolving credit 798 !`9? 601 483
Retail – other 1 478 1 931 8 ;!=:? 2 665 2 638
SME – retail 661 449 :!::< 1 349 1 427
)KECHEQHJPGH!%IIQMEFD! - - - - - 2 300 ;!'<< 1 516 1 623
Corporate 63 !_' 42
SME – corporate 813 !?:' 549 595
Retail mortgages 82 !?; 67 65
Retail other 1 165 :!:_7 759 789
SME – retail 177 !:`` 141 132
.KDGQ!QGSOLEKGH!GCKJKJGP! - 299 - - - - ;99 161 152
"QMIGQKJGP!JC!IMPPGPPJMC! - 2 11 736 28 - ``` 941 887
1MCBQGSOLEKGH!GCKJKJGP! 598 53 - 2 52 - `<7 1 165 637
/MKEL!HG\EOLKGH!LMECP!ECH!EH[ECFGP! 1 038 3 500 3 133 18 010 386 2 300 ;?!'_` 25 437 27 045


The coverage ratio and expected recovery ratio by business cluster and by product is shown in detail in the table below.
!! ]!M\!KMKEL!
aOCG!;<:<! &V! ]! &V! &V! &V! &V! &V! ]! ]!
1GHNECd!,EIJKEL!! :!<'?! '^`! !77:! !=?`! !=?`! !=7'! !'=! =_^9! 7'^:!
Other loans and advances 1 038 3,7 551 487 487 453 34 46,9 53,1
1GHNECd!,MQIMQEKG!! '!7<<! :;^'! ;!?7<! !_7<! !_7<! !=;<! !;'<! :?^_! ?:^=!
Residential mortgages 41 0,1 27 14 14 13 1 34,1 65,9
Commercial mortgages 2 955 10,4 2 478 477 477 285 192 16,1 83,9
Lease and instalment debtors 40 0,1 28 12 12 7 5 30,0 70,0
Personal loans 22 0,1 11 11 11 10 1 50,0 50,0
Properties in possession 2 0,0 2 0,0 100,0
Other loans and advances 440 1,6 304 136 136 105 31 30,9 69,1
1GHNECd!(OPJCGPP!(ECdJCS!! '!:''! ::^:! ;!;''! !9<<! !9<<! !_``! !;;'! ;?^`! `:^'!
Residential mortgages 1 302 4,6 1 059 243 243 155 88 18,7 81,3
Commercial mortgages 416 1,5 355 61 61 (4) 65 14,7 85,3
Lease and instalment debtors 572 2,0 324 248 248 215 33 43,4 56,6
Credit card balances 4 0,0 1 3 3 3 75,0 25,0
Properties in possession 11 0,0 11 0,0 100,0
Other loans and advances 828 3,0 483 345 345 308 37 41,7 58,3
1GHNECd!&GKEJL!! :?!<:<! _=^<! :;!7;9! 7!=?:! 7!=?:! =!?<=! !_``! '<^=! _9^_!
Residential mortgages 14 034 49,8 10 893 3 141 3 141 2 834 307 22,4 77,6
Commercial mortgages 60 0,2 30 30 30 27 3 50,0 50,0
Lease and instalment debtors 900 3,3 337 563 563 544 19 62,6 37,4
Credit card balances 507 1,8 13 494 494 492 2 97,4 2,6
Personal loans 1 161 4,1 531 630 630 288 342 54,3 45,7
Properties in possession 736 2,6 612 124 124 124 16,8 83,2
Other loans and advances 612 2,2 113 499 499 495 4 81,5 18,5
1GHNECd!6GELKD! !'?_! :^=! !;7`! !:;9! !:;9! !_`! !_;! ''^=! __^_!
Residential mortgages 346 1,2 228 118 118 56 62 34,1 65,9
Properties in possession 28 0,1 28 0,0 100,0
Other loans and advances 12 0,1 1 11 11 11 91,7 8,3
#VIGQJEL!(ECd!! ;!'<<! ?^;! !9'7! :!'_7! :!'_7! :!;=?! !::`! 79^'! =<^`!
Residential mortgages 82 0,3 59 23 23 6 17 28,0 72,0
Commercial mortgages 632 2,2 482 150 150 137 13 23,7 76,3
Lease and instalment debtors 1 563 5,6 384 1 179 1 179 1 092 87 75,4 24,6
Personal loans 23 0,1 10 13 13 13 56,5 43,5
Other loans and advances
,GCKQEL!>ECESGVGCK! ! !! W:X! !:! !:! !:! ! !! :<<^<!
Other loans and advances (1) 1 1 1 100,0


!aOCG!;<:<! &V! ]! &V! &V! &V! &V! &V! ]! ]!
3QMOI! ;?!'_`! :<<^<! :9!'7=! 9!<:'! 9!<:'! `!_`<! :!'='! ':^?! _?^;!
Residential mortgages 15 805 55,7 12 266 3 542 3 542 3 064 475 22,4 77,6
Commercial mortgages 4 063 14,3 3 345 718 718 445 273 17,7 82,3
Lease and instalment debtors 3 075 10,9 1 073 2 002 2 002 1 858 144 65,1 34,9
Credit card balances 511 1,8 14 497 497 495 2 97,3 2,7
Personal loans 1 206 4,3 552 654 654 311 343 54,2 45,8
Properties in possession 777 2,7 653 124 124 124 16,0 84,0
Other loans and advances 2 930 10,3 1 451 1 476 1 476 1 373 106 50,5 49,5

!aOCG!;<<9! &V! ]! &V! &V! &V! &V! &V! ]! ]!
3QMOI! ;7!='`! :<<^<! :?!';7! `!::;! `!::;! _!<<;! :!::<! ;?^<! `;^<!
Residential mortgages 15 377 60,5 12 877 2 500 2 500 2 066 434 16,3 83,7
Commercial mortgages 1 900 7,5 1 571 329 329 193 136 17,3 82,7
Lease and instalment debtors 2 334 9,2 927 1 407 1 407 1 248 159 60,3 39,7
Credit card balances 616 2,4 55 561 561 550 11 91,1 8,9
Personal loans 1 213 4,8 564 649 649 432 217 53,5 46,5
Properties in possession 941 3,7 804 137 137 137 14,6 85,4
Other loans and advances 3 056 12,0 1 527 1 529 1 529 1 376 153 50,0 50,0

!-GFGVNGQ!;<<9! &V! ]! &V! &V! &V! &V! &V! ]! ]!
3QMOI! ;`!<=7! :<<^<! :9^;:7! `!?'<! `!?'<! _!_9<! :!:=<! ;9^<! `:^<!
Residential mortgages 15 956 59,0 12,951 3 005 3 005 2 627 378 18,8 81,2
Commercial mortgages 3 513 13,0 2,964 549 549 334 215 15,6 84,4
Lease and instalment debtors 2 469 9,1 915 1 554 1 554 1 423 131 62,9 37,1
Credit card balances 504 1,9 1 503 503 499 4 99,8 0,2
Personal loans 1 222 4,5 543 679 679 383 296 55,6 44,4
Properties in possession 887 3,3 719 168 168 168 18,9 81,1

Other loans and advances 2 494 9,2 1,122 1 372 1 372 1 256 116 55,0 45,0
&V! (ECdJCS!
Balance at the beginning of the period 2 9 871 5 ??` 791 791
Disposal/writedowns/revaluations (9) (332) (2) !W'='X (230) (580)
Properties in possession acquired during
11 197 25 ;'' 380 676
the period

Balance at the end of the period - 2 11 736 28 - - ``` 941 887

Unsold 2 9 466 28 7<7 692 565
Sold awaiting transfer 2 270 ;`; 249 322


Distribution and quality of Nedbank Group’s credit risk profile

The graphs below are derived from our AIRB credit system and provide a means of comparative analysis across
Nedbank Group’s portfolios. Long-run average or through-the-cycle LGDs are used for the derivation of EL for the
Nedbank Group in line with internal economic capital use instead of downturn LGDs used for Basel II regulatory
Thereafter, Nedbank Limited is presented on an asset class basis for regulatory purposes using downturn LGD
(dLGD) and thus downturn EL (dEL). The graphs provided are based on both the performing and non-performing
portfolios. Both the average performing PD, LGD and EL percentages as well as the total PD, LGD and EL
percentages (which includes performing and non-performing) are shown.
The trends in the graphs can mainly be attributed to three factors, namely the change in the economic cycle,
methodological changes and the continued focus on data quality enhancements.
There are encouraging signs in the economy that indicate the cycle may have bottomed out and we are emerging
from the trough. The first quarter of 2010 represented the first quarter of y-o-y credit growth since the beginning of
2008. The strain in the economy during 2009 significantly affected retail consumers. Retail mortgages continue to be
plagued by bad debts, as seen in the non-performing loans that have increased, albeit at a slower rate than the
previous year.
Wholesale banking, which was resilient throughout the economic downturn, also shows some signs of credit stress as
reflected in the increase in defaults across Nedbank Capital, Business Banking and Property Finance.
Nedbank Group’s rating models are based on through-the-cycle PDs, which means that they are built on long-term
historical default data. The factors that are included in the models also assess clients' recent behaviour and metrics in
order to update the PD accordingly with their risk profile. The models are not cycle-neutral and have some sensitivity
to changes in the economy and may result in clients being up or downgraded.
Despite the downgrading of some clients as a result of the current economic conditions, which included some
exposure to banks in the PIIGS countries, the average performing PD and expected loss parameters in a number of
portfolios have shown a slight improvement compared with December 2009. The defaulted clients, who then transfer
into the non-performing portfolio, as well as higher quality clients coming onto the book due to stricter lending criteria
and more selective asset growth has resulted in the overall improvement in the performing portfolio.
Methodological changes are also responsible for some of the movements since 2008. In January 2009 the review and
updating of the Africa PD and LGD parameters resulted in the improved NGR distributions for the Africa portfolio and
the lower LGD parameters. The new PD and LGD models implemented in March 2009 in the Retail Card portfolio
resulted in the improved NGR distribution and the increased LGD. This is also evident in the Retail revolving credit
asset class distributions and parameters.
In December 2009 new PD models were implemented in Home Loans, which resulted in increased granularity across
the NGR distribution. Due to the relative size of the Home Loans portfolio the effect of this change can be seen at both
a Nedbank Limited and group level. In 2010 the enhancement of a variable within the Home Loans behavioural
scorecard model resulted in the improved NGR distribution and the decreased PD for this business unit and the Retail
mortgages asset class. Additionally, the reclassification of current account exposure from the Retail - other asset class
to Retail revolving credit resulted in an improved LGD and the lower EL.
During our Basel II implementation we applied extra-conservatism in deriving some credit risk parameter estimates.
With ongoing refinement and data quality enhancements overtime we increasingly have been in a position to remove
most of this extra-conservatism, reducing risk-weighted assets and so to a significant extent offsetting the impact of
the current deteriorating economic environment. Nedbank Group continues to dedicate efforts to the continuous
improvement of data quality and the credit risk parameters that are key inputs into the AIRB credit rating system.
Please refer to the graphs that follow for brief explanations of some of the drivers behind the migrations between the
NGR bands for the individual business units and asset classes.


































2008 2009 2010 H1


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3% 4% 4%
3% 2% 2%
4% 4% 3%

12% 13% 12%


70% NGR24-25
20% 22%

20% NGR12-14
8% NGR03-05
10% 9%
7% 10%

10% 18% 18% 17%

1% 1% 1%
2008 2009 2010H1

* For reporting group results, AIRB benchmarks based on expert judgement are applied to Imperial Bank and the small group subsidiaries under the Standardised
Approach. Nedbank Limited operates fully under the Advanced Internal Ratings-based Approach, and this accounts for 87% of total group credit exposure.

Over the period 2008 to 2009, a significant decrease in exposures in the NGR02 rating class drove a decrease in
EAD% for this bucket. New PD models implemented in March 2009 in the Retail Card portfolio resulted in improved
NGR parameters which is evident by the increase in EAD% in the NGR12 to NGR15 buckets and the decrease in the
NGR17 and NGR19 buckets. The new PD models implemented in December 2009 in the Home Loans portfolio
resulted in improved granularity in the NGR distribution which contributed the shift from NGR17 to the other NGR
































2008 2009 2010 H1


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100% 1% 1%
1% 1%
3% 4%
7% 4%
7% 10%

15% 18%
70% NGR24-25

60% NGR18-20

50% 29% 28% NGR12-14


33% 35% 35%


2008 2009 2010H1

An improved rating in a large exposure client during 2009 was the main cause of the increase of EAD% in the NGR08
bucket and the decrease in the NGR09 bucket from 2008 to 2009. The decrease in EAD% in the NGR10 from 2008 to
2009 was driven by rating migrations to lower NGR buckets over this period.





































2008 2009 2010 H1


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100% 1%
1% 4% 4%
1% 1%
8% 7%


28% 27% NP
70% NGR24-25



40% NGR09-11
39% 46% 47%


11% 6%
10% 8%

4% 4%
2% 2% 1%
2008 2009 2010H1

Over the 2008 to 2009 period, a large exposure was downgraded from NGR10 to NGR12, resulting in the shifts in
EAD% in these NGR buckets. The increase in EAD% in the NGR12 bucket from 2009 to 2010 H1 was due to a new
large exposure to a client in this rating class.
The movement in EAD% in the NGR13 and NGR14 buckets over the period 2009 to 2010 H1 was due to the
downgrade of a client. Increasing defaults over the period 2008 to 2009 were due to stress in the commercial real
estate sector.





































2008 2009 2010 H1


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100% 2% 2% 2%


45% 46%


76% NGR21-23


40% 28%
28% NGR09-11


19% 18%

7% 6% 6%
2008 2009 2010H1

As previously mentioned, in 2009 the Africa PD parameters were reviewed and resulted in the improved NGR
distributions for the portfolio.