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NEDBANK GROUP LIMITED - Update on Nedbank Groups Performance for the three months to 31 March 2018 and Pillar 3 Basel III Capital Adequacy

Release Date: 10/05/2018 08:00
Code(s): NED NBKP     PDF:  
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Update on Nedbank Group’s Performance for the three months to 31 March 2018 and Pillar 3 Basel III Capital Adequacy

NEDBANK GROUP LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06
JSE share code: NED
NSX share code: NBK
ISIN: ZAE000004875
('Nedbank Group' or 'the group')

NEDBANK LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1951/000009/06
JSE share code: NBKP
ISIN: ZAE000043667
("Nedbank Limited" or "the bank")


UPDATE ON NEDBANK GROUP’S PERFORMANCE FOR THE THREE MONTHS TO 31 MARCH 2018 AND
PILLAR 3 BASEL III CAPITAL ADEQUACY, LEVERAGE AND LIQUIDITY RATIOS AT 31 MARCH 2018


UPDATE ON THE GROUP’S PERFORMANCE FOR THE THREE MONTHS TO 31 MARCH 2018
Nedbank Group produced a strong performance for the first three months of the year, underpinned by the return to profitability of Ecobank
Transnational Incorporated (ETI) in their fourth-quarter of 2017 (equity-accounted one quarter in arrear in Nedbank Group’s first quarter of
2018). Managed Operations performed in line with our expectations. While business and consumer confidence levels have improved, the
beneficial impact thereof in the group’s performance to date has largely been limited to improved trading and market-related activities. Credit
demand and transactional activity has remained subdued, but an improvement is expected from the second half of 2018.


Net interest income grew at low- to mid-single-digit levels. The net interest margin (NIM) for the period widened ahead of the full-year 2017
level of 3,62% led by advances and funding mix benefits, as well as improved asset pricing.


The group’s credit loss ratio (CLR) now reported under IFRS 9, increased in line with expectations and was slightly below the lower end of our 60
to 100 bps through-the-cycle target range.


Non-interest revenue grew just above mid-single-digit levels. Commission and fee growth reflects subdued levels of client transactional activity
as well as accounting impacts from IFRS 15, offset by continued cross-sell and gains in clients across our retail and wholesale businesses. In line
with the improved business sentiment, trading and private equity income grew strongly, while insurance income increased off a low base in the
first quarter of 2017.


Disciplined expense management resulted in expenses growing in line with our expectations.


Associate income from the group’s share of ETI’s attributable income is equity-accounted one quarter in arrear, based on ETI’s publicly disclosed
results. In Q1 2018 the group’s share of ETI’s attributable profit of US $16,5m for their fourth quarter in 2017 (announced on 21 March 2018)
was R42m (Q1 2017: R1 203m loss) and in Q2 2018 the group’s share of ETI’s attributable profit of US $77m for their first quarter in 2018
(announced on 23 April 2018) is estimated at R198m (subject to exchange rate movements) (Q2 2017: R142m). As a result, the group’s associate
income relating to ETI for the first six months of 2018 is estimated at R240m (H1 2017: R1 061m loss).


Our earnings guidance for 2018 remains the same as announced on 2 March 2018, where we noted: ‘Reflecting on the impact on the group of
the greater levels of business and consumer confidence evident in the early part of 2018, an improving economic outlook, ongoing delivery on
our strategy and ETI’s returning to sustained levels of profitability, our guidance for growth in diluted headline earnings per share for 2018 is to
be in line with our medium-to-long-term target of greater than or equal to GDP plus CPI plus 5%.’


Shareholders are advised that the guidance is based on organic earnings and our latest macroeconomic outlook, and have not been reviewed or
reported on by the group’s auditors.


PILLAR 3 BASEL III CAPITAL ADEQUACY, LEVERAGE AND LIQUIDITY RATIOS AT 31 MARCH 2018
This quarterly Pillar 3 disclosure covers the operations of Nedbank Group Limited (group) as well as Nedbank Limited (bank) and complies with
the Basel Committee on Banking Supervision’s (BCBS) revised Pillar 3 disclosure requirements and the South African Reserve Bank’s (SARB)
Directive 1/2018.

                                                                                                            Nedbank Group
                                                                                          Mar 2018   Dec 2017   Sep 2017   Jun 2017   Mar 2017

      Available capital
1     Common equity tier 1 (CET1)                                                  (Rm)     59 438    60 313     60 772      56 274     56 592
1a    Fully loaded ECL accounting model                                            (Rm)     59 438
2     Tier 1                                                                       (Rm)     63 623    64 737     65 200      60 689     60 390
2a    Fully loaded ECL accounting model Tier 1                                     (Rm)     63 623
3     Total capital                                                                (Rm)     77 046    75 920     76 384      73 994     73 153
3a    Fully loaded ECL accounting model total capital                              (Rm)     77 046
      Risk-weighted assets
4     Total risk-weighted assets (RWA)                                             (Rm)    542 314   528 206    522 810     516 051    508 793
      Risk-based capital ratios as a percentage of RWA
5     Common equity tier 1 ratio                                                    (%)       11,0       11,4       11,6       10,9       11,1
5a    Fully loaded ECL accounting model common equity tier 1                        (%)       11,0
6     Tier 1 ratio                                                                  (%)       11,7       12,3       12,5       11,8       11,9
6a    Fully loaded ECL accounting model tier 1 ratio                                (%)       11,7
7     Total capital ratio                                                           (%)       14,2       14,4       14,6       14,3       14,4
7a    Fully loaded ECL accounting model total capital ratio                         (%)       14,2
      Additional CET1 buffer requirements as a percentage of RWA
8     Capital conservation buffer requirement                                       (%)      1,875       1,25       1,25       1,25       1,25
9     Countercyclical buffer requirement                                            (%)
10    Bank G-SIB and/or D-SIB additional requirements                               (%)
11    Total of bank CET1 specific buffer requirements (row 8 + row 9 + row 10)      (%)      1,875       1,25       1,25       1,25       1,25
12    CET1 available after meeting the bank’s minimum capital requirements          (%)        3,6        4,2        4,4        3,7        3,9
      Basel III leverage ratio
13    Total Basel III leverage ratio exposure measure                              (Rm)  1 019 589  1 009 172  1 013 565  1 000 130    999 644
14    Basel III leverage ratio (row 2/row 13)                                       (%)        6,2        6,4        6,4        6,1        6,0
14a   Fully loaded ECL accounting model Basel III leverage ratio (row 2a /row13)    (%)        6,2
      Liquidity Coverage Ratio
15    Total HQLA                                                                   (Rm)    139 476   138 180    151 314     144 568    141 704
16    Total net cash outflow                                                       (Rm)    132 001   118 956    125 652     138 260    144 159
17    LCR ratio                                                                     (%)      105,7     116,2       120,0      104,6       98,3




Basel III capital adequacy
Both the group and bank remain well capitalised at levels significantly above the minimum regulatory requirements. The common-equity tier 1
ratios of 12,5% (December 2017: 12,6%) and 12,3% (December 2017: 12,6%), respectively are reflective of organic capital generation and growth
in risk weighted assets during the period and include the full impact of the implementation of IFRS 9 on 1 January 2018. The group CET 1 capital
ratio also decreased marginally following the strengthening of the ZAR against the USD during the period. The total tier 1 and total capital
adequacy ratios were adversely impacted by a further grandfathering of old-style preference shares (R531m) in January 2018 in line with the Basel
III transitional arrangements. The total CARs were positively impacted by the issuance of further new-style tier 2 capital of R2bn during March
2018.

The following table sets out the capital ratios including unappropriated profits at 31 March 2018:
%                                                                                                                                              Nedbank Group            Nedbank Limited
Including unappropriated profits
Common-equity tier 1 capital                                                                                                                            12,5                       12,3
Tier 1 capital                                                                                                                                          13,2                       13,3
Total capital                                                                                                                                           15,7                       16,5

OV1: OVERVIEW OF RISK-WEIGHTED ASSETS
                                                                                                                  Nedbank Group                              Nedbank Limited(1)
                                                                                                               Mar 2018               Dec 2017             Mar 2018                Dec 2017
                                                                                                            RWA           MRC(2)           RWA           RWA        MRC(2)              RWA
    1    Credit risk                                                                                     365 177          40 626       356 893       305 159        33 949          295 646
    2      Standardised Approach                                                                          38 064           4 235        37 410           415            46              426
    3      AIRB Approach                                                                                 327 113          36 391       319 483       304 744        33 903          295 220
    4    Counterparty credit risk                                                                         27 269           3 034        23 921        26 583         2 957           23 169
    5      Current Exposure Method                                                                        27 269           3 034        23 921        26 583         2 957           23 169
    7    Equity positions in banking book under Market-based Approach                                     27 537           3 063        26 927        20 482         2 279           20 386
       Securitisation exposures in banking book under Internal Ratings-based
    12 Approach                                                                                              546              61           621           546            61              621
    16 Market risk                                                                                        21 157           2 354        17 142        18 240         2 029           14 046
    17     Standardised Approach                                                                           3 750             417         3 643         1 394           155            1 222
    18     Internal Model Approach                                                                        17 407           1 937        13 499        16 846         1 874           12 824
    19 Operational risk                                                                                   66 333           7 379        66 333        57 664         6 415           57 664
    21     Standardised Approach                                                                           6 030             671         6 030            16             1               16
    22     Advanced Measurement Approach                                                                  52 596           5 851        52 596        50 380         5 605           50 380
    24     Floor adjustment                                                                                 7 707            857         7 707         7 268           809            7 268
       Amounts below the thresholds for deduction (subject to 250% risk
                                                                                                          12 956           1 441        15 016         2 373           264            2 058
    23 weighting)
    25 Other assets (100% risk weighting)                                                                 21 339           2 374        21 353        18 096         2 013           17 616
    26 Total                                                                                             542 314          60 332       528 206       449 143        49 967          431 206

   (1)   Nedbank Limited refers to the SA reporting entity in terms of regulation 38 (BA700) of the regulations relating to banks issued in terms of the Banks Act (Act No 94 of 1990).
   (2)   Total minimum required capital (MRC) is measured at 11,125% in line with the transitional requirements and excludes bank-specific Pillar 2b and D-SIB capital requirements.


Credit RWA
Nedbank Limited’s lending portfolios make up approximately 94% of the total credit extended by the group and utilise the AIRB Approach. The
lending portfolios of Nedbank Private Wealth International, the Rest of Africa subsidiaries and some of the legacy Imperial Bank portfolio remain
on TSA.

CR8: RWA FLOW STATEMENTS OF CREDIT RISK EXPOSURES UNDER AIRB
Rm                                                                                                                                                                                      RWA
1        RWA at 31 December 2017                                                                                                                                                     319 483
2        Asset size                                                                                                                                                                    4 567
3        Asset quality                                                                                                                                                                 1 552
4        Model updates                                                                                                                                                                 1 500
5        Methodology and policy
6        Acquisitions and disposals
7        Foreign exchange movements
8        Other                                                                                                                                                                            11
9        RWA at 31 March 2018                                                                                                                                                        327 113

Market RWA
Trading activity in Nedbank Corporate and Investment Banking (CIB) is primarily focused on client activities and flow trading. This includes market
making and the facilitation of client business in the foreign exchange, interest rate, equity, credit and commodity markets. There were no
incremental or comprehensive risk capital charges.


MR3: RWA FLOW STATEMENT OF MARKET RISK EXPOSURES UNDER IMA
Rm                                                                                                                               VaR    Stressed VaR        Total RWA
1       RWA at 31 December 2017                                                                                                5 066           8 433           13 499
2       Movement in risk levels                                                                                                1 319             700            2 018
3       Model updates/changes
4       Methodology and policy
5       Acquisitions and disposals
6       Foreign exchange movements                                                                                               467           1 422            1 890
7       Other
8       RWA at 31 March 2018                                                                                                   6 852          10 555           17 407


Leverage ratio
The leverage ratio is a supplementary measure to risk-based capital requirements. The leverage ratios of both the group and bank are well above
minimum regulatory requirements.

LR1: SUMMARY COMPARISON OF ACCOUNTING ASSETS VS LEVERAGE RATIO EXPOSURE MEASURE
    Item                                                                                                                                                 Mar 2018
    1      Total consolidated assets as per published financial statements                                                                                993 447
           Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting
    2      purposes but outside the scope of regulatory consolidation
           Adjustment for fiduciary assets recognised on the balance sheet pursuant to the operative accounting framework but excluded
    3      from the leverage ratio exposure measure
    4      Adjustments for derivative financial instruments                                                                                                (5 315)
    5      Adjustment for securities financing transactions (ie repos and similar secured lending)                                                        (16 243)
    6      Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures)                              51 142
    7      Other adjustments                                                                                                                               (3 442)
    8      Leverage ratio exposure                                                                                                                       1 019 589

LR2: LEVERAGE RATIO COMMON DISCLOSURE TEMPLATE
    Item                                                                                                                        Mar 2018                 Dec 2017
    On-balance sheet exposures
    1      On-balance sheet items (excluding derivatives and SFTs, but including collateral)                                         956 768              941 050
    2      Asset amounts deducted in determining Basel III Tier 1 capital                                                            (13 718)             (15 445)
    3      Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2)                                  943 050              925 605

    Derivative exposures
    4      Replacement cost associated with all derivatives transactions (ie net of eligible cash variation margin)                   19 559               25 358
    5      Add-on amounts for PFE associated with all derivatives transactions                                                        13 818               13 372
    6      Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to
           the operative accounting framework                                                                                          1 363                1 452
    7      Deductions of receivables assets for cash variation margin provided in derivatives transactions                                                   (142)
    8      Exempted CCP leg of client-cleared trade exposures                                                                        (10 826)              (8 791)
    9      Adjusted effective notional amount of written credit derivatives                                                              395                1 845
    10 Credit derivatives (protection bought) (same reference name with equal to or greater remaining
       maturity)                                                                                                                       (680)               (1 998)
    11 Total derivative exposures (sum of lines 4 to 10)                                                                              23 629               31 096

    Securities financing transaction exposures
    12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions                            18 109               17 366
    13 Netted amounts of cash payables and cash receivables of gross SFT assets                                                      (17 333)             (16 758)
    14 CCR exposure for SFT assets                                                                                                       776                  609
    15 Agent transaction exposures                                                                                                       216                  112
    16 Total securities financing transaction exposures (sum of lines 12 to 15)                                                        1 768                1 329

    Other off-balance sheet exposures
    17 Off-balance sheet exposure at gross notional amount                                                                           197 398              197 398
    18 Adjustments for conversion to credit equivalent amounts                                                                     (146 256)             (146 256)
    19 Off-balance sheet items (sum of lines 17 and 18)                                                                               51 142               51 142

    Capital and total exposures
    20 Tier 1 capital                                                                                                                 63 623               64 737
    21 Total exposures (sum of lines 3, 11, 16 and 19)                                                                             1 019 589            1 009 172

    Leverage ratio(1)
    22 Basel III leverage ratio (%)                                                                                                      6,2                  6,4

    (1) Basis of preparation for the leverage ratio is quarterly averaging.


Liquidity coverage ratio (LCR)
In accordance with the provisions of section 6(6) of the Banks Act, 1990 (Act No 94 of 1990), banks are directed to comply with the relevant LCR
disclosure requirements, as set out in Directive 6/2014, Directive 11/2014 and Directive 1/2018.

The LCR aims to ensure that a bank holds an adequate stock of unencumbered high quality liquid assets (HQLA) to cover total net cash outflows
over a 30-day period under a prescribed stress scenario. Based on the final revisions announced by the Basel Committee the LCR is being phased-
in by 10% each year and will reach a minimum requirement of 100% from 1 January 2019.

The figures below reflect the simple average of daily observations over the quarter ending 31 March 2018 for Nedbank Limited and the simple
average of the month-end values at 31 January 2018, 28 February 2018 and 31 March 2018 for all non-SA banking entities. The figures are based
on the regulatory submissions to SARB.
                                                                                                                Nedbank Group Limited(1)                       Nedbank Limited
                                                                                                                     Total                Total              Total                Total
                                                                                                               unweighted             weighted         unweighted             weighted
                                                                                                                  value(2)             value(3)           value(2)             value(3)
    Rm                                                                                                           (average)            (average)          (average)            (average)
    1     Total HQLA                                                                                                                    139 476                                134 784
          Cash outflows
    2     Retail deposits and deposits from small-business clients, of which                                        175 866              17 428             160 521              16 052
    3      stable deposits                                                                                            3 162                 158
    4      less stable deposits                                                                                     172 704              17 270             160 521              16 052
    5     Unsecured wholesale funding, of which                                                                     246 276             121 572             214 762             107 157
    6      operational deposits (all counterparties) and deposits in institutional networks of
           cooperative banks                                                                                        123 490              30 883             105 495              26 374
    7      non-operational deposits (all counterparties)                                                            122 313              90 216             109 083              80 599
    8      unsecured debt                                                                                               473                 473                 184                 184
    9     Secured wholesale funding                                                                                  24 109                                  23 882
    10 Additional requirements, of which                                                                            101 903              17 602              91 974              14 759
    11     outflows related to derivative exposures and other collateral requirements                                   758                 758                 723                 723
    12     outflows related to loss of funding on debt products
    13     credit and liquidity facilities                                                                          101 145              16 844              91 251              14 036
    14 Other contractual funding obligations
    15 Other contingent funding obligations                                                                         164 688                8 531            155 642               8 068
    16 Total cash outflows                                                                                          712 842             165 133             646 781             146 036
          Cash inflows
    17 Secured lending                                                                                               15 296                  38              15 296                  38
    18 Inflows from fully performing exposures                                                                       50 036              32 332              37 196              21 817
    19 Other cash inflows                                                                                             4 263               4 143                 522                 522
    20 Total cash inflows                                                                                            69 595              36 513              53 014              22 377
    21 Total HQLA                                                                                                                       139 476                                 134 784
    22 Total net cash outflows(4)                                                                                                       132 001                                 123 659
    23 LCR (%)                                                                                                                            105,7                                   109,0

    (1) Only banking and/or deposit-taking entities are included and the group data represents an aggregation of the relevant individual net cash outflows and the individual HQLA
        portfolios, where surplus HQLA holdings in excess of the minimum requirement of 90% for 2018 have been excluded from the aggregated HQLA number in the case of all non-SA banking
        entities.
    (2) Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
    (3) Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows).
    (4) Note that total cash outflows less total cash inflows may not be equal to total net cash outflows to the extent that regulatory caps have been applied to cash inflows as specified by the
        regulations.

The group's quarterly average LCR exceeded the minimum regulatory requirement of 90% applicable in 2018, where the group maintains
appropriate operational buffers designed to absorb seasonal and cyclical volatility in the LCR. Nedbank's portfolio of LCR-compliant HQLA
(comprising mainly of government bonds and treasury bills) increased to a quarterly average of R139,5bn, up marginally from December 2017
where the portfolio amounted to R138,2bn. Nedbank will continue to procure additional HQLA to support balance sheet growth and the LCR
phase-in, while maintaining appropriately sized surplus liquid-asset buffers. The lower LCR observed in the current quarter (105,7%), compared
with the previous quarter (116,2%), relates to a business-as-usual seasonal trends observed every year after the December holiday period.

Shareholders are advised that this report has not been reviewed or reported on by the group’s auditors.

Sandton
10 May 2018

Sponsors to Nedbank Group in South Africa
Merrill Lynch South Africa (Pty) Limited
Nedbank CIB

Sponsor to Nedbank Group in Namibia
Old Mutual Investment Services (Namibia) (Pty) Ltd

Sponsors to Nedbank Limited
Investec Bank Limited
Nedbank CIB




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