Nedbank Group Ltd.
Annual Report 2015

Plain-text annual report

2015 NEDBANK LIMITED aNNUal RePORt for the year ended 31 December 2015 NedbaNk limited – ANNUAL RepoR t 2015 A SECTION HEADING (continued)2015 HigHligHts Headline earnings 8 275 (2014: 8 077) Increase 2,5% (2014: 12,4%) Return on equity 15,4% (2014: 16,5%) NIR/expense ratio 74,7% (2014: 73,5%) Common-equity tier 1 ratio 10,6% (2014: 11,0%) Credit loss ratio 78 bps (2014: 82 bps) Return on assets 1,05% (2014: 1,13%) CONtENts ANNUAL RepoRt Financial highlights Ten-year review: Consolidated statement of comprehensive income Ten-year review: Consolidated statement of financial position Responsibility of our directors Certification from our Company Secretary Report from our Group Audit Committee Report from our directors Independent auditors' report to the shareholders of Nedbank Ltd audited consolidated financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cashflows Segmental reporting Notes to the consolidated financial statements additional information not covered by the auditors' report Compliance with IFRS - financial statement notes Worldclass risk management Report from group remuneration committee chair Reporting back on remuneration Board of directors information to our shareholders Notice of our annual general meeting Form of proxy Notes to form of proxy Terms used in our report Abbreviations, acronyms and initialisms used in our report Contact details 2 4 6 8 9 10 12 15 16 17 18 20 21 24 121 122 140 142 152 154 157 158 159 163 167 1 FINANCIAL hIGhLIGhTS for the year ended 31 December Headline earnings reconciliation Profit attributable to equity holders of the parent Non-headline earnings items Non-headline earnings items Taxation on non-headline earnings items headline earnings key ratios Net interest income to average interest-earning banking assets Credit loss ratio – banking advances Non-interest revenue to total income Efficiency ratio Total equity attributable to equity holders of the parent Return on ordinary shareholders’ equity Average interest-earning banking assets Total assets Return on total assets Total risk-weighted assets Bank capital adequacy ratios (including unappropriated profits): – Common equity tier 1 – Tier 1 – Total Share statistics Number of shares in issue: – Ordinary shares – Preference shares Weighted-average number of ordinary shares headline earnings per ordinary share Dividends per preference share: – Declared per share Interim Final – Paid per share – Preference share traded price Closing high Low – Number of preference shares traded 2015 2014 8 163 (112) (144) 32 8 275 3,07 0,78 43,9 58,8 56 170 15,4 729 118 860 733 1,05 415 541 10,6 11,5 14,1 27,6 358,3 27,6 30 030 7 998 (79) (96) 17 8 077 3,37 0,82 42,7 58,1 52 236 16,5 644 737 753 444 1,13 368 823 11,0 12,1 14,7 27,2 358,3 27,2 29 650 78,24198 75,62212 38,22487 36,86072 40,01711 38,76140 76,98627 72,56847 899 983 825 54,4 975 1 056 925 59,5 Rm Rm Rm Rm Rm % % % % Rm % Rm Rm % Rm % % % m m m cents cents cents cents cents cents cents cents m 2 NedbaNk limited – ANNUAL RepoR t 2015 HEADLINE EARNINGS (Rm) 10 000 EXPENSES AND EFFICIENCY RATIO Expenses (Rm) Efficiency ratio (%) Rm 25 000 20 000 15 000 10 000 1 1 7 3 6 5 6 5 9 6 4 5 3 2 8 3 8 3 8 3 1 3 5 5 8 8 4 6 9 8 1 7 7 7 0 8 5 7 2 8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5 000 0 5 2 7 1 1 5 , 1 6 8 6 7 2 1 , 8 4 5 1 7 6 2 1 , 4 0 5 2 9 7 3 1 , 3 3 5 3 8 9 4 1 , 3 6 5 5 5 9 6 1 , 8 6 5 5 6 5 8 1 , 3 6 5 9 9 1 0 2 , 6 6 5 1 3 0 2 2 1 , 8 5 9 5 4 3 2 , 8 8 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 TOTAL EQUITY (Rbn) TOTAL ASSETS AND RETURN ON TOTAL ASSETS 60 50 40 30 20 10 0 1 , 8 2 1 , 3 3 , 4 6 3 , 0 8 3 , 4 8 3 , 0 3 4 7 , 1 5 , 0 6 5 , 0 6 5 , 0 0 6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NET INTEREST INCOME TO AVERAGE INTEREST-EARNING BANKING ASSETS (%) 5 Rbn 1 000 800 600 400 200 0 Total assets (Rbn) Return on total assets (%) 2 0 4 0 , 1 1 6 4 3 , 1 7 4 5 1 , 1 5 4 5 , 7 0 6 7 5 , 7 0 4 1 6 , 9 0 5 4 6 0 , 1 9 9 6 1 , 1 3 5 7 1 , 1 1 6 8 1 , 1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NON-INTEREST REVENUE TO TOTAL INCOME Non-interest revenue (NIR) (Rm) NIR to total income (%) Rm 20 000 15 000 10 000 8 000 6 000 4 000 2 000 0 4 3 2 1 0 % 80 60 40 20 0 % 1,5 1,2 0,9 0,6 0,3 0 % 50 40 30 20 10 0 1 , 4 1 , 4 8 3 , 5 3 , 2 3 , 2 3 , 4 3 , 4 3 , 5 3 , 3 3 , 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5 000 0 6 6 5 8 , 0 5 4 5 2 7 9 8 , 1 4 7 7 8 9 , 3 9 3 8 3 3 0 1 , 0 0 4 1 4 7 0 1 , 4 0 4 5 5 5 2 1 1 , 2 4 1 5 1 4 1 , 9 2 4 6 6 4 5 1 , 3 3 4 6 9 1 6 1 , 7 2 4 4 1 5 7 1 , 9 3 4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NedbaNk limited – ANNUAL RepoR t 2015 3 TEN-yEAR REvIEW CONSOLIDATED STATEMENT OF COMPREhENSIvE INCOME 2015 Rm 2014 2013 2012 2011 2010 2009 2008 2007 2006 Rm Interest and similar income Interest expense and similar charges Net interest income Impairments charge on loans and advances income from lending activities Non-interest revenue Operating income Total operating expenses Indirect taxation Profit from operations before non-headline earnings items Non-headline earnings items Profit from operations Share of (losses)/profits of associate companies and joint arrangements Profit before direct taxation Direct taxation Profit for the year Profit attributable to: – Ordinary and preference equity holders – Non-controlling interest – ordinary shareholders – Non-controlling interest – preference shareholders Headline earnings 55 128 32 724 22 404 4 608 17 796 17 514 35 310 23 459 668 11 183 (144) 11 039 (1) 11 038 2 828 8 210 8 163 47 8 210 8 275 50 075 28 322 21 753 4 478 17 275 16 196 33 471 22 031 522 10 918 (96) 10 822 12 10 834 2 786 8 048 7 998 50 8 048 8 077 44 107 23 873 20 234 5 529 14 705 15 466 30 171 20 199 480 9 492 (55) 9 437 28 9 465 2 297 7 168 7 152 16 7 168 7 189 42 900 24 102 18 798 5 239 13 559 14 151 27 710 18 601 460 8 649 (49) 8 600 8 600 2 159 6 441 6 410 31 6 441 6 460 41 417 24 119 17 298 5 321 11 977 12 555 24 532 16 955 413 7 164 (48) 7 116 7 116 1 610 5 506 5 483 23 5 506 5 531 43 421 27 556 15 865 6 360 9 505 10 741 20 246 14 983 387 4 876 (103) 4 773 4 773 983 3 790 3 737 53 3 790 3 838 49 332 33 795 15 537 6 659 8 878 10 338 19 216 13 792 402 5 022 (32) 4 990 (1) 4 989 960 4 029 3 790 224 15 4 029 3 823 55 154 39 874 15 280 4 755 10 525 9 877 20 402 12 671 356 7 375 745 8 120 9 8 129 1 791 6 338 6 106 217 15 6 338 5 469 40 185 26 631 13 554 2 115 11 439 9 725 21 164 12 768 298 8 098 25 8 123 54 8 177 2 185 5 992 5 681 298 13 5 992 5 656 27 089 16 600 10 489 1 465 9 024 8 566 17 590 11 725 334 5 531 183 5 714 68 5 782 1 669 4 113 3 870 243 4 113 3 711 4 NedbaNk limited – ANNUAL RepoR t 2015 CONSOLIDATED STATEMENT OF COMPREhENSIvE INCOME 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 41 417 24 119 17 298 5 321 11 977 12 555 24 532 16 955 413 7 164 (48) 7 116 7 116 1 610 5 506 5 483 23 5 506 5 531 43 421 27 556 15 865 6 360 9 505 10 741 20 246 14 983 387 4 876 (103) 4 773 4 773 983 3 790 3 737 53 3 790 3 838 49 332 33 795 15 537 6 659 8 878 10 338 19 216 13 792 402 5 022 (32) 4 990 (1) 4 989 960 4 029 3 790 224 15 4 029 3 823 55 154 39 874 15 280 4 755 10 525 9 877 20 402 12 671 356 7 375 745 8 120 9 8 129 1 791 6 338 6 106 217 15 6 338 5 469 40 185 26 631 13 554 2 115 11 439 9 725 21 164 12 768 298 8 098 25 8 123 54 8 177 2 185 5 992 5 681 298 13 5 992 5 656 27 089 16 600 10 489 1 465 9 024 8 566 17 590 11 725 334 5 531 183 5 714 68 5 782 1 669 4 113 3 870 243 4 113 3 711 Rm Rm Interest and similar income Interest expense and similar charges Net interest income Impairments charge on loans and advances income from lending activities Non-interest revenue Operating income Total operating expenses Indirect taxation Non-headline earnings items Profit from operations Profit before direct taxation Direct taxation Profit for the year Profit attributable to: – Ordinary and preference equity holders – Non-controlling interest – ordinary shareholders – Non-controlling interest – preference shareholders Headline earnings Profit from operations before non-headline earnings items Share of (losses)/profits of associate companies and joint arrangements 55 128 32 724 22 404 4 608 17 796 17 514 35 310 23 459 668 11 183 (144) 11 039 (1) 11 038 2 828 8 210 8 163 47 8 210 8 275 50 075 28 322 21 753 4 478 17 275 16 196 33 471 22 031 522 10 918 (96) 10 822 12 10 834 2 786 8 048 7 998 50 8 048 8 077 44 107 23 873 20 234 5 529 14 705 15 466 30 171 20 199 480 9 492 (55) 9 437 28 9 465 2 297 7 168 7 152 16 7 168 7 189 42 900 24 102 18 798 5 239 13 559 14 151 27 710 18 601 460 8 649 (49) 8 600 8 600 2 159 6 441 6 410 31 6 441 6 460 NedbaNk limited – ANNUAL RepoR t 2015 5 TEN-yEAR REvIEW (continued) CONSOLIDATED STATEMENT OF FINANCIAL POSITION Rm 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale Investments in private-equity associates, associate companies and joint arrangements Deferred taxation assets Investment property Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central banks Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders – Preference shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Current taxation liabilities Other liabilties held for sale Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments total liabilities total equity and liabilities 18 151 60 078 30 948 42 733 10 757 56 322 15 644 26 828 17 467 35 004 13 811 31 279 12 587 37 575 14 660 26 194 666 807 603 329 566 047 520 116 493 107 471 447 446 428 436 420 3 925 904 1 648 2 1 400 67 8 114 4 885 16 190 4 881 5 393 236 2 369 16 1 158 165 7 459 4 409 14 843 4 516 4 204 340 2 932 12 1 098 69 87 6 571 2 847 13 199 4 188 4 528 241 2 832 508 1 029 362 84 6 171 1 992 12 641 3 830 860 733 753 444 699 155 645 350 613 540 576 490 544 990 547 132 460 627 401 888 28 18 532 37 610 56 170 3 561 27 17 422 34 787 52 236 3 561 27 17 422 30 524 47 973 3 561 27 17 422 26 140 43 589 3 561 223 183 141 136 121 110 59 954 33 996 55 980 15 479 708 036 634 623 9 911 87 8 404 35 763 3 009 44 977 800 779 860 733 287 3 002 35 634 697 464 753 444 51 675 16 588 585 497 10 016 13 297 1 804 33 265 647 480 699 155 47 286 13 475 542 671 9 273 67 36 367 1 880 30 295 598 064 645 350 11 514 31 715 14 314 29 991 3 989 629 3 549 8 565 66 488 6 082 2 027 11 862 3 634 27 14 422 24 856 39 305 3 561 42 987 13 791 516 540 8 286 27 997 1 473 29 439 570 553 613 540 7 469 21 955 14 077 31 667 3 613 440 2 999 5 933 48 82 5 394 1 965 11 068 3 328 27 14 422 20 281 34 730 3 560 38 400 11 930 491 038 6 179 76 1 358 1 408 26 101 538 090 576 490 6 823 14 408 12 871 35 754 3 917 580 3 012 12 922 36 102 4 754 1 783 10 437 3 151 27 14 422 18 174 32 623 3 483 1 796 91 37 993 10 799 5 218 162 1 514 1 298 20 082 506 997 544 990 7 638 10 411 23 114 41 834 4 731 314 2 743 10 913 71 104 4 124 1 667 10 061 2 977 27 14 422 16 927 31 376 3 122 1 644 300 36 442 23 077 6 145 117 1 982 1 227 14 060 510 690 547 132 9 545 11 775 9 924 29 271 375 421 4 920 29 2 739 735 65 75 3 757 1 305 8 351 2 715 27 14 422 13 954 28 403 3 122 1 307 300 33 132 10 336 391 526 10 419 275 1 470 1 145 12 324 427 495 460 627 11 165 13 855 10 314 22 031 321 724 5 120 138 2 385 41 690 48 66 3 323 1 357 7 026 2 605 27 14 422 9 583 24 032 2 770 955 300 28 057 11 549 341 708 9 098 338 1 410 1 210 8 518 373 831 401 888 467 924 464 082 6 NedbaNk limited – ANNUAL RepoR t 2015 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 666 807 603 329 566 047 520 116 493 107 471 447 446 428 436 420 11 514 31 715 14 314 29 991 7 469 21 955 14 077 31 667 6 823 14 408 12 871 35 754 7 638 10 411 23 114 41 834 3 989 629 3 549 8 565 66 488 6 082 2 027 11 862 3 634 3 613 440 2 999 5 933 48 82 5 394 1 965 11 068 3 328 3 917 580 3 012 12 922 36 102 4 754 1 783 10 437 3 151 4 731 314 2 743 10 913 71 104 4 124 1 667 10 061 2 977 9 545 11 775 9 924 29 271 375 421 4 920 29 2 739 735 65 75 3 757 1 305 8 351 2 715 11 165 13 855 10 314 22 031 321 724 5 120 138 2 385 41 690 48 66 3 323 1 357 7 026 2 605 860 733 753 444 699 155 645 350 613 540 576 490 544 990 547 132 460 627 401 888 27 14 422 24 856 39 305 3 561 27 14 422 20 281 34 730 3 560 223 183 141 136 121 110 42 987 13 791 516 540 8 286 27 997 1 473 29 439 570 553 613 540 38 400 11 930 491 038 6 179 76 1 358 1 408 26 101 538 090 576 490 27 14 422 18 174 32 623 3 483 1 796 91 37 993 10 799 27 14 422 16 927 31 376 3 122 1 644 300 36 442 23 077 467 924 464 082 5 218 162 1 514 1 298 20 082 506 997 544 990 6 145 117 1 982 1 227 14 060 510 690 547 132 27 14 422 13 954 28 403 3 122 1 307 300 33 132 10 336 391 526 10 419 275 1 470 1 145 12 324 427 495 460 627 27 14 422 9 583 24 032 2 770 955 300 28 057 11 549 341 708 9 098 338 1 410 1 210 8 518 373 831 401 888 Investments in private-equity associates, associate companies and joint Rm assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale arrangements Deferred taxation assets Investment property Property and equipment Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves Long-term employee benefit assets Mandatory reserve deposits with central banks total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders – Preference shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Current taxation liabilities Other liabilties held for sale Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments total liabilities total equity and liabilities 18 151 60 078 30 948 42 733 3 925 904 1 648 2 1 400 67 8 114 4 885 16 190 4 881 28 18 532 37 610 56 170 3 561 59 954 33 996 9 911 87 763 3 009 44 977 800 779 860 733 10 757 56 322 15 644 26 828 5 393 236 2 369 16 1 158 165 7 459 4 409 14 843 4 516 27 17 422 34 787 52 236 3 561 55 980 15 479 8 404 35 287 3 002 35 634 697 464 753 444 17 467 35 004 13 811 31 279 4 204 340 2 932 12 1 098 69 87 6 571 2 847 13 199 4 188 27 17 422 30 524 47 973 3 561 51 675 16 588 585 497 10 016 13 297 1 804 33 265 647 480 699 155 12 587 37 575 14 660 26 194 4 528 241 2 832 508 1 029 362 84 6 171 1 992 12 641 3 830 27 17 422 26 140 43 589 3 561 47 286 13 475 542 671 9 273 67 36 367 1 880 30 295 598 064 645 350 708 036 634 623 NedbaNk limited – ANNUAL RepoR t 2015 7 RESPONSIBILITy OF OUR DIRECTORS The directors are responsible for the preparation and fair presentation of the consolidated financial statements of Nedbank Ltd (comprising the statement of financial position at 31 December 2015, the statement of comprehensive income, the statement of changes in equity and statement of cashflows for the year then ended), the segmental reporting and the notes to the financial statements (including a summary of significant accounting policies and other explanatory notes) in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and IFRS Interpretation Committee (IFRS IC), the South African Institute of Chartered Accountants (SAICA) Financial Reporting Guides as issued by the Accounting Practices Committee, Financial Pronouncements as issued by the Financial Reporting Standards Council, the requirements of the Companies Act, 71 of 2008 (as amended), and the JSE Listings Requirements. In addition, the directors are responsible for the preparation of the directors' report. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error and for maintaining adequate accounting records and an effective system of risk management as well as the preparation of the supplementary schedules included in these financial statements. The directors have made an assessment of the ability of the company and its subsidiaries to continue as going concerns and there is no reason to believe that the business will not be a going concern in the year ahead. The independent auditors are responsible for reporting on whether the consolidated financial statements are fairly presented in accordance with IFRS. Approval of consolidated annual financial statements The consolidated annual financial statements of Nedbank Ltd, as identified in the first paragraph, were approved by the Nedbank Ltd Board of Directors on 1 March 2016 and are signed on its behalf by: V Naidoo Chairman Sandown 1 March 2016 mWt brown Chief Executive 8 NedbaNk limited – ANNUAL RepoR t 2015 CERTIFICATION FROM OUR COMPANy SECRETARy In terms of section 88(2)(e) of the Companies Act, 71 of 2008 (as amended), I certify that, to the best of my knowledge and belief, Nedbank Ltd has filed with the Commissioner all such returns and notices as are required by the Companies Act, 71 of 2008, and that all such returns and notices are true, correct and up to date. tSb Jali Company Secretary Sandown 1 March 2016 NedbaNk limited – ANNUAL RepoR t 2015 9 REPORT FROM OUR GROUP AUDIT COMMITTEE overview The Nedbank Group Audit Committee (GAC) assists the board in fulfilling its oversight responsibilities, in particular with regard to evaluation of the adequacy and efficiency of accounting policies, internal controls and financial and corporate reporting processes. In addition, the GAC assesses the effectiveness of the internal auditors and the independence and effectiveness of the external auditors. This report aims to provide details of how the GAC has satisfied its various obligations during the period as well discuss some of the key issues that arose and how the committee addressed these to assist in ensuring the integrity of Nedbank's financial reporting. Composition and governance The committee is chaired by Malcolm Wyman and has five members, all of whom are independent non-executive directors. On 25 November 2015 Stanley Subramoney joined the committee as a fifth member and underwent a detailed induction programme, which included briefings on matters relevant to the responsibilities of the committee and meetings with the finance executive. The committee met six times during the year, including the annual meeting with the Bank Supervision Department of the South African Reserve Bank (SARB). GAC members Malcolm Wyman (Chair) Stanley Subramoney Nomavuso Mnxasana Mpho Makwana Tom Boardman Scheduled meeting attendance 6/6 – 6/6 6/6 6/6 The chair of the committee reports to the board on its activities and the matters discussed at each meeting, highlighting any key items that the committee feels requires action and provides recommendations for their resolution. The Chief Executive (CE), the Chief Financial Officer (CFO), the Chief Operating Officer (COO), the Chief Risk Officer (CRO), the Chief Internal Auditor (CIA), the Chief Governance and Compliance Officer and representatives of the external auditors are invited to attend all GAC meetings. Other members of management are invited to attend certain meetings in order to provide the committee with greater insight into specific issues or areas of the group. The GAC chair has regular contact with the management team to address relevant matters directly. The CIA and the external auditors have direct access to the committee, including closed sessions without management, on any matter that they regard as relevant to the fulfilment of the committee's responsibilities. The GAC Chair meets with the CIA and external auditors separately between audit committee meetings. Ongoing training is provided to committee members on a range of financial, regulatory and other topical compliance matters. During 2015 members received training on liquid-asset portfolios and hedge-related accounting, and IFRS 9 Accounting implications and approach. Members also received presentations on future changes to external audit reporting, Companies Act and Banks Act requirements of the GAC, with a 'deep dive' into the activities of the new Nedbank Corporate and Investment Banking Cluster. The performance of the committee is reviewed annually as part of the effectiveness review of the board and all its committees. The 2015 review concluded that the committee continued to operate effectively and successfully discharged its responsibilities and duties. Internal control The committee is responsible for reviewing the effectiveness of systems for internal control, financial reporting and risk management, and considering the major findings of any internal investigations into control weaknesses, fraud or misconduct, and management's response thereto. The GAC receives regular reports provided as part the Enterprisewide Risk Management Framework (ERMF) to assist in evaluating the group's internal controls. The ERMF places emphasis on accountability, responsibility, independence, reporting, communication and transparency, both internally and in respect of all Nedbank's key external stakeholders. Significant areas of focus within the reports include: ■■ ■■ ■■ ■■ identifying and managing material risks within the group and changes to these risk profiles during the year; creating and maintaining an effective internal control environment throughout the group; demonstrating the necessary respect for the control environment; and identifying and correcting weaknesses in systems and internal controls. The GAC receives regular reports from the Group Information Technology Committee regarding the monitoring of the adequacy and effectiveness of the group's information system controls and from the Group Credit Committee regarding its oversight of the adequacy and effectiveness of the credit monitoring processes and systems. The GAC receives regular reports on issues in the Group's key issues control log from the CRO and regular reports regarding governance and compliance matters (including the Companies Act and Banks Act) from the Chief Governance and Compliance Officer. having considered, analysed, reviewed and debated information provided by management and Internal Audit and the external auditors, the GAC considered that the internal controls of the group had been effective in all material aspects throughout the year under review. Financial reporting process The GAC received regular reports from the CFO regarding the financial performance of the group, the tracking and monitoring of key performance indicators, details of budgets, forecasts, long-term plans and capital expenditures, financial reporting controls and processes, and the adequacy and reliability of management information used during the financial reporting process. The GAC reviewed and approved the accounting policies of the group as reported in the annual financial statements, monitoring the consistency of application and compliance with accounting standards. The GAC also reviewed and approved the related group policies (Finance and Accounting Risk Policy, Taxation Policy and Regulatory Reporting Policy). The GAC further assessed and confirmed the appropriateness of the going-concern assumption used in the annual financial statements, taking into account management budgets and the capital and the liquidity profiles. The GAC also: ■■ ■■ ■■ received a summary of the key technical accounting matters from the CFO for consideration as well as a summary of critical accounting judgements and estimates made during the financial reporting process; received input where there have been substantive discussions between management and the external auditors; and discussed all key areas of judgement with management and the external auditors. The GAC satisfied itself as to the expertise, resources and experience of the finance function, as well as the appropriateness of the expertise and experience of the CFO in terms of the JSE Listings Requirements. The Audit Committee considered the following significant issues and key areas of management judgement applied in the preparation of the financial statements in the current year. ■■ Fair value of financial instruments – The GAC reviewed and discussed reports from the CFO regarding the Investment Committee review of investment valuations and details of critical valuation judgements applied to the valuation of group treasury and trading instruments. Financial instruments and investments are disclosed in notes 34 to 35 of the financial statements and in the accounting policy discussed in note 1.6. ■■ Credit risk provisions – The GAC reviewed and challenged reports from the Group Credit Committee regarding the level and appropriateness of impairments, provisioning methodologies and 10 NedbaNk limited – ANNUAL RepoR t 2015 ■■ ■■ related key judgements in determining the impairment balances, and satisfied itself as to the level of impairments. taxation-related matters – The GAC reviewed reports from the CFO regarding the tax computation and, where applicable, the judgements made in determining tax accrual and the deferred tax balance. The taxation expense and related balances are disclosed in note 11 to the financial statements. impairment considerations for goodwill, intangible assets and associate investments – The GAC reviewed reports from the CFO regarding the annual goodwill impairment assessment, the consideration of impairment applied to certain intangible assets, and related assumptions and judgements as well as the consideration of the indicators of impairment for associate investments. The methodology used by the group for goodwill impairment testing is set out in note 1.8 to the financial statements. The external auditors are preparing for the changes in requirements to auditors' reporting of key audit matters in their report and have actively engaged with the GAC. The report aims to provide information that allows users of the financial statements to understand how the external auditors have considered and evaluated the significant matters identified during the course of their audit. This will be effective in the auditors' report on the 2016 financial statements. Update on key focus areas in 2015 The new SAP enterprise resource planning (ERP) system went live early in 2015, impacting the entire financial accounting control environment. The GAC monitored the implementation of the project and received regular updates from the CFO on its progress. The project was delivered within the timetable and with all material controls operating effectively. IFRS 9 received much attention this year as the planning and pilot phases of the project were launched. The project is being managed jointly between Group Finance and Group Risk, and the GAC satisfied itself that significant progress is being made, with the next stage of collaboration and development being the focus for 2016. Regulatory reporting process The GAC reviewed the adequacy of the regulatory reporting processes as required by the Banks Act of South Africa, which includes evaluation of the quality of reporting and the adequacy of systems and processes, and consideration of any findings regarding the regulatory reports by the external auditors. The GAC also hosts an annual trilateral meeting with representatives of the Bank Supervision Department of the SARB where, among other things, key external audit findings, internal audit matters and reporting responsibilities in terms of the regulations are discussed. Internal Audit Internal Audit performs an independent assurance function and forms part of the third line of defence as set out in the ERMF in the integrated report. The CIA has a functional reporting line to the committee chair and an operational reporting line to the CE. The GAC, with respect to its evaluation of the adequacy and effectiveness of internal controls, receives reports from the CIA, assesses the effectiveness of the group internal audit function and reviews and approves the annual Group Internal Audit plan. In particular the GAC: ■■ ■■ ensured that the CIA has a direct reporting line to the Chair of the GAC; reviewed and recommended the Internal Audit Charter for approval by the board of directors; ■■ monitored the effectiveness of the internal audit function in terms of its scope, execution of its plan, coverage, independence, skills, staffing, overall performance and position within the organisation; and ■■ monitored and challenged, where appropriate, action taken by management with regard to adverse internal audit findings. external auditors The GAC is responsible for the appointment, compensation and oversight of the external auditors for the group, namely Deloitte & Touche and KPMG Inc. The GAC has a well-established policy on auditor independence and audit effectiveness. During the period the GAC: ■■ ■■ recommended to the board the selection of the external auditors and the approval of their audit fees for the year under review; approved the external auditors' annual plan and related scope of work, confirming suitable reliance on Group Internal Audit and the appropriateness of key audit risks identified; and ■■ monitored the effectiveness of the external auditors in terms of their audit quality, expertise and independence, as well as the content and execution of the audit plan. A further annual review of the quality of the audit and the performance of the joint external auditors was undertaken in 2015 through among others questionnaires completed by key finance staff, Group Internal Audit members central to the assessment process and members of the GAC. As part of the assessment of the external auditors' independence, the committee reviewed and approved the Non-audit Services Policy, which governs the types of service that can be performed by the auditors, as well as the value and scope of the non-audit services provided by the auditors. Only those non-audit services that do not affect their independence and entail skills and experience that make them the most appropriate suppliers were approved during the period. Fees paid to the auditors are disclosed in note 8 to the annual financial statements. The GAC is of the view that the group continues to receive an efficient, effective and independent audit service and recommended to the board the reappointment of the external auditors for 2016. Key focus areas for 2016 ■■ Review and consideration of management's plans in respect of future changes to the IFRS, most notably: IFRS 9 Financial Instruments – significant progress was made during 2015, with the focus for 2016 on impairments and the development of models. IFRS 15 Revenue Recognition – the effective date was postponed to 1 January 2018; this continues to be an area of emphasis for the upcoming year. ■■ Continued focus on ensuring that the group's financial systems, processes and controls are operating effectively, are consistent with the group's complexity and are responsive to changes in the environment and industry. Annual financial statements and integrated reporting process The GAC reviewed and discussed the audited annual financial statements with the CFO, the CE, the CRO, Internal Audit and the external auditors. The GAC assessed, and found to be effective and appropriate, the financial reporting process and controls that led to the compilation of the annual financial statements as well as the presentation and disclosure in the annual financial statements with regard to the approved accounting policies, IFRS and the requirements of the Companies Act for fair presentation. The GAC reviewed and discussed the integrated report, reporting process and governance and financial information included in the integrated report after considering recommendations from the Transformation, Social and Ethics Committee, the Group Remuneration Committee, The Group Risk and Capital Management Committee and the Directors' Affairs Committee. The GAC recommended to the board that the annual financial statements and the financial information included in the integrated report be approved. The board subsequently approved the annual financial statements and the integrated report, which will be open for discussion at the forthcoming annual general meeting. m Wyman Group Audit Committee Chair 1 March 2016 NedbaNk limited – ANNUAL RepoR t 2015 11 REPORT FROM OUR DIRECTORS for the year ended 31 December 2015 The board of directors is pleased to present the annual financial statements of Nedbank Ltd for the year ended 31 December 2015. During the period under review, and also subsequent to year-end, the following changes occurred to the Nedbank board: Nature of business Nedbank Ltd ('Nedbank' or 'the company') is a registered bank that, through its subsidiaries, provides a wide range of banking and financial services. Nedbank maintains a primary listing of its non-redeemable, non- cumulative, non-participating preference shares under 'Preference Shares' on JSE Limited ('the JSE'). Annual financial statements Details of the financial results are set out on pages 16 to 120 of the annual financial statements, which have been prepared under the supervision of the Nedbank Chief Financial Officer, Mrs RK Morathi, and audited in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and IFRS Interpretation Committee (IFRS IC), the SAICA Financial Reporting Guides as the Accounting Practices Committee, Financial Pronouncements as issued by the Financial Reporting Standards Council, the requirements of the Companies Act, 71 of 2008 (as amended) and the JSE Listings Requirements. issued by Year under review The year under review is fully covered in the ‘Reflections from our Chairman’, the ‘Reflections from our Chief Executive’ and the ‘Reflections from our Chief Financial Officer’ sections of the 2015 Nedbank Group Integrated Report. Share capital Details of the authorised and issued share capital, together with details of shares issued during the year, appear in note 29 to the annual financial statements, available at nedbankgroup.co.za. ownership The holding company of Nedbank is Nedbank Group Ltd (‘Nedbank Group’), whose holding company is Old Mutual Life Assurance Company (SA) Ltd and associates. Nedbank Group holds 100% of the issued ordinary shares of the company. The ultimate holding company is Old Mutual plc, incorporated in England and Wales. Further details of shareholders appear in note 55 to the annual financial statements. Dividends Details of the dividends appear in note 13 to the annual financial statements. Directors Biographical details of the current directors appear in the ‘Board of directors’ section. Details of directors' and prescribed officers’ remuneration and Nedbank Group shares and Nedbank non-redeemable, non-cumulative, non-participating preference shares issued to directors and prescribed officers appear in the ‘Reporting back on remuneration’ section. ■■ Mfundo Nkuhlu was appointed as an executive director and Chief Operating Officer on 1 January 2015; ■■ ■■ ■■ ■■ ■■ ■■ Reuel Khoza, Mustaq Enus-Brey and Gloria Serobe retired as non- executive directors on 11 May 2015 having been on the board for nine years in a non-executive capacity; Graham Dempster retired as an executive director on 11 May 2015 having reached retirement age; Stanley Subramoney was appointed as a non-executive director on 23 September 2015; Julian Roberts resigned as non-executive director on 31 October 2015; Bruce hemphill was appointed as a non-executive director on 25 November 2015; and Paul hanratty resigned as non-executive director with effect from 12 March 2016. In terms of Nedbank’s memorandum of incorporation not less than one- third of the directors are required to retire at each Nedbank annual general meeting and may offer themselves for election or reelection. The directors so retiring are firstly those directors appointed by the Nedbank board since the last annual general meeting, and thereafter those longest in office since their last election. Stanley Subramoney and Bruce hemphill were appointed by the board of  directors since the previous Nedbank annual general meeting on 7  May  2015 and, in terms of the memorandum of incorporation, their appointments terminate at the close of the annual general meeting to be held on 4 May 2016. They are available for election. Ian Gladman, Raisibe Morathi and Malcolm Wyman are also required to seek reelection at the annual general meeting. The aforementioned directors make themselves available for reelection and separate resolutions will be submitted for approval at the annual general meeting to be held on 4 May 2016. In terms of Nedbank Group policy, as applied by Nedbank, non-executive directors and independent non-executive directors of Nedbank who have served on the board for a period longer than nine years are required to retire. None of the current non-executive directors and independent non- executive directors of Nedbank have served on the board in that capacity for more than nine years. 12 NedbaNk limited – ANNUAL RepoR t 2015 Details of the members of the board who served during the year and at the reporting date are given below: Name position as director Date appointed as director DKT Adomakoh (Ghanaian) Non-executive director 21 February 2014 TA Boardman Non-executive director 1 November 2002 (1 March 2010 as non-executive) Date resigned/retired as director (where applicable) MWT Brown BA Dames GW Dempster MA Enus-Brey ID Gladman PB hanratty (Irish) JB hemphill RJ Khoza PM Makwana MA Matooane NP Mnxasana RK Morathi v Naidoo JK Netshitenzhe MC Nkuhlu Chief Executive Non-executive director Executive director Non-executive director Non-executive director Non-executive director 17 June 2004 30 June 2014 5 August 2009 16 August 2005 7 June 2012 8 August 2014 Retired 11 May 2015 Retired 11 May 2015 Resigned 12 March 2016 Non-executive director 25 November 2015 Chairman and non-executive director 16 August 2005 Retired 11 May 2015 Non-executive director 17 November 2011 Non-executive director Non-executive director Chief Financial Officer and executive director Chairman and non-executive director Non-executive director Chief Operating Officer and executive director 15 May 2014 1 October 2008 1 September 2009 1 May 2015 5 August 2010 1 January 2015 JvF Roberts (British) Non-executive director 1 December 2009 Resigned 31 October 2015 S Subramoney GT Serobe Non-executive director 23 September 2015 Non-executive director 16 August 2005 Retired 11 May 2015 MI Wyman (British) Senior independent director 1 August 2009 Directors' interests Nedbank Group holds the issued ordinary shares of Nedbank. The directors' interests in ordinary shares in Nedbank Group and non- in redeemable, non-cumulative, non-participating preference shares Nedbank at 31  December 2015 and any movements therein up to the reporting date are set out in the ‘Reporting back on remuneration’ section. The directors had no interest in any third party or company responsible for managing any of the business activities of the group. Banking transactions with directors are entered into in the normal course of business under terms that are no more favourable than those arranged with third parties. Audit Committee and Group transformation, Social and ethics Committee Reports The Audit Committee Report appears on pages 12 and 13 and the report from the Group Transformation, Social and Ethics Committee Chair appears in the Nedbank Group Ltd Integrated Report. Company Secretary and registered office As part of the annual board evaluation process, the board of directors has conducted an assessment of the Company Secretary. The results were discussed by the board of directors on 26 February 2016 and the board is satisfied that Mr Jali is suitably competent, qualified and experienced and has adequately and effectively performed the role and duties of a company secretary. Mr Jali has direct access to, and ongoing communication with, the Chairman of the board and the Chairman and the Company Secretary meet regularly through the year. Mr Jali is not a director of the Company and the board is satisfied that as far as is reasonably possible, an arm's length relationship between the Company Secretary and the board is intact. Details of Mr Jali’s qualifications and experience appear in the ‘Established and admired leadership teams’ section of the Nedbank Group Ltd Integrated Report. The Company Secretary’s addresses and the registered office are as follows: Business address Registered address postal address 135 Rivonia Road Sandown, Sandton 2196 SA Nedbank Ltd PO Box 1144 Johannesburg, 2000 SA Nedbank Ltd Nedbank 135 Rivonia Campus 135 Rivonia Road Sandown, Sandton, 2196 SA property and equipment There was no material change in the nature of the fixed assets of Nedbank or its subsidiaries or in the policy regarding their use during the year. political donations Nedbank Group has an established policy of not making donations to any political party. Contracts and matters in which directors and officers of the company have an interest No contracts in which directors and officers of the company had an interest and that significantly affected the affairs or business of the company or any of its subsidiaries were entered into during the year. NedbaNk limited – ANNUAL RepoR t 2015 13 REPORT FROM OUR DIRECTORS (continued) for the year ended 31 December 2015 Joel Netshitenzhe is an executive director of the Mapungubwe Institute for Strategic Reflection (MISTRA). In 2014, MISTRA received a grant of R1  million (2013: R2m) from the Nedbank Eyethu Community Trust [formed in 2005 as part of Nedbank Group’s black economic empowerment (BEE) transaction]. The Nedbank Eyethu Community Trust provides funding to charitable or non–profit organisations that qualify. The grant to MISTRA was evaluated against the normal criteria for funding by the trust. No grant was received by MISTRA in 2015. Directors' and prescribed officers’ service contracts There are no service contracts with the directors of the company, other than for the Chairman and executive directors as set out below. The directors who entered into these service contracts remain subject to retirement by rotation in terms of Nedbank’s memorandum of incorporation. The key responsibilities relating to vassi Naidoo’s position as Chairman of Nedbank are encapsulated in a contract. Service contracts have been entered into for Mike Brown, Mfundo Nkuhlu and Raisibe Morathi. These service contracts are effective until the executive directors reach the normal retirement age and stipulate a maximum notice period of six months (12 months for Mike Brown) under most circumstances. Details relating to the service contracts of prescribed officers are incorporated in the ‘Reporting back on remuneration’ section. Insurance The group has placed cover in the London insurance market for up to R3,5bn for losses in excess of R50m. Our group captive insurer provides cover for total losses below the R50m level engagement point, retaining R100m, in any one year. Selected insurance covers are placed with the Old Mutual Group. Subsidiary companies Details of principal subsidiary companies are reflected in note 52 to the annual financial statements at nedbankgroup.co.za. Special resolutions by subsidiaries ■■ 9 January 2015 by Depfin Investments (Pty) Ltd for the reclassification of 100 Class J no-par-value preference shares. ■■ ■■ 17 February 2015 by Depfin Investments (Pty) Ltd for the reclassification of 1 150 Class G no-par-value preference shares. 17 February 2015 by Depfin Investments (Pty) Ltd for the reclassification of 300 000 of Series 50B no-par-value preference shares. ■■ ■■ ■■ ■■ 19 June 2015 by Depfin Investments (Pty) Ltd for the reclassification of 390 K no-par-value preference shares. 19 June 2015 by Depfin Investments (Pty) Ltd for the reclassification of 300 000 of Series 499B no-par-value preference shares. 25 November 2015 by Depfin Investments (Pty) Ltd for the reclassification of 500 000 Class L no-par-value preference shares. 14 December 2015 by Depfin Investments (Pty) Ltd for the reclassification of 500 000 Class M no-par-value preference shares. Acquisition of shares No shares in Nedbank were acquired by Nedbank or by a Nedbank subsidiary during the financial year under review. events after the reporting period In line with the subscription agreement, Nedbank will subscribe for shares in African Bank holdings Ltd for R10,2m on 11 March 2016 and for an additional R399,8m on 30 March 2016, representing a 4,1% holding in African Bank holdings Ltd. This aligns with Nedbank’s commitment under the provisions of this agreement. On 11 March 2016, Old Mutual announced its new strategy which seeks to realise long term value for its shareholders and other stakeholders by separating its four businesses – Old Mutual Emerging Markets, Nedbank Group, Old Mutual Wealth and Old Mutual Asset Management – from each other. This strategy is referred to as the Old Mutual Managed Separation. The Old Mutual Managed Separation, is expected to result in Old Mutual over time reducing its approximately 54% interest in Nedbank Group to an appropriate strategic minority position to underpin the continuing commercial relationship between OMEM and Nedbank Group. Old Mutual currently envisages reducing its shareholding in Nedbank Group primarily by way of a distribution of Nedbank Group shares to the shareholders of Old Mutual in an orderly manner and at an appropriate time in the context of the Old Mutual Managed Separation and does not intend to sell any part of its shareholding in Nedbank Group to a new strategic investor. The boards of directors and management teams of Old Mutual and Nedbank Group are working closely together to determine the most effective method and appropriate timing to effect the Old Mutual Managed Separation, in a way that safeguards the stability and integrity of both Nedbank Group and the South African financial services sector. Old Mutual expects that the Old Mutual Managed Separation will be materially completed by the end of 2018. Nedbank Group shareholders and stakeholders will – on a regular basis – be kept appropriately informed of further developments in this regard. The directors are not aware of any other material events that have occurred between the reporting date and 11 March 2016. 14 NedbaNk limited – ANNUAL RepoR t 2015 INDEPENDENT AUDITORS' REPORT TO ThE ShAREhOLDER OF NEDBANK LTD Report on the financial statements We have audited the consolidated financial statements of Nedbank Ltd set out on pages 16 to 120, which comprise the statement of financial position at 31 December 2015, and the statement of comprehensive income, statement of changes in equity and statement of cashflows for the year then ended, and the notes, comprising a summary of significant accounting policies and other explanatory information, and specified sections of the remuneration report. Directors’ responsibility for the financial statements The company’s directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinion In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of Nedbank Ltd at 31 December 2015, and its consolidated financial performance and consolidated cashflows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. other reports required by the Companies Act As part of our audit of the consolidated financial statements for the year ended 31 December 2015, we have read the Report from the Directors, the Report from the Group Audit Committee and the Company Secretary’s Certification for the purpose of identifying whether there are material inconsistencies between these reports and the audited consolidated financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited consolidated financial statements. however, we have not audited these reports and accordingly do not express an opinion on these reports. Report on other legal and reporting requirements In terms of the Independent Regulatory Board for Auditors (IRBA) Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that Deloitte & Touche has been the auditor of Nedbank Ltd for 42 years and KPMG Inc has been the auditor of Nedbank Ltd for 42 years. We are independent of the group in accordance with the IRBA Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements in SA. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in SA. The IRBA Code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B). kPmG inc Registered Auditor Per heather Berrange Chartered Accountant (SA) Director KPMG Crescent 85 Empire Road Parktown, Johannesburg 2193 deloitte & touche Registered Auditor Per Mgcinisihlalo Jordan Chartered Accountant (SA) Partner Building 8, Deloitte Place The Woodlands, Woodlands Drive Woodmead, Sandton 2128 The company’s principal place of business is at KPMG Crescent, 85 Empire Road, Parktown, where a list of the directors’ names is available for inspection. A full list of partners and directors is available on request. Sandown 1 March 2016 NedbaNk limited – ANNUAL RepoR t 2015 15 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December Accounting policy Notes Interest and similar income Interest expense and similar charges Net interest income Impairments charge on loans and advances income from lending activities Non-interest revenue Operating income Total operating expenses Indirect taxation Profit from operations before non-trading and capital items Non-trading and capital items Profit from operations Share of (losses)/profits of associate companies and joint arrangements Profit before direct taxation Direct taxation Profit for the year Other comprehensive income net of taxation items that may subsequently be reclassified to profit or loss – Exchange differences on translating foreign operations – Fair–value adjustments on available-for-sale assets items that may not subsequently be reclassified to profit or loss – Gains on property revaluations – Remeasurements on long-term employee benefit assets total comprehensive income for the year Profit attributable to: – Ordinary and preference equity holders – Non-controlling interest – ordinary shareholders Total comprehensive income attributable to: – Ordinary and preference equity holders – Non-controlling interest – ordinary shareholders total comprehensive income for the year 5 6 19.1 7 8 9 10 11.1 1.24 1.24 1.6 1.22, 1.24 1.24 1.3 1.7 1.4 1.6 1.10 1.9 1.3 1.3 1.3 1.3 2015 Rm 55 128 32 724 22 404 4 608 17 796 17 514 35 310 23 459 668 11 183 (144) 11 039 (1) 11 038 2 828 8 210 578 190 (9) 118 279 2014 rm 50 075 28 322 21 753 4 478 17 275 16 196 33 471 22 031 522 10 918 (96) 10 822 12 10 834 2 786 8 048 126 14 (113) 163 62 8 788 8 174 8 163 47 8 210 8 739 49 8 788 7 998 50 8 048 8 123 51 8 174 16 NedbaNk limited – ANNUAL report 2015 CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 31 December 2015 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances¹ Other assets Current taxation assets Investment securities Non-current assets held for sale Investments in private-equity associates, associate companies and joint arrangements Deferred taxation assets Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central banks Intangible assets total assets equity aNd liabilities Ordinary share capital Ordinary share premium Reserves total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to ordinary shareholders total equity Derivative financial instruments Amounts owed to depositors² Provisions and other liabilities Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments total liabilities total equity and liabilities ¹ ² Included in loans and advances are loans to fellow subsidiaries amounting to R19,9bn (2014: R18,6bn). Included in amounts owed to depositors are deposits from fellow subsidiaries amounting to R21,5bn (2014: R11,4bn). Accounting policy Notes 2015 Rm 2014 rm 1.5, 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.6 1.12 1.3, 1.6 1,7 1.10, 1.20 1.9 1.5, 1.6 1.3, 1.8, 1.13 1.16, 1.17 1.16 1.4, 1.15 1.16 1.3 1.6 1.6 1.6, 1.14 1.7 1.7 1.9 1.6 14 15 16 17 18 20 21 23 22 24 26 27 14 28 29.1 29.2 16 30 31 24 27 32 18 151 60 078 30 948 42 733 10 757 56 322 15 644 26 828 666 807 603 329 3 925 904 1 648 2 1 400 67 8 114 4 885 16 190 4 881 5 393 236 2 369 16 1 158 165 7 459 4 409 14 843 4 516 860 733 753 444 28 18 532 37 610 56 170 3 561 223 59 954 33 996 27 17 422 34 787 52 236 3 561 183 55 980 15 479 708 036 634 623 9 911 87 763 3 009 44 977 800 779 860 733 8 404 35 287 3 002 35 634 697 464 753 444 NedbaNk limited – ANNUAL report 2015 17 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December reserves ordinary share capital rm ordinary share premium rm Foreign currency translation reserve¹ rm property revaluation reserve² rm 27 17 422 148 1 537 Number of ordinary shares 27 241 024 14 163 (36) 27 241 024 314 625 27 1 17 422 1 110 162 1 664 16 33 380 52 236 3 561 183 55 980 190 118 (60) 27 555 649 28 18 532 352 1 722 (1 035) 95 7 36 469 56 170 3 561 223 59 954 total equity other attributable to preference attributable to Non- controlling interest ordinary distributable reserves⁴ Available-for- sale reserve⁵ distributable equity holders reserves⁶ of the parent share capital and premium shareholders total equity rm 3 561 reserves other non- rm 80 (7) 7 80 15 Share-based payments reserve³ rm (363) (7) (145) (515) (177) (343) rm 129 (113) (9) rm 28 993 (323) (3 400) 8 059 50 1 (371) (5 200) 8 440 222 (2) rm 47 973 (323) (3 400) 8 123 (145) – 7 1 1 111 (371) (5 200) 8 739 – (343) (2) rm 141 (9) 51 (9) 49 rm 51 675 (323) (3 409) 8 174 (145) – 7 1 1 111 (371) (5 209) 8 788 – (343) (2) Balance at 31 December 2013 Preference share dividend Dividend to shareholders Total comprehensive income for the year Transfer (from)/to reserves Share-based payments reserve movement Regulatory risk reserve provision Other movements balance at 31 december 2014 Shares issued Preference share dividend Dividend to shareholders Total comprehensive income for the year Transfer (from)/to reserves Share-based payments reserve movement Other movements balance at 31 december 2015 ¹ ² ³ ⁴ ⁵ ⁶ This represents the cumulative foreign exchange differences that arise on the translation of an entity with a different functional currency compared with the presentation currency of the parent company. The cumulative reserve relating to a subsidiary, associate company or joint venture that is disposed of is included in the determination of profit/loss on disposal of the subsidiary, associate company or joint venture. This represents the cumulative amounts that have been recognised on the revaluation of group properties net of deferred taxation. When the property is disposed of, the cumulative revaluation surplus is transferred directly to retained income. All share-based payment expenses are recognised in the statement of comprehensive income, with the corresponding amount recognised in share-based payment reserves. Any excess tax benefit over the relative tax on the share-based payments expense is recognised directly in this reserve. On the expiry or exercise of a share-based instrument the cumulative amount recognised in this respect is transferred directly to other distributable reserves. The negative share-based payment reserve arises from the grants paid by Nedbank Ltd to various share schemes to acquire Nedbank Group Ltd shares, which is recognised directly in equity. The reconciliation shown in this note is the cumulative share-based payment charge for all share schemes. Represents other non-distributable revaluation surplus on capital items and non-distributable reserves transferred from other distributable reserves in order to comply with various banking regulations. This comprises of all fair-value adjustments, net of the related tax on all financial assets that have been classified as available for sale. On the disposal or impairment of available-for-sale financial assets the cumulative gains and the associated tax recognised on these instruments are recognised in profit and loss for the period and are not included in the determination of headline earnings per share. Represents the accumulated profits after distributions to shareholders and appropriation of retained earnings to other non-distributable earnings. All movements are reflected net of taxation. 18 NedbaNk limited – ANNUAL report 2015  Number of ordinary ordinary share capital share premium ordinary shares 27 241 024 rm 27 rm 17 422 27 241 024 314 625 27 1 17 422 1 110 162 1 664 reserves Foreign currency translation reserve¹ rm 148 14 property revaluation reserve² rm 1 537 163 (36) 190 118 (60) Balance at 31 December 2013 Preference share dividend Dividend to shareholders Total comprehensive income for the year Transfer (from)/to reserves Share-based payments reserve movement Regulatory risk reserve provision Other movements balance at 31 december 2014 Shares issued Preference share dividend Dividend to shareholders Total comprehensive income for the year Transfer (from)/to reserves Share-based payments reserve movement Other movements balance at 31 december 2015 income. ¹ ² ³ ⁴ ⁵ ⁶ This represents the cumulative foreign exchange differences that arise on the translation of an entity with a different functional currency compared with the presentation currency of the parent company. The cumulative reserve relating to a subsidiary, associate company or joint venture that is disposed of is included in the determination of profit/loss on disposal of the subsidiary, associate company or joint venture. This represents the cumulative amounts that have been recognised on the revaluation of group properties net of deferred taxation. When the property is disposed of, the cumulative revaluation surplus is transferred directly to retained All share-based payment expenses are recognised in the statement of comprehensive income, with the corresponding amount recognised in share-based payment reserves. Any excess tax benefit over the relative tax on the share-based payments expense is recognised directly in this reserve. On the expiry or exercise of a share-based instrument the cumulative amount recognised in this respect is transferred directly to other distributable reserves. The negative share-based payment reserve arises from the grants paid by Nedbank Ltd to various share schemes to acquire Nedbank Group Ltd shares, which is recognised directly in equity. The reconciliation shown in this note is the cumulative share-based payment charge for all share schemes. Represents other non-distributable revaluation surplus on capital items and non-distributable reserves transferred from other distributable reserves in order to comply with various banking regulations. This comprises of all fair-value adjustments, net of the related tax on all financial assets that have been classified as available for sale. On the disposal or impairment of available-for-sale financial assets the cumulative gains and the associated tax recognised on these instruments are recognised in profit and loss for the period and are not included in the determination of headline earnings per share. Represents the accumulated profits after distributions to shareholders and appropriation of retained earnings to other non-distributable earnings. All movements are reflected net of taxation. reserves Share-based payments reserve³ rm other non- distributable reserves⁴ rm Available-for- sale reserve⁵ rm other distributable reserves⁶ rm total equity attributable to equity holders of the parent rm preference share capital and premium rm 3 561 Non- controlling interest attributable to ordinary shareholders rm 141 (9) 51 total equity rm 51 675 (323) (3 409) 8 174 – (145) 7 1 28 993 (323) (3 400) 8 059 50 1 47 973 (323) (3 400) 8 123 – (145) 7 1 16 33 380 52 236 3 561 183 55 980 (9) (371) (5 200) 8 440 222 (2) 1 111 (371) (5 200) 8 739 – (343) (2) (9) 49 1 111 (371) (5 209) 8 788 – (343) (2) (363) 80 129 (113) (7) (145) (515) (177) (343) (7) 7 80 15 27 555 649 28 18 532 352 1 722 (1 035) 95 7 36 469 56 170 3 561 223 59 954 NedbaNk limited – ANNUAL report 2015 19 CONSOLIDATED STATEMENT OF CASHFLOwS for the year ended 31 December Cash generated by operations Cash received from clients Cash paid to clients, employees and suppliers Dividends received on investments Recoveries on loans previously written off Change in funds for operating activities Increase in operating assets Increase in operating liabilities Net cash from operating activities before taxation Taxation paid Cashflows from/(utilised by) operating activities Cashflows utilised by investing activities Acquisition of property and equipment, computer software and development costs and investment property Disposal of property and equipment, computer software and development costs and investment property Disposal/(Acquisition) of non-current assets held for sale Disposal of investment banking assets Acquisition of private-equity associates, associate companies and joint arrangements Disposal of private-equity associates, associate companies and joint arrangements Acquisition of other investments Disposal of other investments Cashflows utilised by financing activities Net proceeds from issue of ordinary shares Issue of long-term debt instruments Redemption of long-term debt instruments Dividends paid to ordinary shareholders Preference share dividends paid effects of exchange rate changes on opening cash and cash equivalents (excluding foreign borrowings) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of year² Cash and cash equivalents at the end of the year² ¹ Represents amounts less than R1m. ² Including mandatory reserve deposits with central banks. Notes 33.1 33.2 33.3 33.4 33.5 33.6 33.7 14 2015 Rm 19 257 72 602 2014 rm 18 386 66 220 (54 509) (48 803) 30 1 134 (9 508) (102 943) 93 435 9 749 (3 771) 5 978 (2 070) 40 929 (16 624) (64 065) 47 441 1 762 (3 463) (1 701) (2 011) (2 604) (2 439) 43 14 10 (326) 83 (443) 1 153 4 884 1 112 19 813 (10 470) (5 200) (371) (51) 8 741 25 600 34 341 45 (4) 11 (181) 133 (174) 598 (1 354) 7 004 (4 635) (3 400) (323) ¹ (5 066) 30 666 25 600 20 NedbaNk limited – ANNUAL report 2015 SEGMENTAL REPORTING for the year ended 31 December The group’s identification of its segments and the measurement of segment results are based on the group’s internal management reporting as used for day-to-day decisionmaking and as reviewed by the chief operating decisionmaker, which in Nedbank Ltd's case is the Group Executive Committee. The measure of segment profit is headline earnings. Nedbank Corporate and Investment Banking Nedbank Corporate and Investment Banking offers the full spectrum of transactional, corporate, investment banking and markets solutions, characterised by a highly integrated partnership approach. These solutions include lending products, advisory services, leverage financing, trading, broking, structuring, hedging and client coverage. The cluster has expertise in a broad spectrum of product and relationship-based solutions, including specialist corporate finance advice, innovative products and services, customised transactional banking and property finance. Nedbank Corporate and Investment Banking's primary units are Markets, Investment Banking, Property Finance, Transactional Services and Client Coverage. Nedbank retail and Business Banking Nedbank Retail serves the financial needs of all individuals (excluding high-net-worth individuals serviced by Nedbank wealth) and small businesses with a turnover of up to R10m to whom it offers a full spectrum of banking and assurance products and services. The retail product portfolio includes transactional accounts, home loans, vehicle and asset finance [including Motor Finance Corporation (MFC)], card (both card-issuing and merchant-acquiring services), personal loans and investments. The business banking portfolio offers the full spectrum of commercial banking products and related services to entities with an annual turnover of up to R700m. Nedbank Wealth Nedbank wealth provides a range of financial services through three divisions of wealth Management, Asset Management and Insurance. The cluster has operations in SA, London, on the Isle of Man, Jersey, Guernsey and the United Arab Emirates. Nedbank wealth creates, manages and protects the wealth of a wide spectrum of clients ranging from high-net-worth individuals all the way through to the entry level market. rest of Africa Rest of Africa is responsible for the group’s banking operations and expansion activities in the rest of Africa and has client-facing subsidiaries (retail and wholesale banking) in Lesotho, Malawi, Namibia, Swaziland and Zimbabwe and an investment, with joint management control, in a bank in Mozambique, Banco Único, SA. The division also holds the 21,8% investment in Ecobank Transnational Incorporated, manages the Ecobank—Nedbank alliance and facilitates investments in other countries in Africa. Centre The Centre is an aggregation of business operations that provide various support services to Nedbank Group Ltd, which includes the following clusters: Group Finance, Group Technology, Group Strategic Planning and Economics, Group Human Resources, Enterprise Governance and Compliance, Group Risk and Group Marketing, Communications and Corporate Affairs. The centre also includes Group Balance Sheet Management, which is responsible for capital management, liquidity and funding management, the management of banking book interest rate risk, margin management and strategic portfolio management. NedbaNk limited – ANNUAL report 2015 21 SEGMENTAL REPORTING (continued) for the year ended 31 December Nedbank Ltd Fellow subsidiaries Nedbank Corporate and Investment Banking Nedbank retail and Business Banking Nedbank Wealth rest of Africa Centre¹ 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 statement of financial position (Rm) assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets 34 341 60 078 30 948 42 733 666 807 25 826 25 600 56 322 15 644 26 828 603 329 25 721 (4 731) (15 536) 460 (327) (14 825) (30 034) (2 650) (10 912) 71 (349) (9 692) (32 337) 12 910 35 005 30 102 24 950 355 784 11 816 total assets 860 733 753 444 (64 993) (55 869) 470 567 equity and liabilities Total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Intergroup liabilities total equity and liabilities statement of comprehensive income (Rm) Net interest income Impairments charge on loans and advances income from lending activities Non-interest revenue Operating income Total operating expenses Indirect taxation Profit/(loss) from operations Share of profits/(losses) of associate companies and joint arrangements Profit/(loss) before direct taxation Direct taxation Profit/(loss) after direct taxation Profit attributable to non-controlling interest: – Ordinary shareholders – Preference shareholders 59 954 33 996 708 036 13 770 44 977 55 980 15 479 634 623 11 728 35 634 (18 797) 368 (17 815) (28 744) (5) (14 931) 7 (18 827) (22 114) (4) 860 733 753 444 (64 993) (55 869) 22 404 4 608 17 796 17 514 35 310 23 459 668 11 183 (1) 11 182 2 860 8 322 21 753 4 478 17 275 16 196 33 471 22 031 522 10 918 12 10 930 2 803 8 127 47 50 (1 481) (181) (1 300) (4 234) (5 534) (2 651) (115) (2 768) (872) (3 640) (690) (2 950) (23) (371) (1 208) (28) (1 180) (4 116) (5 296) (2 503) (113) (2 680) (149) (2 829) (684) (2 145) (19) (323) 23 096 32 987 346 868 18 176 1 563 47 877 470 567 6 781 1 188 5 593 6 508 12 101 5 105 78 6 918 (1) 6 917 1 702 5 215 6 054 29 414 15 499 16 010 305 158 9 106 381 241 17 497 15 429 319 400 8 184 1 159 19 572 381 241 5 919 506 5 413 5 462 10 875 4 664 74 6 137 12 6 149 1 409 4 740 7 13 Headline earnings/(loss) 8 275 8 077 (2 556) (1 803) 5 208 4 727 1 134 1 042 selected ratios Average interest-earning banking assets (Rm) Return on total assets (%)² Return on ordinary shareholders' equity (%) Net interest income to average interest-earning banking assets (%) Non-interest revenue to total income (%) Non-interest revenue to total operating expenses (%) Credit loss ratio – banking advances (%) Efficiency ratio Effective taxation rate (%) Contribution to group economic profit Number of employees (permanent staff) ¹ Includes all group eliminations. ² Includes the elimination of intercluster balances. 678 135 1,05 15,4 3,30 43,9 74,7 0,78 58,8 25,6 1 156 29 477 613 628 1,13 16,5 3,54 42,7 73,5 0,82 58,1 25,6 1 215 28 872 (45 945) (38 566) 342 898 1,24 22,6 310 902 1,24 27,0 1,98 49,0 127,5 0,40 38,4 24,6 2 205 2 728 1,90 48,0 117,1 0,19 41,0 22,9 2 365 2 788 (1 369) (1 835) (897) (1 627) During the period the Nedbank Corporate and Nedbank Capital Clusters were merged to form the Nedbank Corporate and Investment Banking Cluster. Similarly, the Nedbank Retail and Nedbank Business Banking Clusters were merged to form the Nedbank Retail and Business Banking Cluster. The comparative segment information previously presented for Nedbank Corporate, Nedbank Capital, Nedbank Retail and Nedbank Business Banking has been represented based on the new merged clusters, ie Nedbank Corporate and Investment Banking and Nedbank Retail and Business Banking. This had the consequential effect that certain intergroup assets and liabilities and the related eliminations between Nedbank Retail and Business Banking and the Centre have been restated. Depreciation costs of R969m (2014: R906m) and amortisation costs of R705m (2014: R644m) for property, equipment, computer software and capitalised development are charged based on an activity-justified transfer pricing methodology by the segment owning the assets to the segment utilising the benefits thereof. 22 NedbaNk limited – ANNUAL report 2015 16 789 23 647 305 13 944 1 198 12 453 68 336 19 198 459 75 557 2 960 36 598 (66 436) 68 336 (357) 149 (506) (144) (650) (328) 279 (601) (601) (215) (386) 276 (662) 15 002 26 028 10 454 49 89 13 334 64 956 19 470 (8) 66 767 3 783 32 700 (57 756) 64 956 300 153 147 153 300 54 186 60 60 73 (13) 4 260 (277) 3 161 2 932 3 839 279 929 5 631 292 560 377 268 882 5 888 278 079 26 924 27 565 248 135 224 103 292 560 278 079 3 686 6 816 6 999 15 955 3 212 12 743 10 972 23 715 17 077 302 6 336 6 336 1 781 4 555 95 4 460 1,57 16,6 4,89 40,7 64,3 1,14 63,4 28,1 960 3 373 1 775 21 263 15 216 3 771 11 445 10 530 21 975 16 076 243 5 656 5 656 1 562 4 094 63 4 031 1,49 14,6 4,97 40,9 65,5 1,39 62,4 27,6 310 1 774 15 161 5 28 206 16 176 61 322 2 734 10 34 083 16 884 7 611 61 322 766 39 727 3 593 4 320 2 730 95 1 495 1 495 361 1 134 39 612 1,84 41,5 1,93 82,4 131,6 0,15 62,6 24,1 778 2 107 934 9 943 1 24 819 21 912 57 609 2 830 4 26 122 17 626 11 027 57 609 628 41 587 3 399 3 986 2 484 102 1 400 1 400 358 1 042 32 351 1,91 36,8 1,94 84,4 136,9 0,17 61,7 25,6 660 2 119 4 438 1 801 76 327 16 515 9 784 32 941 6 799 172 21 208 808 5 3 949 32 941 740 201 539 819 1 358 1 526 29 (197) 872 675 (79) 754 63 691 2,31 10,2 3,53 52,5 53,7 1,25 62,8 (11,7) (193) 1 812 3 328 1 849 24 336 14 073 7 818 27 428 3 549 47 17 058 876 4 5 894 27 428 898 35 863 768 1 631 1 256 30 345 149 494 85 409 52 357 1,58 10,1 4,75 46,1 61,2 0,23 69,2 17,2 (122) 1 605 20 921 20 373 (1 225) 3 744 (1 101) 3 614 325 997 306 401 20 934 18 920 (5 361) (16 380)  Nedbank Ltd Fellow subsidiaries Nedbank Corporate and Investment Banking Nedbank retail and Business Banking Nedbank Wealth rest of Africa Centre¹ 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 3 161 2 932 3 839 279 929 5 631 292 560 377 268 882 5 888 278 079 26 924 27 565 248 135 3 686 6 816 6 999 224 103 3 373 1 775 21 263 860 733 753 444 (64 993) (55 869) 470 567 381 241 292 560 278 079 15 955 3 212 12 743 10 972 23 715 17 077 302 6 336 6 336 1 781 4 555 95 4 460 15 216 3 771 11 445 10 530 21 975 16 076 243 5 656 5 656 1 562 4 094 63 4 031 1 774 15 161 5 28 206 16 176 61 322 2 734 10 34 083 16 884 7 611 61 322 766 39 727 3 593 4 320 2 730 95 1 495 1 495 361 1 134 934 9 943 1 24 819 21 912 57 609 2 830 4 26 122 17 626 11 027 57 609 628 41 587 3 399 3 986 2 484 102 1 400 1 400 358 1 042 1 134 1 042 325 997 1,57 16,6 306 401 1,49 14,6 4,89 40,7 64,3 1,14 63,4 28,1 960 20 921 4,97 40,9 65,5 1,39 62,4 27,6 310 20 373 39 612 1,84 41,5 1,93 82,4 131,6 0,15 62,6 24,1 778 2 107 32 351 1,91 36,8 1,94 84,4 136,9 0,17 61,7 25,6 660 2 119 statement of financial position (Rm) assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets total assets equity and liabilities Total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Intergroup liabilities total equity and liabilities statement of comprehensive income (Rm) Net interest income Impairments charge on loans and advances income from lending activities Non-interest revenue Operating income Total operating expenses Indirect taxation Profit/(loss) from operations Share of profits/(losses) of associate companies and joint arrangements Profit/(loss) before direct taxation Direct taxation Profit/(loss) after direct taxation Profit attributable to non-controlling interest: – Ordinary shareholders – Preference shareholders Headline earnings/(loss) selected ratios Return on total assets (%)² Return on ordinary shareholders' equity (%) Net interest income to average interest-earning banking assets (%) Non-interest revenue to total income (%) Non-interest revenue to total operating expenses (%) Credit loss ratio – banking advances (%) Efficiency ratio Effective taxation rate (%) Contribution to group economic profit ¹ Includes all group eliminations. ² Includes the elimination of intercluster balances. 34 341 60 078 30 948 42 733 666 807 25 826 860 733 59 954 33 996 708 036 13 770 44 977 22 404 4 608 17 796 17 514 35 310 23 459 668 11 183 (1) 11 182 2 860 8 322 1,05 15,4 3,30 43,9 74,7 0,78 58,8 25,6 1 156 25 600 56 322 15 644 26 828 603 329 25 721 753 444 55 980 15 479 634 623 11 728 35 634 21 753 4 478 17 275 16 196 33 471 22 031 522 10 918 12 10 930 2 803 8 127 1,13 16,5 3,54 42,7 73,5 0,82 58,1 25,6 1 215 (64 993) (55 869) 470 567 (4 731) (15 536) 460 (327) (14 825) (30 034) (18 797) 368 (17 815) (28 744) (5) (1 481) (181) (1 300) (4 234) (5 534) (2 651) (115) (2 768) (872) (3 640) (690) (2 950) (23) (371) (2 650) (10 912) 71 (349) (9 692) (32 337) (14 931) 7 (18 827) (22 114) (4) (1 208) (28) (1 180) (4 116) (5 296) (2 503) (113) (2 680) (149) (2 829) (684) (2 145) (19) (323) 12 910 35 005 30 102 24 950 355 784 11 816 23 096 32 987 346 868 18 176 1 563 47 877 6 781 1 188 5 593 6 508 12 101 5 105 78 6 918 (1) 6 917 1 702 5 215 1,24 22,6 1,98 49,0 127,5 0,40 38,4 24,6 2 205 2 728 6 054 29 414 15 499 16 010 305 158 9 106 381 241 17 497 15 429 319 400 8 184 1 159 19 572 5 919 506 5 413 5 462 10 875 4 664 74 6 137 12 6 149 1 409 4 740 1,24 27,0 1,90 48,0 117,1 0,19 41,0 22,9 2 365 2 788 47 50 7 13 8 275 8 077 (2 556) (1 803) 5 208 4 727 Average interest-earning banking assets (Rm) 678 135 613 628 (45 945) (38 566) 342 898 310 902 Number of employees (permanent staff) 29 477 28 872 (1 369) (1 835) (897) (1 627) During the period the Nedbank Corporate and Nedbank Capital Clusters were merged to form the Nedbank Corporate and Investment Banking Cluster. Similarly, the Nedbank Retail and Nedbank Business Banking Clusters were merged to form the Nedbank Retail and Business Banking Cluster. The comparative segment information previously presented for Nedbank Corporate, Nedbank Capital, Nedbank Retail and Nedbank Business Banking has been represented based on the new merged clusters, ie Nedbank Corporate and Investment Banking and Nedbank Retail and Business Banking. This had the consequential effect that certain intergroup assets and liabilities and the related eliminations between Nedbank Retail and Business Banking and the Centre have been restated. Depreciation costs of R969m (2014: R906m) and amortisation costs of R705m (2014: R644m) for property, equipment, computer software and capitalised development are charged based on an activity-justified transfer pricing methodology by the segment owning the assets to the segment utilising the benefits thereof. 4 438 1 801 76 327 16 515 9 784 3 328 1 849 24 336 14 073 7 818 32 941 27 428 6 799 172 21 208 808 5 3 949 32 941 740 201 539 819 1 358 1 526 29 (197) 872 675 (79) 754 63 691 20 934 2,31 10,2 3,53 52,5 53,7 1,25 62,8 (11,7) (193) 1 812 3 549 47 17 058 876 4 5 894 27 428 898 35 863 768 1 631 1 256 30 345 149 494 85 409 52 357 18 920 1,58 10,1 4,75 46,1 61,2 0,23 69,2 17,2 (122) 1 605 16 789 23 647 305 13 944 1 198 12 453 68 336 19 198 459 75 557 2 960 36 598 (66 436) 68 336 (357) 149 (506) (144) (650) (328) 279 (601) (601) (215) (386) 276 (662) 15 002 26 028 49 10 454 89 13 334 64 956 19 470 (8) 66 767 3 783 32 700 (57 756) 64 956 300 153 147 153 300 54 186 60 60 73 (13) 4 260 (277) (5 361) (16 380) (1 225) 3 744 (1 101) 3 614 NedbaNk limited – ANNUAL report 2015 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 1 1.1 PRINCIPAL ACCOUNTING POLICIES The group applies the following accounting policies in preparing the consolidated financial statements of Nedbank Ltd. Basis of preparation The financial statements have been prepared on a going-concern basis and have been prepared on a consistent basis with the prior year. The amendments to standards, effective 1 January 2015, did not have a significant impact on the basis of preparation. During the year the group has complied with externally imposed capital requirements (refer to the Risk and Balance Sheet Management Review available at nedbank.co.za for further information). The consolidated financial statements have been prepared in accordance with the IFRS as issued by the International Accounting Standards Board and IFRS IC, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, Financial Pronouncements as issued by the Financial Reporting Standards Council, the requirements of the Companies Act, 71 of 2008 (as amended), and the JSE Listings Requirements. The financial information presented in the consolidated financial statements comprises that of the parent company, Nedbank Ltd, together with its subsidiaries, including consolidated structured entities, joint arrangements and associates, presented as a single entity (the group). Separate financial statements for the company are available at the company's headoffice at Nedbank 135 Rivonia Road Campus, 135 Rivonia Road, Sandown, 2196, Johannesburg. 1.2 The financial statements are presented in SA rand, the functional currency of Nedbank Ltd, and are rounded to the nearest million rands. Accounting policy elections The following accounting policy elections have been made by the group: asset/liability Option election and implication Property and equipment ■■ International Accounting Standards (IAS) 16 permits the use of the cost or revaluation model for the subsequent measurement of property and equipment. Investment in venture capital divisions ■■ IAS 28 provides an exemption from applying the equity method of accounting if an investment in an associate is held by or indirectly through a venture capital organisation. ■■ ■■ ■■ ■■ Land and buildings are stated at revalued amounts, being fair value less subsequent depreciation and impairment. Revaluation surpluses are recognised directly in equity, through other comprehensive income. when the property is disposed of, the cumulative revaluation surplus is transferred directly to retained income. Computer equipment, furniture and other equipment and vehicles are carried at cost less accumulated depreciation. In venture capital divisions the group has elected to carry associate and joint-venture entities at fair value through profit and loss under IAS 39. Financial instruments ■■ IAS 39 allows for the irrevocable designation of financial assets and liabilities on initial recognition at fair value through profit or loss if the designation eliminates or significantly reduces an accounting mismatch. ■■ ■■ The group has elected to designate certain fixed-rate financial assets and liabilities at fair value through profit and loss to reduce the accounting mismatch. Regular way purchases or sales of financial assets are recognised and derecognised using trade date accounting. Investments in subsidiaries, associate companies and joint arrangements ■■ ■■ IAS 39 permits trade date or settlement date accounting for the regular way purchase or sale of financial assets. In terms of IAS 27 investments in subsidiaries, associates and joint arrangements can be accounted for in the separate financial statements either at cost, or in accordance with IAS 39, or in terms of IAS 28. ■■ The group has elected to recognise these investments at cost less impairments in the separate financial statements. accounting policy 1.10 1.3 1.6 1.3 24 NedbaNk limited – ANNUAL report 2015 1.3 Group accounting those entities, undertakings subsidiary undertakings and consolidated structured entities Subsidiary including are unincorporated entities such as trusts and partnerships that are controlled by the group. The  group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The group is considered to have power over an entity when it has existing rights that give it the current ability to direct the relevant activities of the entity. The group is exposed, or has rights, to variable returns from its involvement with the entity when the investor’s returns from its involvement have the potential to vary as a result of the entity’s performance. The group considers all facts and circumstances relevant to its involvement with an entity to evaluate whether control exists. The group assesses any changes to the facts and circumstances relevant the consolidation requirements on a continuous basis. the entity and reassesses to The consolidated financial statements include the assets, liabilities including and results of the company plus subsidiaries, consolidated structured entities from the date control is established until the date that control ceases. Intragroup balances, transactions, income and expenses, and profits and losses are eliminated in preparation of the consolidated financial statements. Unrealised losses are not eliminated to the extent that they provide objective evidence of impairment. Subsidiaries include structured entities that are designed so that its activities are not governed by way of voting rights. In assessing whether the group has power over such investees in which it has an interest, the group considers factors such as the purpose and design of the investee, its practical ability to direct the relevant activities of the investee, the nature of its relationship with the investee, and the size of its exposure to the variability of returns of the investee. associates An associate is an entity over which the group has the ability to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the entity. This is generally demonstrated by the group holding in excess of 20%, but no more than 50%, of the voting rights. in other comprehensive The group’s share of postacquisition profit or loss and post- acquisition movements income are recognised in the income statement and other comprehensive income, respectively. The group applies the equity method of accounting from the date significant influence commences until the date significant influence ceases (or the associate is classified as held for sale), ie when the group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil, inclusive of any long-term debt outstanding. The recognition of further losses is discontinued, except to the extent that the group has incurred legal or constructive obligations, or guaranteed obligations, in respect of the associate. In applying the equity method the investor should use the financial statements of the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. If it is impracticable, the most recent available financial statements of the associate or joint venture should be used, with adjustments made for the effects of any significant transactions or events occurring between the ends of the two accounting periods. However, the difference between the reporting date of the associate and that of the investor cannot be longer than three months. where an entity within the group transacts with an associate of the group, unrealised profits and losses are eliminated to the extent of the group’s interest in the associate but only to the extent that there is no evidence of impairment. At each reporting date the group determines whether there is objective evidence that the investments in associates are impaired. Objective evidence of impairment for an associate investment includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the associate investment may not be recovered. A significant or prolonged decline in the fair value of an associate investment below its cost is also considered objective evidence of impairment. The carrying amounts of such investments are then reduced to recognise any impairment by applying the impairment methodology described in 1.13. Investments in associates that are held with the intention of disposing thereof within 12 months are accounted for and classified as non-current assets held for sale in accordance with the methodology described in 1.12. Joint arrangements Joint arrangements are those entities over which the group has joint control, established by contractual agreements requiring unanimous consent for decisions about relevant activities that significantly affect the arrangements’ returns. They are classified as either joint operations or joint ventures, depending on the contractual rights and obligations of the investor, and accounted for as follows: ■■ Joint operation – when the group has rights to the assets, and obligations for the liabilities, relating to an arrangement, it accounts for its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation, in accordance with the applicable IFRS. ■■ Joint venture – when the group has rights only to the net assets of the arrangement, it accounts for its interest using the equity method as described in the associates accounting policy. sponsored entities where the group does not have an interest in an unconsolidated structured entity, the group will assess whether it sponsors the specific structured entity. The group will sponsor such an entity by assessing whether the group led the formation of the entity, the name of the group is associated with the name of the entity or it provides certain implicit guarantees to the entity in question. Common control transactions Transactions in which combining entities are controlled by the same party or parties before and after the transaction, and where that control is not transitory, are referred to as common-control transactions. The group’s accounting policy for the acquiring entity to account for the transaction is at book values as reflected in the consolidated financial statements of the selling entity. The excess of the cost of the transaction over the acquirer’s proportionate share of the net assets value acquired in common- control transaction will be allocated to the common-control reserve in equity. associate companies and joint ventures held by venture capital divisions where the group has an investment in an associate or joint-venture company held by a venture capital division, whose primary business is to purchase and dispose of minority stakes in entities, the investment is classified as designated at fair value through profit or loss, as the divisions are managed on a fair-value basis. Changes in the fair value of these investments are recognised in non-interest revenue in profit or loss in the period in which they occur. NedbaNk limited – ANNUAL report 2015 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.3 Group accounting (continued) acquisitions and disposals of stakes in group companies Acquisitions of subsidiaries (entities acquired) and businesses (assets and liabilities acquired) are accounted for using the acquisition method. The cost of a business combination is measured as the aggregate of the fair values (at the acquisition date) of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. where the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, that asset or liability is measured at the acquisition date fair value. Subsequent changes in such fair values are accounted for in accordance with IAS 39, either in profit or loss or other comprehensive income. Changes in the fair value of a contingent consideration that has been classified as equity are not recognised. identifiable assets, The acquiree’s liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair value at the date of acquisition, except: ■■ deferred taxation assets or liabilities, which are recognised and measured in accordance with IAS 12 Income Taxes, and liabilities or assets related to employee benefit arrangements, which are recognised and measured in accordance with IAS 19 Employee Benefits; ■■ liabilities or equity instruments that relate to the replacement, by the group, of an acquiree’s share-based payment awards, which are measured in accordance with IFRS 2 Share-based Payments; and ■■ assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale, and discontinued operations, which are measured in accordance with that standard. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the group reports provisional amounts for the items for which the accounting is incomplete. where provisional amounts were reported, these are adjusted during the measurement period (see below). Additional assets or liabilities are recognised to reflect any new information obtained about the facts and circumstances that existed at the date of acquisition, which, if known, would have affected the amounts recognised on that date. The measurement period is the period from the date of acquisition to the date the group receives complete information about the facts and circumstances that existed at the acquisition date. This measurement period is subject to a maximum of one year after the acquisition date. where a business combination is achieved in stages, the group’s previously held interests in the acquired entity are remeasured to fair value at the acquisition date on the date the group attains control, and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income (OCI) are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the group’s equity therein. The interest of non-controlling shareholders is initially measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The choice of measurement basis is made on an acquisition-by- acquisition basis. Subsequent to the acquisition, non-controlling interests consist of the amount attributed to such interests at initial recognition and the non-controlling interest’s share of changes in equity since the date of the combination. The difference between the proceeds from the disposal of a subsidiary, the fair value of any retained investment and its carrying amount at the date of disposal, including the cumulative amount of any exchange differences recognised in the statement of changes in equity that relate to the subsidiary, is recognised as a gain or loss on the disposal of the subsidiary in the group profit or loss for the period. All changes in the group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (transactions with owners). Any difference between the amount by which the non-controlling interests are increased or decreased and the fair value of the consideration paid or received is recognised directly in equity and attributed to the group. Goodwill Goodwill arises on the acquisition of subsidiaries and is recognised as an asset on the date that control is acquired, being the acquisition date. Goodwill represents the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net fair value of the If, after reassessment, the group’s interest in the net fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred plus the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any), this excess is recognised immediately in profit or loss as a bargain purchase gain. identifiable net assets recognised. Goodwill is not amortised, but is tested for impairment at least once a year. Any impairment loss is recognised immediately in profit or loss and is not subsequently reversed. Refer to accounting policy 1.8. On disposal of a subsidiary the goodwill attributable to the subsidiary is included in the determination of the profit or loss on disposal. 1.4 Foreign currency translation Foreign currency transactions Individual entities within the group may use a different functional currency than that of the group, being the currency of the primary economic environment in which the respective entities operate. Transactions in foreign currencies are translated into the functional currency of the individual entities at the date of the transaction by applying the spot exchange rate ruling at the transaction date to the foreign currency amounts. Monetary assets and liabilities in foreign currencies are translated into the functional currency of the respective entities of the group at the spot exchange rate ruling at the reporting date. Exchange differences that arise on the settlement or translation of monetary items at rates that are different from those at which they were translated on initial recognition during the period or in previous financial statements are recognised in profit or loss in the period that they arise. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the respective functional currencies of the group entities using the foreign exchange rates ruling at the dates when the fair values were determined. Non-monetary assets and liabilities denominated in foreign currencies that are measured in terms of historical cost are converted into the functional currency of the respective group entities at the rate of exchange ruling at the date of the transaction and are not subsequently retranslated. Exchange differences on non-monetary items are recognised consistently with the gains and losses that arise on such items, ie 26 NedbaNk limited – ANNUAL report 2015 exchange differences relating to an item for which gains and losses are recognised directly in equity are generally recognised in equity. Similarly, exchange differences for non-monetary items for which gains and losses are recognised in profit or loss are recognised in profit or loss in the period in which they arise. investments in foreign operations Nedbank Ltd’s presentation currency is SA rand. The assets and liabilities, including goodwill, of those entities that have functional currencies other than that of the group (SA rand) are translated at the closing exchange rate. Income and expenses are translated using the average exchange rate for the period. The differences that arise on translation of these entities are recognised in OCI in the statement of comprehensive income. The cumulative exchange differences are recognised as a separate component of equity and are represented by the balance in the foreign currency translation reserve. On disposal of a foreign operation the cumulative amount in the foreign currency translation reserve related to that operation is transferred to profit or loss for the period when the gain or loss on the disposal of the foreign operation is recognised. The primary and major determinants for non-rand functional currencies are the economic factors that determine the sales price for goods and services as well as costs. Additional supplementary factors to be considered are funding, autonomy and cashflows. 1.5 Cash and cash equivalents 1.6 Cash and cash equivalents represents cash on hand and demand deposits and cash equivalents, which are short-term (ie a maturity of less than 90 days from acquisition), highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value. Cash and cash equivalents therefore include cash and balances with central banks that can be withdrawn on demand (except where a specific minimum balance at the end of the day is required to be maintained), other eligible bills and amounts due from other banks. Financial instruments Financial instruments, as recognised in the statement of financial position, include all financial assets and financial liabilities, including derivative instruments, but exclude investments in subsidiaries, associate companies and joint arrangements (other than investments held by venture capital divisions) and employee benefit plans and leases. Financial instruments are accounted for under IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures and IFRS 13 Fair-value Measurement. This accounting policy should be read in conjunction with the group’s categorised statement of financial position, the group’s risk management policies and note 35.1. initial recognition Financial instruments are recognised in the statement of financial position when the group becomes a party to the contractual provisions of a financial instrument. All purchases of financial assets that require delivery within the timeframe established by regulation or market convention (‘regular way’ purchases) are recognised at the trade date, which is the date on which the group commits to purchase the financial asset. The liability to pay for ‘regular way’ purchases of financial assets is recognised on the trade date, which is when the group becomes a party to the contractual provisions of the financial instrument. Contracts that require or permit net settlement of the change in the value of the contract are not considered ‘regular way’ contracts and are treated as derivatives between the trade and settlement dates of the contract. initial measurement Financial instruments that are categorised and designated at initial recognition as being at fair value through profit or loss are recognised at fair value. Transaction costs, which are directly attributable to the acquisition or on issue of these financial instruments, are recognised immediately in profit and loss. Financial instruments that are not carried at fair value through profit or loss are initially measured at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial instruments. where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique, the variables of which include only data from observable markets, the group defers such differences (day-one gains or losses). Day-one gains or losses are amortised on a straight-line basis over the life of the financial instrument. To the extent that the inputs determining the fair value of the instrument become observable, or on derecognition of the instrument, day-one gains or losses are recognised immediately in profit or loss. Categories of financial instruments Subsequent to instruments are initial recognition, financial measured at fair value or amortised cost, depending on their classification and whether fair value can be measured reliably: ■■ Financial instruments at fair value through profit or loss Financial instruments at fair value through profit or loss instruments that are held for trading and consist of instruments that the group has designated, at the initial recognition date, as at fair value through profit or loss. The group classifies instruments as held for trading if they have been acquired or incurred principally for the purpose of sale or repurchase in the near term, they are part of a portfolio of identified financial instruments for which there is evidence of a recent actual pattern of short-term profittaking or they are derivatives. The group’s derivative transactions include foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, and currency and interest rate options (both written and purchased). Financial instruments that the group has elected, at the initial recognition date, to designate as at fair value through profit or loss are those that meet any one of the following conditions: the designation of fair value through profit or loss eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on assets and liabilities on different bases; the instrument forms part of a group of financial instruments that is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to key management personnel, using a fair-value basis; or a contract contains one or more embedded derivatives that require separation from the host contract or a derivative that significantly modifies the cashflows of the host contract. to relating the amortised-cost basis Gains or losses on financial instruments at fair value through profit or loss (excluding interest income and interest expense calculated on interest-bearing instruments that have been designated as at fair value through profit or loss) are reported in non-interest revenue in the period in which they arise. Interest income and interest expense calculated in accordance with the effective-interest method are reported in interest income and expense, except for interest income and interest expense on instruments held for trading, which are recognised in non-interest revenue. NedbaNk limited – ANNUAL report 2015 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.6 Financial instruments (continued) ■■ Non-trading financial liabilities All financial liabilities, other than those at fair value through profit or loss, are classified as non-trading financial liabilities and are measured at amortised cost. The interest expense is recorded in interest expense and similar charges. ■■ Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and a fixed maturity that the group has the positive intention and ability to hold to maturity, other than those that meet the definition of loans and receivables or those that were designated as at fair value through profit or loss or available for sale. Held-to-maturity financial assets are measured at amortised cost, with interest income recognised in interest and similar income. ■■ Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those financial assets classified by the group on initial recognition as at fair value through profit or loss, available for sale or loans and receivables that are held for trading. Financial assets that are classified as loans and receivables are carried at amortised cost, with interest income recognised in interest and similar income. Gains or losses arising on disposal are recognised in non-interest revenue. ■■ Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that the group has designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets as at fair value through profit or loss. losses recognised fair-value gains or Available-for-sale financial assets are measured at fair value, with in other comprehensive income, unless the asset has been designated as a hedged item in a fair-value hedging relationship subject to hedge accounting. In a fair-value hedging relationship the portion of the fair value gain or loss of the asset attributable to the hedged risk is recorded in profit and loss to offset changes in the fair value of the hedging instrument. Any other changes in the fair value of the asset attributable to aspects other than the hedged risk is recognised in other comprehensive income. Foreign currency translation gains or losses on monetary items, impairment losses and interest income calculated using the effective-interest-rate method, are reported in profit or loss. derivative financial instruments and hedge accounting Derivatives are classified as financial assets when their fair value is positive or as financial liabilities when their fair value is negative, subject to the offsetting principles as described under ‘Offsetting financial income’. The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. instruments and related ■■ Derivatives that qualify for hedge accounting The group applies hedge accounting when transactions meet the criteria set out in IAS 39. The group's hedging strategy makes use of fair-value hedges, which are hedges of the change in fair-value of recognised assets or liabilities or firm commitments (‘fair value hedges’). At the inception of a hedging relationship the group designates and documents the relationship between the hedging instrument and the hedge item as well as its risk management objective and strategy for undertaking the hedging transactions, and the nature of the risk being hedged. The group also documents its assessment of whether the hedging instrument is effective in offsetting changes in fair value or cashflow of the hedged item attributable to the hedged risk. Hedge effectiveness is assessed at inception and throughout the term of each hedging relationship. Each hedge must be expected to be highly effective (prospective effectiveness) (retrospective and demonstrate actual effectiveness effectiveness) on an ongoing basis. For prospective effectiveness the hedging instrument must be expected to be highly effective in offsetting changes in fair value or cashflows attributable to the hedges risk during the period for which the hedge is designated. For actual effectiveness to be achieved the changes in fair value or cashflows must offset each other in the range of 80% to 125%. Interest on designated qualifying hedges is included in net interest income. ■■ Fair-value hedges where a hedging relationship is designated as a fair-value hedge, the hedged item is adjusted for the change in fair value in respect of the risk being hedged. Fair-value gains and losses arising on the remeasurement of both the hedging instrument and the hedged item are recognised in ‘net interest income’, for so long as the hedging relationship is effective. Any hedge ineffectiveness is recognised in profit and loss in non-interest revenue. If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for fair value hedge accounting, or the designation is discontinued. is revoked, then hedge accounting ■■ Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of derivatives that are not designated as being subject to hedge in non-interest accounting are recognised revenue. immediately embedded derivatives Derivatives in a host contract that is a financial or non-financial instrument, such as an equity conversion option in a convertible bond, are separated from the host contract when all of the following conditions are met: ■■ ■■ The economic characteristics and risks of the embedded derivative are not closely related to those of the host contract. A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. ■■ The combined contract is not measured at fair value, with changes in fair value recognised in profit or loss. The host contract is accounted for: ■■ ■■ under IAS 39 if it is a financial instrument; and in accordance with other appropriate accounting standards if it is not a financial instrument. If an embedded derivative is required to be separated from its host contract, but it is not possible to measure the fair value of the embedded derivative separately, either at acquisition or at a subsequent financial reporting date, the entire hybrid instrument is categorised as at fair value through profit or loss and measured at fair value. 28 NedbaNk limited – ANNUAL report 2015 measurement basis of financial instruments There are two bases of measurement, namely amortised cost and fair value: ■■ Amortised cost instrument The amortised cost of a financial instrument is the amount at initial which the financial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective-interest method of any difference between the initial contractual amount and the maturity amount, less any cumulative impairment losses. is measured on The effective-interest method is a method of calculating the amortised cost of a financial instrument and of allocating the interest income and expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial instrument. when calculating the effective interest rate, cashflows are estimated considering all contractual terms of the financial instrument, but future credit losses are not considered. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. ■■ Fair value The fair value of a financial instrument is the amount that would be received to sell the asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of instruments that are quoted in an active market is determined using quoted prices where they represent those at which regularly and recently occurring transactions take place. The group uses valuation techniques to establish the fair value of instruments where quoted prices in active markets are not available. For a detailed discussion of the fair value of financial instruments refer to note 35.1. impairment of financial assets The group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event has (or events have) an impact on the estimated future cashflows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the group about the following loss events: ■■ ■■ ■■ ■■ ■■ ■■ significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in respect of interest or principal payments; the group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the group would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cashflows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the payment status of borrowers in the group; or national or local economic conditions that correlate with defaults on the assets in the group. Loans that would otherwise be past due or impaired and whose terms have been renegotiated and display the characteristics of a performing loan are reset to performing status. Loans whose terms have been renegotiated continue to be monitored to determine whether they are considered to be impaired or past due. ■■ Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity financial assets carried at amortised cost has been incurred, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cashflows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. The group first assesses whether there is objective evidence of impairment individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the group determines that there is no objective evidence of impairment for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised is reversed by impairment adjusting the allowance account. The reversal may not result in a carrying amount of the financial asset that exceeds what the amortised cost would have been had the impairment not been recognised at the date on which the impairment is reversed. The amount of the reversal is recognised in profit or loss for the period. loss ■■ Available-for-sale financial assets income, is removed when a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity, in the statement of comprehensive income, and there is objective evidence that the asset is impaired, the cumulative loss that has been recognised directly in equity, in the statement of comprehensive from equity and recognised in profit or loss. The amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. Impairment losses recognised in profit or loss for an investment in an equity instrument classified as available for sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss for the period. NedbaNk limited – ANNUAL report 2015 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.6 Financial instruments (continued) ■■ Maximum credit risk Credit risk arises principally from loans and advances to clients, investment securities, derivatives and irrevocable commitments to provide facilities. The maximum credit risk is typically the gross carrying amount, net of any amounts offset and impairment losses. The maximum credit exposure for loan commitments is the full amount of the commitment if the loan cannot be settled net in cash or using another financial asset. derecognition The group derecognises a financial asset (or group of financial assets) or a part of a financial asset (or part of a group of financial assets) when, and only when: ■■ ■■ ■■ the contractual rights to the cashflows arising from the financial asset have expired; or it transfers the financial asset, including substantially all the risks and rewards of ownership of the asset; or it transfers the financial asset, neither retaining nor transferring substantially all the risks and rewards of ownership of the asset, but no longer retaining control of the asset. A financial liability (or part of a financial liability) is derecognised when, and only when, the liability is extinguished, ie when the obligation specified in the contract is discharged, cancelled or has expired. The difference between the carrying amount of a financial asset or financial liability (or part thereof) that is derecognised and the consideration paid or received, including any non-cash assets transferred or liabilities assumed, is recognised in non-interest revenue for the period. securitisations The group securitises various consumer and commercial financial assets, generally resulting in the sale of these assets to structured entities, which in turn issue securities to investors. Interests in the securitised financial assets may be retained in the form of senior or subordinated tranches, interest-only strips or other residual interests (retained interests). Retained interests are primarily recorded in available-for-sale investment securities and carried at fair value. Gains or losses on securitisation, if the financial assets or liabilities are derecognised, depend in part on the carrying amount of the transferred financial assets, allocated between the financial assets derecognised and the retained interests based on their relative fair values at the date of transfer. Gains or losses on securitisation are recorded in non-interest revenue for the period. Offsetting financial instruments and related income Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when the group has a legally enforceable right to set off the financial asset and financial liability and the group has an intention of settling the asset and liability on a net basis or realising the asset and settling the liability simultaneously. Income and expense items are offset only to the extent that their related instruments have been offset in the statement of financial position. 1.7 Collateral Financial and non-financial assets are held as collateral in respect of recognised financial assets. Such collateral, except cash collateral, is not recognised by the group, as the group does not retain the risks and rewards of ownership, and is obliged to return such collateral to counterparties on settlement of the related obligations. Should a counterparty be unable to settle its obligations, the group takes possession of collateral or calls on other credit enhancements as full or part settlement of such amounts. These assets are recognised when the applicable recognition criteria under IFRS are met, and the group’s accounting policies are applied from the date of recognition. Cash collateral is recognised when the group receives the cash and is reported as amounts received from depositors. Collateral is also given to counterparties under certain financial arrangements, but such assets are not derecognised where the group retains the risks and rewards of ownership. Such assets are at risk to the extent that the group is unable to fulfil its obligations to counterparties. For a detailed discussion on collateral see note 47. sale and repurchase agreements and lending of securities Securities sold subject to linked repurchase agreements are retained in the financial statements, as the group retains all risks and rewards of ownership of the securities. The securities are recorded as trading or investment securities and the counterparty liability is included in amounts owed to other depositors, deposits from other banks, or other money market deposits, as appropriate. Securities purchased under agreements to resell are recorded as loans and advances to other banks or clients, as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the duration of the agreements using the effective-interest method. Securities lent to counterparties are also retained in the financial statements and any interest earned is recognised in profit or loss using the effective interest-rate method. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in non-interest revenue. The obligation to return them is recorded at fair value as a trading liability. acceptances Acceptances comprise undertakings by the group to pay bills of exchange drawn on clients. The group expects most acceptances to be settled simultaneously with the reimbursement from clients. Acceptances are recorded as liabilities within amounts owed to depositors, with the corresponding asset recorded in the statement of financial position within loans and advances. Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Issued financial guarantee contracts are recognised as insurance contracts and are measured at the best estimate of the expenditure required to settle any financial obligation as of the reporting date. Liability adequacy testing is performed to ensure that the carrying amount of the liability for issued financial guarantee contracts is sufficient. Any increase in the liability relating to guarantees is recognised in profit or loss. taxation Taxation expense, recognised in the statement of comprehensive income, comprises current and deferred taxation. Current or deferred taxation is recognised in profit or loss, except to the extent that it relates to items recognised directly in equity, in which case it too is recognised in equity and to the extent that it relates to items recognised in other comprehensive income (OCI), in which case it too is recognised in OCI. Current taxation Current taxation is the expected tax payable on the taxable income for the year, using taxation rates enacted or substantively enacted at the reporting date, and any adjustment to taxation payable in respect of previous years (prior-period tax paid). 30 NedbaNk limited – ANNUAL report 2015 deferred taxation Deferred taxation is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective taxation bases. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, and is measured at the taxation rates (enacted or substantively enacted at the reporting date) that are expected to be applied to the temporary differences when they reverse. Deferred taxation is recognised in profit or loss for the period, except to the extent that it relates to a transaction that is recognised directly in equity or in OCI, or a business combination that is accounted for as an acquisition. The effect on deferred taxation of any changes in taxation rates is recognised in profit or loss for the period, except to the extent that it relates to items previously charged or credited directly to equity. liabilities are recognised for all taxable Deferred taxation temporary differences, and deferred taxation assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Deferred taxation assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related taxation benefits will be realised. Deferred taxation is not recognised for the following temporary differences: ■■ ■■ ■■ the initial recognition of goodwill; the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries, associates and jointly controlled entities to the extent that the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred taxation assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related taxation benefits will be realised. Deferred taxation assets and liabilities are offset if there is a legally enforceable right to offset current taxation liabilities against current taxation assets, and they relate to income taxes levied by the same taxation authority on the same taxable entity, or on different taxation entities, but they intend to settle current tax liabilities and assets on a net basis or their taxation assets and liabilities will be realised simultaneously. 1.8 Intangible assets Goodwill and goodwill impairment Goodwill arises on the acquisition of subsidiaries, associates and joint arrangements. Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investments the carrying amount of goodwill is included in the carrying amount of the investment. Goodwill is allocated to one or more cash-generating units (CGUs), being the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is allocated to the CGUs in which the synergies from the business combinations are expected. Each CGU containing goodwill is annually tested for impairment. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses that are recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to a CGU and then to reduce the carrying amount of the other assets in the CGU on a pro rata basis. However, the carrying amount of these other assets may not be reduced below the highest of its fair value less cost to sell, its value in use and zero. impairment testing procedures The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value in use. The fair value less cost to sell is determined by ascertaining the current market value of an asset (or the CGU) and deducting any costs related to the realisation of the asset. In assessing value in use the expected future cashflows from the CGU are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the particular CGU. Impairment losses relating to goodwill are not reversed and all impairment losses are recognised in capital and non-trading items for the period. Computer software and capitalised development costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, and expenditure on internally generated goodwill and brands are recognised as an expense in profit or loss for the period. If costs can be reliably measured and future economic benefits are available, expenditure on computer software and other development activities, whereby set procedures and processes are applied to a project for the production of new or substantially improved products and processes, is capitalised if the computer software and other developed products or processes are technically and commercially feasible and the group has intention to complete development. The and sufficient expenditure capitalised includes the cost of materials and directly attributable employee and other direct costs. Computer development expenditure is amortised only once the relevant intended by software less management. Capitalised software accumulated amortisation and impairment losses. Expenditure for the development of computers that are not yet available for use is not amortised and is stated at cost less impairment losses. is available for use is stated at cost in the manner resources Amortisation of computer software and development costs is charged to profit or loss on a straight-line basis over the estimated useful lives of these assets, which do not exceed five years and are reviewed annually. Subsequent expenditure relating to computer software is capitalised only when it increases the future economic benefits embodied in the specific asset, in its current condition, to which it relates. All other subsequent expenditure is recognised as an expense in the period in which it is incurred. The profit or loss on the disposal of computer software is recognised in non-trading and capital items (in profit or loss). The profit or loss on disposal is the difference between the net proceeds received and the carrying amount of the asset. The amortisation methods and residual values of these intangible assets are reviewed on an annual basis. Contractual client relationships Contractual client relationships, including the present value of in- force business in insurance businesses, acquired in a business combination are recognised at fair value at the date of acquisition. The contractual client relationships have a finite useful life and are carried at cost less accumulated amortisation. The useful lives of these client relationships are reviewed on an annual basis. Amortisation is calculated using the straight-line method over the expected life of the client relationship. NedbaNk limited – ANNUAL report 2015 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.9 employee benefits The group operates a number of postemployment defined-benefit and defined-contribution plans for eligible employees. The assets of these plans are generally held in separate trustee–administered funds. These benefits are accounted for in accordance with IAS 19 Employee Benefits. defined-benefit plans The liability recognised in the statement of financial position in respect of defined-benefit pension plans is the present value of the defined-benefit obligation at the reporting date less the fair value of plan assets. The defined-benefit obligation is calculated annually by independent actuaries using the projected-unit credit method. The present value of the defined-benefit obligation is determined by discounting the estimated future cash outflows using yields for government bonds that have maturity dates approximating the terms of the group’s obligations. Gains or losses resulting from remeasurements are recognised immediately in other comprehensive income. Remeasurements include actuarial gains and losses, return on plan assets, excluding amounts included in net interest, and the asset ceiling, excluding amounts included in net interest. Current service costs and net interest on the defined-benefit liability are recognised immediately as an expense in profit or loss. Past service costs are recognised in profit or loss on the earlier of the date of the plan amendment or curtailment, and the date the group recognises related restructuring costs. Plan assets are only offset against plan liabilities where they are assets held by long-term employee benefit funds or qualifying insurance policies. Qualifying insurance policies exclude any policies held by the group’s holding or subsidiary companies. defined-contribution plans Contributions to defined-contribution plans are recognised as an expense in profit or loss in the periods during which services are rendered by employees. Postemployment benefit plans The group provides postretirement medical benefits and disability cover for eligible employees. The non-pension postemployment benefits are accounted for, in accordance with their nature, as either a defined-contribution plan or a defined-benefit plan. Similarly, the expected costs associated with such benefits are accounted for in a manner consistent with their classification. short-term employee benefits Short-term employee benefits include salaries, accumulated leave payments, bonuses and non-monetary benefits such as medical aid contributions. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount to be paid under short- term cash bonus plans or accumulated leave if the group has a present, legal or constructive obligation to pay this amount as a result of past services provided by the employee and the obligation can be estimated reliably. 1.10 property and equipment Items of property and equipment are initially recognised at cost if it is probable that any future economic benefits associated with the items will flow to the group and they have a cost that can be measured reliably. Subsequent expenditure is capitalised to the carrying amount of items of property and equipment if it is measurable and it is probable that it increases the future economic benefits associated with the asset. All other expenses are recognised in profit or loss as an expense when incurred. Subsequent to initial recognition, computer equipment, vehicles and furniture and other equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Land and buildings, the fair values of which can be reliably measured, are carried at revalued amounts, being the fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation increases are credited directly to other comprehensive income and presented in 'Revaluation reserve’. However, equity under the heading revaluation increases are recognised in profit or loss to the extent that they reverse a revaluation decrease of the same asset previously recognised in profit or loss. Revaluation decreases are recognised in profit or loss. However, decreases are debited directly to equity to the extent of any credit balance existing in the revaluation surplus in respect of the same asset. Land and buildings are revalued on the same basis as investment properties. This accounting policy should be read in conjunction with note 26. depreciation Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Items of property and equipment that are classified as held for sale in terms of IFRS 5 are not depreciated. The depreciable amounts of property and equipment are recognised in profit or loss on a straight line basis over the estimated useful lives of the items of property and equipment, unless they are included in the carrying amount of another asset. The useful lives, residual values and depreciation methods for property and equipment are assessed and adjusted (where required) on an annual basis. On revaluation any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the item concerned and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount and residual values. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred net of any related deferred taxation between the revaluation reserve and retained earnings as the property is utilised. Land is not depreciated. The maximum initial estimated useful lives are as follows: Computer equipment Motor vehicles Fixtures and furniture Leasehold property Significant leasehold property components Freehold property Significant freehold property components 5 years 6 years 10 years 20 years 10 years 50 years 5 years derecognition Items of property and equipment are derecognised on disposal or when no future economic benefits are expected from their use or disposal. The gain or loss on derecognition is recognised in profit or loss and is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. On derecognition any surplus in the revaluation reserve in respect of an individual item of property and equipment is transferred directly to retained earnings in the statement of changes in equity. Compensation from third parties for items of property and equipment that were impaired, lost or given up is included in profit or loss when the compensation becomes receivable. 1.11 Investment properties Investment properties comprise real estate held for earning rentals and/or for capital appreciation. This does not include real estate held for use in the supply of services or for administrative purposes. 32 NedbaNk limited – ANNUAL report 2015 1.12 Investment properties are initially measured at cost plus any directly attributable expenses. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons valuations are carried out over a cyclical basis over a 12-month period due to the large number of investment properties involved. External valuations are obtained once every three years on a rotational basis. In the event of a material change in market conditions between the valuation date and reporting date an internal valuation is performed and adjustments made to reflect any material changes in value. The valuation methodology applied is dependent on the nature of the property. Income-generating assets are valued using discounted cashflows. Vacant land, land holdings and residential flats are valued according to sales of comparable properties. Near- vacant properties are valued at land value less the estimated cost of demolition. Surpluses and deficits arising from changes in fair value are recognised in profit or loss for the period in the statement of comprehensive income. For properties reclassified during the year from property and equipment to investment properties any revaluation gain arising is initially recognised in profit or loss to the extent of previously charged impairment losses. Any residual excess is taken to the revaluation reserve. Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deficit is accounted for in profit or loss for the period. Investment properties that are reclassified to owner-occupied property are revalued at the date of transfer, with any difference being taken to profit or loss. Non-current assets held for sale and discontinued operations Non-current assets (or disposal groups) are classified as held for sale when their carrying amount will be recovered principally through sale rather than use. The asset or disposal group must be available for immediate sale in its present condition and the sale should be highly probable, with an active programme to find a buyer and the appropriate level of management approving the sale. Immediately before classification as held for sale, all assets and in accordance with the group’s liabilities are remeasured accounting policies. Non-current assets (or disposal groups) held for sale are measured at the lower of the carrying amount and fair value less incremental directly attributable cost to sell (excluding taxation and finance charges) and are not depreciated. Gains or losses recognised on initial classification as held for sale and subsequent remeasurement are recognised in profit or loss, regardless of whether the assets were previously measured at revalued amounts. The maximum gains that can be recognised are the cumulative impairment losses previously recognised in profit or loss. A disposal group continues to be consolidated while classified as held for sale. Income and expenses continue to be recognised in profit or loss. Non-current assets (or disposal groups) are reclassified from held for sale to held for use if they no longer meet the held-for-sale criteria. On reclassification the non-current asset (or disposal group) is remeasured at the lower of its recoverable amount and the carrying amount that would have been recognised had the asset (or disposal group) never been classified as held for sale. Any gains or losses are recognised in profit or loss, unless the asset was carried at a revalued amount prior to classification as held for sale. A discontinued operation is a clearly distinguishable component of the group’s business that has been disposed of or is held for sale, which: 1.13 ■■ ■■ represents a separate major line of business or geographical area of operations; is part of a single coordinated plan to dispose of a major line of business or geographical area of operations; or ■■ is a subsidiary acquired exclusively with a view to resale. This accounting policy should be read in conjunction with note 23. Impairment (all assets other than financial assets, deferred taxation assets and investment property) The group assesses all assets (other than financial assets, deferred taxation assets and investment property) for indications of impairment or the reversal of a previously recognised impairment at each reporting date. These impairments (where the carrying amount of an asset exceeds its recoverable amount), or the reversal of a previously recognised impairment, are recognised in profit or loss for the period. Intangible assets not yet available for use are tested, at least on an annual basis, for impairment. An impairment loss is recognised in profit or loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. The fair value less cost to sell is determined by ascertaining the current market value of an asset and deducting any costs related to the realisation of the asset. In assessing value in use the expected future pretax cashflows from the asset are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset the cashflows of which are largely dependent on those of other assets the recoverable amount is determined for the CGU to which the asset belongs. A previously recognised impairment loss will be reversed if the recoverable amount increases as a result of a change in the estimates used previously to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised in prior periods. 1.14 provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event in respect of which it is probable that an outflow of economic benefits will occur and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the reasonable estimate of the expenditure required to settle the obligation at the reporting date. where the effect of discounting is material, the provision is discounted. The discount rate reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Gains from the expected disposal of assets are not taken into account in measuring provisions. Provisions are reviewed at each reporting date and adjusted to reflect the current reasonable estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision is reversed. Reimbursements where some or all of the expenditure required to settle a provision is expected to be reimbursed by a party outside the group, the reimbursement is recognised when it is virtually certain that it will be received if the group settles the obligation. The reimbursement is recorded as a separate asset at an amount not exceeding the related provision. The expense for the provision is presented net of the reimbursement in profit or loss. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the group from an executory contract are lower than the unavoidable cost of meeting the obligations under the contract. Future operating costs or losses are not provided for. NedbaNk limited – ANNUAL report 2015 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.15 Share-based payments equity-settled share-based payment transactions with employees The group receives services from employees as consideration for equity instruments of the group. The fair value of the employee services is measured at the grant date, by reference to the fair value of the equity instruments, and is not subsequently remeasured. If the equity instruments granted vest immediately and an employee is not required to complete a specified period of service before becoming unconditionally entitled to the instruments, the services received are recognised in profit or loss for the period in full on the grant date, with a corresponding increase in equity. where the equity instruments do not vest until the employee has completed a specified period of service, it is assumed that the services rendered by the employee, as consideration for the equity instruments, will be received in the future during the vesting period. The services are accounted for in profit or loss in the statement of comprehensive income as they are rendered during the vesting period, with a corresponding increase in equity. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non- market performance conditions at the vesting date. where the equity instruments are no longer outstanding, the accumulated share-based payment reserve in respect of those equity instruments is transferred to retained earnings. Cash-settled share-based payment transactions with employees The cost of cash-settled transactions is measured initially at fair value at the grant date. The fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognised in the statements of comprehensive income as staff costs. measurement of fair value of equity instruments granted The equity instruments granted by the group are measured at fair value at the measurement date using standard option pricing valuation models. The valuation technique is consistent with generally acceptable valuation methodologies for pricing financial instruments and incorporates all factors and assumptions that knowledgeable, willing market participants would consider in setting the price of the equity instruments. Vesting conditions, other than market conditions, are not taken into account in determining fair value. Vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount. share-based payment transactions with persons or entities other than employees Transactions in which equity instruments are issued to historically disadvantaged individuals and organisations in SA for less than fair value are accounted for as share-based payments. where the group has issued such instruments and expects to receive services in return for equity instruments, the share-based payment charge is spread over the related vesting (ie service) period. In instances where such services could not be identified the cost has been expensed with immediate effect. The valuation techniques are consistent with those mentioned above. ■■ ■■ ■■ ■■ payment of cash, in the form of a dividend or redemption, is at the discretion of the group; the instrument does not provide for the exchange of financial instruments under conditions that are potentially unfavourable to the group; settlement in the group’s own equity instruments is for a fixed number of equity instruments at a fixed price; and the instrument represents a residual interest in the assets of the group after deducting all its liabilities. Consideration paid or received for equity instruments is recognised directly in equity. Equity instruments are initially measured at the proceeds received, less incremental directly attributable issue costs, net of any related income tax benefits. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the group’s equity instruments. when the group issues a compound instrument, ie an instrument that contains a liability and an equity component, the fair value of the liability component is calculated first and the equity component is treated as residual. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. Distributions to holders of equity instruments are recognised as distributions in the statement of changes in equity in the period in which they are payable. Dividends for the year that are declared after the reporting date are disclosed in note 13 to the financial statements. 1.17 treasury shares when the group acquires its own share capital, the amount of the consideration paid, including directly attributable costs and net of any related tax benefit, is recognised as a change in equity. Shares repurchased by the issuing entity are cancelled. Shares repurchased by group entities are classified as treasury shares and are held at cost. These shares are treated as a deduction from the issued and weighted-average number of shares and the cost price of the shares is presented as a deduction from total equity. The par value of the shares is presented as a deduction from ordinary share capital and the remainder of the cost is presented as a deduction from ordinary share premium. Dividends received on treasury shares are eliminated on consolidation. 1.18 Investment contracts investment contract liabilities Liabilities for unit-linked and market-linked contracts are reported at fair value. For unit-linked contracts the fair value is calculated as the account value of the units, ie the number of units held multiplied by the bid price value of the assets in the underlying fund (adjusted for taxation). For market-linked contracts the fair value of the liability is determined with reference to the fair value of the underlying assets. This fair value is calculated in accordance with the financial soundness valuation basis, except that negative rand reserves arising from the capitalisation of future margins are not permitted. The fair value of the liability, at a minimum, reflects the initial deposit of the client, which is repayable on demand. Investment contract liabilities (other than unit-linked and market- linked contracts) are measured at amortised cost. Embedded derivatives included in investment contracts are separated out and measured at fair value. The host contract liability is measured on an amortised-cost basis. 1.16 Share capital Ordinary share capital, preference share capital or any financial instrument issued by the group is classified as equity when: Revenue on investment management contracts Fees charged for investment management services in conjunction with investment management contracts are recognised as revenue 34 NedbaNk limited – ANNUAL report 2015 as the services are provided. Initial fees that exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the projected period over which services will be provided. Contribution income relating to investment contracts Contribution income includes lump sums received in respect of linked businesses with retirement funds and are accounted for when due. The contribution income is set off directly against the liability under investment contracts. benefits relating to investment contracts Policyholder benefits are accounted for when claims are intimated directly against the liability under investment contracts. 1.19 Insurance contracts Contracts under which the scheme accepts insurance risk from another party by agreeing to compensate such party or other beneficiaries if a specified uncertain future event adversely affects the party or other beneficiaries are classified as insurance contracts. Policy liabilities The policy liabilities under unmatured policies, including unintimated claims, are computed at the reporting date according to the financial- soundness valuation method as set out in the guidelines issued by the Actuarial Society of SA in Professional Guidance Note (PGN) 104. Claims intimated but not paid are provided for. The actuarial statement of financial position is included as a separate item in the group’s annual financial statements. The group performs a liability adequacy test on its liabilities in line with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. linked products Linked products are investment-related products where the risk and reward of the underlying investment portfolio accrue to the policyholder. Linked products, which provide for returns based on the change in the value of the underlying instruments and market indicators, are initially recorded at cost. These products are revalued at year-end using discounted-cashflow analysis, closing market values and index values based on the observation dates stated in the underlying investment agreements. Valuations are adjusted for the effects of changes in foreign exchange rates. Actuarial liabilities of these linked products are stated at the same value as the underlying investments. 1.20 Leases the group as lessee Leases in respect of which the group bears substantially all risks and rewards incidental to ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the lease property and the present value of the minimum lease payments. Directly attributable costs, such as commission paid, incurred by the group are added to the carrying amount of the asset. Each lease payment is allocated between the liability and finance charges to achieve a constant periodic rate of interest on the balance outstanding. Contingent rentals are expensed in the period they are incurred. The depreciation policy for leased assets is consistent with that of depreciable assets owned. If the group does not have reasonable certainty that it will obtain ownership of the leased asset by the end of the lease term, the asset is depreciated over the shorter of the lease term and its useful life. Leases that are not classified as finance leases are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are recognised in profit or loss on a straight-line basis over the term of the lease. when another systematic basis is more representative of the time pattern of the user’s benefit, then that method is used. the group as lessor where assets are leased out under a finance lease arrangement, the present value of the lease payments is recognised as a receivable and included under loans and advances in the statement of financial position. Initial direct costs are included in the initial measurement of the receivable. The difference between the gross receivable and unearned finance income is recognised under loans and advances in the statement of financial position. Finance lease income is allocated to accounting periods to reflect a constant periodic rate of return on the group’s net investment outstanding in respect of the leases. Assets leased out under operating leases are included under property and equipment in the statement of financial position. Initial direct costs incurred in negotiating and arranging the lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the rental income. Leased assets are depreciated over their expected useful lives on a basis consistent with similar assets. Rental income, net of any incentives given to lessees, is recognised on a straight-line basis over the term of the lease. when another systematic basis is more representative of the time pattern of the user’s benefit, then that method is used. Recognition of lease of land Leases of land and buildings are classified as operating or finance leases in the same way as leases of other assets. However, when a single lease covers both land and a building, the minimum lease payments at the inception of the lease (including any upfront payments) are allocated between the land and the building in proportion to the relative fair values of the respective leasehold interests. Any upfront premium allocated to the land element that is normally classified as an operating lease represents prepaid lease payments. These payments are amortised over the lease term in accordance with the time pattern of benefits provided. If the lease payments cannot be allocated reliably between these two elements, the entire lease is classified as a finance lease, unless it is clear that both elements are operating leases. 1.21 Borrowing costs to Borrowing costs directly attributable the acquisition, construction and production of qualifying assets are capitalised as part of the costs of these assets. Qualifying assets are assets that necessarily take a substantial period of time to prepare for their intended use or sale. Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs capitalised are disclosed in the notes by asset category and are calculated at the group’s average funding cost, except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised. 1.22 Government grants Government grants are recognised when there is reasonable assurance that they will be received and that the group will comply with the conditions attached to them. Grants that compensate the group for expenses or losses already incurred or for purposes of giving immediate financial support to the entity with no future- related costs are recognised as income in the period it becomes receivable. Grants that compensate the group for expenses to be incurred are recognised as revenue in profit or loss on a systematic basis in the same periods in which the expenses will be incurred. Grants that compensate the group for the cost of an asset are recognised in profit or loss as revenue on a systematic basis over the useful life of the asset. NedbaNk limited – ANNUAL report 2015 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 1.23 Client loyalty when a cardholder makes a purchase that is regarded as eligible spend, the person/company will be granted points that can be redeemed at a later date for goods or services. Points do not expire, unless a client is delinquent or dormant, in which case the points accrued are forfeited as stated in the terms and conditions. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale. The award credits are recognised as deferred revenue until the entity fulfils its obligations to deliver awards to clients. The consideration allocated to the award credits will be measured by reference to the fair value thereof, ie the amount for which the award credits could be sold separately and the expected manner by which the points will be utilised. Adjustments are made for the expected utilisation and non-utilisation of the points awarded. 1.24 revenue and expenditure interest income and expense Interest income and expense are recognised in profit or loss using the effective-interest method taking into account the expected timing and amount of cashflows. The effective-interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing financial instrument and its amount at maturity calculated on an effective- interest-rate basis. income and expense Interest Non-interest revenue ■■ Fees and commissions The group earns fees and commissions from a range of services it provides to clients and these are accounted for as follows: Income earned on the execution of a significant act is recognised when the significant act has been performed. Income earned from the provision of services is recognised as the service is rendered by reference to the stage of completion of the service. Income that forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate and recorded in interest income. ■■ Dividend income Dividend income is recognised when the right to receive payment is established on the 'ex dividend' date for equity instruments and is included in dividend income under non- interest revenue. ■■ Net trading income Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with the related interest, expense, costs and dividends. Interest earned while holding trading securities and interest incurred on trading liabilities are reported within non-interest revenue. ■■ Income from investment contracts Refer to 1.18 for non-interest revenue arising on investment management contracts. the transaction or service can be measured reliably, it is probable that the economic benefits of the transaction or service will flow to the group and the costs associated with the transaction or service can be measured reliably. Fair-value gains or losses on financial instruments at fair value through profit or loss, including derivatives, are included in non-interest revenue. These fair-value gains or interest losses are determined after deducting component, which interest income and expense. Gains or losses on derecognition of any financial assets or financial liabilities are included in non- interest revenue. is recognised separately the in Profit from operations before non-trading and capital items Non-trading and capital items and fair-value adjustments of investment properties are separately disclosed on the face of the statement of comprehensive income, being remeasurements excluded from the calculation of headline earnings per share in accordance with the guidance contained in SAICA Circular 2/2015: Headline Earnings. The principal items that will be included under these measures are: gains and losses on sale of subsidiaries and available for sale financial assets; gains and losses on sale of property and equipment; impairment of property and equipment and intangible assets; and fair-value adjustments of investment properties. 1.25 Segmental reporting An operating segment is a component of an entity that engages in business activities from which it may earn revenues, the operating results of which component are regularly reviewed by the group's chief operating decisionmakers to make decisions about resources to be allocated and to assess its performance, and for which financial information is available. The group’s identification of its segments and the measurement of segment results are based on the group’s internal reporting to management. The segments have been identified according to the nature of their respective products and services and their related target markets, the detail of which can be found in the segmental reporting section. The segments identified are complemented by the Centre, which provides support in the areas of finance, human resources, governance and compliance, risk management and information technology. Additional information relating to major clients and other performance measures is provided. The group accounts for intersegment revenues and transfers as if the transactions were with third parties at current market prices. 2 2.1 StANDArDS AND INterpretAtIoNS Significant standards and interpretations issued and not yet effective iFRs 9 Financial instruments IFRS 9 Financial Instruments (IFRS 9) was issued in its entirety in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). The final version of this standard incorporates amendments to the classification and measurement, hedge accounting guidance, as well as the accounting requirements for the impairment of debt instruments measured at amortised cost and fair value through other comprehensive income (FVOCI). These elements of the final standard, and a description of the expected impact on the group’s statement of financial position, and performance, are discussed in detail below: ■■ Other ■■ Classification and measurement Exchange and securities trading income, from investments and net gains on the sale of investment banking assets, is recognised in profit or loss when the amount of revenue from Financial assets are to be classified and measured based on the business model for managing the financial asset and the cashflow characteristics of the financial asset. 36 NedbaNk limited – ANNUAL report 2015 Debt instruments are carried at amortised cost if it is the entity’s business model to hold that asset for the purpose of collecting contractual cashflows (‘hold to collect’) and those cashflows comprise solely payments of principal and interest. However, where the entity’s business model considers both the collection of contractual cashflows and sale of financial assets (‘hold to collect and sell’) and those cashflows comprise solely payments of principal and interest, such financial assets will be subsequently measured at FVOCI. Movements in the carrying amount should be taken through OCI, except for the recognition of impairment gains or losses, interest revenue, and foreign exchange gains and losses, which are recognised in profit and loss. where the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss. where the business model is neither ‘hold to collect’ nor ‘hold to collect and sell’ or the cashflows are not solely payments of principal and interest, the financial asset is carried at fair value through profit or loss in its entirety. The group has initiated a process to determine the various business models that are applied by the group, and whether the group’s financial assets meet the 'solely payments of principal and interest' criterion. Until the process has been completed the group is unable to quantify the expected impact. For financial liabilities designated as at fair value through profit or loss, a further requirement is that all changes in the fair value of financial liabilities attributable to changes in the entity’s own credit risk are recognised in OCI. where the financial liability is derecognised, the cumulative gain or loss previously recognised in OCI is not reclassified from equity to profit or loss, but it may be reclassified within equity. The group currently provides note disclosure in respect of the change in fair value due to credit risk of the group’s financial liabilities designated at fair value through profit or loss in note 36.2. The group currently designates certain fixed-rate assets and liabilities, which are economically hedged via interest rate swaps, at fair value through profit or loss. This option remains available under IFRS 9. ■■ Impairments: IFRS 9’s expected credit loss model Impairments in terms of IFRS 9 will be determined based on an expected-credit-loss model rather than the current incurred-loss model required by IAS 39. Entities are required to recognise an allowance for either 12-month or lifetime expected credit losses (ECLs), depending on whether there has been a significant increase in credit risk since initial recognition. The measurement of ECLs reflects a probability-weighted outcome, the time value of money and the entity’s best available forward-looking information. The aforementioned probability-weighted outcome must consider the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is low. The expected-credit-loss model applies to debt instruments recorded at amortised cost or at FVOCI, such as loans, debt securities and trade receivables, lease receivables and most loan commitments and financial guarantee contracts. The group has initiated a process to determine the quantitative impact of the standard on the group's statement of financial position and ongoing performance metrics. Until the process has been completed, the group is unable to quantify the expected impact. For further discussion of the group’s approach to IFRS 9, please refer to the group’s Pillar 3: Basel III Public Disclosure Report for the year ended 31 December 2015. ■■ Hedge accounting The hedge accounting requirements under IFRS 9 are closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. IFRS 9 allows the deferral of the requirements relating to hedge accounting, permitting continuation with IAS 39 principles until the IASB’s macro-hedging project is completed, so as to ensure that reporting entities do not have to comply with interim measures before macro-hedging rules are finalised. The group, like most financial institutions, is considering adopting the deferral option. Accordingly, the new hedging model is not expected to have a significant impact on the micro-hedge accounting of the group. The standard is effective for financial years commencing on or after 1 January 2018. iFRs 15 Revenue from Contracts with Customers IFRS 15 Revenue from Contracts with Customers establishes a single, comprehensive framework for revenue recognition that applies to all contracts with clients (except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments). The core principle of the standard is that revenue recognised reflects the consideration to which the company expects to be entitled in exchange for the transfer of promised goods or services to the client. The standard incorporates a five-step analysis to determine the amount and timing of revenue recognition. The standard is effective for the group for the financial year commencing 1 January 2018. The group has initiated a process to determine the impact of the standard on the group's statement of financial position and performance. Until the process has been completed, the group is unable to quantify the expected impact. iFRs 16 leases The International Accounting Standards Board (IASB) issued IFRS 16 Leases (IFRS 16) in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, ie the client (‘lessee’) and the supplier (‘lessor’). IFRS 16 replaces the previous lease standard, IAS 17 Leases (IAS 17), and related interpretations. the group as lessee IFRS 16 eliminates the classification of leases as either operating leases or finance leased as is required by IAS 17 and, instead, introduces a single-lessee accounting model. Applying that model, a lessee is required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. the group as lessor IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leased or finance leases, and to account for those two types of leases differently. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets and financial liabilities. The group is in the process of quantifying the aforementioned increase in leased assets and financial liabilities. The standard is effective for financial years commencing on or after 1 January 2019. NedbaNk limited – ANNUAL report 2015 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 3 KeY ASSUMptIoNS CoNCerNING tHe FUtUre AND KeY SoUrCeS oF eStIMAtIoN The group’s accounting policies are set out in note 1 of the annual financial statements. Certain of these policies, as well as estimates made by management, are considered to be important for an understanding of the group’s financial condition since they require management to make difficult, complex or subjective judgements and estimates, some of which may relate to matters that are inherently uncertain. The following accounting policies include estimates that are particularly sensitive in terms of judgements and the extent to which estimates are used. Other accounting policies involve significant amounts of judgements and estimates, but the total amounts involved are not significant for the financial statements. Management has agreed the accounting policies and critical accounting estimates with the board and Nedbank Group Audit Committee. 3.1 Allowances for loan impairment and other credit risk provisions Allowances impairment represent management’s for estimate of the losses incurred in the loan portfolios at the reporting date. loan The group assesses its loan portfolios for impairment at each reporting date. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the group makes judgements as to whether there is observable data indicating a measurable decrease in the estimated future cashflows from a portfolio of loans before the decrease can be allocated to an individual loan in that portfolio. Estimates are made of the duration between the occurrence of a loss event and the identification of a loss on an individual basis. The impairment for performing loans is calculated on a portfolio basis, based on historical loss ratios, adjusted for national and industry-specific economic conditions and other indicators present at the reporting date that correlate with defaults on the portfolio. These include early arrears and other indicators of potential default, such as changes in macroeconomic conditions and legislation affecting credit recovery. These annual loss ratios are applied to loan balances in the portfolio and scaled to the estimated loss emergence period. within the Nedbank Retail and Business Banking, and Nedbank wealth portfolios, which comprise large numbers of small homogeneous assets with similar risk characteristics where credit-scoring techniques are generally used, statistical techniques are used to calculate impairment allowances on the portfolio, based on historical recovery rates and assumed emergence periods. These statistical analyses use as primary inputs the extent to which accounts in the portfolio are in arrears and historical information on the eventual losses encountered from such delinquent portfolios. There are many such models in use, each tailored to a product, line of business or client category. Judgement and knowledge are needed in selecting the statistical methods to be used when the models are developed or revised. The impairment allowance reflected in the financial statements for these portfolios is therefore considered to be reasonable and supportable. For larger exposures impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the expected future cashflows are taken into account, for example the business prospects for the client, the realisable value of collateral, the group’s position relative to other claimants, the reliability of client information and the likely cost and duration of the workout process. The level of the impairment allowance is the difference between the value of the discounted expected future cashflows (discounted at the loan’s original effective interest rate) and its carrying amount. Subjective judgements are made in the calculation of future cashflows. Furthermore, judgements change with time as new information becomes available or as workout strategies evolve, resulting in frequent revisions to the impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in the allowances and have a direct impact on the impairments charge. 3.2 Fair value of financial instruments Certain of the group’s financial instruments are carried at fair value through profit or loss, such as those held for trading and those designated by management under the fair-value option. Other non-derivative financial assets may be designated as available for sale. Available-for-sale financial investments are initially recognised at fair value and are subsequently held at fair value. Gains and losses arising from changes in fair value of such assets are included as a separate component of other comprehensive income and presented in equity. The fair value of a financial instrument is the amount that would be received when selling the asset or paid when transfering the liability in an orderly transaction at the measurement date between knowledgeable, willing parties, other than in a forced or liquidation sale. Financial instruments entered into as trading transactions, together with any associated hedging, are measured at fair value and the resultant profits and losses are included in net trading income, along with interest and dividends arising from long and short positions and funding costs relating to trading activities. Assets and liabilities resulting from gains and losses on financial instruments held for trading are reported gross in trading portfolio assets and liabilities or derivative financial instruments, reduced by the effects of netting agreements where there is an intention to settle net with counterparties. Details of the processes, procedures and assumptions used in the determination of fair value are discussed in note 35.1 to the financial statements. In particular, the areas that involve the greatest amount of judgement and complexity include the following: ■■ ■■ ■■ assessing whether instruments are trading with sufficient frequency and volume, for them to be considered liquid; the inclusion of a measure of the counterparties non- performance risk in the fair value measurement of loans and advances, which involves the modelling of dynamic credit spreads; the inclusion of credit valuation adjustment (CVA) and debit valuation adjustment (DVA) in the fair-value measurement of derivative instruments; and ■■ the inclusion of own credit risk in the calculation of the fair value of financial liabilities. These concepts are continuously developing and evolving within the context of the SA market and changes in these assumptions will therefore arise as the market develops. 3.3 Derecognition, securitisations and structured entities The group enters into transactions that may result in the derecognition of certain financial instruments. Judgement is applied as to whether these financial instruments are derecognised from the group’s statement of financial position. The group sponsors the formation of structured entities primarily for the purpose of allowing clients to hold investment for asset securitisation transactions, for asset financing and for buying or selling credit protection. The group consolidates structured entities it controls in terms of IFRS guidance. where it is difficult to determine whether the group controls a structured entity, the group makes judgements, in terms of IFRS guidance, about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the structured entity in question. In arriving at judgements, these factors are considered both jointly 38 NedbaNk limited – ANNUAL report 2015 and separately. Further those securitisations, consolidated into the group financial statements, can be found in note 44 to the financial statements. in respect of information 3.4 Goodwill the Management considers at least annually whether the current carrying value of goodwill is to be impaired. The first step of the impairment review process requires identification of independent CGUs by segmenting the group business into as many largely independent income streams as is reasonably practicable. The goodwill is then allocated to these independent units. The first element of this allocation is based on the areas of the business expected to benefit from the synergies derived from the acquisition. The second element reflects the allocation of the net assets acquired and the difference between the consideration paid for those net assets and their fair value. This allocation is reviewed following business reorganisation. The carrying value of the unit, including the allocated goodwill, is compared with its fair value or value in use to determine whether any impairment exists. If the recoverable amount of a unit is less than its carrying value, goodwill will be impaired. Detailed calculations may need to be carried out, taking into consideration changes in the market in which a business operates (eg competitive activity and regulatory change). In the absence of readily available market price data this calculation is based on discounting expected pretax cashflows at a risk-adjusted interest rate appropriate to the operating unit, the determination of both of which requires the exercise of judgement. The estimation of pretax cashflows is sensitive to the periods for which detailed forecasts are available and to assumptions regarding the long-term sustainable cashflows. while forecasts are compared with actual performance and external economic data, expected cashflows naturally reflect management’s view of future performance. The most significant amount of goodwill relates to Nedbank Ltd. The goodwill impairment testing performed in 2015 indicated that none of the goodwill was impaired in the year under review. Management believes that reasonable changes in key assumptions used to determine the recoverable amount of Nedbank Ltd’s goodwill would not result in impairment. Further information in respect of goodwill recognised in the statement of financial position can be found in note 28 to the financial statements. Intangible assets other than goodwill An internally generated intangible asset, specifically internally developed software generated during the development phase, is recognised as an asset if certain conditions are met. These conditions include technical feasibility, intention to complete the development, ability to use the asset under development and demonstration of how the asset will generate probable future economic benefits. The cost of a recognised internally generated intangible asset comprises all costs directly attributable to making the asset capable of being used as intended by management. Conversely, all expenditures arising during the research phase are expensed as incurred. The decision to recognise internally generated intangible assets requires significant judgement, particularly in the following areas: ■■ ■■ evaluation of whether or not activities should be considered research activities or development activities; assumptions about future market conditions, client demand and other developments; 3.5 ■■ ■■ ■■ assessment of whether completing an asset is technically feasible (the term ‘technical feasibility’ is not defined in the accounting standards, and therefore requires a group- specific and necessarily judgemental approach); evaluation of the future ability to use or sell the intangible asset arising from the development and the assessment of probability of future benefits from sale or use; and evaluation of whether or not a cost is directly or indirectly attributable to an intangible asset and whether or not a cost is necessary for completing a development. All intangible assets of the group have finite useful lives. Consequently, the depreciable amount of the intangible assets is allocated on a systematic basis over their useful lives. Judgement is applied to the following: ■■ ■■ Determining the useful life of an intangible asset, based on estimates regarding the period over which the intangible asset is expected to produce economic benefits to the group. Determining the appropriate amortisation method. Accounting standards require that the straight-line method be used, unless management can reliably determine the pattern in which the future economic benefits of the asset are expected to be consumed by the group. Both the amortisation period and the amortisation method have an impact on the amortisation expenses recorded in each period. In making impairment assessments for the group’s intangible assets, management uses certain complex assumptions and estimates about future cashflows, which require significant judgement and assumptions about future developments. These assumptions are affected by various factors, including changes in the group’s business strategy, internal forecasts and estimation of the group’s weighted-average cost of capital. Due to these factors, actual cashflows and values could vary significantly from the forecast future cashflows and related values derived using the discounted-cashflow method. Further information in respect of intangible assets recognised in the statement of financial position can be found in note 28. 3.6 employee benefits The group provides pension plans for employees in most parts of the world. Arrangements for staff retirement benefits vary from country to country and are made in accordance with local regulations and custom. For defined-benefit schemes, including postretirement medical aid schemes, actuarial valuation of each of the scheme’s obligations using the projected-unit credit method and the fair valuation of each of the scheme’s assets are performed annually in accordance with the requirements of IAS 19 Employee Benefits. The actuarial valuation is dependent on a series of assumptions, the key ones being interest rates, mortality, investment returns and inflation. Mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the group’s own experience. The returns on fixed-interest investments are set to market yields at the valuation date (less an allowance for risk) to ensure consistency with the asset valuation. The returns on equities are based on the long-term outlook for global equities at the calculation date, having regard to current market yields and dividend growth expectations. The inflation assumption reflects long-term expectations of both earnings and retail price inflation. Further information on employee benefit obligations, including assumptions, is set out in note 27 to the financial statements. NedbaNk limited – ANNUAL report 2015 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 3.7 Income taxes The group is subject to direct taxation in a number of jurisdictions in which it operates. There may be transactions and calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business. The group recognises liabilities based on objective estimates of the quantum of taxes that may be due. where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred taxation provisions in the period in which such determination is made through profit and loss for that period. 3.8 Financial risk management The group’s risk management policies and procedures are disclosed in the ‘worldclass risk management’ section. These risk management procedures include, but are not limited to, credit risk, securitisation risk, liquidity risk, interest rate risk in the banking book and market risk. 4 CAPITAL MANAGEMENT Nedbank Group’s Capital Management Framework reflects the integration of risk, capital, strategy and performance measurement across the group and contributes significantly to the Enterprisewide Risk Management Framework (ERMF). A board-approved Solvency and Capital Management policy requires the group to be capitalised at the greater of Basel III regulatory capital and economic capital. The Group Capital Management Division is housed within the Balance Sheet Management Cluster that reports to the Chief Operating Officer and is mandated with the implementation of the Capital Management Framework and the Internal Capital Adequacy Assessment Process (ICAAP) across the group. The capital management (incorporating ICAAP) responsibilities of the board and management are incorporated in their respective terms of reference as contained in the ERMF and are assisted by the board’s Group Risk and Capital Management Committee, and Group Asset and Liability Committee (ALCO) and Executive Risk Committee (Group ALCO), respectively. Capital, reserves and long-term debt instruments The group's capital management framework, policies and processes cover the group's capital and reserves as per the consolidated statement of changes in equity, as well as the long- term debt instruments per note 32. Further details on the ERMF, capital management and regulatory requirements are disclosed in the Pillar 3: Basel III Public Disclosure Report, which is unaudited, unless stated otherwise. 40 NedbaNk limited – ANNUAL report 2015 5 INTEREST AND SIMILAR INCOME Home loans (including properties in possession) Commercial mortgages Finance lease and instalment debtors Credit cards Overdrafts Term loans and other Government and other securities Interest on government and other securities Fair-value adjustments on hedged items (refer to note 16.5) Fair-value adjustments on hedging instruments (refer to note 16.5) Short-term funds and securities Interest and similar income may be analysed as follows: – Interest and similar income from financial instruments not at fair value through profit and loss – Interest and similar income from financial instruments at fair value through profit or loss 6 INTEREST EXPENSE AND SIMILAR CHARGES Deposit and loan accounts Current and savings accounts Negotiable certificates of deposit Other liabilities Long-term debt instruments Interest expense and similar charges may be analysed as follows: – Interest expense and similar charges from financial instruments not at fair value through profit and loss – Interest expense and similar charges from financial instruments at fair value through profit or loss 2015 Rm 11 126 11 513 9 781 1 945 1 342 12 678 3 378 3 374 (20) 24 3 365 55 128 46 426 8 702 55 128 20 731 683 5 883 1 851 3 576 2014 rm 10 333 9 798 8 807 1 710 1 204 12 393 3 521 3 521 (3) 3 2 309 50 075 41 747 8 328 50 075 18 203 628 4 919 1 729 2 843 32 724 28 322 29 123 3 601 32 724 26 183 2 139 28 322 An unaudited margin analysis of the interest income and interest expense by asset and liability category is presented as additional financial information in the Nedbank Group Ltd Integrated Report. NedbaNk limited – ANNUAL report 2015 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 7 NON-INTEREST REVENUE Commission and fee income Administration fees Cash-handling fees Insurance commission Exchange commission Other fees Guarantee income Card income Service charges Other commission Insurance income Fair-value adjustments (note 7.1) Fair-value adjustments Fair-value adjustments – own debt Net trading income Foreign exchange Debt securities Equities Commodities Private-equity income Securities dealing – realised Securities dealing – unrealised Dividends received from unlisted investments Other income¹ Interest and distribution¹ Investment income Dividends received from unlisted investments Long-term-asset sales Net sundry income Rents received Rental income from properties in possession Other sundry income¹ 7.1 Analysis of fair-value adjustments Fair-value adjustments can be analysed as follows: – Held for trading – Designated as at fair value through profit or loss 7.2 Government grants 2015 Rm 2014 rm 13 404 12 591 505 850 652 398 1 104 181 3 247 3 601 2 866 260 (12) (102) 90 2 783 1 225 1 545 (7) 20 905 417 (161) 384 76 189 40 30 10 134 10 1 123 121 819 613 379 921 168 2 969 3 467 3 134 284 35 73 (38) 2 394 1 148 1 194 27 25 750 350 (22) 83 188 151 51 40 11 91 61 2 28 17 514 16 196 1 617 (1 629) (12) 146 (111) 35 The group receives various government grants, from the SA and foreign governments. The government grants take a variety of forms, including interest rate subsidies on loans advanced to clients and payment in respect of previously written-off advances in respect of qualifying deceased estates. The government grants that are received by the group are recognised when the conditions of the government grant have been fulfilled and the grant is due to the group. Certain government assistance is directed towards the group's clients, including grants made to clients as first-time homeowners. Although the group may assist the client in obtaining the grant, these grants do not qualify as government grants as envisaged by the accounting standard. The group receives certain SA government grants in the form of refunds for skills development levies and they pertain to prior training that has been facilitated by the group on behalf of its employees. No assistance has been received by the group from any government or government organisation in respect of any troubled asset or financial-crisis- related programme. ¹ 2014 restated to reflect a R339m reclassification of other sundry income to private equity income. 42 NedbaNk limited – ANNUAL report 2015 8 TOTAL OPERATING EXPENSES Staff costs Remuneration and other staff costs Short-term incentives Long-term employee benefits (note 26.2)¹ Share-based payments expense – employees BEE transaction expenses² BEE share-based payments expenses Fees Computer processing Depreciation for computer equipment Amortisation of computer software Operating lease charges for computer equipment Development costs Other computer processing expenses Communication and travel Depreciation for vehicles Other communication and travel Occupation and accommodation Depreciation for owner-occupied land and buildings Operating lease charges for land and buildings Other occupation and accommodation expenses Marketing and public relations Fees and assurances Auditors’ remuneration Statutory audit – current year – prior-year Non-audit services – other services Other fees and assurance costs Furniture, office equipment and consumables Depreciation for furniture and other equipment Operating lease charge for furniture and other equipment Other office equipment and consumables Other sundries 2015 Rm 12 893 10 508 1 953 19 413 20 16 4 2014 rm 12 550 9 971 1 945 27 607 46 21 25 3 312 2 902 428 705 320 65 1 794 773 3 770 1 858 316 738 804 1 538 2 323 153 106 1 46 396 644 281 169 1 412 756 4 752 1 637 131 718 788 1 472 1 757 103 84 1 18 2 170 1 654 547 222 8 317 195 631 375 7 249 280 23 459 22 031 Certain expenses incurred by the company on behalf of subsidiary companies are recovered from subsidiary companies. Refer to the online 2015 Remuneration Report at netbankgroup.co.za, for a detailed breakdown of directors' and prescribed officers' remuneration. Includes contributions to defined-benefit and pension funds and postretirement medical aid funding and any adjustments for defined-benefit obligations together with any fair-value adjustments of plan assets held. See note 26. ¹ ² See note 48 for a description of the BEE schemes. NedbaNk limited – ANNUAL report 2015 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 9 INDIRECT TAXATION Value-added taxation¹ Other transaction taxes 1 Comprises the value-added taxation incurred that is irrecoverable in respect of the making of exempt supplies as defined in the Value-added Tax Act, 1991. 10 NON-TRADING AND CAPITAL ITEMS Net loss on sale of property and equipment Net impairment of property and equipment, and intangible assets 11 11.1 DIRECT TAXATION Charge for the year SA normal taxation: – Current charge – Capital gains taxation – deferred – Deferred taxation Foreign taxation Current and deferred taxation on income Prior-year (underprovision)/overprovision – current taxation Prior-year overprovision/(underprovision) – deferred taxation Total taxation on income Taxation on non-headline earnings items 11.2 taxation rate reconciliation Standard rate of SA normal taxation Non-taxable dividend income Capital items Other Effective taxation rate 11.3 Income tax recognised in other comprehensive income 2015 Exchange differences on translating foreign operations Fair-value adjustments on available-for-sale assets Remeasurements on long-term employee benefit assets Gains on property revaluations 2014 Exchange differences on translating foreign operations Fair-value adjustments on available-for-sale assets Remeasurements on long-term employee benefit assets Gains on property revaluations 11.4 Future taxation relief 2015 Rm 492 176 668 (26) (118) (144) 2 851 (29) 24 10 2 856 (1) 5 2 860 (32) 2 828 2015 % 28,0 (2,5) 0,1 25,6 2014 rm 396 126 522 (96) (96) 2 785 (29) 2 85 2 843 221 (261) 2 803 (17) 2 786 2014 % 28,0 (2,6) 0,1 0,1 25,6 Gross taxation Net of taxation 190 (9) 388 162 14 (113) 86 195 (109) (44) (24) (32) 190 (9) 279 118 14 (113) 62 163 The group has estimated taxation losses of R203m (2014: R168m) that can be set off against future taxable income, of which R91m (2014: R31m) has been applied to the deferred taxation balance. 44 NedbaNk limited – ANNUAL report 2015 12 EARNINGS Headline earnings reconciliations rm 2015 2014 Gross Net of taxation Gross Net of taxation Profit attributable to ordinary and preference equity holders Less: Non-trading and capital items Net loss on sale of investments and property and equipment Net impairment of property and equipment and intangible assets Headline earnings attributable to ordinary and preference equity holders (144) (26) (118) 8 163 (112) (26) (86) 8 275 (96) (96) 13 DIVIDENDS 13.1 ordinary shares 2015 Final declared for 2014 – paid 2015 Interim declared for 2015 Ordinary dividends paid 2015 Final ordinary dividend declared for 2015 2014 Final declared for 2013 – paid 2014 Interim declared for 2014 Ordinary dividends paid 2014 Final ordinary dividend declared for 2014 ¹ Total dividend declared for 2015: 16 331 cents per share. ² Total dividend declared for 2014: 11 013 cents per share. Millions of shares Cents per shares 27 28 27 27 11 747 7 258¹ 19 005 9 073¹ 9 544 2 937² 12 481 8 076² 7 998 (79) (79) 8 077 rm 3 200 2 000 5 200 2 600 800 3 400 NedbaNk limited – ANNUAL report 2015 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 13 DIVIDENDS 13.2 preference shares dividends declared 2014 Number of shares Cents per share Amount rm Nedbank – Final (dividend 22) declared for 2013 – paid March 2014 Nedbank – Interim (dividend 23) declared for 2014 – paid September 2014 358 277 491 35,70775 358 277 491 36,86072 2015 Nedbank – Final (dividend 24) declared for 2014 – paid March 2015 Nedbank – Interim (dividend 25) declared for 2015 – paid September 2015 358 277 491 38,76140 358 277 491 38,22487 2016 Nedbank – Final (dividend 26) declared for 2015 – payable 4 April 2016 358 277 491 40,01711 128 132 260 139 137 276 143 rate % Amount rm 7,708 7,917 8,125 143,4 17,4 92,5 33,5 143,4 rate % Amount rm Days 184 23 119 42 Days 184 184 181 29 152 184 17 167 7,083 7,083 7,500 7,500 7,708 181 7,708 127,9 127,9 127,9 132,1 20,2 111,9 63,2 323,2 138,9 12,5 126,4 136,9 94,7 370,5 dividends declared calculations 2015 Nedbank – 1 July 2015 – 31 december 2015 1 July 2015 – 23 July 2015 24 July 2015 – 19 November 2015 20 November 2015 – 31 December 2015 Total declared dividends declared calculations 2013 (Paid march 2014) Nedbank – 1 July 2013 – 31 december 2013 1 July 2013 – 31 Dec 2013 Profit attributable to preference shareholders 2014 (Paid september 2014) Nedbank – 1 January 2014 – 30 June 2014 1 January 2014 – 29 January 2014 30 January 2014 – 30 June 2014 Nedbank (MFC) – Participating preference shares¹ Profit attributable to preference shareholders 2014 (Paid march 2015) Nedbank – 1 July 2014 – 31 december 2014 1 July 2014 – 17 July 2014 18 July 2014 – 31 December 2014 2015 (Paid september 2015) Nedbank – 1 January 2015 – 30 June 2015 Nedbank (MFC) – Participating preference shares¹ Profit attributable to preference shareholders ¹ Profit share calculated on an annual basis. 46 NedbaNk limited – ANNUAL report 2015 14 CASH AND CASH EQUIVALENTS Coins and bank notes Money at call and short notice Balances with central banks – other than mandatory reserve deposits Cash and cash equivalents, excluding mandatory reserve deposits with central banks Mandatory reserve deposits with central banks Money at call and short notice constitutes amounts withdrawable in 32 days or less. Mandatory reserve deposits are not available for use in the group's day-to-day operations. Cash on hand and mandatory reserve deposits are non-interest bearing. 15 OTHER SHORT-TERM SECURITIES 15.1 Analysis Negotiable certificates of deposit Treasury bills and other bonds 15.2 Sectoral analysis Banks Government and public sector Other services 16 DERIVATIVE FINANCIAL INSTRUMENTS 2015 Rm 6 673 10 686 792 18 151 16 190 34 341 8 717 51 361 60 078 8 678 49 786 1 614 60 078 2014 rm 6 437 3 890 430 10 757 14 843 25 600 7 277 49 045 56 322 8 410 47 491 421 56 322 These transactions have been entered into in the normal course of business and are carried at fair value. The principal types of derivative contracts into which the group enters are described below. ■■ Swaps These are over the counter (OTC) agreements between two parties to exchange periodic payments of interest, or payments for the change in value of a commodity, or related index, over a set period based on notional principal amounts. The group enters into swap transactions in several markets. Interest rate swaps exchange fixed rates for floating rates of interest based on notional amounts. Basis swaps exchange floating or fixed interest calculated using different bases. Cross-currency swaps are the exchange of interest based on notional values of different currencies. ■■ Options Options confer the right, but not the obligation, on the buyer to receive or pay a specific quantity of an asset or financial instrument for a specific price on or before a specified date. Options may be exchange-traded or OTC agreements. The group principally buys and sells currency, interest rate and equity options. ■■ Futures and forwards Short-term interest rate futures, bond futures, market index futures, equity and commodity futures and forward foreign exchange contracts are all agreements to deliver, or take delivery of, a specified amount of an asset or financial instrument based on a specified rate, price or index applied against the underlying asset or financial instrument, at a specified date. Futures are exchange-traded at standardised amounts of the underlying asset or financial instrument. Forward contracts are OTC agreements and are principally dealt in by the group, in interest rates as forward rate agreements and in currency as forward foreign exchange contracts. Collateral The group may require collateral in respect of the credit risk present in derivative transactions. The amount of credit risk is principally the positive fair value of the contract. Collateral may be in the form of cash or in the form of a lien over a client's assets, entitling the group to make a claim for current and future liabilities. 16.1 total carrying amount of derivative financial instruments Gross carrying amount of assets Gross carrying amount of liabilities Net carrying amount 2015 Rm 30 948 (33 996) (3 048) 2014 rm 15 644 (15 479) 165 A detailed breakdown of the carrying amount (fair value) and notional principal of the various types of derivative financial instruments held by the group is presented in the following tables in notes 16.2 – 16.5. NedbaNk limited – ANNUAL report 2015 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 16 DERIVATIVE FINANCIAL INSTRUMENTS (continued) 16.2 Notional principal of derivative financial instruments This represents the gross notional amounts of all outstanding contracts at year-end. This gross notional amount is the sum of the absolute amount of all purchases and sales of derivative instruments. The notional amounts do not represent amounts exchanged by the parties and therefore represent only the measure of involvement by the group in derivative contracts and not its exposure to market or credit risks arising from such contracts. The amounts actually exchanged are calculated on the basis of the notional amounts and other terms of the derivative, which  relate to interest rates, exchange rates, securities or commodity prices or financial and other indices. Notional principal Rm 2015 Positive value Rm Negative value Rm Notional principal rm 2014 positive value rm Negative value rm Hedging derivatives Interest rate derivatives Interest rate swaps Other derivatives Equity derivatives Options written Options purchased Futures¹ Commodity derivatives Futures Exchange rate derivatives Forwards Futures Currency swaps Options purchased Options written Interest rate derivatives Interest rate swaps Forward rate agreements Futures Caps Floors 275 275 275 275 17 848 5 959 5 994 5 895 421 421 389 194 352 685 63 32 036 2 196 2 214 1 086 256 517 120 531 654 3 105 2 948 1 843 8 341 5 994 2 347 214 214 202 743 178 601 9 21 937 2 196 519 084 262 036 236 291 598 1 050 1 050 9 507 5 959 3 548 207 207 186 451 174 084 54 10 099 2 214 567 172 255 084 295 363 2 507 1 898 793 11 527 8 266 2 541 2 541 3 184 1 957 1 957 303 944 242 209 1 214 49 331 5 244 5 946 682 767 515 712 121 404 6 160 2 169 650 36 672 3 317 2 541 776 1 173 1 173 142 695 115 300 108 22 043 5 244 344 379 256 677 65 300 1 696 900 650 19 156 4 949 2 541 2 408 784 784 161 249 126 909 1 106 27 288 5 946 338 388 259 035 56 104 4 464 1 269 17 516 Credit default swaps 29 586 18 059 total notional principal 1 493 994 730 657 763 337 997 209 491 839 505 370 ¹ Includes contracts for difference with positive notionals of R124m (2014: R45m) and negative notionals of R1 326m (2014: R1 677m). The equity forward agreement has positive notionals of R591m (2014: R163m) and negative notionals of R1 536m (2014: R568m). 48 NedbaNk limited – ANNUAL report 2015 16.3 Carrying amount of derivative financial instruments The amounts disclosed represent the fair value of all derivative instruments held at year-end. The fair value of a derivative financial instrument is the amount at which it could be exchanged in an orderly transaction between market participants at the measurement date, other than a forced liquidation or sale. Fair values are obtained from quoted market prices, discounted-cashflow models and market-accepted option-pricing models. 2015 Carrying amount of assets Rm Net carrying amount Rm Carrying amount of liabilities Rm Net carrying amount rm 2014 Carrying amount of assets rm Carrying amount of liabilities rm Hedging derivatives Interest rate derivatives Interest rate swaps Other derivatives Equity derivatives Options written Options purchased Futures¹ Commodity derivatives Futures Exchange rate derivatives Forwards Futures Currency swaps Options purchased Options written Interest rate derivatives Interest rate swaps Forward rate agreements Futures Caps Floors Credit default swaps total carrying amount 27 27 (418) 418 (59) (59) (1 154) 59 18 (1 285) 184 (130) (1 862) (2 388) (19) 1 (23) 1 566 902 418 484 24 24 17 760 11 383 18 6 175 184 12 235 10 827 329 44 2 1 902 418 484 83 83 18 914 11 324 7 460 130 14 097 13 215 348 43 25 1 032 466 (3 048) 30 948 33 996 2 8 (352) 360 9 9 1 129 1 320 (3) (263) 234 (159) (983) (1 190) 19 (2) (8) 4 194 165 2 372 360 12 10 10 6 645 3 089 3 322 234 8 615 7 534 56 4 4 364 352 12 1 1 5 516 1 769 3 3 585 159 9 598 8 724 37 2 12 1 017 823 15 644 15 479 ¹ Includes contracts for difference and an equity forward agreement. The fair value of the contracts for difference is zero as the variation margin is settled at the end of every day. The equity forward agreement is an asset with a fair value of R264m (2014: R2m). NedbaNk limited – ANNUAL report 2015 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 16 DERIVATIVE FINANCIAL INSTRUMENTS (continued) 16.4 Analysis of derivative financial instruments Hedging derivatives other derivatives Rm derivative assets 2015 Maturity analysis Under one year One to five years Over five years 2014 Maturity analysis Under one year One to five years Over five years derivative liabilities 2015 Maturity analysis Under one year One to five years Over five years 2014 Maturity analysis Under one year One to five years Over five years Interest rate derivatives equity derivatives Commodity derivatives exchange rate derivatives Interest rate derivatives total 5 22 27 1 1 2 283 619 902 260 112 372 283 619 24 24 10 10 83 – 902 83 252 112 – 364 1 1 13 623 3 155 982 17 760 3 425 1 932 1 288 6 645 12 527 2 999 3 388 18 914 2 385 1 653 1 478 5 516 616 3 600 8 019 12 235 787 3 154 4 674 8 615 569 3 975 9 553 14 097 632 3 097 5 869 9 598 14 546 7 379 9 023 30 948 4 482 5 199 5 963 15 644 13 462 7 593 12 941 33 996 3 270 4 862 7 347 15 479 Notional principal of derivatives 2015 Maturity analysis Under one year One to five years Over five years 2014 Maturity analysis Under one year One to five years Over five years 75 200 275 75 200 275 10 541 5 856 1 451 17 848 6 513 1 753 421 363 155 17 652 8 387 497 390 385 063 203 803 871 507 408 646 213 841 421 389 194 1 086 256 1 493 994 1 957 257 249 28 404 18 291 224 932 255 640 202 195 682 767 490 651 285 872 220 686 997 209 8 266 1 957 303 944 The maturity analysis in this note is prepared based on contractual maturities. 16.5 Derivatives designated as fair value hedges in terms of the group's fair value hedge accounting solution As part of the group’s hedging activities, it enters into transactions that are designated as fair-value hedge transactions. Fair-value hedges are used by the group to mitigate the risk of changes in the fair value of financial instruments due to movements in market interest rates. Derivatives that are designated by the group to form part of these fair value hedge transactions principally consist of interest rate swaps. The corresponding hedged items forming part of these fair value hedges, designated into the fair value hedge accounting solution, primarily consist of fixed-rate government bonds (refer to note 17). For qualifying fair-value hedges all changes in the fair value of the derivative and in the fair value of the hedged item in relation to the risk being hedged are recognised in profit and loss. The group recognised the following gains and losses on hedging instruments and hedged items: 50 NedbaNk limited – ANNUAL report 2015 Losses on hedged items (assets) (note 5) Gains on hedging instruments (assets) (note 5) 17 GOVERNMENT AND OTHER SECURITIES 17.1 Analysis Government and government-guaranteed securities Other dated securities¹ 17.2 Sectoral analysis Financial services, insurance and real estate Banks Manufacturing Transport, storage and communication Retailers, catering and accommodation Government and public sector Other sectors ¹ Includes securitised assets. See note 42. 2015 Rm (20) 24 4 26 398 16 335 42 733 5 838 3 368 3 872 1 647 25 285 2 723 42 733 2014 rm (3) 3 13 839 12 989 26 828 2 516 2 897 1 882 694 17 571 1 268 26 828 18 LOANS AND ADVANCES The group extends advances to individuals and to the corporate, commercial and public sectors. Advances made to individuals are mostly in the form of mortgages, instalment credit, overdrafts, personal loans and credit card borrowings. This note should be read in conjunction with note 19 'Impairment of loans and advances', as this note represents the gross exposure before any impairment provision. Specific impairments have been raised against those loans identified as impaired, and the analysis per product type can be found in note 19.2. Portfolio impairments are recognised against loans and advances classified as 'neither past due nor impaired' or 'past due but not impaired' 18.1 Categories of loans and advances Mortgage loans Home loans Commercial mortgages Net finance lease and instalment debtors (note 18.4) Gross investment Unearned finance charges Credit cards Other loans and advances Properties in possession Overdrafts Term loans Personal loans Other term loans Overnight loans Other loans to clients Foreign client lending Remittances in transit Other loans¹ Preference shares and debentures Factoring accounts Deposits placed under reverse repurchase agreements Trade, other bills and bankers' acceptances Impairment of loans and advances (note 19) Comprises: – Loans and advances to clients – Loans and advances to banks ¹ Represents clients' indebtedness for acceptances and other loans. 2015 Rm 267 806 132 217 135 589 97 500 123 068 (25 568) 14 025 298 536 354 13 481 107 636 16 746 90 890 27 527 103 376 22 129 184 81 063 20 660 5 329 20 173 677 867 (11 060) 666 807 651 555 26 312 677 867 2014 rm 252 098 128 889 123 209 92 487 115 877 (23 390) 13 376 256 316 596 13 214 103 820 17 457 86 363 21 638 75 488 12 314 156 63 018 17 995 4 986 18 291 288 614 277 (10 948) 603 329 594 771 19 506 614 277 NedbaNk limited – ANNUAL report 2015 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 18.2 Sectoral analysis Individuals Financial services, insurance and real estate Banks Manufacturing Building and property development Transport, storage and communication Retailers, catering and accommodation wholesale and trade Mining and quarrying Agriculture, forestry and fishing Government and public sector Other services 18.3 Geographical analysis SA Rest of Africa Europe Asia United States Other 2015 Rm 230 688 181 083 26 312 42 726 9 119 25 649 20 601 28 208 32 397 5 091 17 377 58 616 2014 rm 219 820 152 858 19 506 40 397 8 878 23 696 23 444 17 456 25 009 4 283 21 551 57 379 677 867 614 277 2015 Rm 2014 rm 636 467 579 634 17 667 18 504 4 294 722 213 10 735 12 473 3 754 2 961 4 720 677 867 614 277 18.4 Net finance lease and instalment debtors Rm Gross 2015 unearned finance charges 2014 Unearned finance charges Net Net Gross No later than one year 28 525 (5 851) 22 674 29 912 (5 977) 23 935 Later than one year and no later than five years Later than five years 83 993 10 550 (17 510) (2 207) 123 068 (25 568) 66 483 8 343 97 500 80 762 5 203 115 877 ( 16 350) (1 063) (23 390) 64 412 4 140 92 487 52 NedbaNk limited – ANNUAL report 2015 18.5 Classification of loans and advances total Neither past due nor impaired past due but not individually impaired Defaulted Rm 2015 2014 2015 2014 2015 2014 Mortgage loans 267 806 252 098 250 241 235 721 10 442 8 870 2015 7 123 2 568 1 079 354 625 3 365 2014 7 507 2 333 902 596 651 3 179 89 669 11 807 84 624 11 394 5 263 1 139 5 530 1 080 12 215 102 611 27 527 101 834 20 660 5 102 12 058 98 679 21 638 74 878 17 995 4 574 641 1 660 505 1 962 281 219 1 261 391 160 298 67 114 Net finance lease and instalment debtors Credit cards Properties in possession Overdrafts Term loans 97 500 14 025 354 13 481 92 487 13 376 596 13 214 107 636 103 820 Overnight loans 27 527 Other loans to clients 103 376 21 638 75 488 17 995 4 986 20 660 5 329 Preference shares and debentures Factoring accounts Deposits placed under reverse repurchase agreements Trade, other bills and bankers' acceptances 20 173 18 291 20 173 18 291 288 288 677 867 614 277 641 839 580 140 19 586 18 464 16 442 Loans and advances defaulted – not impaired Loans and advances defaulted – impaired 403 16 039 16 442 15 673 345 15 328 15 673 NedbaNk limited – ANNUAL report 2015 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December LOANS AND ADVANCES (continued) 18 18.6 Age analysis of loans and advances Rm 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 total < 1 month > 1 month < 3 months > 3 months > 6 months < 6 months < 12 months > 12 months Neither past due nor impaired 641 839 580 140 641 839 580 140 Mortgage loans 250 241 235 721 250 241 235 721 Net finance lease and instalment debtors 89 669 84 624 89 669 84 624 Credit cards Overdrafts Term loans Overnight loans Other loans to clients 11 807 11 394 11 807 11 394 12 215 12 058 12 215 12 058 102 611 98 679 102 611 98 679 27 527 21 638 27 527 21 638 101 834 74 878 101 834 74 878 Preference shares and debentures 20 660 17 995 20 660 17 995 Factoring accounts 5 102 4 574 5 102 4 574 Deposits placed under reverse repurchase agreements 20 173 18 291 20 173 18 291 Trade, other bills and bankers' acceptances – 288 – 288 Past due but not individually impaired 19 586 18 464 12 035 10 558 7 507 7 866 Mortgage loans 10 442 8 870 7 040 5 670 3 369 3 178 Net finance lease and instalment debtors 5 263 5 530 2 580 2 311 2 677 3 214 Credit cards Overdrafts Term loans Overnight loans Other loans to clients Factoring accounts subtotal Defaulted Mortgage loans 44 33 6 40 22 5 5 13 1 139 1 080 641 505 1 660 1 962 783 570 627 739 434 356 66 341 58 890 1 033 1 072 – 281 160 – 219 298 275 160 216 298 6 3 661 425 598 604 653 874 590 698 7 507 7 866 44 40 16 442 15 673 7 123 7 507 Net finance lease and instalment debtors 2 568 2 333 Credit cards Properties in possession Overdrafts Term loans Other loans to clients Factoring accounts 1 079 354 625 902 596 651 3 365 3 179 1 261 67 391 114 total loans and advances 677 867 614 277 54 NedbaNk limited – ANNUAL report 2015 18.7 Credit quality of loans and advances Rm 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 total NGr 1–12 NGr 13–20 NGr 21–25 Np1– Np3 Unrated Neither past due nor impaired 641 839 580 140 276 494 220 377 331 665 309 817 27 395 22 614 Mortgage loans 250 241 235 721 72 397 57 518 165 776 165 436 10 370 8 839 Net finance lease and instalment debtors 89 669 84 624 4 157 4 344 76 677 72 674 8 285 6 929 Credit cards Overdrafts Term loans Overnight loans Other loans to clients 11 807 11 394 1 134 1 099 8 958 8 714 1 715 1 581 12 215 12 058 3 305 3 314 8 323 8 256 282 247 102 611 98 679 69 878 73 127 26 718 20 427 5 636 4 787 27 527 21 638 21 088 16 834 5 700 4 800 101 834 74 878 69 875 35 243 30 875 19 896 739 368 4 227 Preference shares and debentures 20 660 17 995 15 084 11 401 2 939 3 958 Factoring accounts 5 102 4 574 1 026 143 4 076 4 431 Deposits placed under reverse repurchase agreements 20 173 18 291 18 550 17 354 1 623 Trade, other bills and bankers' acceptances 288 937 288 Past due but not individually impaired Mortgage loans¹ 19 586 18 464 10 442 8 870 9 9 2 2 2 729 2 672 16 555 15 647 1 609 1 467 8 704 7 363 703 246 45 119 726 4 461 4 760 230 26 875 596 835 479 222 1 519 1 720 7 1 240 160 192 298 Net finance lease and instalment debtors¹ 5 263 5 530 Credit cards Overdrafts Term loans Overnight loans Other loans to clients¹ Factoring accounts Defaulted Mortgage loans¹ 1 139 1 080 641 505 1 660 1 962 281 160 219 298 16 442 15 673 7 123 7 507 Net finance lease and instalment debtors¹ 2 568 2 333 Credit cards Properties in possession Overdrafts Term loans Other loans to clients¹ Factoring accounts 1 079 354 625 902 596 651 3 365 3 179 1 261 67 391 114 6 285 27 332 1 698 3 928 550 677 305 379 241 338 716 19 512 2 637 2 636 85 7 60 18 26 208 113 39 2 9 15 117 36 35 22 20 34 26 34 15 528 13 937 914 1 702 6 689 7 103 434 404 2 534 2 295 34 38 1 079 902 618 644 3 357 2 546 34 1 184 67 333 114 354 596 7 8 77 7 633 24 total loans and advances 677 867 614 277 276 503 220 379 334 394 312 489 43 950 38 295 15 613 13 963 7 407 29 151 The group uses a master rating scale for measuring credit risk, which measures borrower risk excluding the effect of collateral and any credit mitigation (ie probability of default only). The comprehensive probability of default rating scale, which is mapped to default probabilities and external rating agency scales, enables the group to measure credit risk consistently and accurately across its entire portfolio. A brief explanation of the scale follows: NGR 1–12: Represents borrowers who demonstrate a strong capacity to meet financial obligations, and who have a negligible or low probability of default. This category comprises, but is not limited to, the group's large corporate clients, including financial institutions, parastatals and other government-related institutions. NGR 13–20: Represents borrowers who demonstrate a satisfactory ability to make payments and who have a low or moderate probability of default. This category comprises, but is not limited to, small and medium businesses, medium-sized corporate clients and individuals. NGR 21–25: Represents borrowers who are of higher risk. This category comprises higher-risk individuals or small businesses, as well as borrowers that were rated higher on inception but have since migrated down the rating scale as a result of poor financial performance. However, the borrower has not defaulted and is continuing to make repayments. NP 1–3: Represents clients who have defaulted. where this rating appears in the 'past due but not impaired' category, the borrowers are continuing to make repayments against their obligation and are being closely monitored. NedbaNk limited – ANNUAL report 2015 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 19 19.1 IMPAIRMENT OF LOANS AND ADVANCES Impairment of loans and advances Balance at beginning of year Impairments charge Statement of comprehensive income charge net of recoveries: – Loans and advances – Advances designated as at fair value through profit or loss (see note 35.1) Recoveries Amounts written off against the impairment/Other transfers Impairment of loans and advances total impairment Specific impairment portfolio impairment 2015 10 948 5 742 4 608 4 606 2 1 134 (5 630) 11 060 2014 11 332 5 407 4 478 4 476 2 929 (5 791) 10 948 2015 6 758 5 304 4 170 4 168 2 1 134 (5 647) 6 415 2014 7 476 5 059 4 130 4 128 2 929 (5 777) 6 758 2015 4 190 438 438 438 2014 3 856 348 348 348 17 4 645 (14) 4 190 19.2 Impairments of loans and advances by classification total impairment – 2015 Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Preference shares and debentures Trade, other bills and bankers' acceptances Impairment of loans and advances Total impairment – 2014 Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Preference shares and debentures Trade, other bills and bankers' acceptances Impairment of loans and advances Balance at the beginning of the year rm Impairment charge/ (release) rm Amounts written off against the impairment/ other transfers rm 2 440 908 52 986 436 3 782 2 343 1 184 290 (41) 947 222 2 945 1 194 1 (499) (241) 11 (755) (180) (2 668) (1 298) total rm 2 125 957 22 1 178 478 4 059 2 239 1 1 10 948 5 742 (5 630) 11 060 2 861 785 18 888 492 3 739 2 549 (1) 1 253 304 19 800 180 2 786 1 065 (674) (181) 15 (702) (236) (2 743) (1 271) 1 2 440 908 52 986 436 3 782 2 343 1 11 332 5 407 (5 791) 10 948 56 NedbaNk limited – ANNUAL report 2015 19.2 Impairments of loans and advances by classification (continued) Balance at the beginning of the year rm Impairment charge/ (release) rm Amounts written off against the impairment/ other transfers rm specific impairment – 2015 Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Specific impairment of loans and advances Specific impairment – 2014 Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Preference shares and debentures Specific impairment of loans and advances Portfolio impairment – 2015 Home loans Commercial mortgages Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Preference shares and debentures Trade, other bills and bankers' acceptances Portfolio impairment of loans and advances Portfolio impairment – 2014 Home loans Commercial mortgages Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Trade, other bills and bankers' acceptances Portfolio impairment of loans and advances 1 552 540 52 864 299 2 205 1 246 6 758 1 912 476 18 775 369 2 315 1 612 (1) 7 476 888 368 122 137 1 577 1 097 1 4 190 949 309 113 123 1 424 937 1 3 856 311 165 (41) 936 202 2 561 1 170 5 304 314 248 19 791 166 2 615 906 (493) (241) 11 (755) (180) (2 689) (1 300) (5 647) (674) (184) 15 (702) (236) (2 725) (1 272) 1 5 059 (5 777) (127) 125 11 20 384 24 1 (6) 21 2 total rm 1 370 464 22 1 045 321 2 077 1 116 6 415 1 552 540 52 864 299 2 205 1 246 – 6 758 755 493 133 157 1 982 1 123 1 1 438 17 4 645 (61) 56 9 14 171 159 348 3 (18) 1 (14) 888 368 122 137 1 577 1 097 1 4 190 NedbaNk limited – ANNUAL report 2015 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December IMPAIRMENT OF LOANS AND ADVANCES (continued) 19 19.3 Sectoral analysis total impairment Specific impairment portfolio impairment 2015 Rm 2014 rm 2015 Rm 2014 rm 2015 Rm 2014 rm Individuals 7 380 7 588 4 855 4 979 2 525 2 609 Financial services, insurance and real estate Manufacturing Building and property development Transport, storage and communication Retailers, catering and accommodation wholesale and trade Mining and quarrying Agriculture, forestry and fishing Government and public sector Other services 19.4 Geographical analysis SA Other African countries Europe Asia United States Other 1 514 1 314 365 123 229 27 131 406 82 31 772 11 060 501 101 175 29 131 157 40 58 854 10 948 10 621 10 554 363 54 8 1 13 75 282 – 37 – 11 060 10 948 418 95 52 72 6 67 251 52 17 530 6 415 6 127 275 13 6 415 488 339 41 69 4 78 47 18 47 648 6 758 1 096 270 71 157 21 64 155 30 14 242 4 645 6 444 4 494 45 232 37 88 54 8 1 6 758 4 645 953 826 162 60 106 25 53 110 22 11 206 4 190 4 110 30 50 4 190 876 19.5 Interest on specifically impaired loans and advances Interest on specifically impaired loans and advances is determined for the period for which the loan and advance were classified as specifically impaired. The amount is calculated by multiplying the discounted expected recovery by the effective interest rate for the specifically impaired loan and advance. The interest on specifically impaired loans and advances reflects the unwinding of the time value of money for the expected discounted recovery. Interest on specifically impaired loans and advances does not represent the contractual interest that has been earned on the outstanding balance of a loan and advance. 20 OTHER ASSETS Sundry debtors and other accounts 21 INVESTMENT SECURITIES Listed investments Unlisted investments Strate Ltd Private-equity portfolio Other 2015 Rm 3 925 3 925 432 1 216 57 618 541 2014 rm 5 393 5 393 624 1 745 51 1 195 499 Total listed and unlisted investments 1 648 2 369 Refer to note 35.2.1 for the classification of investment securities in terms of the fair-value hierarchy. 58 NedbaNk limited – ANNUAL report 2015 22 INVESTMENTS IN PRIVATE EQUITY ASSOCIATES, ASSOCIATE COMPANIES AND JOINT ARRANGEMENTS 22.1 Movement in carrying amount Carrying amount at the beginning of the year Share of associate companies’ and joint arrangements’ (losses)/profits after taxation for the current year Net movement of associate companies and joint arrangements at cost¹ Fair-value movements Carrying amount at the end of the year 22.2 Analysis of carrying amount Associate investments on acquisition: Net asset value Share of retained earnings since acquisition Fair-value movements 22.3 Valuation Directors’ valuation 2015 Rm 1 158 (1) 24 219 2014 Rm 1 098 12 10 38 1 400 1 158 949 39 412 1 400 1 400 1 400 730 39 389 1 158 1 158 1 158 ¹ These amounts include movements due to acquisitions and disposals. Refer to note 50 for further information in respect of investments in private-equity associates, associate companies and joint arrangements. 23 NON-CURRENT ASSETS HELD FOR SALE Properties sold not yet transferred¹ Property and equipment previously included in: 2015 Rm 2 2 2014 Rm 16 16 Non-current assets and liabilities held for sale are measured at the lower of the carrying amount and fair value less incremental directly attributable costs of disposal and are not depreciated. In accordance with IFRS 13 Fair Value Measurement the measurement of the group's non-current assets and liabilities are considered to be non-recurring. Non-recurring fair-value measurements are those that IFRS requires or permits to be recognised in the statement of financial position in particular circumstances. Furthermore, the group classifies these assets and liabilities into level 3 of the fair- value hierarchy. Level 3 fair-value measurements are those that include the use of significant unobservable inputs. ¹ Commitments for the sale of properties had been entered into at year-end by the group, the transfer of which had not been effected at year-end. NedbaNk limited – ANNUAL RepoR t 2015 59 24 DEFERRED TAXATION 24.1 Reconciliation of deferred taxation balance Deferred taxation assets Balance at the beginning of the year Current year temporary differences recognised in the statement of comprehensive income Capital gains taxation Client credit agreements Deferred acquisition costs Deferred fee income Depreciation Fair-value adjustments of financial instruments Impairment of loans and advances Other income and expense items Share-based payments Taxation losses recognised Recognised directly in equity Other movements Balance at the end of the year Deferred taxation liabilities Balance at the beginning of the year Current year temporary differences recognised in the statement of comprehensive income Capital gains taxation Client credit agreements Deferred acquisition costs Deferred fee income Depreciation Fair-value adjustments of financial instruments Impairment of loans and advances Other income and expense items Property revaluations Share-based payments Recognised directly in equity Other movements Balance at the end of the year 2015 Rm 165 22 (3) (3) 9 2 17 (120) 67 287 22 (62) (20) 83 (4) 150 40 (23) (188) (4) 50 154 300 763 2014 Rm 69 307 20 (5) (37) 15 (17) (32) 114 241 21 (13) (25) (186) 165 297 19 9 4 12 (6) (29) 287 60 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December24.2 Analysis of deferred taxation Deferred taxation assets Capital gains taxation Client credit agreements Deferred acquisition costs Deferred fee income Depreciation Fair-value adjustments of financial instruments Impairment of loans and advances Other income and expense items Property revaluations Share-based payments Taxation losses Deferred taxation liabilities Capital gains taxation Deferred acquisition costs Deferred fee income Depreciation Fair-value adjustments of financial instruments Impairment of loans and advances Other income and expense items Property revaluations Share-based payments 25 25.1 INVESTMENT PROPERTY Fair value Fair value at the beginning of the year Transfers to non-current assets held for sale (note 23) Fair value at the end of the year 25.2 Fair value of investment property 2015 Rm 35 14 33 (41) 26 67 223 479 (238) 549 50 (1 260) 249 591 120 763 2014 Rm (184) (16) (396) 272 (408) 78 1 249 31 (443) (27) 9 165 52 28 88 119 287 87 (87) Investment properties are freehold and are either held to earn rentals or for capital appreciation. Internal professional valuers perform valuations on an annual basis. External valuers are obtained once every three years on a rotational basis in accordance with the group's policies for the valuation of properties. The internal and external valuers are members or associates of the Institute of Valuers (SA) or a local equivalent in the case of foreign subsidiaries. The carrying amount of these properties is the fair value of the property as determined by registered independent valuers who have recent experience in the location and category of the property being valued. In determining the fair value of these investment properties, the following factors were considered: In accordance with IFRS 13 Fair Value Measurement, the measurement of the group's investment properties are considered to be recurring. Recurring fair-value measurements are those that IFRS requires or permits to be recognised in the statement of financial position at the end of each reporting period. Furthermore, the group classifies its investment properties into level 3 of the fair-value hierarchy. Level 3 fair-value measurements are those that include the use of significant unobservable inputs. 25.3 Rental income and operating expenses from investment property Rental income from investment property Direct operating expense arising from investment property that generated rental income 2015 Rm 2014 Rm 4 6 NedbaNk limited – ANNUAL RepoR t 2015 61 26 PROPERTY AND EQUIPMENT Land Buildings Computer equipment Furniture and other equipment Vehicles total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Gross carrying amount Balance at 1 January 873 789 4 221 4 005 3 083 2 897 3 840 3 294 24 24 12 041 11 009 Transfers from furniture and other equipment and buildings¹ Acquisitions Increases arising from revaluations² 13 Transfers to non-current assets held for sale Disposals Writeoff of accumulated depreciation on revaluations Effect of movements in foreign exchange rates and other movements (1) 2 83 (1) 1 683 459 146 (144) 180 137 (3) (15) (128) (85) (1 683) 874 728 164 745 4 3 1 501 1 658 (67) (542) (83) (198) (4) (294) (759) 159 220 – (4) (128) (85) (1) 27 1 17 2 24 13 296 12 041 Balance at 31 December 885 873 6 237 4 221 3 895 3 083 2 252 3 840 2 5 14 (1) accumulated depreciation and impairment losses Balance at 1 January Transfers from furniture and other equipment and buildings¹ Depreciation charge for the year Writeoff of accumulated depreciation on revaluations Disposals Effect of movements in foreign exchange rates and other movements 402 371 2 039 2 154 2 126 1 898 15 15 4 582 4 438 875 316 131 428 396 222 375 3 4 969 906 (875) (128) (115) (85) (15) (64) (511) (70) (147) (4) (249) (677) (128) (85) Balance at 31 December 1 350 402 2 405 2 039 1 408 2 126 Carrying amount At 1 January At 31 December 873 885 789 3 819 3 634 1 044 743 1 714 1 396 873 4 887 3 819 1 490 1 044 844 1 714 2 5 1 19 9 8 8 15 5 182 4 582 9 9 7 459 6 571 8 114 7 459 ¹ At the beginning of the year assets previously classified under furniture and other equipment were transferred to buildings to reflect the underlying nature of these assets. ² Gains on property revaluations are recognised in profit or loss to the extent that they reverse a revaluation decrease of the same asset previously recognised in profit or loss. Equipment (principally computer equipment, motor vehicles, fixtures and furniture) is stated at cost less accumulated depreciation and impairment losses. Land and buildings are recognised at the revalued amount, which is based on external valuations obtained every three years on a rotation basis for all properties in accordance with the group's accounting policy. The valuers are members or associates of the Institute of Valuers (SA) or a local equivalent in the case of foreign subsidiaries. An annual internal review is also done on those properties not subject to external valuation. The carrying amount of properties is the fair value as determined by the valuers less subsequent accumulated depreciation and impairment losses. Adjustments in the valuation of the properties are recorded in the revaluation reserve, which is amortised over the remaining useful life of the property. In determining the fair value of properties, the following factors are considered: type of property Valuation method Significant inputs parameters Market comparable approach and discounted cashflow Market comparable approach and replacement value Income capitalisation rates 8,0% – 13,5% (2014: 11,0% – 13,5%) Price per square meter Commercial property Residential property total land and buildings Land Buildings 2015 Rm 2014 Rm 2015 Rm 2014 Rm 880 868 4 877 3 809 5 5 10 10 885 873 4 887 3 819 In accordance with IFRS 13 Fair Value Measurement the measurement of the group's properties are considered to be recurring. Recurring fair-value measurements are those that IFRS requires or permits to be recognised in the statement of financial position at the end of each reporting period. Furthermore, the group classifies its properties measured at fair value into level 3 of the fair-value hierarchy. Level 3 fair-value measurements are those that include the use of significant unobservable inputs. In respect of certain properties there are restrictions of title in terms of regulatory restrictions such as servitudes. This does not have a material effect on the ability of the group to transfer these properties. No material plant and equipment have been pledged as security for liabilities. If land and buildings were carried under the cost and not the revaluation model, the carrying amount would have been R3 265 m (2014: R2 444m). 62 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 27 LONG-TERM EMPLOYEE BENEFITS The group has a number of defined-benefit and defined-contribution plans in terms of which it provides pension, postretirement medical aid and long-term disability benefits to employees and their dependants on retirement, death or disability. All eligible employees and former employees are members of trustee-administered or underwritten schemes within the group, financed by company and employee contributions. All SA retirement plans are governed by the Pension Funds Act of 1956. The defined-benefit funds are actuarially valued using the projected-unit credit method. Any deficits are funded to ensure the ongoing financial soundness of the funds. The benefits provided by the defined-benefit schemes are based on years of membership and/or salary levels. These benefits are provided from contributions by employees, the group and income from the assets of these schemes. The benefits provided by the defined-contribution schemes are determined by the accumulated contributions and investment earnings. At the dates of the latest valuations, the defined-benefit plans were in a sound financial position in terms of section 16 of the Pensions Funds Act. The funds that constitute the assets and liabilities that the group has recognised in the statement of financial position in respect of its defined- benefit plans are listed below. The latest actuarial valuations were performed at 31 December 2015. Postemployment benefits Defined-benefit pension funds Nedgroup Pension Fund (including the Optiplus policy). BoE Funds, which consist of BoE Ltd Pension Fund (1969), Pension Fund of BoE Bank: Business Division. Nedbank UK Pension Fund. Other funds consisting of Nedbank Swaziland Ltd Pension Fund and Nedbank Lesotho Pension Fund. Defined-benefit medical aid schemes Nedgroup Medical Aid Scheme for Nedbank employees and pensioners. Nedgroup Medical Aid Scheme for past BoE employees and pensioners. Other long-term employee benefits Disability fund Nedbank Group Disability Fund [including the Old Mutual Alternative Risk Transfer Fund (OMART) policy]. Insurance policies held with related parties Optiplus (Nedgroup Pension Fund), OMART (Nedbank Group Disability Fund) and PRMA (Symetry) annuity policy are insurance policies, the proceeds of which can only be used to pay or fund the employee benefits under the specific funds. However, these policies are not qualifying insurance policies in terms of IAS 19 Employee Benefits since they are held with related parties. These rights to reimbursement are therefore recognised as separate assets and in all other respects are treated in the same way as other plan assets. 27.1 Analysis of long-term employee benefits assets and liabilities Rm 2015 Postemployment benefits Other long-term employee benefits – disability fund 2014 Postemployment benefits Other long-term employee benefits – disability fund Notes assets liabilities 27.1.1 27.1.1 4 512 373 4 885 4 035 374 4 409 (2 636) (373) (3 009) (2 628) (374) (3 002) The group's defined-benefit obligation in terms of the Nedbank Group Disability Fund is recognised together with the fair value of the assets held in OMART. OMART is a structured entity controlled by the group and was established to fund this defined-benefit obligation of R373m (2014: R374m). The value of the OMART asset held by the group is R373m (2014: R374m). NedbaNk limited – ANNUAL RepoR t 2015 63 27 LONG-TERM EMPLOYEE BENEFITS 27.1.1 Net asset/(liability) recognised Rm 2015 Present value of defined-benefit obligation Fair value of plan assets¹ Funded status Unrecognised due to paragraph 64 limit Asset Liability 2014 Present value of defined-benefit obligation Fair value of plan assets¹ Funded status Unrecognised due to paragraph 64 limit Asset² Liability² pension and provident funds Medical aid funds (5 065) 7 576 2 511 (57) 2 454 3 258 (804) (5 024) 7 053 2 029 (20) 2 009 2 856 (847) (1 832) 1 254 (578) (578) 1 254 (1 832) (1 772) 1 170 (602) (602) 1 179 (1 781) ¹ ² In terms of IAS 19 Employee Benefits insurance policies issued by related parties of the reporting entity are excluded from the definition of qualifying insurance policies. The fair value of plan assets includes non-qualifying insurance policies for pension funds to the value of R781m (2014: R828m) and for medical aid to the value of R1 254m (2014: R1 179m). R1 179m of non-qualifying insurance policies were reflected under the pension and provident funds; however, these polices relate to the medical aid fund and the comparative information has been restated to align with the current year's presentation. 27.2 postemployment benefits Rm analysis of postemployment benefit assets and liabilities 2015 Pension funds Nedgroup Fund Nedbank UK Fund Other funds Medical aid funds Nedgroup scheme for Nedbank employees Nedgroup scheme for BoE employees Total 2014 Pension funds Nedgroup Fund Nedbank UK Fund Other funds Medical aid funds Nedgroup scheme for Nedbank employees Nedgroup scheme for BoE employees Total present value of obligation Fair value of plan asset Surplus/ (Deficit) Unrecognised due to paragraph 64 limit Net asset/ (liability) 5 065 4 434 461 170 1 832 1 705 127 6 897 5 024 4 460 395 169 1 772 1 644 128 6 796 7 576 6 890 487 199 1 254 1 254 8 830 7 053 6 488 384 181 1 170 1 170 8 223 2 511 2 456 26 29 (578) (451) (127) 1 933 2 029 2 028 (11) 12 (602) (474) (128) 1 427 (57) (26) (31) – 2 454 2 456 – (2) (578) (451) (127) (57) 1 876 (20) (20) – 2 009 2 028 (11) (8) (602) (474) (128) (20) 1 407 64 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December27.2 postemployment benefits (continued) Rm Present value of defined-benefit obligation 2015 Balance at the beginning of the year Current service cost Interest cost Contributions by plan participants Actuarial losses Benefits paid Impact of foreign currency exchange rate changes Balance at the end of the year 2014 Balance at the beginning of the year Current service cost Interest cost Contributions by plan participants Actuarial losses Benefits paid Impact of foreign currency exchange rate changes Balance at the end of the year Fair value of plan assets 2015 Balance at the beginning of the year Expected return on plan assets Actuarial gains Contributions by the employer Contributions by plan participants Benefits paid Scheme-settled administration costs Impact of foreign currency exchange rate changes Balance at the end of the year 2014 Balance at the beginning of the year Expected return on plan assets Actuarial gains Contributions by the employer Contributions by plan participants Benefits paid Scheme-settled administration costs Impact of foreign currency exchange rate changes Balance at the end of the year pension and provident funds Medical aid funds total 5 024 34 384 10 (142) (339) 94 1 772 75 165 (113) (67) 5 065 1 832 6 796 109 549 10 (255) (406) 94 6 897 6 352 102 533 10 180 (395) 14 6 796 8 223 649 170 94 10 (405) (10) 99 1 571 68 151 42 (60) 1 772 1 170 106 (14) 58 (66) 1 254 8 830 893 92 (24) 265 (56) 7 413 620 266 303 10 (391) (11) 13 7 053 1 170 8 223 4 781 34 382 10 138 (335) 14 5 024 7 053 543 184 36 10 (339) (10) 99 7 576 6 520 528 290 38 10 (335) (11) 13 NedbaNk limited – ANNUAL RepoR t 2015 65 LONG-TERM EMPLOYEE BENEFITS (continued) 27 27.2 postemployment benefits (continued) Rm Net (income)/expense recognised 2015 Current service cost Interest cost Scheme-settled plan administration costs 2014 Current service cost Interest cost Scheme-settled plan administration costs movements in net asset/(liability) recognised 2015 Balance at the beginning of the year Net income/(expense) recognised in the statement of comprehensive income Net remeasurements– credit for the year Contributions paid by the employer Impact of foreign currency exchange rate changes Balance at the end of the year 2014 Balance at the beginning of the year Net income/(expense) recognised in the statement of comprehensive income Net remeasurements– credit for the year Contributions paid by the employer Impact of foreign currency exchange rate changes Balance at the end of the year distribution of plan assets 2015 Equity instruments Debt instruments Property Cash International Other 2014 Equity instruments Debt instruments Property Cash International Rm actual return on plan assets 2015 2014 66 NedbaNk limited – ANNUAL RepoR t 2015 pension and provident funds Medical aid funds 34 (159) 10 (115) 34 (145) 11 (100) 2 009 115 289 36 5 75 59 134 68 59 127 (602) (134) 99 59 total 109 (100) 10 19 102 (86) 11 27 1 407 (19) 388 95 5 2 454 (578) 1 876 1 721 100 151 38 (1) (678) (127) (66) 269 1 043 (27) 85 307 (1) 2 009 (602) 1 407 % % % 32,14 27,23 5,07 6,08 29,48 23,00 7,00 3,00 49,00 15,00 3,00 30,84 24,36 4,78 12,17 27,42 0,43 100,00 100,00 100,00 34,18 28,74 4,89 6,32 25,87 100,00 25,00 17,00 43,00 15,00 100,00 pension and provident funds Medical aid funds 727 818 92 68 32,88 27,07 4,19 11,54 24,32 100,00 total 819 886 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December27.2 postemployment benefits (continued) Principal actuarial assumptions 2015 Discount rates Expected rates of return on plan assets Inflation rate Expected rates of salary increases Pension increase allowance Annual increase to medical aid subsidy Average expected retirement age (years) 2014 Discount rates Expected rates of return on plan assets Inflation rate Expected rates of salary increases Pension increase allowance Annual increase to medical aid subsidy Average expected retirement age (years) Range % Used in valuation % 3.70 – 10.10 3.70 – 10.10 2.10 – 7.70 8.70 – 8.70 0.49 – 7.70 55 to 65 3.60 – 8.10 3.60 – 8.10 2.25 – 5.90 6.90 – 7.10 0.53 – 5.90 55 to 65 10,8 10,8 7,9 7,9 8,9 60 9,1 9,1 6,5 6,5 7,5 60 Pension funds The expected long-term return is a function of the expected long-term returns on equities, cash and bonds. In setting these assumptions the asset splits at the latest available date were used and adjustments were made to reflect the effect of expenses. Weighted-average assumptions Discount rate Expected return on plan assets Future salary increases Future pension increases 2015 % 9,69 9,69 7,92 7,14 2014 % 7,86 7,86 6,34 5,53 Medical aid funds The overall expected long-term rate of return on plan assets is 10,8%. The expected rate of return is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation. The expected rate of return is based on the expected performance of the entire portfolio. Rm experience adjustments on present value of defined-benefit obligation for past five years 2015 2014 2013 2012 2011 2010 experience adjustments on fair value of plan assets for past five years 2015 2014 2013 2012 2011 2010 estimate of future contributions Contributions expected for ensuing year Pension and provident funds medical aid funds 113 (42) 148 18 153 48 (14) (24) 28 18 (2) (10) (89) 55 229 10 (106) 30 (30) 95 40 total 24 13 377 28 47 78 (14) (24) 28 18 (32) 85 40 NedbaNk limited – ANNUAL RepoR t 2015 67 LONG-TERM EMPLOYEE BENEFITS (continued) 27 27.2 postemployment benefits (continued) Fund surplus/(deficit) for past five years Rm Pension funds 2015 2014 2013 2012 2011 2010 medical aid funds 2015 2014 2013 2012 2011 2010 effect of 1% change in assumed medical cost trend rates (Rm) 1% increase – effect on current service cost and interest cost 1% increase – effect on accumulated benefit obligation 1% decrease – effect on current service cost and interest cost 1% decrease – effect on accumulated benefit obligation present value of obligation Fair value of plan asset Surplus/ (Deficit) 5 065 5 024 4 781 4 784 4 191 3 917 1 832 1 772 1 571 1 584 1 482 1 222 7 576 7 053 6 520 5 635 5 115 4 908 1 254 1 170 893 854 830 810 2015 44 272 (35) (222) 2 511 2 029 1 739 851 924 991 (578) (602) (678) (730) (652) (412) 2014 50 274 (20) (222) 68 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December28 INTANGIBLE ASSETS Rm 2015 Cost Balance at the beginning of the year Acquisitions Development costs commissioned to software Impairment losses Disposals and retirements Foreign currency translation and other movements Balance at the end of the year accumulated amortisation and impairment losses Balance at the beginning of the year Amortisation charge Disposals and retirements Foreign currency translation and other movements Balance at the end of the year Carrying amount At the beginning of the year At the end of the year 2014 Cost Balance at the beginning of the year Acquisitions Development costs commissioned to software Impairment losses Disposals and retirements Foreign currency translation and other movements Balance at the end of the year accumulated amortisation and impairment losses Balance at the beginning of the year Amortisation charge Disposals and retirements Foreign currency translation and other movements Balance at the end of the year Carrying amount At the beginning of the year At the end of the year Goodwill Software Software development costs 957 1 032 (621) (68) (1) 1 299 135 1 633 7 629 149 621 (42) (2) 6 1 633 8 361 224 5 344 705 (2) 6 total 10 219 1 181 – (110) (2) 5 11 293 5 703 705 (2) 6 224 6 053 135 6 412 1 409 1 409 2 285 2 308 822 1 164 4 516 4 881 1 633 6 859 241 761 (33) (198) (1) 952 804 (761) (38) 9 444 1 045 – (71) (198) (1) 1 633 7 629 957 10 219 224 4 897 135 5 256 644 (198) 1 644 (198) 1 224 5 344 135 5 703 1 409 1 409 1 962 2 285 817 822 4 188 4 516 NedbaNk limited – ANNUAL RepoR t 2015 69 28 INTANGIBLE ASSETS (continued) 28.1 Analysis of goodwill by segment Nedbank Corporate and Investment Banking Nedbank Retail and Business Banking Other 2015 Rm 776 629 4 2014 Rm 776 629 4 1 409 1 409 Goodwill is allocated to individual CGUs based on business activity. Impairment testing is done on a regular basis by comparing the net carrying value of the CGUs with the estimated value in use. The value in use is determined by discounting estimated future cashflows of each CGU. The discounted cashflow calculations have been performed using Nedbank’s cost of equity, which is calculated using the capital asset pricing model. No impairments resulting from impairment testing have been effected for the reporting periods presented. Management regards the useful lives of all CGUs to be indefinite. See note 3 for key assumptions used when assessing goodwill impairment. The value in use of the various CGUs was based on the following assumptions: Riskfree rate (%) Beta range Equity risk premium (%) Terminal growth rate range (%) Cashflow projection (years) Discount rate range (%) Goodwill on a geographical basis relates to SA in total and is as follows: – Carrying amount – Estimated value in use Net estimated recoverable amounts 29 SHARE CAPITAL 29.1 ordinary share capital Authorised 30 000 000 (2014: 30 000 000) ordinary shares of R1 each Issued 27 555 649 (2014: 27 241 024) fully paid ordinary shares of R1 each 2015 9,76 2014 7,98 0,30– 0,76 0,21– 0,89 6,00 6,00 0,00– 4,80 0,00– 5,80 5 3 9,80– 14,33 9,08– 12,81 1 409 84 497 83 088 1 409 100 801 99 392 2015 Rm 30 28 28 2014 Rm 30 27 27 Subject to the restrictions imposed by the Companies Act, 2008, the unissued shares are under the control of the directors until the forthcoming annual general meeting. 70 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December29.2 preference share capital and premium Nedbank Ltd preference share capital and premium Authorised 1 000 000 000 (2014: 1 000 000 000) non-redeemable non-cumulative preference shares of R0,001 each 5 000 Class ‘A’ redeemable cumulative preference shares of R0,0001 each 5 000 Class ‘B’ redeemable cumulative preference shares of R0,0001 each Issued 358 277 491 (2014: 358 277 491) non-redeemable non-cumulative preference shares of R0,001 each 100 Class ’A’ redeemable cumulative preference shares of R0,0001 each 100 Class ‘B’ redeemable cumulative preference shares of R0,0001 each Preference share premium ¹ Represents amounts less than R1m. 2015 Rm 2014 Rm 1 ¹ ¹ ¹ ¹ 1 ¹ ¹ ¹ ¹ 3 561 3 561 3 561 3 561 Preference shares are classified as equity instruments by Nedbank Ltd ('the company'). Each preference share confers on the holder the right to capital of the company in the form of a cash dividend prior to payment of dividends to any other class of shareholder. The rate is limited to 83,33% of the prevailing prime rate on a deemed value of R10 and is never compounded. The dividends, if declared, accrue half-yearly on 30 June and 31 December and are payable within 120 days of these dates respectively. If a preference dividend is not declared, the dividend will not accumulate and will never become payable by the company, whether in preference to payments to any other class of share or otherwise. Each preference share confers on the holder the right to a return of capital on the winding-up of the company prior to any payment to any other class of share, but holders are not entitled to any further participation in the profits, assets or any surplus assets of the company in such circumstances. The holders of this class of share are not entitled to be present or vote (even by proxy) at any meeting of the company except when a declared dividend or part thereof remains in arrears and unpaid after six months from the due date or a resolution is proposed that directly affects the rights attached to the preference share or the interests of the holder, including resolutions to wind up the company or to reduce its share capital. At every general meeting where the preference shareholder is entitled to vote, the voting rights are restricted to the holder's nominal value in proportion to the total nominal value of all shares issued by the company. No shares in the capital of the company, in priority to the preference shares, can be created or issued without prior sanction of the holders of preference shares by way of a resolution passed at a separate class meeting properly constituted in terms of the provisions set out in the memorandum of incorporation. NedbaNk limited – ANNUAL RepoR t 2015 71 30 AMOUNTS OWED TO DEPOSITORS 30.1 Classifications Current accounts Savings deposits Other deposits and loan accounts Call and term deposits Fixed deposits Cash management deposits Other deposits and loan accounts Foreign currency liabilities Negotiable certificates of deposit Deposits received under repurchase agreements¹ Comprises: – Amounts owed to depositors – Amounts owed to banks 2015 Rm 67 504 9 820 492 764 269 716 46 478 60 753 115 817 44 823 77 594 15 531 2014 Rm 62 385 9 649 453 350 252 157 41 264 60 025 99 904 29 807 66 849 12 583 708 036 634 623 655 024 53 012 708 036 586 058 48 565 634 623 Deposit products include current accounts, savings accounts, call and notice deposits, fixed deposits and negotiable certificates of deposit. Term deposits vary from six months to five years in both the wholesale and retail markets. Foreign currency liabilities are either matched by advances to clients or hedged against exchange rate fluctuations. ¹ The group has pledged government and other securities (note 17) and negotiable certificates of deposit (note 15) amounting to R15 614m (2014: R11 986m) as collateral for deposits received under repurchase agreements. These amounts represent assets that have been transferred, but that do not qualify for derecognition under IAS 39. The associated liabilities amounted to R15 531m (2014: R12 583m). 30.2 Sectoral analysis Banks Government and public sector Individuals Business sector 30.3 Geographical analysis SA Rest of Africa Europe Asia 2015 Rm 53 012 47 880 168 698 438 446 708 036 2014 Rm 48 565 46 652 154 520 384 886 634 623 685 149 613 638 8 316 11 338 3 233 6 956 13 865 164 708 036 634 623 72 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December31 PROVISIONS AND OTHER LIABILITIES Creditors and other accounts Deferred revenue: client loyalty programmes Short-trading securities and spot positions Leave pay accrual (note 31.1) 31.1 Leave pay accrual Balance at the beginning of the year Recognised in profit or loss Utilised during the year Balance at the end of the year 31.2 Day-one gains and losses 2015 Rm 6 236 256 2 744 675 9 911 711 1 391 (1 427) 675 2014 Rm 6 668 258 767 711 8 404 676 386 (351) 711 The group enters into transactions where the fair value of the financial instruments are determined using valuation models for which certain inputs are not based on market-observable prices or rates. Such financial instruments are initially recognised at the transaction price, which is the best indicator of fair value. The transaction price may differ from the valuation amount obtained, giving rise to a day-one profit or loss. The difference between the transaction price and the valuation amount, commonly referred to as ‘day-one profit or loss’, is deferred and either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market-observable inputs, or realised when the financial instrument is derecognised. The group's day-one profits are attributable to commodity financial instruments. There are no material day-one profits or losses to report on for the years ended 31 December 2014 and 2015. NedbaNk limited – ANNUAL RepoR t 2015 73 32 LONG-TERM DEBT INSTRUMENTS instrument code Subordinated debt Callable notes (rand-denominated) NED9 NED11 NED13 NED14 NED15 NED16 NED 17 NED 18 NED 19 NED 20 Callable notes (US dollar-denominated) EMTN01 Hybrid subordinated debt Callable notes (rand-denominated) NEDH1A NEDH1B Securitised liabilities– rand-denominated Callable notes (rand-denominated) GRH1A1 GRH1A2 GRH1A3 GRH1B SUBLOAN 2 GRH1A1 GRH1A2 GRH1A3 GRH1B GH31C SUBLOAN 1 Date callable Date repayable Nominal value Rm Instrument terms up to callable date Instrument terms after callable date Interest on notes payable 6 July 2017 6 July 2022 17 September 2017 17 September 2020 25 July 2018 25 July 2023 29 November 2018 29 November 2023 8 April 2019 8 April 2019 14 October 2019 16 January 2020 1 July 2020 1 July 2020 8 April 2024 8 April 2024 14 October 2024 16 January 2025 1 July 2025 1 July 2025 3 March 2017 3 March 2022 20 November 2018 20 November 2018 20 November 2018 20 November 2018 25 October 2017 25 October 2017 25 October 2017 25 October 2017 25 October 2017 25 February 2018 25 February 2020 25 February 2020 25 February 2020 25 February 2020 25 February 2020 25 October 2039 25 October 2039 25 October 2039 25 October 2039 25 October 2039 25 February 2042 25 February 2042 25 February 2042 25 February 2042 25 February 2042 25 February 2042 2 000 1 000 1 800 1 200 450 1 737 300 225 1 624 407 US$m 100 Rm 487 1 265 Rm 480 336 900 110 227 650 100 680 80 65 180 JIBAR + 0,47% per annum Floating 3-month JIBAR + 2,20% 10,54% per annum Floating 3-month JIBAR + 2,85% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 2,55% per annum Floating 3-month JIBAR + 2,55% 10,49% per annum Fixed at 10.49% per annum JIBAR + 2,55% per annum Floating 3-month JIBAR + 2,55% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 3,50% per annum Floating 3-month JIBAR + 3,50% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% 3-month USD LIBOR 3-month USD LIBOR + 3,00% 15,05% per annum Floating 3-month JIBAR + 7,00% JIBAR + 4,75% per annum Floating 3-month JIBAR + 7,00% JIBAR + 0,58% per annum JIBAR + 0,58% per annum JIBAR + 1,1% per annum JIBAR + 1,25% per annum JIBAR + 1,54% per annum JIBAR + 1,90% per annum JIBAR + 1,2% per annum JIBAR + 1,45% per annum JIBAR + 1,55% per annum JIBAR + 2,2% per annum JIBAR + 3,0% per annum 3-month JIBAR + 1,49% 3-month JIBAR + 1,69% 3-month JIBAR + 2,08% 3-month JIBAR + 2,57% 3-month JIBAR + 1,2% 3-month JIBAR + 1,45% 3-month JIBAR + 1,55% 3-month JIBAR + 2,2% 3-month JIBAR + 3,0% Prime + 6,575% per annum 3-month JIBAR + 0,58% 2014 Rm 11 713 8 654 2 031 1 048 1 828 1 209 461 1 771 306 1 159 1 159 1 900 575 1 325 1 395 32 340 912 111 2015 Rm 11 495 9 932 2 032 1 829 1 209 461 1 772 306 229 1 664 430 1 563 1 563 2 679 161 913 112 1 558 101 685 81 66 1 Quarterly Biannually Quarterly Quarterly Biannually Quarterly Quarterly Quarterly Quarterly Biannually Quarterly Biannually Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly 74 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December32 LONG-TERM DEBT INSTRUMENTS instrument code Subordinated debt Callable notes (rand-denominated) Callable notes (US dollar-denominated) Hybrid subordinated debt Callable notes (rand-denominated) Securitised liabilities– rand-denominated Callable notes (rand-denominated) NED9 NED11 NED13 NED14 NED15 NED16 NED 17 NED 18 NED 19 NED 20 EMTN01 NEDH1A NEDH1B GRH1A1 GRH1A2 GRH1A3 GRH1B GRH1A1 GRH1A2 GRH1A3 GRH1B GH31C SUBLOAN 2 SUBLOAN 1 6 July 2017 6 July 2022 17 September 2017 17 September 2020 25 July 2018 25 July 2023 29 November 2018 29 November 2023 8 April 2019 8 April 2019 14 October 2019 16 January 2020 1 July 2020 1 July 2020 8 April 2024 8 April 2024 14 October 2024 16 January 2025 1 July 2025 1 July 2025 25 October 2017 25 October 2017 25 October 2017 25 October 2017 25 October 2017 25 February 2018 25 February 2020 25 February 2020 25 February 2020 25 February 2020 25 February 2020 25 October 2039 25 October 2039 25 October 2039 25 October 2039 25 October 2039 25 February 2042 25 February 2042 25 February 2042 25 February 2042 25 February 2042 25 February 2042 Nominal value Rm 2 000 1 000 1 800 1 200 450 1 737 300 225 1 624 407 US$m 100 Rm 487 1 265 Rm 480 336 900 110 227 650 100 680 80 65 180 Date callable Date repayable Instrument terms up to callable date Instrument terms after callable date Interest on notes payable JIBAR + 0,47% per annum Floating 3-month JIBAR + 2,20% 10,54% per annum Floating 3-month JIBAR + 2,85% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 2,55% per annum Floating 3-month JIBAR + 2,55% 10,49% per annum Fixed at 10.49% per annum JIBAR + 2,55% per annum Floating 3-month JIBAR + 2,55% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% JIBAR + 3,50% per annum Floating 3-month JIBAR + 3,50% JIBAR + 2,75% per annum Floating 3-month JIBAR + 2,75% 3 March 2017 3 March 2022 3-month USD LIBOR 3-month USD LIBOR + 3,00% 20 November 2018 20 November 2018 20 November 2018 20 November 2018 15,05% per annum Floating 3-month JIBAR + 7,00% JIBAR + 4,75% per annum Floating 3-month JIBAR + 7,00% JIBAR + 1,1% per annum JIBAR + 1,25% per annum JIBAR + 1,54% per annum JIBAR + 1,90% per annum 3-month JIBAR + 1,49% 3-month JIBAR + 1,69% 3-month JIBAR + 2,08% 3-month JIBAR + 2,57% JIBAR + 0,58% per annum JIBAR + 0,58% per annum JIBAR + 1,2% per annum JIBAR + 1,45% per annum JIBAR + 1,55% per annum JIBAR + 2,2% per annum JIBAR + 3,0% per annum 3-month JIBAR + 1,2% 3-month JIBAR + 1,45% 3-month JIBAR + 1,55% 3-month JIBAR + 2,2% 3-month JIBAR + 3,0% Prime + 6,575% per annum 3-month JIBAR + 0,58% Quarterly Biannually Quarterly Quarterly Biannually Quarterly Quarterly Quarterly Quarterly Biannually Quarterly Biannually Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly 2014 Rm 11 713 8 654 2 031 1 048 1 828 1 209 461 1 771 306 1 159 1 159 1 900 575 1 325 1 395 32 340 912 111 2015 Rm 11 495 9 932 2 032 1 829 1 209 461 1 772 306 229 1 664 430 1 563 1 563 2 679 161 913 112 1 558 101 685 81 66 1 NedbaNk limited – ANNUAL RepoR t 2015 75 32 LONG-TERM DEBT INSTRUMENTS (continued) instrument code Senior unsecured debt Senior unsecured notes (rand-denominated) NBK2A NBK2B NBK3A NBK4 NBK6A NBK6B NBK7B NBK9A NBK9B NBK10A NBK11A NBK12A NBK12B NBK13A NBK13B NBK14A NBK14B NBK15A NBK15B NBK16A NBK16B NBK17A NBK17B NBK18A NBK18B NBK19A NBK19B NBK20A NBK20B NBK21A NBK21B NBK22A NBK22B NBK23A NBK23B NBK24A NBK24B NBK25B NBK26B NBK27B NBK28B Other Unsecured debentures (rand-denominated) Total long-term debt instruments in issue Date callable Date repayable Nominal value Rm Instrument terms up to callable date Instrument terms after callable date Interest on notes payable 8 September 2009 8 September 2009 8 September 2009 28 October 2009 13 April 2010 13 April 2010 13 April 2010 23 March 2011 23 March 2011 25 July 2013 15 September 2015 15 September 2015 9 September 2019 28 October 2024 19 April 2015 19 April 2015 19 April 2020 23 March 2016 23 March 2016 25 July 2016 28 November 2013 28 November 2020 19 March 2014 21 February 2012 19 March 2014 21 February 2012 26 June 2014 24 August 2012 12 February 2015 24 August 2012 12 February 2015 25 July 2013 22 April 2015 19 March 2021 20 February 2015 19 March 2024 21 February 2017 25 June 2021 27 August 2015 27 August 2022 27 August 2017 12 February 2025 25 July 2016 22 April 2026 28 November 2013 28 November 2016 1 June 2015 14 March 2014 1 June 2015 26 June 2014 1 June 2015 26 June 2014 21 July 2015 7 November 2014 19 November 2015 12 February 2015 19 November 2015 11 February 2015 19 November 2015 11 February 2015 12 February 2015 22 April 2015 1 June 2015 1 June 2020 20 March 2017 1 June 2022 26 June 2017 1 June 2026 25 June 2021 21 July 2027 9 November 2017 19 November 2022 12 February 2018 19 November 2025 12 February 2020 19 November 2027 12 February 2022 12 February 2025 22 April 2026 1 June 2018 19 November 2015 19 November 2020 30 November 2029 3 244 1 044 1 273 660 478 1 027 80 1 137 677 151 1 888 855 1 297 391 405 500 250 215 786 2 607 3 056 800 694 380 1 035 280 806 1 739 650 2 000 240 952 472 884 90 666 12 1 980 500 1 427 476 Rm 200 10,55% per annum 10,55% per annum JIBAR + 2,20% per annum 3-month JIBAR + 2,20% per annum 11,39% per annum Zero coupon 9,68% per annum 11,39% per annum Zero coupon 9,68% per annum JIBAR + 1,75% per annum 3-month JIBAR + 1,75% per annum JIBAR + 2,15% per annum 3-month JIBAR + 2,15% per annum 9,36% per annum 9,36% per annum JIBAR + 1,25% per annum JIBAR + 1,25% per annum 6,91% per annum 8,92% per annum 9,38% per annum 6,91% per annum 8,92% per annum 9,38% per annum JIBAR + 1,00% per annum JIBAR + 1,00% per annum 9,73% per annum 9,73% per annum JIBAR + 1,30% per annum JIBAR + 1,30% per annum 9,29% per annum 9,29% per annum JIBAR + 1,31% per annum JIBAR + 1,31% per annum 9,44% per annum 9,29% per annum JIBAR + 1,00% per annum 8,79% per annum JIBAR + 1,31% per annum 9,44% per annum JIBAR + 0,8% per annum JIBAR + 0,8% per annum 9,95% per annum 9,95% per annum JIBAR + 0,75% per annum JIBAR + 0,75% per annum 9,26% per annum 9,26% per annum JIBAR + 0,85% per annum JIBAR + 0,85% per annum 9,64% per annum 9,64% per annum JIBAR + 0,9% per annum JIBAR + 0,9% per annum 10,36% per annum 10,36% per annum JIBAR + 1,3% per annum JIBAR + 1,3% per annum JIBAR + 1,45% per annum JIBAR + 2,00% per annum 10,63% per annum JIBAR + 1,12% per annum 10,07% per annum JIBAR + 1,25% per annum 10,69% per annum 10,94% per annum JIBAR + 1,55% per annum JIBAR + 2,00% per annum JIBAR + 2,10% per annum JIBAR + 1,30% per annum JIBAR + 1,55% per annum Zero coupon 10,63% per annum JIBAR + 1,12% per annum JIBAR + 1,25% per annum JIBAR + 1,45% per annum JIBAR + 1,55% per annum JIBAR + 2,10% per annum JIBAR + 1,30% per annum 10,07% per annum 10,69% per annum 10,94% per annum JIBAR + 1,55% per annum 2015 Rm 2014 Rm 30 785 22 511 3 347 1 054 1 385 263 487 1 043 81 1 166 678 154 1 903 878 1 307 402 408 501 252 700 3 068 698 1 037 806 650 243 Biannually Quarterly Biannually Biannually Quarterly Quarterly Biannually Quarterly Biannually Biannually Biannually Quarterly Biannually Quarterly Biannually Biannually Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Quarterly Quarterly Quarterly Quarterly 1 372 245 81 1 166 678 155 1 903 878 402 408 501 222 700 2 702 3 070 815 698 383 1 037 282 806 1 754 650 2 095 244 963 477 895 91 674 12 2 002 508 1 436 480 18 18 15 15 44 977 35 634 During the year there were no defaults or breaches of principal, interest or any other terms and conditions of long-term debt instruments. 76 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December32 LONG-TERM DEBT INSTRUMENTS (continued) instrument code Senior unsecured debt Senior unsecured notes (rand-denominated) 28 November 2013 28 November 2020 28 November 2013 28 November 2016 8 September 2009 8 September 2009 8 September 2009 28 October 2009 13 April 2010 13 April 2010 13 April 2010 23 March 2011 23 March 2011 25 July 2013 19 March 2014 21 February 2012 19 March 2014 21 February 2012 26 June 2014 24 August 2012 12 February 2015 24 August 2012 12 February 2015 25 July 2013 22 April 2015 1 June 2015 14 March 2014 1 June 2015 26 June 2014 1 June 2015 26 June 2014 21 July 2015 7 November 2014 19 November 2015 12 February 2015 19 November 2015 11 February 2015 19 November 2015 11 February 2015 12 February 2015 22 April 2015 1 June 2015 15 September 2015 15 September 2015 9 September 2019 28 October 2024 19 April 2015 19 April 2015 19 April 2020 23 March 2016 23 March 2016 25 July 2016 19 March 2021 20 February 2015 19 March 2024 21 February 2017 25 June 2021 27 August 2015 27 August 2022 27 August 2017 12 February 2025 25 July 2016 22 April 2026 1 June 2020 20 March 2017 1 June 2022 26 June 2017 1 June 2026 25 June 2021 21 July 2027 9 November 2017 19 November 2022 12 February 2018 19 November 2025 12 February 2020 19 November 2027 12 February 2022 12 February 2025 22 April 2026 1 June 2018 Nominal value Rm 3 244 1 044 1 273 660 478 1 027 80 1 137 677 151 1 888 855 1 297 391 405 500 250 215 786 2 607 3 056 800 694 380 1 035 280 806 1 739 650 2 000 240 952 472 884 90 666 12 1 980 500 1 427 476 Rm 200 19 November 2015 19 November 2020 Unsecured debentures (rand-denominated) Total long-term debt instruments in issue During the year there were no defaults or breaches of principal, interest or any other terms and conditions of long-term debt instruments. NBK2A NBK2B NBK3A NBK4 NBK6A NBK6B NBK7B NBK9A NBK9B NBK10A NBK11A NBK12A NBK12B NBK13A NBK13B NBK14A NBK14B NBK15A NBK15B NBK16A NBK16B NBK17A NBK17B NBK18A NBK18B NBK19A NBK19B NBK20A NBK20B NBK21A NBK21B NBK22A NBK22B NBK23A NBK23B NBK24A NBK24B NBK25B NBK26B NBK27B NBK28B Other Date callable Date repayable Instrument terms up to callable date Instrument terms after callable date Interest on notes payable 2015 Rm 2014 Rm 10,55% per annum 10,55% per annum JIBAR + 2,20% per annum 3-month JIBAR + 2,20% per annum 11,39% per annum Zero coupon 9,68% per annum 11,39% per annum Zero coupon 9,68% per annum JIBAR + 1,75% per annum 3-month JIBAR + 1,75% per annum JIBAR + 2,15% per annum 3-month JIBAR + 2,15% per annum 9,36% per annum 9,36% per annum JIBAR + 1,25% per annum JIBAR + 1,25% per annum 6,91% per annum 8,92% per annum 9,38% per annum 6,91% per annum 8,92% per annum 9,38% per annum JIBAR + 1,00% per annum JIBAR + 1,00% per annum 9,73% per annum 9,73% per annum JIBAR + 1,30% per annum JIBAR + 1,30% per annum 9,29% per annum 9,29% per annum JIBAR + 1,31% per annum JIBAR + 1,31% per annum 9,44% per annum 9,29% per annum JIBAR + 1,00% per annum 8,79% per annum JIBAR + 1,31% per annum 9,44% per annum JIBAR + 0,8% per annum JIBAR + 0,8% per annum 9,95% per annum 9,95% per annum JIBAR + 0,75% per annum JIBAR + 0,75% per annum 9,26% per annum 9,26% per annum JIBAR + 0,85% per annum JIBAR + 0,85% per annum 9,64% per annum 9,64% per annum JIBAR + 0,9% per annum JIBAR + 0,9% per annum 10,36% per annum 10,36% per annum JIBAR + 1,3% per annum JIBAR + 1,3% per annum 10,63% per annum JIBAR + 1,12% per annum 10,07% per annum JIBAR + 1,25% per annum 10,69% per annum 10,63% per annum JIBAR + 1,12% per annum JIBAR + 1,25% per annum JIBAR + 1,45% per annum JIBAR + 1,55% per annum JIBAR + 1,45% per annum JIBAR + 2,00% per annum 10,94% per annum JIBAR + 1,55% per annum JIBAR + 2,00% per annum JIBAR + 2,10% per annum JIBAR + 1,30% per annum JIBAR + 1,55% per annum JIBAR + 2,10% per annum JIBAR + 1,30% per annum 10,07% per annum 10,69% per annum 10,94% per annum JIBAR + 1,55% per annum 30 November 2029 Zero coupon Biannually Quarterly Biannually Biannually Quarterly Quarterly Biannually Quarterly Biannually Biannually Biannually Quarterly Biannually Quarterly Biannually Biannually Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Semi-annually Quarterly Quarterly Quarterly Quarterly Quarterly 30 785 1 372 245 81 1 166 678 155 1 903 878 402 408 501 222 700 2 702 3 070 815 698 383 1 037 282 806 1 754 650 2 095 244 963 477 895 91 674 12 2 002 508 1 436 480 18 18 22 511 3 347 1 054 1 385 263 487 1 043 81 1 166 678 154 1 903 878 1 307 402 408 501 252 700 3 068 698 1 037 806 650 243 15 15 44 977 35 634 NedbaNk limited – ANNUAL RepoR t 2015 77 33 CASHFLOW INFORMATION 33.1 Reconciliation of profit from operations to cash generated by operations Profit from operations Adjusted for: – Depreciation (note 8) – Amortisation: computer software and intangible assets (note 8) – Movement in impairment of loans and advances – Net income on investment banking assets – Net impairment of property and equipment, and intangible assets (note 10) – Net loss on sale of property and equipment (note 10) – Indirect taxation (note 9) Cash generated by operations 33.2 Cash received from clients Interest and similar income (note 5) Commission and fees (note 7) Net trading income (note 7) Other income 33.3 Cash paid to clients, employees and suppliers Interest expense and similar charges (note 6) Staff costs (note 8) Other operating expenses 33.4 Increase in operating assets Other short-term securities Government and other securities Loans and advances and other operating assets 2015 Rm 2014 Rm 11 039 10 822 969 705 5 742 (10) 118 26 668 19 257 55 128 13 404 2 783 1 287 72 602 906 644 5 407 (11) 96 522 18 386 50 075 12 591 2 394 1 160 66 220 (32 724) (12 893) (8 892) (28 322) (12 550) (7 931) (54 509) (48 803) (3 756) (15 905) (83 282) (21 318) 4 451 (47 198) (102 943) (64 065) 78 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December33.5 Increase in operating liabilities Current and savings accounts Other deposits, loan accounts and foreign currency liabilities Negotiable certificates of deposit Deposits received under repurchase agreements Creditors and other liabilities 33.6 taxation paid Amounts receivable at the beginning of the year Statement of comprehensive income charge (excluding deferred taxation) Other taxation received Amounts receivable at the end of the year Total indirect taxation (note 9) Taxation paid 33.7 Dividends paid 2015 Rm 2014 Rm 5 290 54 430 10 745 2 948 20 022 93 435 201 (2 828) 341 (817) (3 103) (668) (3 771) 6 487 60 038 (17 724) 325 (1 685) 47 441 327 (3 074) 7 (201) (2 941) (522) (3 463) Recognised in the consolidated statement of changes in shareholders' equity (5 200) (3 400) NedbaNk limited – ANNUAL RepoR t 2015 79 34 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CATEGORIES OF FINANCIAL INSTRUMENTS Notes total Rm at fair value through profit or  loss Held for trading Rm designated¹ Rm available-for-sale Held-to-maturity loans and Financial liabilities Non-financial assets, financial assets investments receivables at amortised cost liabilities and equity Rm Rm Rm Rm Rm 9 346 30 948 9 614 32 120 12 17 869 11 305 63 084 1 631 1 154 18 151 60 078 30 948 42 733 666 807 3 925 904 1 648 2 1 400 67 8 114 4 885 16 190 4 881 32 863 3 007 18 807 17 18 151 571 603 3 913 16 190 860 733 82 040 95 043 3 024 51 670 609 857 28 18 532 37 610 56 170 3 561 223 59 954 33 996 708 036 9 911 87 763 3 009 44 977 800 779 860 733 33 996 104 503 2 910 141 409 141 409 64 993 50 401 65 444 65 444 904 2 246 67 8 114 4 885 4 881 19 099 28 18 532 37 610 56 170 3 561 223 59 954 931 87 763 3 009 4 790 64 744 538 540 6 020 44 576 589 136 589 136 2015 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale Investments in private-equity associates, associate companies and joint arrangements Deferred taxation assets Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central bank Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments Total liabilities Total equity and liabilities 14 15 16 17 18 20 21 23 22 24 26 27 14 28 29.1 29.2 16 30 31 24 27 32 80 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 34 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CATEGORIES OF FINANCIAL INSTRUMENTS Notes total Rm at fair value through profit or  loss Held for trading Rm designated¹ Rm available-for-sale financial assets Rm Held-to-maturity investments Rm loans and receivables Rm Financial liabilities at amortised cost Rm Non-financial assets, liabilities and equity Rm 32 863 3 007 18 807 17 18 151 571 603 3 913 16 190 860 733 82 040 95 043 3 024 51 670 609 857 Investments in private-equity associates, associate companies and joint 2015 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale arrangements Deferred taxation assets Property and equipment Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves Long-term employee benefit assets Mandatory reserve deposits with central bank total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments Total liabilities Total equity and liabilities 14 15 16 17 18 20 21 23 22 24 26 27 14 28 29.1 29.2 16 30 31 24 27 32 18 151 60 078 30 948 42 733 666 807 3 925 904 1 648 2 1 400 67 8 114 4 885 16 190 4 881 28 18 532 37 610 56 170 3 561 223 59 954 33 996 708 036 9 911 87 763 3 009 44 977 800 779 860 733 9 346 30 948 9 614 32 120 12 17 869 11 305 63 084 1 631 1 154 33 996 104 503 2 910 141 409 141 409 64 993 50 401 65 444 65 444 904 2 246 67 8 114 4 885 4 881 19 099 28 18 532 37 610 56 170 3 561 223 59 954 931 87 763 3 009 4 790 64 744 538 540 6 020 44 576 589 136 589 136 NedbaNk limited – ANNUAL RepoR t 2015 81 34 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CATEGORIES OF FINANCIAL INSTRUMENTS (continued) Notes total Rm At fair value through profit or loss Held for trading Rm Designated¹ Rm Available-for-sale Held-to-maturity financial assets investments Rm Rm Loans and receivables Rm Financial liabilities Non-financial assets, at amortised cost liabilities and equity Rm Rm 2014 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities² Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale Investments in private-equity associates, associate companies and joint arrangements Deferred taxation assets Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central bank Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities³ Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments total liabilities total equity and liabilities 14 15 16 17 18 20 21 23 22 24 26 27 14 28 29.1 29.2 16 30 31 24 27 32 8 447 15 644 5 229 26 306 18 15 282 8 603 58 431 383 2 352 898 10 757 56 322 15 644 26 828 603 329 5 393 236 2 369 16 1 158 165 7 459 4 409 14 843 4 516 753 444 55 644 85 949 3 768 41 838 549 184 – 27 17 422 34 787 52 236 3 561 183 55 980 15 479 634 623 8 404 35 287 3 002 35 634 697 464 753 444 – – 15 479 77 201 902 93 582 93 582 – – 39 437 2 040 41 477 41 477 32 593 3 751 9 245 10 757 518 592 4 992 14 843 – – – – – – – – 236 16 260 165 7 459 4 409 4 516 17 061 27 17 422 34 787 52 236 3 561 183 55 980 969 35 287 3 002 4 293 60 273 – 517 985 6 533 33 594 558 112 558 112 17 – – – – ¹ Refer to note 35 in respect of financial instruments designated as at fair value through profit or loss. ² ³ Floating rate notes of R1 097m were included in the prior year as loans and receivables, whereas these instruments are classified as available for sale. Accordingly, the loans and receivables and available-for-sale categories have been restated. R969m of provisions and other liabilities were previously included in the financial liabilities at amortised cost category within the categories of financial instruments. However, these balances are not within the scope of the IAS 39 categories of financial instruments. Therefore, this amount has been presented under non-financial assets, liabilities and equity and the comparative information has been restated to align with current year presentation. 82 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December34 CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CATEGORIES OF FINANCIAL INSTRUMENTS (continued) Notes total Rm At fair value through profit or loss Held for trading Rm Designated¹ Rm Available-for-sale financial assets Rm Held-to-maturity investments Rm Loans and receivables Rm Financial liabilities at amortised cost Rm Non-financial assets, liabilities and equity Rm Investments in private-equity associates, associate companies and joint 2014 assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities² Loans and advances Other assets Current taxation assets Investment securities Non-current assets held for sale arrangements Deferred taxation assets Property and equipment Intangible assets total assets equity and liabilities Ordinary share capital Ordinary share premium Reserves Long-term employee benefit assets Mandatory reserve deposits with central bank total equity attributable to equity holders of the parent Preference share capital and premium Non-controlling interest attributable to: – Ordinary shareholders total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities³ Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments total liabilities total equity and liabilities 14 15 16 17 18 20 21 23 22 24 26 27 14 28 29.1 29.2 16 30 31 24 27 32 10 757 56 322 15 644 26 828 603 329 5 393 236 2 369 16 1 158 165 7 459 4 409 14 843 4 516 27 17 422 34 787 52 236 3 561 183 55 980 15 479 634 623 8 404 35 287 3 002 35 634 697 464 753 444 8 447 15 644 5 229 26 306 18 – – 15 479 77 201 902 93 582 93 582 15 282 8 603 58 431 383 2 352 898 – – 39 437 2 040 41 477 41 477 ¹ Refer to note 35 in respect of financial instruments designated as at fair value through profit or loss. Floating rate notes of R1 097m were included in the prior year as loans and receivables, whereas these instruments are classified as available for sale. Accordingly, the loans and receivables and available-for-sale categories R969m of provisions and other liabilities were previously included in the financial liabilities at amortised cost category within the categories of financial instruments. However, these balances are not within the scope of the IAS 39 categories of financial instruments. Therefore, this amount has been presented under non-financial assets, liabilities and equity and the comparative information has been restated to align with current year ² ³ have been restated. presentation. 32 593 3 751 9 245 17 10 757 518 592 4 992 14 843 753 444 55 644 85 949 3 768 41 838 549 184 – – – – – – – – – – – – – – 517 985 6 533 33 594 558 112 558 112 236 16 260 165 7 459 4 409 4 516 17 061 27 17 422 34 787 52 236 3 561 183 55 980 969 35 287 3 002 4 293 60 273 NedbaNk limited – ANNUAL RepoR t 2015 83 35 FAIR-VALUE MEASUREMENT– FINANCIAL INSTRUMENTS 35.1 Valuation of financial instruments background Information obtained from the valuation of financial instruments is used by the group to assess the performance of the business and, in particular, provide assurance that the risk and return measures that the business has taken are accurate and complete. It is important that the valuation of financial instruments accurately represent the financial position of the group while complying with the requirements of the applicable accounting standards. The fair value of a financial instrument is the amount that would be received for selling the asset or paid for transferring a liability in an orderly transaction between market participants at the measurement date. Underlying the definition of fair value is a presumption that an entity is a going concern without any intention or need to liquidate, to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Fair value is not, therefore, the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distressed sale. Control environment Validation and approval The business unit entering into the transaction is responsible for the initial determination and recording of the fair value of the transaction. There are normalised review protocols for the independent review and validation of fair values separate from the business unit entering into the transaction. These include, but are not limited to: ■■ ■■ ■■ ■■ daily controls over the profit or loss recorded by trading and treasury frontoffice traders; specific controls to ensure consistent pricing policies and procedures are adhered to; independent valuation of structures, products and trades; and periodic review of all elements of the modelling process. The validation of pricing and valuation methodologies is verified by a specialist team that is part of the group’s risk management function and that is independent of all the business units. A specific area of focus is the marking-to-model of illiquid and/or complex financial instruments. The review of the modelling process includes approval of model revisions, vetting of model inputs, review of model results and more specifically the verification of risk calculations. All valuation techniques are validated and reviewed by qualified senior staff and are calibrated and back-tested for validity by using prices from any observable current market transaction in the same instrument (ie without modification or repackaging) or based on any observable market data. The group obtains market data consistently in the same market where the instrument was originated or purchased. If the fair-value calculation deviates from the quoted market value due to inaccurate observed market data, these deviations in the valuation are documented and presented at a review committee, which is independent of both the business unit and the specialist team, for approval. The committee will need to consider both the regulatory and accounting requirements in arriving at an opinion on whether the deviation is acceptable. The group refines and modifies its valuation techniques as markets and products develop and as the pricing for individual products becomes more or less readily available. While the group believes its valuation techniques are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions may result in different estimates of fair value at the different reporting dates. Stress testing and sensitivity measures Comprehensive stress testing is conducted by the group, in which the following, at a minimum, are considered: ■■ ■■ ■■ ■■ anticipated future projected trading positions; historical events; scenario testing to evaluate plausible future events; and specific testing to supplement the value at risk (VaR) methodology (ie one-day holding period and 99% confidence interval). For further discussion in respect of stress testing and sensitivity measures refer to note 35.6. Valuation methodologies The objective of a fair-value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair-value measurement includes, but is not limited to, consideration of the following: ■■ ■■ ■■ the particular asset or liability that is being measured (consistently with its unit of account); the principal (or most advantageous) market for the asset or liability; and the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair-value hierarchy within which the inputs are categorised. Quoted price A financial instrument is regarded as quoted in an active market if quoted prices are readily available from an exchange, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The appropriate quoted market price for an asset held or a liability to be issued is usually the current bid price and, for an asset to be acquired or a liability held, the asking price. The objective of determining fair value is to arrive at the transaction price of an instrument on the measurement date (ie without modifying or repackaging the instrument) in the principal (or most advantageous) active market to which the business has immediate access. The existence of published price quotations in an active market is the most reliable evidence of fair value and, when they exist, they are used without adjustment to measure the financial asset or financial liability. A market is considered to be active if transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. 84 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December These quoted prices would generally be classified as level 1 in terms of the fair-value hierarchy prescribed by IFRS 13 Fair Value Measurement. Valuation techniques If the market for a financial instrument is not active, the group establishes fair value by using various valuation techniques. These valuation techniques may include: ■■ ■■ ■■ ■■ ■■ ■■ using recent arm’s length market transactions between knowledgeable, willing parties; reference to the current fair value of another instrument that is substantially of the same in nature; reference to the value of the net asset of the underlying business; earnings multiples; discounted-cashflow analysis; and various option pricing models. If there is a valuation technique that is commonly used by market participants to price the financial instrument and that technique has been demonstrated to provide reasonable estimates of prices obtained in actual market transactions, the group will use that technique. In applying valuation techniques, and to the extent possible, the group maximises the use of relevant observable inputs and minimises the use of unobservable inputs. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange and motivated by normal business considerations. In applying valuation techniques, the group uses estimates and assumptions that are consistent with available information about the estimates and assumptions that market participants would use in setting a price for the financial instrument. Fair value is therefore estimated on the basis of the results of a valuation technique that makes maximum use of market inputs and relies as little as possible on entity-specific inputs. A valuation technique would be expected to arrive at a realistic estimate of the fair value if: ■■ ■■ it reasonably reflects how the market could be expected to price the instrument; and the inputs to the valuation technique reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. Therefore, a valuation technique: ■■ ■■ will incorporate all relevant factors that market participants would consider in determining a price; and is consistent with accepted economic methodologies for pricing financial instruments. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the various component parts. If a rate (rather than a price) is quoted in an active market, the group uses that market-quoted rate as an input into a valuation technique to determine fair value. If the market-quoted rate does not include credit risk or other factors that market participants would include in valuing the instrument, the group adjusts for these factors. Valuation techniques applied by the group would generally be classified as level 2 or level 3 in terms of the fair-value hierarchy prescribed by IFRS 13 Fair Value Measurement. The determination of whether an instrument is classified as level 2 or level 3 is dependent on the significance of observable inputs versus unobservable inputs in relation to the fair value of the instrument. Observable markets Quoted market prices in active markets are the best evidence of fair value and are used as the basis of measurement, if available. A determination of what constitutes ‘observable market data’ will necessitate significant judgement. It is the group’s belief that ‘observable market data’ comprises, in the following hierarchical order: ■■ ■■ prices or quotes from an exchange or listed markets in which there are sufficient liquidity and activity; proxy observable market data that is proven to be highly correlated and has a logical, economic relationship with the instrument that is being valued; and ■■ other direct and indirect market inputs that are observable in the marketplace. Data is considered by the group to be ‘observable’ if the data is: ■■ ■■ ■■ ■■ ■■ ■■ verifiable; readily available; regularly distributed; from multiple independent sources; transparent; and not proprietary. Data is considered by the group to be ‘market-based’ if the data is: ■■ ■■ ■■ ■■ reliable; based on consensus within reasonable narrow, observable ranges; provided by sources that are actively involved in the relevant market; and supported by actual market transactions. It is not intended to imply that all of the above characteristics must be present to conclude that the evidence qualifies as observable market data. Judgement is applied based on the strength and quality of the available evidence. NedbaNk limited – ANNUAL RepoR t 2015 85 35 FAIR-VALUE MEASUREMENT– FINANCIAL INSTRUMENTS (continued) inputs to valuation techniques An appropriate valuation technique for estimating the fair value of a particular financial instrument would incorporate observable market data about the market conditions and other factors that are likely to affect the instrument’s fair value. Inputs are selected on a basis that is consistent with the characteristics of the instrument that market participants would take into account in a transaction for that instrument. Principal inputs to valuation techniques applied by the group include, but are not limited to, the following: ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ Discount rate Where discounted-cashflow techniques are used, estimated future cashflows are based on management’s best estimates and the discount rate used is a market rate at the reporting date for an instrument with similar terms and conditions. The time value of money: The business may use well-accepted and readily observable general interest rates, such as the Johannesburg Interbank Agreed Rate (SA), London Interbank Offered Rate (UK) or an appropriate swap rate, as the benchmark rate to derive the present value of a future cashflow. Credit risk: Credit risk is the risk of loss associated with a counterparty’s failure or inability to fulfil its contractual obligations. The valuation of the relevant financial instrument takes into account the effect of credit risk on fair value by including an appropriate adjustment for the risk taken. Foreign currency exchange prices: Active currency exchange markets exist for most major currencies, and prices are quoted daily on various trading platforms and in financial publications. Commodity prices: Observable market prices are available for those commodities that are actively traded on exchanges in SA, London, New York, Chicago and other commercial exchanges. Equity prices: Prices (and indices of prices) of traded equity instruments are readily observable on the JSE Ltd or any other recognised international exchange. Present value techniques may be used to estimate the current market price of equity instruments for which there are no observable prices. Volatility: Measures of the volatility of actively traded items can be reasonably estimated by the implied volatility in current market prices. The shape and skew of the volatility curve is derived from a combination of observed trades and doubles in the market. In the absence of an active market, a methodology to derive these volatilities from observable market data will be developed and utilised. Recovery rates/Loss given default: These are used as an input to valuation models as an indicator of the severity of losses on default. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads. Prepayment risk and surrender risk: Expected repayment patterns for financial assets and expected surrender patterns for financial liabilities can be estimated on the basis of historical data. Servicing costs: If the cost of servicing a financial asset or financial liability is significant and other market participants would face comparable costs, the issuer would consider them in determining the fair value of that financial asset or financial liability. Dividends: Consistent consensus dividend forecasts adjusted for internal investment analysts’ projections can be applied to each share. Forecasts are usually available for the current year plus one additional year. Thereafter, a constant growth rate would be applied to the specific dates into the future for each individual share. Inception profit (day-one gain or loss): The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (ie the fair value of the consideration given or received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (ie without modification or repackaging) or based on a valuation technique, the variables of which include data from observable markets only. Valuation adjustments To estimate a reliable fair value, where appropriate, the group applies certain valuation adjustments to the pricing information derived from the above sources. In making appropriate adjustments, the group considers certain adjustments to the modelled price that market participants would make when pricing that instrument. Factors that would be considered include, but are not limited to, the following: ■■ Own credit on financial liabilities: The carrying amount of financial liabilities held at fair value is adjusted to reflect the effect of changes in the group’s own credit spreads. As a result, the carrying value of issued bonds and subordinated-debt instruments that have been designated at fair value through profit or loss is adjusted by reference to the movement in the appropriate spreads. The resulting gain or loss is recognised in profit and loss in the statement of other comprehensive income. ■■ Counterparty credit spreads: Adjustments are made to market prices when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameter). Valuation techniques by instrument Other short-term securities and government and other securities The fair value of these instruments is based on quoted market prices from an exchange dealer, broker, industry group or pricing service, when available. When they are unavailable, the fair value is determined by reference to quoted market prices for similar instruments, adjusted as appropriate for the specific circumstances of the instruments. Where these instruments include corporate bonds, the bonds are valued using observable active quoted prices or recently executed transactions, except where observable price quotations are not available. Where price quotations are not available, the fair value is determined based on cashflow models, where significant inputs may include yield curves and bond or single-name credit default swap spreads. Derivative financial instruments Derivative contracts can either be traded via an exchange or OTC and are valued using market standard models and quoted parameter inputs. Parameter inputs are obtained from pricing services, consensus pricing services and recently occurring transactions in active markets, whenever possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures. Other inputs are not observable, but can generally be estimated from historical data or other sources. 86 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December Loans and advances Loans and advances include mortgage loans (home loans and commercial mortgages), other asset-based loans, including collaterised debt obligations, and other secured and unsecured loans. In the absence of an observable market for these instruments, the fair value is determined by using internally developed models that are specific to the instrument and that incorporate all available observable inputs. These models involve discounting the contractual cashflows by using an at- inception credit-adjusted zero-coupon curve. Loans and advances are reviewed for observed and verified changes in credit risk and the credit spread is adjusted at subsequent dates if there has been an observable change in credit risk relating to a particular loan or advance. Investment securities Investment securities include private equity investments, listed investments and unlisted investments. The fair value of listed investments is determined with reference to quoted bid prices at the close of business on the relevant securities exchange. Where private-equity investments are involved, the exercise of judgement is required due to uncertainties inherent in estimating the fair value. The fair value of private equity is determined using appropriate valuation methodologies that, dependent on the nature of the investment, may include an analysis of the investee’s financial position and results, risk profiles and prospects, discounted-cashflow analysis, enterprise value comparisons with similar companies, price/earnings comparisons and earnings multiples. For each investment the relevant methodology is applied consistently over time and may be adjusted for changes in market conditions relative to that instrument. The fair value of unlisted investments is determined using appropriate valuation techniques that may include, but are not limited to, discounted- cashflow analysis, net asset value calculations and directors’ valuations. Other assets Short positions or long positions in equities arise in trading activities where equity shares, not owned by the group, are sold in the market to third parties. The fair value of these instruments is determined by reference to the gross short/long position valued at the offer rate. Investments in instruments that do not have a quoted market price in an active market and the fair value of which cannot be reliably measured, as well as derivatives that are linked to and have to be settled by delivery of such unquoted equity instruments, are measured at fair value using models considered to be appropriate by management. Amounts owed to depositors Amounts owed to depositors include deposits under repurchase agreements, negotiable certificates of deposit and other deposits. These instruments incorporate all market risk factors, including a measure of the group’s credit risk relevant for that financial liability when designated at fair value through profit or loss. The fair value of these financial liabilities is determined by discounting the contractual cashflows using a Nedbank Ltd-specific credit-adjusted yield curve that reflects the level at which the group would issue similar instruments at the reporting date. The market risk parameters are valued consistently to similar instruments held as assets. The fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. When the fair value of a financial liability cannot be reliably determined, the liability is recorded at the amount due. Fair value is considered reliably measurable if: ■■ ■■ the variability in the range of reasonable fair-value estimates is not significant for that instrument; or the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value. Investment contract liabilities The fair value of investment contract liabilities is determined by reference to the fair value of the underlying assets. Long-term debt instruments The fair value of long-term debt instruments is determined by reference to published market values on the relevant exchange, when they are: ■■ ■■ available; and considered to be trading with sufficient volume and frequency. When the above conditions are not met, the fair value is determined using models considered to be appropriate by management. As far as possible, inputs to these models will leverage observable inputs for similar instruments with similar coupons and maturities. Complex instruments These instruments are valued by using internally developed models that are specific to the instrument and that have been calibrated to market prices. In less active markets data is obtained from less frequent market transaction and broker quotes, and through extrapolation and interpolation techniques. Where observable prices or inputs are not available, other relevant sources of information such as historical data, fundamental analysis of the economics of the transaction and proxy information from similar transactions are used. These models are continually reviewed and assessed to ensure that the best available data is being utilised in the determination of fair value. Other liabilities Short positions or long positions in equities arise in trading activities where equity shares, not owned by the group, are sold in the market to third parties. The fair value of these instruments is determined by reference to the gross short/long position valued at the offer rate. Where the group has assets and liabilities with offsetting market risks, it may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position, as appropriate. NedbaNk limited – ANNUAL RepoR t 2015 87 35 FAIR-VALUE MEASUREMENT– FINANCIAL INSTRUMENTS (continued) Summary of principal valuation techniques – level 2 instruments The following table sets out the group's principal valuation techniques used in determining the fair value of financial assets and financial liabilities classified as level 2 in the fair-value hierarchy: Assets Other short-term securities Derivative financial instruments Valuation technique Discounted-cashflow model Discounted-cashflow model Key inputs Discount rates Discount rates Black-Scholes model Riskfree rate and volatilities Multiple valuation techniques Valuation multiples Government and other securities Discounted-cashflow model Discount rates Loans and advances Investment securities Discounted-cashflow model Interest rate curves Discounted-cashflow model Money market rates and interest rates Adjusted net asset value Dividend yield method Underlying price of market traded instruments Dividend growth rates liabilities Derivative financial instruments Discounted-cashflow model Discount rates Amounts owed to depositors Provisions and other liabilities Black-Scholes model Riskfree rate and volatilities Multiple valuation techniques Valuation multiples Discounted-cashflow model Discounted-cashflow model Discount rates Discount rates Long-term debt instruments Discounted-cashflow model Summary of principal valuation techniques – level 3 instruments The summary of the valuation techniques applicable to those financial assets and financial liabilities classified as level 3 in the fair-value hierarchy appears in note 35.7. Discount rates 35.2 Fair-value hierarchy 35.2.1 Financial assets total financial assets recog- nised at amortised cost total financial assets recog- nised at fair value total financial assets Note Held for trading designated at fair value through profit or loss available for sale level 1 level 2 level 3 level 1 level 2 level 3 level 1 level 2 level 3 841 634 661 527 180 107 7 587 74 435 18 4 182 88 984 1 877 – 3 024 – 14 34 341 34 341 – 15 60 078 32 863 27 215 9 346 17 869 16 30 948 30 948 86 30 844 18 17 42 733 18 807 23 926 7 489 2 125 3 750 7 555 3 007 18 666 807 571 603 95 204 32 120 63 051 33 Rm 2015 Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets 20 3 925 3 913 12 12 Investments in private-equity associates, associate companies and joint arrangements Investment securities 22 1 154 21 1 648 1 154 1 648 1 154 432 509 690 17 88 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December total financial assets recog- nised at amortised cost total financial assets recog- nised at fair value total financial assets Rm Note Held for trading Designated at fair value through profit or loss Available for sale Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 2014 Cash and cash equivalents Other short- term securities Derivative financial instruments Government and other securities¹ Loans and advances Other assets Investments in private-equity associates, associate companies and joint arrangements Investment securities 736 383 591 022 145 361 4 618 51 026 – 4 550 79 668 1 731 2 381 1 387 14 25 600 25 600 15 56 322 32 593 23 729 8 447 459 14 823 16 15 644 15 644 10 15 634 17 26 828 9 245 17 583 4 590 639 3 084 5 519 2 381 1 370 18 603 329 518 592 4 992 20 5 393 84 737 401 26 306 18 58 398 33 383 22 898 21 2 369 898 2 369 898 624 928 800 17 ¹ Floating rate notes of R1 097m were included in the prior year as loans and receivables, whereas these instruments are classified as available for sale. Accordingly, the loans and receivables and available-for- sale categories have been restated. Summary of fair-value hierarchies Rm Other short-term securities Derivative financial instruments Government and other securities¹ Loans and advances Other assets Investments in private-equity associates, associate companies and joint arrangements total financial assets recognised at fair value total financial assets classified as level 1 total financial assets classified as level 2 total financial assets classified as level 3 2015 2014 2015 2014 2015 2014 2015 2014 27 215 30 948 23 926 95 204 12 23 729 15 644 17 583 84 737 401 1 154 898 459 10 10 055 86 11 239 27 215 30 844 12 687 95 171 23 270 15 634 7 528 84 704 12 401 18 33 33 1 154 690 898 800 Investment securities 1 648 2 369 432 624 526 945 Reconciliation to categorised statement of financial position Rm Level 1 Level 2¹ Level 3 Reconciliation to statement of financial position Rm Total financial assets Total non-financial assets Total assets 180 107 145 361 11 769 11 549 166 443 132 081 1 895 1 731 Held for trading Designated at fair value through profit or loss Available for sale 2015 2014 2015 2014 2015 2014 7 587 4 618 4 182 4 550 74 435 51 026 88 984 79 668 3 024 2 381 1 387 18 1 877 1 731 82 040 55 644 95 043 85 949 3 024 3 768 Note 2015 2014 34 841 634 736 383 34 19 099 17 061 860 733 753 444 ¹ Floating rate notes of R1 097m were included in the prior year as loans and receivables, whereas these instruments are classified as available for sale. Accordingly, the loans and receivables and available-for-sale categories have been restated. NedbaNk limited – ANNUAL RepoR t 2015 89 FAIR-VALUE MEASUREMENT– FINANCIAL INSTRUMENTS (continued) 35 35.2 Fair-value hierarchy (continued) 35.2.2 Financial liabilities total financial liabilities recog- nised at amortised cost total financial liabilities recog- nised at fair value total financial liabilities Note Held for trading Designated at fair value through profit or loss Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 2015 795 989 589 136 206 853 2 870 138 539 156 65 288 Derivative financial instruments 16 33 996 33 996 126 33 870 Amounts owed to depositors 30 708 036 538 540 169 496 104 503 Provisions and other liabilities Long-term debt instruments 2014 Derivative financial instruments Amounts owed to depositors Provisions and other liabilities¹ Long-term debt instruments 31 32 16 30 31 32 Summary of fair-value hierarchies Rm Derivative financial instruments Amounts owed to depositors Provisions and other liabilities¹ Long-term debt instruments 8 980 6 020 2 960 2 744 166 44 977 44 576 401 64 993 50 245 156 693 171 558 112 135 059 772 92 810 575 40 902 15 479 15 479 5 15 474 634 623 517 985 116 638 77 201 39 437 7 435 6 533 902 767 135 35 634 33 594 2 040 575 1 465 total financial liabilities recognised at fair value total financial liabilities classified as level 1 total financial liabilities classified as level 2 total financial liabilities classified as level 3 2015 2014 2015 2014 2015 2014 2015 2014 33 996 15 479 126 5 33 870 15 474 169 496 116 638 169 496 116 638 2 960 902 2 744 401 2 040 156 767 575 216 245 135 1 465 206 853 135 059 3 026 1 347 203 827 133 712 Reconciliation to categorised statement of financial position Rm Level 1 Level 2 Level 3 Reconciliation to statement of financial position Rm Total financial liabilities¹ Total equity and non-financial liabilities¹ Total equity and liabilities Held for trading Designated at fair value 2015 2014 2015 2014 2 870 772 156 575 138 539 92 810 65 288 40 902 141 409 93 582 65 444 41 477 Note 2015 2014 34 795 989 693 171 34 64 744 60 273 860 733 753 444 ¹ R969m of provisions and other liabilities were previously included in the 'financial liabilities at amortised cost' category within the categories of financial instruments. However, these balances are not within the scope of the IAS 39 categories of financial instruments. Therefore, this amount has been presented under non-financial assets, liabilities and equity and the comparative information has been restated to align with the current-year presentation. The tables presented above analyse the financial assets and financial liabilities that are measured at fair value by level of fair-value hierarchy as required by IFRS 13 Fair Value Measurement. The levels of the hierarchy are defined as follows: level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. level 2: Valuation techniques using market data that is either directly or indirectly observable. Various factors influence the availability of observable data and these may vary from product to product and change over time. Factors include, for example, the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the market, the maturity of market modelling and the nature of the transaction (bespoke or generic). level 3: Valuation techniques that include significant inputs that are unobservable. To the extent that a valuation is based on inputs that are not market-observable the determination of the fair value can be more subjective, dependent on the significance of the unobservable inputs to the overall valuation. Unobservable inputs are determined based on the best information available and may include reference to similar instruments, similar maturities, appropriate proxies or other analytical techniques. 90 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 35.3 Details of changes in valuation techniques There have been no changes to valuation techniques. 35.4 Significant transfers between level 1 and level 2 There were significant transfers between level 1 and level 2 of the fair-value hierarchy within government and other securities and other short-term securities due to changes in the level of market activity. The impacted categories are: ■■ ■■ ■■ Held for trading– R1 308m Designated– R2 397m Available for sale– R2 074m In terms of the group’s policy, transfers of financial instruments between levels of the fair-value hierarchy are deemed to have occurred at the end of the reporting period. 35.5 Level 3 reconciliation assets Rm 2015 Opening balance at 1 January Gains in profit for the year Gains in other comprehensive income for the year Purchases and issues Sales and settlements transfers from level 2 transfers to level 2 Closing balance at 31 december 18 18 53 89 (36) 305 (212) 304 (137) 1 (75) 898 33 800 1 731 71 305 (212) Held for trading Derivative financial instruments Designated as at fair value 1 731 Investments in private- equity associates, associate companies and joint arrangements Loans and advances Investment securities total financial assets classified as level 3 Rm 2014 opening balance at 1 January Gains/ (losses) in profit for the year Gains in other comprehensive income for the year purchases and issues Sales and settlements transfers from level 2 transfers to level 2 Closing balance at 31 December 2014 18 18 1 877 1 154 33 690 1 895 Held for trading Investment securities 5 5 (5) (5) Designated as at fair value 1 719 250 169 (407) Investments in private- equity associates, associate companies and joint arrangements Loans and advances Investment securities total financial assets classified as level 3 860 33 826 42 208 142 (146) 27 (261) 1 724 250 169 (412) Gains and losses include, but are not limited to, fair-value gains or losses, translation gains or losses and trading gains or losses. 35.6 Unrealised gains or losses The unrealised gains or losses arising on instruments classified as level 3 include the following: trading income Private-equity gains 2015 Rm 71 71 1 731 898 33 800 1 731 2014 Rm 193 193 NedbaNk limited – ANNUAL RepoR t 2015 91 FAIR-VALUE MEASUREMENT– FINANCIAL INSTRUMENTS (continued) 35 35.7 effect of changes in significant unobservable assumptions to reasonable possible alternatives The fair-value measurement of financial instruments are, in certain circumstances, measured using valuation techniques that include assumptions that are not market observable. Where these scenarios apply, the group performs stress testing on the fair value of the relevant instruments. In performing the stress testing, appropriate levels for the unobservable input parameters are chosen so that they are consistent with prevailing market evidence and in line with the group’s approach to valuation control. The following information is intended to illustrate the potential impact of the relative uncertainty in the fair value of financial instruments for which valuation is dependent on unobservable input parameters and which are classified as level 3 in the fair-value hierarchy. However, the disclosure is neither predictive nor indicative of future movements in fair value. The following table shows the effect on fair value of changes in unobservable input parameters to reasonably possible alternative assumptions: 2015 assets Derivative financial instruments Valuation technique Significant unobservable input Variance in fair value % Discounted- cashflow model, Black-Scholes model and multiple valuation techniques Discount rates, riskfree rates, volatilities, credit spreads and valuation multiples Between (13) and 10 amount recognised in the statement of financial position Favourable change in value Unfavourable change in value Rm Rm Rm 18 2 (2) Loans and advances Discounted cashflows Credit spreads and Between (13) and 10 Between (13) and 10 33 690 3 62 (4) (77) discount rates Valuation multiples, correlations, volatilities and credit spreads Valuation multiples Between (7) and 8 1 154 96 (108) Discounted cashflows, adjusted net asset value, earnings multiples, third-party valuations and dividend yields Discounted cashflows and earnings multiples Investment securities Investments in private- equity associates, associate companies and joint arrangements total financial assets classified as level 3 2014 assets Discounted cashflows, adjusted net asset value, earnings multiples, third-party valuations and dividend yields Discounted cashflows and earnings multiples Investment securities Investments in private- equity associates, associate companies and joint arrangements total financial assets classified as level 3 Loans and advances Discounted cashflows Credit spreads and discount rates Valuation multiples, correlations, volatilities and credit spreads 1 895 163 (191) Between (13) and 13 Between (13) and 13 33 800 3 76 (4) (95) Valuation multiples Between (16) and 16 898 124 (134) 1 731 203 (233) 92 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December35.8 Assets and liabilities not measured at fair value for which fair value is disclosed Certain financial instruments of the group are not carried at fair value, including those categorised as held to maturity, loans and receivables, and financial liabilities at amortised cost. The calculation of the fair value of these financial instruments incorporates the group’s best estimate of the value at which these financial assets could be exchanged, or financial liabilities transferred, between market participants at the measurement date. The group’s estimate of what fair value is does not necessarily represent what it would be able to sell the asset for or transfer the respective financial liability for in an involuntary liquidation or distressed sale. The fair values of these respective financial instruments at the reporting date detailed below are estimated only for the purpose of IFRS disclosure, as follows: Rm 2015 Financial assets Other short-term securities Government and other securities Loans and advances Financial liabilities Long-term debt instruments 2014 Financial assets Other short-term securities Government and other securities Loans and advances Financial liabilities Long-term debt instruments loans and advances Fair value level 1 level 2 level 3 Carrying Value 623 273 32 863 18 807 618 012 32 709 17 415 571 603 567 888 44 576 44 576 42 933 42 933 17 415 17 415 24 269 24 269 560 430 560 043 9 338 32 593 9 245 518 592 33 594 33 594 32 580 9 338 518 125 33 554 33 554 9 338 23 385 23 385 567 888 567 888 518 125 518 125 32 709 32 709 18 664 18 664 32 580 32 580 10 169 10 169 Loans and advances, recognised in note 18, that are not recognised at fair value principally comprise variable-rate financial assets. The interest rates on these variable-rate financial assets are adjusted when the applicable benchmark interest rate changes. Loans and advances are not actively traded in most markets and it is therefore not possible to determine the fair value of these loans and advances using observable market prices and market inputs. Due to the unique characteristics of the loans and advances portfolio and the fact that there have been no recent transactions involving the disposals of such loans and advances, there is no basis to determine a price that could be negotiated between market participants in an orderly transaction. The group is not currently in the position of a forced sale of such underlying loans and advances, and it would therefore be inappropriate to value the loans and advances on a forced-sale basis. For specifically impaired loans and advances, the carrying value as determined after consideration of the group’s IAS 39 credit impairments is considered the best estimate of fair value. The group has developed a methodology and model to determine the fair value of the gross exposures for the performing loans and advances measured at amortised cost. This model incorporates the use of average interest rates and projected monthly cashflows per product type. Future cashflows are discounted using interest rates at which similar loans would be granted to borrowers with similar credit ratings and maturities. Methodologies and models are updated on a continuous basis for changes in assumptions, forecasts and modelling techniques. Future forecasts of the group’s probability of default (PDs) and loss given defaults (LGDs) for periods 2016 to 2018 (2014: for periods 2015 to 2017) are based on the latest available internal data and is applied to the first three years’ projected cashflows. Thereafter, PDs and LGDs are gradually reverted to their long-run averages and are applied to the remaining projected cashflows. Inputs into the model include various assumptions utilised in the pricing of loans and advances. The determination of such inputs is highly subjective and therefore any change to one or more of the assumptions may result in a significant change in the determination of the fair value of loans and advances. Government and other securities The fair value of government and other securities is determined based on available market prices (level 1) or discounted-cashflow analysis (level 2), where an instrument is not quoted or the market is considered to be inactive. See note 17 for further detail. Other short-term securities The fair value of other short-term securities is determined using a discounted-cashflow analysis (level 2). See note 15 for further detail. long-term debt instruments The fair value of long-term debt instruments is determined based on available market prices (level 1) or discounted-cashflow analysis (level 2) where an instrument is not quoted or the market is considered to be inactive. amounts owed to depositors The amounts owed to depositors principally comprise of variable-rate liabilities. The carrying value of the amounts owed to depositors approximates fair value because the instruments reprice to current market rates at frequent intervals. In addition, a significant portion of the balance is callable or is short term in nature. Cash and cash equivalents, other assets, mandatory deposits with central banks, and provisions and other liabilities The carrying values of cash and cash equivalents, other assets, mandatory deposits with central banks and provisions and other liabilities are considered a reasonable approximation of their respective fair values, as they are either short term in nature or are repriced to current market rates at frequent intervals. NedbaNk limited – ANNUAL RepoR t 2015 93 36 FINANCIAL INSTRUMENTS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS The group has satisfied the criteria for designation of financial instruments as at fair value through profit or loss in terms of the accounting policies. Various fixed-rate advances and liabilities are entered into by the group. The overall interest rate risk of the group is economically hedged by way of interest rate swaps and managed by the Group ALCO. The interest rate risk is then traded to the market through the central trading desk. The swaps and frontdesk trading instruments meet the definition of 'derivatives', and are measured at fair value in terms of IAS 39. Fixed-rate advances and liabilities, however, do not meet this definition. Therefore, to avoid any accounting mismatch of holding the advances at amortised cost and the hedging instruments at fair value, the advances and liabilities are designated as at fair value through profit or loss and are held at fair value. Various instruments are designated as at fair value through profit or loss, which is consistent with the group's documented risk management or investment strategy. The fair value of the instruments is managed and reviewed on a regular basis by the risk/investment functions of the group. The risk of the portfolio is measured and monitored on a fair-value basis. Financial assets designated as at fair value through profit or loss 36.1 Maximum exposure to credit risk Change in fair value due to change in credit risk¹ Current period Cumulative Rm Negotiable certificates of deposit Treasury bills and other bonds Government-guaranteed Other dated securities Mortgage loans Net finance lease and instalment debtors Leases and debentures Preference shares Loans and advances (secured and unsecured) Foreign client lending Other loans Debtors and accruals Private-equity associates, associate companies and joint arrangements Listed investments Unlisted investments 2015 913 16 956 1 265 10 041 18 007 18 434 82 1 663 5 558 8 993 10 345 1 155 432 1 199 2014 2015 2014 2015 2014 2 2 (2) 15 282 2 794 5 809 20 785 19 030 44 2 012 5 588 3 990 6 982 383 898 624 1 728 95 043 85 949 2 2 (2) ¹ Positive amounts represent gains, while negative amounts represent losses. See note 19.1. Nedbank Ltd has estimated the change in credit risk as being the amount arising from the change in fair value of the financial instrument that is not attributable to changes in market conditions that give rise to market risk. Individual credit spreads for loans or receivables that have been designated as at fair value through profit or loss are determined at inception of the deal. The credit spread is calculated as the difference between the benchmark interest rate and the interest rate charged to the client. Subsequent changes in the benchmark interest rate and the credit spread give rise to changes in fair value in the financial instrument. Loans and advances are reviewed for observable changes in credit risk and the credit spread is adjusted at subsequent dates if there has been an observable change in credit risk relating to a particular loan or advance. No credit derivatives are used to hedge the credit risk on any of the financial assets designated as at fair value through profit or loss. A breakdown of the financial assets that are designated as at fair value through profit or loss can be found in note 34. A detailed explanation of how each financial asset is valued can be found in note 35. 94 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December36.2 Financial liabilities designated as at fair value through profit or loss Rm 2015 Long-term debt instruments Call and term deposits Foreign currency liabilities Provisions and other liabilities Negotiable certificates of deposit 2014 Long-term debt instruments Call and term deposits Foreign currency liabilities Negotiable certificates of deposit Change in fair value due to change in credit risk¹ Contractually payable at maturity Fair value Current period Cumulative 401 31 221 9 527 50 24 245 65 444 2 040 20 964 8 060 10 413 41 477 409 31 291 9 527 24 369 65 596 1 909 20 955 8 061 10 408 41 333 (36) (54) (54) (90) 38 (16) (16) 6 (103) (157) 48 (39) (54) (45) ¹ Positive amounts represent losses, while negative amounts represent gains. The change in fair value due to credit risk has been determined as the difference between fair values determined using a credit-adjusted liability curve and a riskfree liability curve. The curves are constructed using a standard 'bootstrapping' process to derive a zero-coupon yield curve. The credit-adjusted curve was based on offer rates of negotiable certificates of deposit and promissory notes with maturity periods of up to five years, and thereafter the offer rates of issued Nedbank Ltd bonds are applied. 37 OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES In accordance with the requirements of IFRS 7 Financial Instruments: Disclosures, the table below sets out the impact of: ■■ recognised financial instruments that are set off in the statement of financial position in accordance with the requirements of IAS 32 Financial Instruments: Presentation; and ■■ financial instruments that are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments and transactions that did not qualify for presentation on a net basis. The group reports financial assets and financial liabilities on a net basis in the statement of financial position only if there is a legally enforceable right to set off the recognised amounts and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Certain master netting arrangements may not meet the criteria for offsetting in the statement of financial position because: ■■ these agreements create a right of setoff that is enforceable only following an event of default, insolvency or bankruptcy; and ■■ the group and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Master netting arrangements and similar agreements include derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include derivatives, sales and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending agreements. Financial instruments such as loans and deposits are not disclosed in the table below unless they are offset in the statement of financial position. NedbaNk limited – ANNUAL RepoR t 2015 95 37 OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) effects of netting on the statement of financial position Related amounts not set off in the statement of financial position amounts set off in the statement of financial position in accordance with iaS 32 Net amounts included in the statement of financial position¹ amounts that may be netted on the occurrence of a future event Gross amounts Net amounts reflecting the effect of master netting arrangements amounts not subject to iFRS 7 offsetting disclosure² total amounts recognised in the statement of financial position Financial collateral (5 182) 2 291 (2 891) 30 055 (32 946) 1 035 (1 856) (157) 893 (3 048) 30 948 (1 050) (33 996) 3 939 3 939 (1 551) (1 551) 2 388 2 388 2 388 2 388 664 419 666 807 664 419 666 807 (95 413) 36 296 (59 117) (59 117) (648 919) (708 036) (95 413) 36 296 (59 117) (59 117) (648 919) (708 036) effects of netting on the statement of financial position Related amounts not set off in the statement of financial position Amounts set off in the statement of financial position in accordance with IAS 32 Net amounts included in the statement of financial position¹ Amounts that may be netted on the occurrence of a future event Gross amounts Net amounts reflecting the effect of master netting arrangements Amounts not subject to IFRS 7 offsetting disclosure² total amounts recognised in the statement of financial position Financial collateral (2 812) 2 787 25 (25) 15 395 (15 420) 190 249 (59) 165 15 644 (15 479) 5 386 5386 (2 874) (2 874) 2 512 2 512 2 512 2 512 600 817 600 817 603 329 603 329 (88 695) 29 516 (59 179) (59 179) (575 444) (634 623) (88 695) 29516 (59 179) (59 179) (575 444) (634 623) Rm 2015 Derivative financial instruments Assets Liabilities Assets excluding derivative financial instruments Loans and advances Liabilities excluding derivative financial instruments Amounts owed to depositors Rm 2014 Derivative financial instruments Assets Liabilities Assets excluding derivative financial instruments Loans and advances Liabilities excluding derivative financial instruments Amounts owed to depositors ¹ ² Includes the net amount of financial assets and financial liabilities where offsetting has been applied in terms of IAS 32 and financial instruments that are subject to master netting agreements but where no offsetting has been applied. Excludes financial instruments that are neither subject to setoff nor master netting agreements. Includes financial instruments that are neither subject to setoff nor master netting agreements. 96 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December38 CREDIT ANALYSIS OF OTHER SHORT-TERM SECURITIES, AND GOVERNMENT AND OTHER SECURITIES Credit ratings Rm 2015 2014 2015 2014 2015 2014 2015 2014 Investment grade Subinvestment grade Not rated total Other short-term securities Negotiable certificates of deposit Treasury bills and other Government and other securities Government and government- guaranteed securities Other dated securities 58 880 54 895 1 071 1 333 127 94 60 078 56 322 8 717 7 213 64 8 717 7 277 50 163 47 682 1 071 1 269 127 94 51 361 49 045 35 133 25 138 3 761 1 294 3 839 396 42 733 26 828 25 738 13 220 660 600 19 26 398 13 839 9 395 11 918 3 101 694 94 013 80 033 4 832 2 627 3 839 3 966 377 490 16 335 12 989 102 811 83 150 All debt securities that are purchased by the group are rated using an internal rating system, being the Nedbank Group Rating (NGR) scale. The group requires that all investments be rated using the NGR scale to ensure that credit risk is measured consistently and accurately across the group. This ensures compliance with the group's policy on the rating of investments. The NGR scale has been mapped to the Standard & Poor's credit rating system. According to the NGR scale investment grade can be equated to a Standard & Poor's rating of above BBB-. All government and other short-term securities are current and not impaired. Investment grade includes credit ratings from NGR01 to NGR11 and subinvestment grade includes credit ratings from NGR12 to NGR25. NedbaNk limited – ANNUAL RepoR t 2015 97 39 LIQUIDITY GAP Rm 2015 Cash and cash equivalents (including mandatory reserve deposits with central banks) Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments < 3 months > 3 months < 6 months > 6 months < 1 year > 1 year < 5 years > 5 years Non- determined total 32 529 1 812 22 047 12 712 18 055 7 264 8 795 3 336 2 415 7 379 9 023 1 091 155 029 1 688 27 290 7 481 48 309 17 172 259 479 15 301 176 700 219 491 46 838 76 260 291 294 201 024 7 998 2 882 2 582 7 593 12 941 511 986 56 433 58 386 70 542 10 689 34 341 60 078 30 948 42 733 666 807 25 826 860 733 59 954 33 996 708 036 25 826 25 826 59 954 5 252 525 236 59 315 Net liquidity gap (305 745) (12 477) 13 770 13 770 3 923 64 891 11 369 19 805 97 940 193 354 15 997 39 627 161 397 44 977 73 724 860 733 (47 898) – 2014 Cash and cash equivalents (including mandatory reserve deposits with central banks) Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Net liquidity gap 25 280 220 100 24 408 13 593 15 974 2 347 2 746 555 1 181 5 199 5 963 550 127 412 290 21 759 3 855 39 889 16 609 255 399 5 524 158 870 180 396 36 417 60 999 279 554 170 357 1 962 406 902 4 862 7 347 460 177 46 894 47 966 68 894 10 692 25 600 56 322 15 644 26 828 603 329 25 721 753 444 55 980 15 479 634 623 25 721 25 721 55 980 1 354 463 493 (283 097) 1 576 48 876 (12 459) 5 706 54 574 6 425 22 328 96 084 183 470 4 670 22 709 147 648 67 708 (41 987) 35 634 753 444 – 11 728 11 728 This note has been prepared on a contractual maturity basis. 98 NedbaNk limited – ANNUAL RepoR t 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 67 506 9 820 502 355 44 824 85 740 15 543 33 996 40 CONTRACTUAL MATURITY ANALYSIS FOR FINANCIAL LIABILITIES Statement of financial position amount < 3 months > 3 months < 6 months < 6 months < 1 year > 1 year > 5 years < 5 years Non- determinable maturity total Rm 2015 Long-term debt instruments 44 977 5 761 742 Amounts owed to depositors 708 036 515 772 58 518 5 637 62 361 29 997 77 482 22 263 11 655 64 400 – 725 788 Current accounts Savings deposits Other deposits and loan accounts 67 504 67 506 9 820 9 820 492 764 371 842 Foreign currency liabilities 44 823 30 693 34 631 6 305 32 722 4 663 51 505 3 163 11 655 Negotiable certificates of deposit Deposits received under repurchase agreements Derivative financial instruments – liabilities Provisions and other liabilities 77 594 20 368 17 582 24 976 22 814 15 531 15 543 33 996 7 998 2 882 2 582 7 593 12 941 13 770 800 779 529 531 62 142 70 580 115 072 46 859 13 769 13 769 13 769 837 953 Guarantees on behalf of clients Confirmed letters of credit and discounting transactions Unutilised facilities and other 26 374 26 374 4 419 4 419 101 747 101 747 132 540 132 540 – – – – 2014 Long-term debt instruments 35 634 1 891 Amounts owed to depositors 634 623 463 512 2 026 49 126 6 934 50 916 27 312 75 009 5 298 10 905 Current accounts Savings deposits Other deposits and loan accounts 62 385 9 649 62 386 9 650 453 350 336 760 Foreign currency liabilities 29 807 25 313 31 436 2 315 31 209 50 987 10 905 1 160 1 020 Negotiable certificates of deposit Deposits received under repurchase agreements Derivative financial instruments – liabilities Provisions and other liabilities 66 849 16 808 15 375 18 547 23 002 12 583 12 595 15 479 1 962 406 902 4 862 7 347 11 728 697 464 467 365 51 558 58 752 107 183 23 550 Guarantees on behalf of clients Confirmed letters of credit and discounting transactions Unutilised facilities and other 22 807 22 807 3 248 3 248 102 968 102 968 – – 26 374 4 419 101 747 132 540 43 461 649 468 62 386 9 650 461 297 29 808 73 732 12 595 15 479 11 728 11 728 11 728 720 136 22 807 3 248 102 968 Provisions and other liabilities are included in this table in order to provide a reconciliation with the statement of financial position. Derivatives are not profiled on an undiscounted basis. 129 023 129 023 – – – – – 129 023 NedbaNk limited – ANNUAL RepoR t 2015 99 41 HISTORICAL VALUE AT RISK (VaR) (99%, ONE-DAY) BY RISK TYPE 2015 2014 Rm average minimum maximum Year-end Average Minimum Maximum Year-end Foreign exchange Interest rate Credit Commodity Diversification total VaR exposure 3,2 7,3 7,0 0,4 (5,2) 12,7 0,6 3,8 4,9 17,8 22,4 11,6 2,4 7,4 41,9 17,7 21,4 9,2 1,7 (8,8) 41,2 3,7 7,7 3,8 0,3 (5,7) 9,8 0,6 5,2 2,7 10,7 12,5 5,3 0,9 6,7 14,8 0,9 5,6 5,3 0,9 (3,8) 8,9 The ‘Worldclass risk management’ section contains information on the group trading book VaR and the comparison of trading VaR. 42 INTEREST RATE REPRICING GAP Rm 2015 Total assets Total equity and liabilities Interest rate hedging activities Repricing profile Cumulative repricing profile < 3 months > 3 months < 6 months > 6 months < 1 year > 1 year < 5 years > 5 years trading and non-rate total 553 361 518 086 13 375 48 650 48 650 31 050 25 943 7 120 12 227 21 915 43 452 22 773 188 182 860 733 32 805 20 080 12 555 251 264 860 733 10 936 (24 385) (7 046) 46 (1 013) 3 172 (63 082) – – 60 877 60 923 59 910 63 082 Expressed as a percentage of total assets (%) 5,7 7,1 7,1 7,0 7,3 2014 Total assets Total equity and liabilities Interest rate hedging activities Repricing profile Cumulative repricing profile Expressed as a percentage of total assets (%) 498 952 471 251 24 443 52 144 52 144 6,9 22 551 26 122 7 628 4 057 56 201 7,5 22 788 26 798 44 265 16 317 15 880 149 008 753 444 4 289 208 667 753 444 1 215 (25 199) (8 087) (2 795) 53 407 7,1 2 749 56 155 7,5 3 504 (59 659) 59 659 7,9 – – The ‘Worldclass risk management’ section contains information on interest rate risk in the banking book. 43 SECURITISATIONS Nedbank Group Ltd uses securitisation primarily as a funding diversification tool and to add flexibility in mitigating structural liquidity risk. The group currently has four active traditional securitisation transactions: ■■ ■■ ■■ ■■ Synthesis Funding Ltd (Synthesis), an asset-backed commercial paper (ABCP) programme launched in 2004; Greenhouse Funding (RF) Ltd, (Greenhouse), a residential mortgage-backed securitisation programme; Greenhouse Funding III (RF) Ltd, (Greenhouse III), a residential mortgage-backed securitisation programme; and Precinct Funding 1 (RF) Ltd (Precinct), a commercial mortgage-backed securitisation programme. Nedbank Group also has two active Committed Liquidity Facility (CLF) transactions: ■■ West Road South No 3 (RF) Ltd, (West Road South), a commercial mortgage-backed CLF programme launched in 2014, with R14,5bn assets transferred into the programme; and ■■ Greenhouse Funding 4 (RF) Ltd, (Greenhouse 4), a residential mortgage-backed CLF programme launched in 2015, with R3,1bn assets transferred into the programme. Synthesis Funding ltd Synthesis primarily invests in long-term rated bonds and offers capital market funding to SA corporates. These assets are funded through the issuance of short-dated investment-grade commercial paper to institutional investors. All the commercial paper issued by Synthesis is assigned the highest short-term RSA local-currency credit rating by Fitch, and is listed on the JSE Ltd. Liquidity facilities have been obtained from a F1+(zaf)-rated bank in order to ensure the availability of sufficient funds in instances where timing mismatches could occur. These timing mismatches to the possible mismatch between the receipt of funds relating to financial assets and disbursement of funds relating to the redemption of financial liabilities. These liquidity facilities cover the nominal value of the commercial paper it is issued against and exceed the maturity date of the underlying financial liability by five days. Synthesis is a partially supported conduit the credit support of which is dependent on transaction-specifc credit enhancement as well as available programme-wide credit enhancement (PWCE) provided by Nedbank. PWCE is calculated as 5% of the aggregate book value of financial assets (excluding defaults) plus a dynamic percentage based on the credit quality of the underlying portfolio of the rated securities. If a rated security falls below AA-(zaf), Synthesis must either remove the asset from the portfolio, obtain a guarantee by an entity rated at least AA-(zaf) or Nedbank must post PWCE within 15 business days. Currently, there are no financial assets in the conduit portfolio and all rated securities are rated at least AA-(zaf) or are guaranteed by Nedbank if rated below AA-(zaf). As a result, no PWCE is currently required in accordance with Synthesis's transaction documentation. In terms of assets not meeting the AA-(zaf) requirement, Nedbank guarantees an aggregate amount of R850m at the financial year-end. 100 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December Greenhouse programmes The Greenhouse transactions are securitisation vehicles that acquires the rights, title, interest and related security of residential home loans from Nedbank Ltd under a segregated series medium-term note programme. During December 2007 the first Greenhouse transaction was created and R2bn of home loans from Nedbank Ltd were securitised. Greenhouse was subsequently restructured and refinanced on 19 November 2012 as a static amortising structure. The proceeds from the refinance of this transaction, through the issuance of new notes and subordinated loans, was utilised to repay the R1,3bn existing notes and subordinated loans on their scheduled maturity, and to acquire additional home loans from Nedbank Ltd. The senior notes, which are rated by Fitch and listed on the JSE Ltd, were placed with third-party investors and the junior notes and subordinated loans were retained by the group. The home loans transferred to Greenhouse have continued to be recognised as financial assets. Greenhouse III, a second standalone residential-mortgage-backed securitisation (RMBS) programme was implemented during 2014. Greenhouse III is a securitisation vehicle that acquires the rights, title, and interest in and to, and the related security of residential home loans from Nedbank Ltd under a segregated series medium-term note programme. In April 2015 Greenhouse III securitised R2bn worth of home loans originated by Nedbank Ltd through the issuance of senior notes to the capital market, as well as subordinated notes and subordinate loans provided by Nedbank Ltd. The notes issued by Greenhouse III are listed on the JSE Ltd and rated by Fitch. The Greenhouse vehicles make use of an internal risk management policy, and utilises the Nedbank Group Ltd credit risk monitoring process to govern lending activities to external parties. In addition, financial assets may be introduced into the programme provided they meet certain eligibility criteria prescribed by the programme agreements. Nedbank has provided the Greenhouse programmes with interest-bearing subordinated loans at the commencement of each programme as part of the initial funding. Interest is payable on a quarterly basis as part of the priority of payments. The full capital amount outstanding plus any accrued interest will be payable in full on the final termination date, provided that all outstanding notes have been redeemed in full and all secured creditors have been settled. In the Greenhouse structure Nedbank holds the C and Y notes amounting to R113m, and in the Greenhouse III structure Nedbank holds the D note amounting to R100m. These notes rank subordinated to the A and B notes in terms of the priority of payments. Precinct Funding 1 Precinct is an RMBS programme. The originator, seller and servicer of the commercial property loan portfolio is Nedbank CIB Property Finance, the market leader in commercial property finance in South Africa. The Precinct structure takes the form of a static pool of small commercial property loans with limited substitution and redraws/further advance capabilities. Precinct has issued notes rated by Moody’s Investors Service and listed on the JSE Ltd. The A and B notes were placed with third-party investors and the junior notes and subordinated loan were retained by the group. The vehicle makes use of an internal risk management policy and utilises the Nedbank Group credit risk monitoring process to govern lending activities to external parties. The primary measures used to identify, monitor and report on the level of exposure to credit risk include individual loan and loan portfolio ageing and performance analysis, analysis of impairment adequacy ratios, analysis of loss ratio trends and analysis of loan portfolio profitability. The maximum credit exposure to credit risk in respect of the mortgage loans is the balance of outstanding advances before taking into account the value of collateral held as security against such exposures and impairments raised. The collateral held as security for the mortgage asset exposure is in the form of first indemnity bonds over fixed commercial property. Nedbank has provided Precinct with an interest-bearing subordinated loan at the commencement of this transaction as part of the initial funding. Interest is payable on a quarterly basis as part of the priority of payments. The full capital amount outstanding plus any accrued interest will be payable in full on the final termination date, provided that all outstanding notes have been redeemed in full and all secured creditors have been settled. Nedbank holds the C and D notes amounting to R225m, which rank subordinated to the A and B notes in terms of the priority of payments. The following table shows the carrying amount of securitised assets, stated at the amount of the group’s continuing involvement where appropriate, together with the associated liabilities for each category of asset in the statement of financial position:¹ Rm loans and advances to clients Residential mortgage loans Less: Impairments Commercial mortgage loans Less: Impairments Other financial assets Corporate and bank paper Other securities Commercial paper Total 2015 2014 Carrying amount of assets associated liabilities Carrying amount of assets Associated liabilities 3 287 (24) 1 280 (3) 1 714 1 038 7 292 3 596 2 277 2 749 8 622 2 520 (24) 1 586 (4) 1 989 1 295 7 362 2 743 2 309 3 285 8 337 ¹ The value of any derivative instruments taken out to hedge any financial asset or liability is adjusted against such instrument in this disclosure. This table presents the gross balances within the securitisation schemes and does not reflect any eliminations of intercompany and cash balances held by the various securitisation vehicles. NedbaNk limited – ANNUAL report 2015 101 44 FOREIGN CURRENCY CONVERSION GUIDE Monetary figures in these financial statements are expressed in SA rand to the nearest million. The approximate value of the SA rand at 31 December against the following currencies was: United States dollar Pound sterling Euro 2015 actual 0,06401 0,04318 0,05861 2014 Actual 0,08638 0,05544 0,07108 45 CONTINGENT LIABILITIES AND UNDRAWN FACILITIES Guarantees on behalf of clients Letters of credit and discounting transactions Irrevocable unutilised facilities and other 2015 average 0,07727 0,05067 0,06997 2015 Rm 26 374 4 419 101 747 132 540 2014 Average 0,09202 0,05593 0,06973 2014 rm 22 807 3 248 102 968 129 023 The group, in the ordinary course of business, enters into transactions that expose the group to tax, legal and business risks. Provisions are made for known liabilities that are expected to materialise (refer to note 40). Possible obligations and known liabilities where no reliable estimate can be made or it is considered improbable that an outflow would result are reported as contingent liabilities. This is in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. There are a number of legal or potential claims against Nedbank Ltd and its subsidiary companies, the outcome of which cannot at present be foreseen. The largest of these potential actions is a claim for R773m in the High Court against Nedbank Ltd (‘Nedbank’) by Absa Bank Ltd (‘Absa’) in connection with Pinnacle Point Group Ltd, where Absa is alleging that Nedbank had a legal duty of care to them in relation to single-stock futures transactions. Nedbank has filed an exception against the claim and the claim has been held in abeyance since April 2012 by mutual agreement. 46 COMMITMENTS 46.1 Capital expenditure approved by directors Contracted Not yet contracted 2015 Rm 1 314 2 222 3 536 2014 rm 1 292 1 278 2 570 Funds to meet capital expenditure commitments will be provided from group resources. In addition, capital expenditure is incurred in the normal course of business throughout the year. 102 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December46.2 operating lease commitments Companies in the group have entered into leases over fixed property, furniture and other equipment for varying periods. The group is a major lessor of properties, which are subject to individual contracts that specify the group's option to renew leases, escalation clauses and purchase options, if applicable. Due to the large number of lease agreements entered into by the group, this information has not been provided in the annual financial statements, but is available from the group on request. The following are the minimum lease payments under non-cancellable leases: 2015 Land and buildings¹ Furniture and equipment 2014 Land and buildings¹ Furniture and equipment 2016 Rm 2015 – 2020 Rm beyond 2020 Rm 760 181 941 2015 rm 690 286 976 1 892 1 892 767 767 2014 – 2019 rm Beyond 2019 rm 1 705 173 1 878 940 940 ¹ The group may from time to time enter into subleases of properties where it is the lessee. These subleases are considered to be immaterial in the context of the group's overall leasing arrangements. The terms of renewal and escalation clauses are as follows: The majority of material leases entered into by the group include an option to renew the lease. If the rental for the renewal period has not been agreed on or determined by the commencement date of the renewal period, the tenant must continue to pay the existing monthly rental. Once the rental is determined, cumulative adjustments will be made to the amount payable for the following month. Escalation clauses for major leases entered into by the group range between 5% and 10% per annum. For all major lease agreements entered into, there is no requirement to pay contingent rent or purchase options. 46.3 Commitments under derivative instruments The group enters into option contracts, financial futures contracts, forward rate and interest rate swap agreements and other financial agreements in the normal course of business (note 16). 47 COLLATERAL 47.1 Collateral pledged The group has pledged government and other securities (note 17) and negotiable certificates of deposit (note 15) amounting to R15 614m (2014: R11 986m) as collateral for deposits received under repurchase agreements. These amounts represent assets that have been transferred, but that do not qualify for derecognition under IAS 39. The associated liabilities of R15 531m (2014: R12 583m) are disclosed in note 30. These transactions are entered into on terms and conditions that are standard industry practice to securities borrowing and lending activities. 47.2 Collateral held to mitigate credit risk Credit risk mitigation refers to the actions that can be taken by the group to manage its exposure to credit risk so as to align such exposure to its risk appetite. This action can be proactive or reactive and the level of mitigation that a bank desires may be influenced by external factors such as the economic cycle or internal factors such as a change in risk appetite. References to credit risk mitigation normally focus on the taking of collateral as well as the management of such collateral. While collateral is an essential component of credit risk mitigation, there are a number of other methods used for mitigating credit risk. The group's credit risk policy acknowledges the role to be played by credit risk mitigation in the management of credit risk, but emphasises that collateral on its own is not necessarily a justification for lending. The primary consideration for any lending opportunity should rather be the borrower's financial position and ability to repay the facility from its own resources and cashflow. NedbaNk limited – ANNUAL report 2015 103 47 COLLATERAL (continued) 47.2 Collateral held to mitigate credit risk (continued) The group generally segregates collateral received into the following two classes: (i) Financial collateral: The group takes financial collateral to support credit exposures in the trading book. This includes cash and debt securities in respect of derivative transactions. These transactions are entered into on terms and conditions that are standard industry practice to securities borrowing and lending activities. (ii) Non-financial collateral: In secured financial transactions the group takes other physical collateral to recover outstanding exposure in the event of the borrower being unable or unwilling to fulfil its obligations. This includes mortgages over property (both residential and commercial), liens over business assets (including, but not limited to, plant, vehicles, aircraft, inventories, trade debtors and financial securities that have a tradable market, such as shares and other securities) and guarantees from parties other than the borrower. Should a counterparty be unable to settle its obligations, the group takes possession of collateral as full or part settlement of such amounts. In general, the group seeks to dispose of such property and other assets that are not readily convertible into cash as soon as the market for the relevant asset permits. The group monitors the concentration levels of collateral to ensure that it is adequately diversified. In particular, the following collateral types are common in the marketplace: (i) Retail portfolio: ■■ mortgage lending secured by mortgage bonds over residential property; ■■ ■■ instalment credit transactions secured by the assets financed; and overdrafts that are either unsecured or secured by guarantees, suretyships or pledged securities. (ii) Wholesale portfolio: ■■ ■■ ■■ ■■ commercial properties are supported by the property financed and a cession of the leases; instalment credit type of transactions that are secured by the assets financed; working capital facilities when secured usually by either a claim on specific assets (fixed assets, inventories or trade debtors) or other collateral such as guarantees; term and structured lending, which usually relies on guarantees or credit derivatives (where only internationally recognised and enforceable agreements are used); and ■■ credit exposure to other banks where the risk is commonly mitigated through the use of financial control and netting agreements. The valuation and management of collateral across all business units of the group are governed by the Group Credit Policy. Management considers collateral held in the retail portfolio to be homogenous by nature and therefore more reliably identifiable. Generally, valuations in respect of mortgage portfolios are updated using statistical index models, while published data by service providers are used for motor vehicles and physical inspection is performed for other types of collateral. Physical valuations are performed six monthly on the defaulted book. At 31 December 2015 management considered R142 614m (2014: R137 042m) to be a reasonable estimate of the collateral held in the retail portfolio. Management considers collateral held in the wholesale portfolio to be non-homogenous and often exhibiting illiquid characteristics and therefore valuing collateral of this nature requires a significant level of judgement. Collateral of this nature is valued at the inception of a transaction and at least annually during the life of the transaction, usually as part of the facility review that includes a review of the security structure and covenants to ensure that proper title is retained over the relevant collateral. At 31 December 2015 management considered R234 525m (2014: R173 627m) to be a reasonable estimate of the collateral held in the wholesale portfolio. A further consideration with regard to the valuation and management of collateral is that when credit intervention is required, or in the case of default, all items of collateral relating to that particular client portfolio are immediately revalued. In such instances physical inspection by an expert valuer is required. This process also ensures that an appropriate impairment is evaluated timeously. As part of the reverse repurchase agreements, the group has received securities as collateral that are allowed to be sold or repledged. The fair value of these securities at the reporting date amounts to R20 191m (2014: R18 311m), of which Rnil (2014: Rnil) have been sold or repledged. 47.3 Collateral taken possession of and recognised in the statement of financial position Included in properties in possession (note 18.1) is an amount of R149m (2014: R241m), which represents assets the group has acquired during the year by taking possession of collateral held as security. 104 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 48 MANAGED FUNDS 48.1 Fair value of funds under management SA unit trusts 48.2 reconciliation of movement in funds under management Balance at 31 December 2013 Inflows Outflows Mark-to-market value adjustment Balance at 31 December 2014 Inflows Outflows Mark-to-market value adjustment Balance at 31 December 2015 2015 Rm 2014 rm 153 801 128 394 SA unit trusts rm 115 235 204 436 (197 862) 6 585 128 394 240 622 (222 072) 6 857 153 801 The group, through a number of subsidiaries, operates unit trusts. Commissions and fees earned in respect of trust and management activities performed are included in the consolidated statement of comprehensive income as non-interest revenue. 49 SHARE-BASED PAYMENTS Nedbank Group Ltd shares, share options over Nedbank Group Ltd shares and equity instruments in respect of Nedbank Group Ltd shares are granted to employees as part of their remuneration package as services are rendered, as well as to clients, business partners and affinity groups as an incentive to retain business and develop growth within the group. The following are the share and share option schemes that have been in place during the year. All schemes are equity-settled at group level, except the Nedbank UK schemes, the Nedbank Wealth Management International schemes and the Nedbank Africa scheme, all of which are cash-settled. As the group cannot estimate reliably the fair value of services received nor the value of additional business received, the group rebuts the presumption that such services and business can be measured reliably. The group therefore measures their fair value by reference to the fair value of the shares, share options or equity instruments granted, in line with the group's accounting policy. The fair value of share option awards is measured at the grant date utilising the Black-Scholes valuation model. For the non-option equity awards, the fair value is measured by reference to the listed share price, which includes the participant’s right to dividends over the vesting period. 49.1 Description of arrangements trust/Special- purpose vehicle (SPV) Scheme traditional employee schemes Nedbank Group (2005) Share Option and Restricted Share Scheme Nedbank Group (2005) Share Scheme Trust maximum term 3 years description Vesting requirements Restricted shares are granted to key personnel to motivate senior employees to remain with the group. The granting of restricted shares is based on job level, merit and performance, and is entirely at the discretion of the trustees acting on recommendations of executive management. Grants are made twice a year for new appointments and annually for existing staff, on a date determined by the trustees. Three years' service and achievement of performance targets based on average return on equity, as well as the Nedbank Group Ltd share price performance against the financial index. In addition, the 2015 grants include a strategic collaboration condition with Old Mutual applicable to group and cluster executives only. Where the performance target is not met, 50% will vest where applicable, provided that the three years' service has been achieved. Nedbank Group (2005) Matched- share Scheme Nedbank Group (2005) Share Scheme Trust All employees of the group are eligible to participate in the scheme. An amount of not more than 50% of their after-tax bonus can be invested, which will be matched by the group with shares. Three years' service and achievement of Nedbank Group Ltd performance target. Where this performance targets is not met, 50% will vest provided that the three years' service has been achieved. 3 years Nedbank UK Long- term Incentive Plan (LTIP) n/a Employees who perform services in the United Kingdom on behalf of the group will be considered for participation in the UK LTIP. Selected employees will be granted share appreciation rights (SARs). SARs are similar to options in that SARs are granted at a predetermined exercised price vesting and expiry date. When the participant elects to exercise SARs, the employer settles the difference between the current market price and the exercise price in cash. Completion of three years' service, from grant date, subject to corporate performance targets being met. 3 years NedbaNk limited – ANNUAL report 2015 105 description Vesting requirements Completion of three years' service, from grant date, subject to corporate performance targets being met. maximum term 3 years 49 SHARE-BASED PAYMENTS (continued) 49.1 Description of arrangements (continued) Scheme trust/Special- purpose vehicle (SPV) Nedbank UK Matched Scheme n/a n/a Nedbank Wealth Management International Long- term Incentive Plan (LTIP) n/a Nedbank Wealth Management International Matched Scheme Nedbank Africa n/a All UK employees of the group are eligible to participate in the scheme. An amount of not more than 50% of their after-tax bonus can be invested, which will be matched by the group with shares. Restricted shares are granted to key Nedbank Wealth Management International personnel to motivate senior employees to remain with the group. The granting of restricted shares is based on job level, merit and performance, and is entirely at the discretion of the trustees acting on recommendations of executive management. Grants are made twice a year for new appointments and annually for existing staff, on a date determined by the trustees. All Nedbank Wealth Management International employees of the group are eligible to participate in the scheme. An amount of not more than 50% of their after-tax bonus can be invested, which will be matched by the group with shares. Restricted shares are granted to key Nedbank Africa personnel to motivate senior employees to remain with the group. The granting of restricted shares is based on job level, merit and performance, and is entirely at the discretion of the trustees acting on recommendations of executive management. Grants are made twice a year for new appointments and annually for existing staff, on a date determined by the trustees. Completion of three years' service, from grant date, subject to corporate performance targets being met. 3 years Completion of three years' service, from grant date, subject to corporate performance targets being met. 3 years Completion of three years' service, from grant date, subject to corporate performance targets being met. 3 years Nedbank eyethu bee schemes – employees Black Executive Scheme Nedbank Eyethu Black Executive Trust Black Management Scheme Nedbank Eyethu Black Management Trust Restricted shares and share options were granted to certain black employees at a senior management level. The beneficial ownership of the shares resides with the participants, including the voting and dividend rights. Restricted shares and share options were granted to certain black employees at a middle and senior management level. The beneficial ownership of the shares resides with the participants, including the voting and dividend rights. Participants must remain in service for four, five and six years, after each of which 1/3 of the shares become unrestricted and 1/3 of the options vest. 7 years Participants must remain in service for four, five and six years, after each of which 1/3 of the shares become unrestricted and 1/3 of the options vest. 7 years Nedbank Swaziland Sinakekelwe Schemes – bee and ltiP Swaziland Broad- based Employee Scheme Nedbank Sinakekelwe Trust Broad-based Employee Scheme Restricted shares were granted to qualifying non-managerial employees who do not participate in any other incentive schemes within the group. The beneficial ownership of the shares lies with the participants, including dividend rights. No dealing in these shares during the restricted period of 5 years. 5 years 106 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 Decemberdescription Vesting requirements maximum term 5 years Participants must remain in service for three, four and five years, after each of which 1/3 of the shares become unrestricted and 1/3 of the options vest. Scheme Swaziland Management Scheme trust/Special- purpose vehicle (SPV) Nedbank Sinakekelwe Trust Management Scheme Swaziland Trust Long-term Incentive Scheme Sinakekelwe Trust Long-term Incentive Scheme Restricted shares and share options were granted to key management personnel as an incentive to remain within the group. Grants are allocated on the basis of job level, performance, potential and skills and competencies portrayed by the employee, entirely at the discretion of the trustees and are allocated under recommendation of the group's executive management team. The beneficial ownership of the shares lie with the participants, including dividend rights. Restricted shares and share options to be granted to key management personnel as an incentive to remain within the group. Grants will be allocated on the basis of job level, performance, potential and skills and competencies portrayed by the employee, entirely at the discretion of the group's executive management team. The beneficial ownership of the shares will lie with the participants, including dividend rights. Grants to staff have yet to be made. Participants must remain in service for three, four and five years, after each of which 1/3 of the shares become unrestricted and 1/3 of the options vest. 5 years No numerical information has been included in either the share-based payment expense or reserve in respect of these schemes, as the cumulative amount is less than R1m. 49.2 effect on profit and financial position traditional employee schemes Nedbank Group (2005) Share Option and Restricted-share Scheme Nedbank Group (2005) Matched-share Scheme Nedbank UK Long-term Incentive Plan¹ Nedbank UK Matched-share Scheme¹ Nedbank Wealth Management International Long-term Incentive Plan¹ Nedbank Wealth Management International Matched-share Scheme¹ Nedbank Africa1 Nedbank eyethu bee schemes Black Executive Scheme Black Management Scheme ¹ This scheme is cash-settled and therefore creates a liability. Share-based payments expense Share-based payments reserve/liability 2015 2014 2015 2014 413 379 102 (59) 2 (14) 2 1 16 12 4 607 517 79 9 2 21 14 7 1 090 880 181 14 3 8 3 1 65 44 21 1 138 939 148 16 19 13 3 82 42 40 429 628 1 155 1 220 NedbaNk limited – ANNUAL report 2015 107 49 SHARE-BASED PAYMENTS (continued) 49.3 Movements in number of instruments Nedbank Group (2005) Share Option Scheme Outstanding at the beginning of the year Granted Forfeited Exercised Outstanding at the end of the year Exercisable at the end of the year 2015 2014 Weighted- average exercise price R Weighted- average exercise price r Number of instruments 10 710 356 3 444 280 (719 950) (3 566 309) 9 868 377 Number of instruments 9 868 377 3 087 302 (438 408) (3 282 846) 9 234 425 Weighted-average share price for share instruments exercised (R) 251,42 196,76 Nedbank Group (2005) matched-share Scheme Outstanding at the beginning of the year Granted Forfeited Exercised Outstanding at the end of the year Exercisable at the end of the year 1 649 973 773 259 (108 820) (397 292) 1 917 120 1 274 585 732 501 (104 291) (252 822) 1 649 973 Weighted-average share price for share instruments exercised (R) 240,75 222,54 Nedbank Uk long-term incentive Plan Outstanding at the beginning of the year Granted Forfeited Other Exercised Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) Nedbank Uk matched-share Scheme Outstanding at the beginning of the year Granted Exercised Other Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) Nedbank Wealth management international long-term incentive Plan Outstanding at the beginning of the year Granted Forfeited Exercised Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) 197 288 28 806 (44 046) (62 546) 119 502 17 427 7 240 (7 856) 16 811 73 223 20 513 (2 750) (29 702) 61 284 198 960 52 336 (9 414) (44 594) 197 288 16 099 2 811 (1 483) 17 427 83 255 20 708 (30 740) 73 223 108 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 DecemberNedbank Wealth management international matched-share Scheme Outstanding at the beginning of the year Granted Exercised Forfeited Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) Nedbank africa Granted Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) black executive Scheme Outstanding at the beginning of the year Forfeited Exercised Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) black management Scheme Outstanding at the beginning of the year Forfeited Exercised Other movements Expired Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) 2015 2014 Weighted- average exercise price R Weighted- average exercise price r Number of instruments Number of instruments 12 643 7 613 (49) 20 207 20 207 4 122 (5 932) 18 397 30 096 30 096 1 014 319 223,06 1 251 781 101,73 (25 795) (168 317) 820 207 20 205 (59 335) (178 127) 1 014 319 641 121,08 241,38 121,08 223,06 1 545 884 227,59 2 710 812 105,23 (100 113) (731 182) 13 281 (21 311) 706 559 164 204 (220 356) (964 666) 23 526 (3 432) 1 545 884 262 053 101,41 248,07 107,36 227,59 NedbaNk limited – ANNUAL report 2015 109 49 SHARE-BASED PAYMENTS (continued) 49.4 Instruments outstanding at the end of the year by exercise price 2015 2014 Nedbank Group (2005) Share Option Scheme 0,00 Nedbank Group (2005) matched-share Scheme 0,00 Nedbank Uk long-term incentive Plan 0,00 Nedbank Uk matched-share Scheme 0,00 Nedbank Wealth management international long-term incentive Plan 0,00 Nedbank Wealth management international matched-share Scheme 0,00 black executive Scheme 0,00 75,74 121,08 128,44 132,18 140,00 161,88 182,98 189,90 black management Scheme 0,00 75,74 104,51 108,45 120,62 121,08 128,44 132,18 139,69 161,88 Nedbank africa 0,00 Weighted- average remaining contractual life (years) Weighted- average remaining contractual life (years) Number of instruments 1,2 1,2 1,4 1,4 1,1 1,1 1,3 1,3 2,4 1,2 2,2 3,2 2,6 1,6 4,2 4,6 5,2 3,2 1,3 1,2 0,6 1,6 0,2 2,2 3,2 2,5 1,6 4,2 2,0 1,2 1,2 1,4 1,4 9 868 377 9 868 377 1 649 973 1 649 973 197 288 197 288 17 427 17 427 73 223 73 223 20 207 20 207 319 169 19 623 127 569 84 182 7 480 60 000 174 489 114 010 107 797 1 014 319 112 718 303 526 71 605 72 620 95 668 164 806 287 811 183 378 169 609 84 144 1 545 885 1,2 1,2 1,1 1,1 1,8 1,2 2,2 1,6 1,1 3,2 3,6 4,2 2,5 1,0 0,2 (0,4) 0,6 1,2 2,2 1,6 1,0 3,2 1,5 2,2 2,2 Number of instruments 9 234 425 9 234 425 1 917 120 1 917 120 119 502 119 502 16 811 16 811 61 284 61 284 18 397 18 397 257 212 84 616 56 402 3 797 40 200 174 489 114 010 89 481 820 207 47 523 82 016 578 8 204 98 111 186 481 103 086 107 907 72 653 706 559 30 096 30 096 110 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December2015 Number of instruments granted Weighted-average fair value per instrument granted (R)¹ Weighted-average share price (R) Weighted-average expected volatility (%)² Weighted-average life (years) Weighted-average riskfree interest rate (%) Weighted-average vesting period (years) 2014 Number of instruments granted Weighted-average fair value per instrument granted (R)¹ Weighted-average share price (R) Weighted-average expected volatility (%)² Weighted-average life (years) Weighted-average riskfree interest rate (%) Number of participants Weighted-average vesting period (years) 49.5 Instruments granted during the year The weighted-average fair value of instruments granted during the year has been calculated using the Black-Scholes option pricing model, with the following inputs and assumptions: Nedbank Group (2005) Share option Scheme Nedbank Group (2005) Matched-share Scheme Nedbank UK Long-term Incentive plan Nedbank UK Matched Scheme Nedbank Wealth Management International Long-term Incentive plan Nedbank Wealth Management International Matched Scheme Nedbank Africa 3 087 302 773 259 28 806 7 240 20 513 4 122 30 096 244,45 185,48 244,40 237,78 242,84 244,45 237,78 109,66 237,78 244,40 237,78 242,84 23 3 7 23 3 7 3 3 23 3 7 11 3 23 3 7 19 3 23 3 7 41 3 14 3 6 3 Number of participants 1 350 1 635 3 440 886 731 882 52 336 2 811 20 708 7 613 203,61 188,72 181,75 188,72 215,58 224,01 210,25 223,03 215,77 224,04 23,0 22,0 22,0 22,0 3,0 7,2 1 615 3,0 3,0 6,8 668 3,0 13 3,0 11 3,0 3,0 6,8 11 3,0 3,0 6,8 24 3,0 ¹ ² Fair value per instrument has been recalculated in line with a change in the valuation methodology for shares linked to the financial index. Expected volatility is determined based on the historical average volatility for shares over their vesting periods. Volatility is determined using expected volatility for all shares listed on the JSE. No further grants were made for the Black Executive Scheme and Black Management Scheme. NedbaNk limited – ANNUAL report 2015 111 50 RELATED PARTIES 50.1 relationship with parent, ultimate controlling party and investees The group's parent company is Nedbank Group Ltd, which holds 100% (2014: 100%) of Nedbank Ltd's ordinary shares. The ultimate controlling party is Old Mutual plc, incorporated in the United Kingdom. Material subsidiaries of the group are identified in note 51 and associate companies and joint arrangements of the group are identified in note 50. 50.2 Key management personnel compensation Key management personnel are those persons who have authority and responsibility for planning, directing and controlling the activities of the group, directly or indirectly, including all directors of the company and its parent, as well as members of the Executive Committee who are not directors, as well as close members of the family of any of these individuals. Details of the compensation paid to the board of directors and prescribed officers and details of their shareholdings in the company are disclosed in the Remuneration Report. Compensation paid to the board of directors and compensation paid to other key management personnel, as well as the number of share instruments held, are shown below: Compensation (Rm) 2015 Directors' fees Remuneration – paid by subsidiaries Short-term employee benefits Gain on exercise of share instruments 2014 Directors' fees Remuneration – paid by subsidiaries Short-term employee benefits Gain on exercise of share instruments Number of share instruments 2015 Outstanding at the beginning of the year Granted Forfeited Exercised Transferred Outstanding at the end of the year 2014 Outstanding at the beginning of the year Granted Forfeited Exercised Outstanding at the end of the year key management personnel directors 15 106 51 55 121 14 84 47 37 98 213 124 89 213 202 120 82 202 total 15 319 175 144 334 14 286 167 119 300 578 468 1 574 989 2 153 457 155 871 428 173 21 304 584 044 21 304 (214 953) (522 789) (737 742) 11 224 (18 626) (7 402) 530 610 1 483 051 2 013 661 571 714 173 902 (7 965) 1 666 293 2 238 007 456 115 (91 879) 630 017 (99 844) (159 183) (455 540) (614 723) 578 468 1 574 989 2 153 457 112 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December50.3 related-party transactions Transactions between Nedbank Ltd and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between Nedbank Ltd and its other related parties are disclosed below. All of these transactions were entered into in the normal course of business. Outstanding balances (Rm) Parent/Ultimate controlling party Deposits owing to Old Mutual Life Assurance Company (SA) Ltd Bank accounts owing to Nedbank Group Ltd Bank balances owing to Old Mutual Life Assurance Company (SA) Ltd Account payable owing to Old Mutual plc Forward exchange rate contracts with Old Mutual plc Fellow subsidiaries Loans owing to Nedgroup Securities (Pty) Ltd Loans owing to Nedbank Malawi Ltd Loans due from other fellow subsidiaries Deposits owing to Old Mutual Asset Managers (SA) (Pty) Ltd Bank balances owing to Old Mutual Asset Managers (SA) (Pty) Ltd Deposits owing to Nedgroup Securities (Pty) Ltd Deposits owing to/(due from) Syfrets Securities Ltd Deposits due from to other fellow subsidiaries Bank balances owing to Syfrets Securities Ltd Bank balances owing to other fellow subsidiaries Equity derivatives with fellow subsidiaries Forward exchange rate contracts with fellow subsidiaries Interest rate contracts with various fellow subsidiaries associates Loans due from associates Deposits owing to assocoiates Bank balances owing to associates key management personnel Mortgage bonds due from key management personnel Deposits owing to key management personnel Deposits owing to entities under the influence of key management personnel Bank balances due from key management personnel Bank balances owing to key management personnel Bank balances due from entities under the influence of key management personnel Bank balances owing to entities under the influence of key management personnel The WIPHOLD and Brimstone consortia and Aka Capital (Pty) Ltd are related parties since certain key management personnel of the company have significant influence over these entities. These entities are participants in the Nedbank Eyethu BEE schemes and the share-based payments reserve recognised in respect of these entities and key management personnel is detailed below: WIPHOLD consortium Brimstone consortium Key management personnel – directors Key management personnel – other Share-based payments reserve Performance fees are paid to the WIPHOLD and Brimstone consortia in terms of the Nedbank Eyethu BEE scheme. WIPHOLD consortium Brimstone consortium Performance fee liability at the end of the year long-term employee benefit plans Bank balances owing to Nedgroup Medical Aid Fund Bank balances owing to Nedgroup Pension Fund Bank balances and deposits owing to other funds Due from/(owing to) 2015 2014 (7) (294) (351) 2 (561) (168) 2 973 (66) (27) (764) 448 912 (6) (4 473) (2) (2) 2 127 (20) (14) 28 (22) (73) 4 (27) 33 (241) (40) (124) (164) (2) (2) (4) (1) (23) (45) (14) (146) (237) (1) (4) 951 (74) 6 904 (24) (15) (768) (1 424) 1 642 (1 841) (24) 1 (1) 1 692 (47) (5) 27 (33) (1 099) 4 (43) 1 (179) (154) (147) (52) (129) (482) (12) (12) (24) (1) (100) (73) NedbaNk limited – ANNUAL report 2015 113 50 RELATED PARTIES (continued) 50.3 related-party transactions (continued) transactions (rm) Parent/Ultimate controlling party Interest income from Old Mutual plc Interest expense to Old Mutual Life Assurance Company (Pty) Ltd Dividend declared to Nedbank Group Ltd Fellow subsidiaries Interest income from Old Mutual Asset Managers (SA) (Pty) Ltd Interest income from fellow subsidiaries Interest income from Syfrets Securities Ltd Interest income from Nedgroup Securities (Pty) Ltd Interest expense to Syfrets Securities Ltd Interest expense to other fellow subsidiaries Interest expense to Old Mutual Asset Managers (SA) (Pty) Ltd Interest expense to Nedgroup Securities (Pty) Ltd Management fee income from fellow subsidiaries Management fee expense to fellow subsidiaries associates Interest expense to associates key management personnel Interest income from key management personnel Interest income from entities under the influence of key management personnel Interest expense to key management personnel Interest expense to entities under the influence of key management personnel The share-based payments charge in respect of the entities that are participants in the Nedbank Eyethu BEE schemes and key management personnel is detailed below: Key management personnel – other Share-based payments expense (included in BBBEE transaction expenses) Key management personnel – directors Key management personnel – other Share-based payments expense (included in staff costs) Income/(expense) 2015 2014 (221) (2 500) (342) (2 200) 25 940 50 27 (537) (394) (12) (1 104) 168 (75) 27 860 506 26 (666) (353) (41) (877) 164 (24) (22) 3 85 (34) (147) (3) (3) (10) (50) (60) 4 348 (31) (227) (5) (5) (17) (60) (77) 114 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 Decemberlong-term employee benefit plans Interest expense to Nedgroup Pension Fund Interest expense to other funds The Nedbank Group Pension Fund has an insurance policy (Optiplus policy) with a fellow subsidiary, Old Mutual Life Assurance Company (SA) Ltd, in respect of its pension plan obligations. Nedbank Ltd has an insurance policy (Symmetry policy) with a fellow subsidiary, Old Mutual Life Assurance Company (SA) (Pty) Ltd, in respect of its postretirement medical aid obligations. The group has an interest in the OMART cell captive within a fellow subsidiary in respect of its disability plan obligations. The value of this policy and this interest are shown as reimbursement rights, with a corresponding liability. In the case of the interest in the cell captive, the group recognises the surplus in the cell captive. The amounts included in the financial statements in respect of this policy and this interest are as follows: Optiplus policy reimbursement right Symmetry policy reimbursement right OMART policy reimbursement right (note 26.1) Included in long-term employee benefit assets Optiplus policy obligation Postretirement medical aid obligation Disability obligation Included in long-term employee benefit liabilities Income/(expense) 2015 2014 (3) (159) (4) (25) 781 1 254 543 2 578 (781) (1 254) (373) (2 408) 827 1 179 511 2 517 (827) (1 179) (374) (2 380) NedbaNk limited – ANNUAL report 2015 115 51 ANALYSIS OF INVESTMENTS IN PRIVATE-EQUITY ASSOCIATES, ASSOCIATE COMPANIES AND JOINT ARRANGEMENTS percentage holding Carrying amount (from) associates Dividends received Nature of activities Property development Property development Property development Property development Property development Property development 2015 % 50 20 35 49 2014 % Measurement method 50 35 20 35 49 Fair value Fair value Fair value Fair value Fair value Fair value Acquisition date Year-end December 10 December July 07 March 05 August 02 August 05 August 07 February February February February February Various Various Group Net indebtedness of loans to/ 2015 Rm 2014 rm 2015 Rm 2014 rm 5 43 38 49 235 1 270 (4) 55 1 691 1 74 49 226 1 633 4 140 2 127 39 22 22 39 2015 Rm 55 172 56 487 318 220 92 1 400 2014 rm 55 63 85 125 57 373 123 235 42 1 158 Century City JV Erf 7 Sandown (Pty) Ltd¹ Falcon Forest Trading 85 (Pty) Ltd² Friedshelf 113 (Pty) Ltd Masingita Property Investment Holdings (Pty) Ltd Odyssey Developments (Pty) Ltd³ Other individually immaterial associates⁴ Private-equity associates (manufacturing, industrial, leisure and other) Private-equity associates (property investment associates) Other Individually immaterial joint arrangements⁴ Entity consolidated as a wholly owned subsidiary from 1 October 2015. Entity disposed of during 2014. ¹ ² ³ The group's proportion of ownership in the entity is 49%, while its voting right equates to 35%. ⁴ Represents various investments that are not individually material. All investments in associate companies and joint arrangements are unlisted. There are no regulatory constraints, apart from the provisions of the Companies Act, 71 of 2008 (as amended), that restrict the distribution of funds to the shareholders. Distribution of funds may, however, be restricted by loan agreements that the entities have entered into. All associates and joint arrangements are considered to be strategic to the group's activities. Unless otherwise stated, all entities are domiciled and incorporated in SA. The group has the same proportion of voting rights as its proportion of ownership interest, unless stated otherwise, and has not incurred any contingent liabilities with regard to the associates or joint arrangements listed above. No significant judgement or assumptions were applied in concluding that the group has significant influence over the associates mentioned above or that the group has joint control over the joint arrangements mentioned above. 116 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December Nature of activities Property development Property development Property development Property development Property development Property development percentage holding 2015 % 50 20 35 49 2014 Measurement % 50 35 20 35 49 method Fair value Fair value Fair value Fair value Fair value Fair value Acquisition date Year-end December 10 December July 07 March 05 August 02 August 05 August 07 February February February February February 51 ANALYSIS OF INVESTMENTS IN PRIVATE-EQUITY ASSOCIATES, ASSOCIATE COMPANIES AND JOINT ARRANGEMENTS Century City JV Erf 7 Sandown (Pty) Ltd¹ Falcon Forest Trading 85 (Pty) Ltd² Friedshelf 113 (Pty) Ltd Masingita Property Investment Holdings (Pty) Ltd Odyssey Developments (Pty) Ltd³ Other individually immaterial associates⁴ Private-equity associates (manufacturing, industrial, leisure and Private-equity associates (property investment associates) other) Other Individually immaterial joint arrangements⁴ Various Various Entity consolidated as a wholly owned subsidiary from 1 October 2015. ¹ ² Entity disposed of during 2014. ³ The group's proportion of ownership in the entity is 49%, while its voting right equates to 35%. ⁴ Represents various investments that are not individually material. All investments in associate companies and joint arrangements are unlisted. There are no regulatory constraints, apart from the provisions of the Companies Act, 71 of 2008 (as amended), that restrict the distribution of funds to the shareholders. Distribution of funds may, however, be restricted by loan agreements that the entities have entered into. All associates and joint arrangements are considered to be strategic to the group's activities. Unless otherwise stated, all entities are domiciled and incorporated in SA. The group has the same proportion of voting rights as its proportion of ownership interest, unless stated otherwise, and has not incurred any contingent liabilities with regard to the associates or joint arrangements listed above. No significant judgement or assumptions were applied in concluding that the group has significant influence over the associates mentioned above or that the group has joint control over the joint arrangements mentioned above. Carrying amount Net indebtedness of loans to/ (from) associates Dividends received Group 2015 Rm 55 172 56 487 318 220 92 1 400 2014 rm 55 63 85 125 57 373 123 235 42 1 158 2015 Rm 2014 rm 2015 Rm 2014 rm 5 43 38 49 235 1 270 (4) 55 1 691 1 74 49 226 1 633 4 140 2 127 39 22 22 39 NedbaNk limited – ANNUAL report 2015 117 52 ANALYSIS OF INVESTMENTS IN SUBSIDIARY COMPANIES banking² Nedbank (Lesotho) Ltd Nedbank (Swaziland) Ltd Other companies³ BoE Holdings (Pty) Ltd, formerly BoE Holdings Ltd IBL Asset Finance and Services Ltd Depfin Investments (Pty) Ltd Nedcor Trade Services Ltd (Mauritius) Nedgroup Investment 102 Ltd Nedcor Investments Ltd Peoples Mortgage Ltd Group Issued capital effective holding 2015 Rm 2014 rm 20 12 2 4 ¹ 4 6 28 45 20 12 2 4 ¹ 4 6 28 45 2015 % 100 65,08 100 100 100 100 100 100 100 2014 % 100 65,08 100 100 100 100 100 100 100 ¹ Represents amounts less than R1m. ² The banking subsidiary companies are restricted in terms of Basel regulations and prudential requirements with regard to the distribution of funds to their holding company. ³ These entities are free of any restrictions imposed on the distribution of funds, except for compliance with any local regulations. Unless otherwise stated, all entities are domiciled in SA. Unless otherwise stated, the financial statements of the subsidiaries used in the preparation of consolidated financial statements are as of the same date or same period than that of the consolidated financial statements. Unless otherwise stated, there are no significant restrictions (eg statutory, contractual and regulatory restrictions) on the group's ability to access or use the assets and settle the liabilities of the group. Headline earnings from subsidiaries (after eliminating intercompany transactions): Aggregate headline earnings attributable to equity holders Aggregate headline losses attributable to equity holders 2015 Rm 8 315 (40) 2014 rm 8 079 (2) General information required in terms of the Companies Act, 71 of 2008, is detailed in respect of only those subsidiaries where the financial position or results are material to the group. It is considered that the disclosure in these statements of such information in respect of the remaining subsidiaries would entail expenses out of proportion to the value to members. Other subsidiaries consist of nominees, property-owning and financial holding companies acquired in the course of lending activities. Nedbank Group Ltd will ensure that, except in the case of political risk, and unless specifically excluded by public notice in a country where a subsidiary is domiciled, its banking subsidiaries and its principal non-banking subsidiaries are able to meet their contractual liabilities. 118 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December52.1 Material non-controlling interests The table below provides detail of non-wholly-owned subsidiaries of the group that have material non-controlling interests: Financial position Total assets Total liabilities Accumulated non-controlling interests at the end of the year Comprehensive income Income from lending activities Non-interest revenue Profit from continuing operations Total comprehensive income Profit allocated to non-controlling interests during the year Cashflows Cashflows from operating activities Cashflows utilised by investing activities Cashflows utilised by financing activities Net increase in cash and cash equivalents dividends paid to non-controlling interests Nedbank (Swaziland) Ltd 2015 Rm 3 874 3 306 198 179 156 115 120 40 637 (9) (27) 601 9 2014 rm 3 596 3 122 165 149 139 97 98 38 62 (8) (25) 29 9 53 INTERESTS IN STRUCTURED CONSOLIDATED AND UNCONSOLIDATED STRUCTURED ENTITIES 53.1 Consolidated structured entities The group holds certain interests in consolidated structured entities in order to ring-fence certain risks and/or achieve specific objectives. Structured entities are entities that have been designed so that voting rights are not the predominant factor in deciding who controls the entity. The group has identified the following consolidated structured entities: ■■ ■■ Old Mutual Alternative Risk Transfer Fund (OMART) (refer to note 26); Securitisation vehicles (refer to note 42): Synthesis Funding Ltd; Greenhouse Funding (RF) Ltd; Greenhouse Funding III (RF) Ltd; Greenhouse Funding 4 (RF) Ltd; Precinct Funding 1 (RF) Ltd; and West Road South No. 3 (RF) Ltd. The following judgements have been applied in determining that the group has control over the following structured entities: Securitisation The group orginated and sponsors certain securitisation vehicles and acts in various capacities with regard to these structures. The group controls these entities and has consolidated these structures since its inception. These securitisation structures include the following: Synthesis Funding Ltd (Synthesis), an ABCP programme, invests in long-term rated bonds and offers capital market funding to SA corporates through the issuance of short-dated investment-grade commercial paper. The group acts in various capacities with regard to this vehicle, which include the role of master liquidity facility provider, programme-wide credit enhancement provider, administrator, dealer, paying and settlement agent, custodian and hedge counterparty. The group is involved in the day-to-day activities of the vehicle. Although the activities and decisionmaking rights are predetermined and restricted; the group exercises a significant degree of discretion in its decisionmaking regarding investments, funding and risk management. Industry knowledge and experience of the group are crucial to successful operation of Synthesis. The group is exposed to variable returns from the entity in the form of fees and interest income as well as residual income subsequent to certain distributions through the provisioning of credit enhancement. As a result, the group has concluded that it controls the entity. Other securitisation vehicles consist of Greenhouse Funding (RF) Ltd; Series 1 (Greenhouse), a residential mortgage-backed securitisation programme; and Precinct Funding 1 (RF) Ltd, a commercial mortgage-backed securitisation programme. The activities of these vehicles are predetermined and restricted in terms of the programme documentation established at its inception. The group does, however, exercise some discretion in its decisionmaking, which includes the selection and transfer of assets and the management of defaulted assets. Through the provision of administration services, the interest rate hedge and credit enhancement, Nedbank Ltd has rights to the residual return of the vehicle. The group has concluded that it controls these entities. Westroad South No 3 and Greenhouse Funding 4 are securitisation vehicles that acquire the rights, title and interest in and to, and the related security of commercial and residential mortgage bonds from Nedbank Ltd. The creation of these vehicles facilitated the group in having appropriately collaterised instruments that have been pledged against the group's committed liquidity facility provided by SARB. The group has concluded that it controls these entities. Refer to note 43 for further information on the securitisation activities of the group. NedbaNk limited – ANNUAL report 2015 119 54 EVENTS AFTER THE REPORTING PERIOD There are no material events after the reporting period to report on. 55 PREFERENCE SHAREHOLDERS' ANALYSIS Register date: Authorised share capital: Issued share capital: Shareholder spread 1–1 000 shares 1 001–10 000 shares 10 001–100 000 shares 100 001–1 000 000 shares 1 000 001 shares and over Total distribution of shareholders Banks Close corporations Endowment funds Individuals Insurance companies Investment companies Medical aid schemes Mutual funds Nominees and trusts Other corporations Private companies Public companies Retirement funds Total Public/Non-public shareholders Non-public shareholders Directors and associates of the company Old Mutual Life Assurance Company (SA) Ltd and associates Nedbank Group Ltd and associates Public shareholders Total beneficial shareholders holding 5% or more Coronation Fund Managers Total major managers Coronation Asset Management (Pty) Ltd (SA) Nedgroup Private Wealth (Pty) Ltd (SA) Sanlam Investment Management (SA) Investec Asset Management (SA) Various retail holders (SA) STANLIB Asset Management (SA) Prescient Investment Management (SA) Grindrod Asset Management (SA) Abax Investments (SA) Outsurance Insurance Company Ltd (SA) Old Mutual plc PSG Konsult (SA) Regent Insurance Company Ltd (SA) Graaf Baronetcy Fund (SA) 31 December 2015 1 000 000 000 shares 358 277 491 shares Number of shareholdings 168 2 022 2 865 428 45 5 528 % 3,04 36,58 51,83 7,74 0,81 Number of shares 88 790 12 713 169 94 491 522 103 126 829 147 857 181 % 0,02 3,55 26,37 28,78 41,28 100,00 358 277 491 100,00 Number of shareholdings Number of shares % 3 60 70 3 376 35 9 12 113 1 618 34 152 2 44 5 528 Number of shareholdings 18 1 11 6 5 510 5 528 0,05 1,09 1,27 61,06 0,63 0,16 0,22 2,04 29,27 0,62 2,75 0,04 0,80 18 3 958 992 9 211 991 85 179 794 34 940 328 7 127 765 1 792 542 100 500 122 78 474 407 1 139 005 25 819 626 1 933 100 8 199 801 % 1,11 2,57 23,77 9,75 1,99 0,50 28,05 21,90 0,32 7,21 0,54 2,29 100,00 358 277 491 100,00 % 0,33 0,02 0,20 0,11 99,67 Number of shares 22 096 537 11 000 10 420 458 11 665 079 336 180 954 % 6,17 2,91 3,26 93,83 100,00 358 277 491 100,00 Number of shares 40 702 493 40 702 493 % 11,36 11,36 Number of shares dec 2015 % holding Dec 2014 % holding 40 702 493 35 460 323 22 549 633 15 302 544 14 888 051 11 264 691 10 550 334 10 226 244 9 358 629 7 586 720 6 487 809 5 765 632 4 848 485 4 057 000 11,36 9,90 6,29 4,27 4,16 3,14 2,94 2,85 2,61 2,12 1,81 1,61 1,35 1,13 13,30 14,30 6,93 7,93 6,23 3,32 4,32 2,63 1,95 2,12 3,12 1,96 1,95 1,38 120 NedbaNk limited – ANNUAL report 2015 COMPLIANCE WITH IFRS¹ – FINANCIAL STATEMENT NOTES Note number Note description 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 PRINCIPAL ACCOUNTING POLICIES STANDARDS AND INTERPRETATIONS KEY ASSUMPTIONS CONCERNING THE FUTURE AND KEY SOURCES OF ESTIMATION CAPITAL MANAGEMENT INTEREST AND SIMILAR INCOME INTEREST EXPENSE AND SIMILAR CHARGES NON-INTEREST REVENUE OPERATING EXPENSES INDIRECT TAXATION NON-TRADING AND CAPITAL ITEMS DIRECT TAXATION EARNINGS DIVIDENDS CASH AND CASH EQUIVALENTS OTHER SHORT-TERM SECURITIES DERIVATIVE FINANCIAL INSTRUMENTS GOVERNMENT AND OTHER SECURITIES LOANS AND ADVANCES IMPAIRMENT OF LOANS AND ADVANCES OTHER ASSETS INVESTMENT SECURITIES INVESTMENTS IN PRIVATE ASSOCIATES, ASSOCIATE COMPANIES AND JOINT ARRANGEMENTS NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE DEFERRED TAXATION INVESTMENT PROPERTY PROPERTY AND EQUIPMENT LONG-TERM EMPLOYEE BENEFITS INTANGIBLE ASSETS SHARE CAPITAL AMOUNTS OWED TO DEPOSITORS PROVISIONS AND OTHER LIABILITIES LONG-TERM DEBT INSTRUMENTS CASHFLOW INFORMATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION – CATEGORIES OF FINANCIAL INSTRUMENTS FAIR-VALUE MEASUREMENT – FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES CREDIT ANALYSIS OF OTHER SHORT-TERM SECURITIES, AND GOVERNMENT AND OTHER SECURITIES LIQUIDITY GAP CONTRACTUAL MATURITY ANALYSIS FOR FINANCIAL LIABILITIES HISTORICAL VALUE AT RISK (99%, ONE-DAY ) BY RISK TYPE INTEREST RATE REPRICING GAP SECURITISATIONS FOREIGN CURRENCY CONVERSION GUIDE CONTINGENT LIABILITIES AND UNDRAWN FACILITIES COMMITMENTS COLLATERAL MANAGED FUNDS SHARE-BASED PAYMENTS RELATED PARTIES ANALYSIS OF INVESTMENTS IN PRIVATE EQUITY ASSOCIATES, ASSOCIATE COMPANIES AND JOINT ARRANGEMENTS ANALYSIS OF INVESTMENTS IN SUBSIDIARY COMPANIES UNCONSOLIDATED STRUCTURED ENTITIES WORLDCLASS AT MANAGING RISK ¹ ² ³ International Financial Reporting Standards (IFRS). International Accounting Standards (IAS). International Financial Reporting Interpretations Committee (IFRIC). IFrS required IAS² 1 IAS 1 and IAS 8 IAS 1 IAS 1 IAS 18, IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 18, IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 18, IAS 20, IAS 32, IAS 39, IFRS 4, IFRS 7, IFRS 8 and IFRS 13 IAS 1, IAS 19, IFRS 2 and IFRS 8 IAS 1 IAS 1, IAS 16, IAS 36 and IFRS 10 IAS 12 IAS 33 IAS 1 and IAS 10 IAS 1, IAS 7 and IFRS 7 IAS 1, IAS 39, IFRS 7, IFRS 8 and IFRS 13 IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 1, IAS 32, IAS 39, IFRS 7, IFRS 8 and IFRS 13 IAS 17, IAS 39, IFRS 7, IFRS 8 and IFRS 13 IAS 39, IFRS 7 and IFRS 8 IAS 1, IAS 39, IFRS 7 and IFRS 13 IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 28, IFRS 11, IFRS 12 and IFRS 13 IFRS 5 and IFRS 13 IAS 12 IAS 40 and IFRS 13 IAS 16, IAS 36 and IFRS 13 IAS 19 and IFRIC³ 14 IAS 38 and IAS 36 IAS 1 IAS 1, IAS 39, IFRS 7, IFRS 8 and IFRS 13 IAS 37, IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 32, IAS 39, IFRS 7 and IFRS 13 IAS 7 IAS 39 and IFRS 7 IAS 39, IFRS 7 and IFRS 13 IAS 32, IAS 39, IFRS 7 and IFRS 13 IFRS 7 and IAS 32 IFRS 7 IFRS 7 IFRS 7 IFRS 7 IFRS 7 IAS 39, IFRS 7 and IFRS 13 IAS 21 IAS 37 and IAS 10 IAS 37, IAS 10, IAS 17 and IFRS 7 IFRS 7 IFRS 7 and IFRS 13 IFRS 2 IAS 24 IAS 28, IFRS 11, IFRS 12 and IFRS 13 IAS 27, IFRS 10 and IFRS 12 IFRS 12 IFRS 7 and IFRS 13 NedbaNk limited – ANNUAL report 2015 121 WORLDCLASS RiSk MANAGeMeNt StRiViNG tO Be WORLDCLASS At MANAGiNG RiSk ACROSS NeDBANk Deeply embedded in the DNA of Nedbank is the understanding that the business of banking is fundamentally about managing risk. the origins of risk within Nedbank evolve from the entities the group is comprised of, and the nature of the business/activities and related processes/outcomes flowing from these, as depicted below … origins of risk Lend = Credit risk We lend out money, which gives rise to credit risk. Fund = Liquidity and funding risks We also take in deposits to fund our lending ... Mismatch = interest rate risk in banking book (iRBB) … and that results in asset and liability mismatches, and so interest rate risk. trade = Market risks We trade and invest in financial markets that drive other market risks … Operate = Operational and legal risks Solvency = Capital risk … and all these business activities are prone to operational, legal, reputational and other risks. We must remain solvent and so balance sheet positioning and capital and liquidity planning are critical given the associated capital risks. Regulated = Regulatory and compliance risks Compete = Strategic, business and financial risks of regulatory Banks are highly regulated with a tsunami change following the global financial crisis, and so the regulatory landscape for banks will remain top of mind. Banks are fiercely competitive as businesses are subject to many competitive forces, as well as to changing technological and macro- environmental that continue to influence overall bank strategy. landscapes Risk management in Nedbank is underpinned by our eRMF. Collectively there are 17 key risks that make up the risk universe in the eRMF. eNteRpRiSeWiDe RiSk MANAGeMeNt FRAMeWORk ReFReSh iN 2015 Since 2003 the eRMF has served Nedbank well and has been resilient through economic cycles. the organisation has placed a strong reliance on this risk governance framework and the three- lines-of-defence model, which are fundamental to Nedbank’s aspiration to be worldclass at managing risk. in response to evolving, emerging risk trends, a changing business environment and the significant regulatory change and developments, a  refresh of the eRMF commenced in 2015, incorporating the current internal and external environment. key considerations of the eRMF refresh included: ■■ ■■ ■■ Significant regulatory change and developments (eg AML, iFRS 9, BCBS 239 (RDAR&R), Retail Distribution Review, Solvency ii/SAM, protection of personal information (pOpi), Basel iii, the pending new twin peaks regulatory structure for SA, and the BiS paper on Corporate Governance principles for Banks). evolving/emerging risk trends and external dynamics (eg financial crime, conduct risk and tCF, and regulatory risk). Stakeholder needs and experiences and what is good for Nedbank in the current environment, particularly in support of the drive for simplification. ■■ A revisit of the key risks comprising Nedbank’s risk universe. the refresh elevates Nedbank’s position to achieve its long-term strategic aspiration of being worldclass at managing risk. 122 NedbaNk limited – ANNUAL report 2015 RiSk StRAteGy AND ViSiON Following the refresh of the eRMF, and arising out of the most challenging risk environment – given the persistent VUCA macroeconomic and geopolitical environments – exacerbated risk both locally and globally, as well as fierce competition traditional and non- traditional competitors, we have crystallised Nedbank’s top 10 risks that form the cornerstone of the Group Risk plan. these are: from ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ Strategic and execution risks Regulatory risk (regulatory tsunami) Balance sheet risks – structure and growth (in view of Basel iii) Concentration risk – (traditionally what hurts banks most) Business risk – (VUCA environment) Credit risk – (given the VUCA macroeconomic environment) Operational risks – AML/CFt and sanctions, data and it risks, information security and cybercrime Rest of Africa risks Conduct risk Compliance risk At Nedbank we approach risk management across three integrated core objectives: ■■ managing risk as threat to minimise and protect against downside risk and against material unforeseen losses. ■■ managing risk as uncertainty to eliminate excessive earnings volatility and minimise material negative surprises. ■■ managing risk as strategic (opportunity) to maximise financial performance through the application of superior risk and business intelligence, risk- based performance measurement, managing for value, strategic portfolio management value and management. client is as much strategic and an Risk opportunity as it is a threat, and the Group Risk plan embodies that, designed in conjunction with Nedbank’s business plans and five key strategic focus areas. A critical success factor for Nedbank to win in 2020, and on a sustainable basis, is that our risk management must become a clearly distinctive competitive differentiator. To achieve this risk vision Nedbank will ‘differentiate through change’ the change being the client at the heart of the regulatory change. Clients at the heart of what we do Understand their needs treat them fairly Act responsibly Be accessible Deliver excellent service Clients are at the heart of regulations Accordingly, the risk vision adopted is: ‘to be admired as Africa’s leading bank in risk management by both our internal and external stakeholders, a core strategic and competitive differentiator that enables Nedbank to win in a sustainable manner.’ Differentiating by strategically leveraging regulatory change the 2016–2018/2020 Group Risk plan has been prepared on this basis to transform risk management strategically across Nedbank from that of our it and differentiate competitors. We are doing this in a collaborative, teamwork, integrated, value- adding, strategic and partnership-based approach. the most fundamental aspect of the Group Risk plan is strategically leveraging and differentiating the regulatory environment, and building towards a winning regulatory environment in 2020. ■■ We will strategically leverage our approximately R3bn regulatory change programme to achieve this. to build a Nedbank aims regulatory environment, which will enable the business with a robust regulatory framework, to achieve the following objectives: ■■ ■■ ■■ ■■ introduce a business-led regulatory change programme that creates a competitive advantage, as seen and experienced by endusers/ roleplayers, through the introduction of new systems, processes and practices, as well as mindset and behavioural changes. embed and integrate regulatory requirements into role/job-specific processes, systems and practices to ensure seamless and simple integration. Create excitement and buy-in by linking what Nedbank needs to do, why it needs to do it and how it needs to do it. enable the change closest to the enduser, with the line manager as change agent, led by senior leaders across Nedbank Group. To be admired as Africa’s leading bank in risk management by both our internal and external stakeholders, a core strategic and competitive differentiator that enables Nedbank to win in a sustainable manner. NedbaNk limited – ANNUAL report 2015 123 WORLDCLASS RiSk MANAGeMeNt (continued) there remains an ongoing imperative to enhance risk management continuously across Nedbank, and the building blocks have been put in place to build that over 2016–2018. During 2016 we will execute the Group Risk plan, including: ■■ ■■ ■■ ■■ ■■ embedding the benefits of the eRMF Refresh; optimising the Combined Assurance model comprising Risk, Compliance, internal Audit and external audit; remaining focused on our business-as- usual, day-to-day risk environments and core risk foundations, and on any material emerging risks (being proactive and forward-looking, not backward-looking); strongly focusing on risk as a strategic driver, working in close collaboration with internal stakeholders to add maximum value and build on Nedbank’s risk intelligence; and clarifying and addressing resourcing, roles, responsibilities and structures (and therefore accountability) around the implementation of regulatory change and risk management, looking at: Operations versus risk and compliance First, second and third lines of defence in our eRMF the Rest of Africa subsidiaries RiSk CULtURe Nedbank Group has a strong risk culture. this is achieved through following best- practice enterprisewide risk management, a strong ‘tone from the top’ from the Ce, top management and the board, and ongoing risk leadership by the CRO. Our approach aligns strategy, policies, people, processes, technology and business intelligence to measure, evaluate, manage and optimise the opportunities, threats and uncertainties that we face every day as a major financial institution. in this way the group  is able to maximise sustainable shareholder value within the group’s clearly defined risk appetite. Nedbank embraces risk management as a core competency that allows the business to optimise risktaking and is objective and transparent. this ensures that the business prices for risk appropriately, linking risk to return. in 2015 Nedbank began the journey to elevate risk to become a competitive differentiator and good progress has been made, including the following: ■■ establishing a RCpO focused on ensuring efficient delivery against the various regulatory programmes, including the AML, tCF, pOpi, iFRS 9, BCBS 239 (RDAR&R), twin peaks and Market Conduct programmes. ■■ Maintaining transparent relationships ■■ and working closely with all regulators. ■■ Maintaining full compliance with Basel iii phase-in requirements. ■■ ■■ ensuring we have a comprehensive recovery plan. ■■ ensuring that Nedbank is equipped to remain resilient through a significant stress event. heightening the focus on financial crime, with new risk management frameworks drafted, in particular for key subrisk components thereof (ie AML, CFt and sanctions, as well as cyber-resilience). Crystallising, as indicated above, Nedbank’s top 10 risks, and including these with comprehensive management actions in the Group Risk plan. ■■ Revising Nedbank’s risk universe. ■■ Managing Nedbank’s credit portfolio soundly by keeping it as well as the overall credit loss ratio (CLR) in good shape. ■■ Maintaining a stable operational risk environment despite an increased inherent operational risk profile. ■■ placing a strong emphasis on the basics of operational risk management, with a focus on both qualitative and quantitative measures. OUR AppROACh tO RiSk AND BALANCe Sheet MANAGeMeNt We approach our strategy development, business activities, risk appetite, risk and balance sheet management fully integrated manner. in a the backbone of the group’s strong risk management culture and risk governance has been and continues to be the group’s At the heart of the group’s business and management processes are integrated worldclass risk and balance sheet management frameworks ■■ eRMF Subframeworks (examples) — Group Credit Risk Management Framework — Group Market Risk Management Framework — Group Operational Risk Management Framework (ORMF) — Group Compliance Framework — Group Financial Crime Risk ■■ ■■ internal Capital Adequacy Assessment process (iCAAp) internal Liquidity Adequacy Assessment process (iLAAp) Recovery plan iii- (Basel compliant) Management Framework (Wip) – AML, CFt and Sanctions Framework – Cyber-resilience Framework — Group Liquidity Risk Management Framework ■■ Capital Management Framework Solvency and Capital Management policy economic Capital Framework ■■ Stress and Scenario testing Framework ■■ Risk Appetite Framework ■■ Risk-adjusted performance Measurement Framework 124 NedbaNk limited – ANNUAL report 2015 is the group, eRMF. the risk management function, as fully embedded across described therein. it sets out the group’s risk universe and major risk classifications, and assigns board and executive responsibility thereto. the CRO leads the implementation of the eRMF across the group. there are risk management frameworks that cover all material risks and governance aspects of the organisation. these encompass structures that are linked with risk-based performance management, ensuring business units focus on key risk areas. Compliance is constantly reviewed by our boards and their committees, and any identified risks or breakdowns of internal controls are reported on, and then actively managed and monitored. policies, processes and procedures relating to governance, effective risk management, capital adequacy and sound internal control have board and senior management oversight and are governed by the three lines of defence. Credit risk is managed across the group in terms of its Group Credit Risk Framework, which incorporates the group credit policy, mandate limits and governance structures, and is reviewed on a quarterly basis. the Group Market Risk Management Framework is in place to achieve effective independent monitoring and management of market risk. of and in recognition of the increasing growth, diversity volatile activities macroeconomic environment in which our businesses operate, the group continued to refine the ORMF to ensure that it is adaptive to to the environment, regulatory requirements, line with emerging leading practices and supports forward-looking risk proactive and identification and agility in response. is responsive in is  Comprehensive Capital Management and Liquidity Risk Management Frameworks are maintained, under the leadership of the Sheet Group Management. these are monitored to ensure adequate levels of capital adequacy and liquidity. of Balance executive is the Capital Management Framework 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 versus solvency) and those focused more on the return or profitability of the group relative to the risk assumed (or risk versus return). the challenge for management and the board is to achieve an optimal balance between these two important dimensions. All Nedbank’s quantifiable risks across the 17 key risks of the eRMF are also captured in our economic-capital Framework. collectively make up and/or support the Liquidity Risk Management Framework. the annual iCAAp and iLAAp were signed off  by the board through the GRCMC in July  2015, and no material issues raised by SARB during the 2015 onsite review. risk-adjusted performance measurement, management and reward economic capital and ep are comprehensively in use across the group, embedded within businesses on a day-to-day basis, and in performance measurement and reward schemes. this risk-adjusted performance measurement has been applied across the group for many years now and helps ensure that excessive risktaking is mitigated and managed appropriately within the group. to monitor Nedbank Group continues the  evolving governance environment to ensure appropriate compliance of the group’s remuneration risk-adjusted practices with the relevant regulatory and/ or statutory requirements. is a economic capital sophisticated, consistent measurement and comparison of risk across business units, risk types and individual transactions. Nedbank assesses the internal requirements for capital using its proprietary economic- capital methodology. products or All of these quantifiable risks, as measured by economic capital, are then allocated back in the form of a capital allocation to businesses where the assets or risk positions reside or originate. Nedbank’s economic capital and iCAAp methodologies are constantly reviewed and updated, taking cognisance of regulatory developments such as Basel iii and Solvency 2/SAM. economic capital not only facilitates a like for like measurement and comparison of risk across businesses but, by incorporating it into the performance measurement, performance of each business can be measured and compared on an absolute basis using ep and a relative percentage return basis, namely return on risk-adjusted capital (RORAC). iCAAp in Nedbank is embedded across the organisation and has been for several years. Some material changes were implemented for capital allocation purposes and iCAAp during 2015, and these include: ■■ ■■ ■■ ■■ ■■ ■■ A revised business risk methodology. enhancements to the calculation and allocation of credit economic capital. A new economic capital charge for credit valuation adjustment (CVA), which was implemented to holistically cover counterparty credit risk, which consists of default risk (ie losses in the event of default), as well as market value losses due to a deterioration in the counterparty’s creditworthiness. implementation of a revised interrisk diversification methodology. Not capitalising for foreign-currency translation risk (FCtR) following the inclusion of foreign-currency translation reserves as qualifying regulatory capital and reserves under Basel iii since 1 January 2013. A revised residual capital allocation based on 11% of minimum economic capital for the client-facing banking business units. in view of the significance of liquidity risk in banking, Nedbank also produces an iLAAp. 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 NedbaNk limited – ANNUAL report 2015 125 WORLDCLASS RiSk MANAGeMeNt (continued) Nedbank’s recovery plan and stress testing in the event of a stress scenario Nedbank has a detailed recovery plan and liquidity risk contingency plan, both of which were during Nedbank’s tested extensively liquidity simulation in March 2015. the recovery plan sets out the circumstances under which the group may need to activate recovery actions and options available for addressing extreme stress scenarios caused by either idiosyncratic events or systemwide market ratings failures. A possible downgrade to junk status is one such event that may mobilise the plan. assessment the plan sets a framework for the bank to act quickly and decisively (eg selling of businesses and significant assets) during a severe crisis to ensure that the bank is able to recover. it describes the integration with existing contingency planning and the including a possible recovery options, detailed likely their effectiveness and the defined points at which they would be invoked. the plan addresses stresses invoked by shortfalls in liquidity and capital, as well as significant operational failures that may jeopardise Nedbank’s ability to continue business operations. it also covers the various options considered by senior management to mitigate stresses encountered by Nedbank. of Also in place is a broad Stress and Scenario testing Framework. the framework recognises and estimates the potential volatility of the capital requirements and base case (expected) three-year business plan projections, including and sensitivities therein, which themselves are subject to fluctuation. key contained assumptions the Stress and scenario testing is performed and if reported quarterly, or more regularly called upon. Macroeconomic scenarios of different severities are considered, ranging from mild-stress to severe-inflation-stress and severe-deflation-stress scenarios. in addition to the quarterly stress-testing process, a wide-ranging set of relevant scenarios is evaluated and presented during the annual iCAAp. the possibility of a further SA credit ratings downgrade has increased materially since the events of December 2015, being exacerbated by the local drought, slowing growth in China, prolonged weak commodity prices, and currency weakness among other adverse factors. Nedbank has defined key trigger events that may move SA closer to a ratings downgrade prior to Standard & poor’s and Fitch announcing their rating reviews in June 2016. Moody’s does not perform rating reviews on fixed future dates. As part of our proactive contingency planning, we have the potential considered a response to such an event to adverse mitigate consequences – our ratings are capped at the sovereign ceiling and therefore any downgrade of the sovereign would lead to a down grade of Nedbank and all SA banks. stress severe-inflation A possible one-notch downgrade to subinvestment grade may precipitate (or be indicative of) a high-stress event, and may lead further to (or be indicative of) scenario. a  therefore, a further SA ratings downgrade can be seen as being inbetween a high- stress severe-inflation-stress scenario. the level of stress along this continuum is likely to be determined by the level of stress in the macroeconomic environment. and a ■■ Nedbank Group has performed comprehensive stress testing on the possibility of a further SA ratings downgrade, with the conclusion that the capital levels and capital buffers remain appropriate and that Nedbank Group is strongly capitalised relative to its business activities, strategy, risk appetite, risk profile and the external environment in which the group operates. risk appetite 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 the Group exco and monitored by ultimately the board, and integrated into our strategy, business, risk and capital plans. Nedbank has had a formal RAF since 2006, with key metrics, governance and reporting, and has been cascaded down effectively into business units. Nedbank’s risk appetite is prudent and appropriately conservative, and has been enabling for our businesses, promoting competitive but appropriate growth and returns. risk there were no material changes made to the Nedbank’s 2016–2018/2020 Nedbank group business plan and the Group Risk plan, with the exception of: appetite in ■■ ■■ the introduction of a comprehensive risk appetite statement for rest of Africa (RoA) exposure including an increase in capital allocated; and decrease in the group’s CLR target range from 80–120 bps to 60–100 bps, due to strategic portfolio tilt and wholesale asset growth outstripping retail. in line with the eRMF refresh, Group Risk is undertaking a refresh of Nedbank’s RAF and will ensure, among others, that it remains constantly relevant, that core risk appetite metrics are aligned with current that new key financial targets, and qualitative risks (eg AML, conduct risk/tCF and reputational risk) are covered. Risk appetite is considered in detail in the Nedbank Group Ltd Annual Results Booklet and the detailed 2015 Pillar 3 Risk and Capital Management Report for the year ended 31  December 2015, available online at nedbankgroup.co.za. CURReNt key RiSk AND BALANCe Sheet MANAGeMeNt pOSitiONS At yeAR- eND 2015 Nedbank’s favourable financial results for the year ended 31 December 2015 is underpinned by a strong balance sheet across all the core dimensions of capital liquidity and funding, credit adequacy, asset quality aided by the strategic portfolio tilt strategy and appropriately conservative provisioning, excellence in risk and balance sheet management, an enabling but prudent risk appetite framework, and a seamless implementation of Basel iii. Further information is available in the Nedbank Group Ltd Annual Results Booklet in the Risk and Balance Sheet Management Review section and will be available in the 2015 Pillar 3 Risk and Capital Management Report available at nedbankgroup.co.za. Credit risk the tough economic environment placed financial pressure on our clients, leading to lower levels of credit demand and transactional banking activity. ■■ ■■ this was particularly prominent in the retail and small-business segments of the market. in our wholesale business stresses in the resources, steel and construction sectors continued to impact growth. Strategic portfolio tilt has delivered excellent results since it was implemented in 2009, resulting in the improvement of the quality of the book’s credit profile, which is evident in the group and RBB CLR remaining at the bottom-end of their target ranges. ■■ While there was some pressure on impairments, particularly in the Nedbank Capital portfolio with CLR increasing to 0,83% (2014:0,14%), driven by lower oil and commodity prices and resulting in high specific impairments, the total CiB CLR remained within their new through- the-cycle target range. Nedbank has gained market share in the wholesale portfolios funding initiatives such as renewable-energy and infrastructure projects and commercial- property lending. through 126 NedbaNk limited – ANNUAL report 2015 ■■ ■■ ■■ Gross loans and advances grew by 11,0% to R693 043m (2014: R624 116m), with banking and trading advances increasing by 10,4% and 26,2% respectively. Derisking and selective origination in the home loan and personal-loan portfolios have been successful, improving asset quality and pricing, as well as growth in vehicle finance, particularly of secondhand and lower- value vehicles. these actions have placed the group in a strong position for the tougher macroeconomic environment and contributed to the change in the group CLR target range from 0,80–1,20% to 0,60–1,00% in 2016. impairments increased by 6,3% to R4 789m (2014: R4 506m) and the CLR  improved slightly to 0,77% (2014: 0,79%). Continued improvements in retail impairments were offset by in the wholesale clusters. impairments increased ■■ ■■ Additional overlays were raised in RBB to R699m (2014: R404m) as deteriorating economic conditions prompted further strengthening of provisioning levels in the second half of 2015. the central portfolio provision was further strengthened to R500m to take into account additional risks, particularly in commodities and in the Rest of Africa, that have been incurred but are only expected to emerge in 2016. portfolio coverage remained stable at 0,70% (2014: 0,70%). A key change in the regulatory environment was the implementation of SARB directive 7/2015, which aims to standardise the treatment of distressed restructures across the industry, by adjusting the monitoring period in which  an account is held in default to  a  minimum of six months. the implementation of this change increased defaulted advances and reduced specific coverage. While defaulted advances increased to  R17 559m (2014: R15 846m) as the stress in the resources and mining sectors impacted the wholesale portfolio, the increase was offset by reductions in both the home loan and personal-loans portfolios. the largest impact was the implementation of SARB directive 7/2015, which shifted an additional R1 881m into defaulted advances. the specific coverage ratio declined to 38,0% (2014: 43,1%), driven mainly by the implementation of SARB directive 7/2015. Restructures tend to have lower coverage as they are expected to cure. the remainder of the coverage changes relate to improved impairments in RBB and the change in mix of retail and wholesale defaulted advances. risk concentrations Unmanaged are potentially a cause of major risk in banks. Concentration risk is therefore considered separately as part of Nedbank’s Risk Appetite Framework. Nedbank Group has adopted a selective origination, client-centred growth emphasis as a core part of its strategic portfolio tilt strategy. Nedbank’s approach to managing its mortgages (or  property portfolio) is to take a holistic approach across both residential and commercial mortgages, preferring a in commercial mortgages given the better risk- based economics and returns. leading market share ■■ Commercial-mortgage lending has increased since 2011 from 18,2% to 19,7% of gross loans and advances, and consequently Nedbank Group has maintained its leading local market share position, currently at 40,4%. this potentially high concentration is mitigated by good-quality assets, high levels of collateral, a low average loan-to-value ratio (approximately 50%), the underpinning of corporate leases, and a highly experienced management team considered to be the leader in property finance in SA. ■■ While Nedbank Group has the smallest residential-mortgage portfolio among the local peer group at 14,5% of market share, the contribution of these advances as a percentage of total gross loans and advances was still substantial at 20,6% in December 2015 (2014: 22,0%). however, this level of contribution to the balance sheet is lower than that of its peers. ■■ ■■ the focus in home Loans since 2009 has been on lending through our own channels, including branch, own sales force and more recently Nedbank’s new online home loan application and, to a far lesser degree compared with the industry, through mortgage originators. this enables a better quality risk profile, more appropriate risk-based pricing and therefore more appropriate returns, with a client-centred approach. postwriteoff recoveries R1 137m (Dec 14: r941m) continued focus on recoveries portfolio coverage 0,70% (Dec 14: 0,70%) remained stable Specific coverage 38,0% (Dec 14: 43,1%) SArB directive 7/2015 impact Defaulted advances as a % of gross advances 2,53% (Dec 14: 2,54%) remained stable Loan-to-deposit-ratio 93,9% (Dec 14: 93,8%) remained stable NedbaNk limited – ANNUAL report 2015 127 ■■ When including residential mortgages, Nedbank’s total mortgage market share is in line with that of its peers at 21,5%. total retail motor vehicle finance exposure within Nedbank Group has increased slightly since 2011 to 11,1% in 2015 (2011: 11,0%) of gross loans and advances, while current market share is approximately 31,0%, which is second of the big four banks in SA. Sound risk management principles are consistently applied by an experienced management team, with CLR decreasing year on year. personal-loan advances have decreased and are now at 2,6% of gross loans and advances, from its peak of 4,3% in 2012. Market risks in summary, other than interest rate risk in the banking book (iRRBB), Nedbank does not have a significant risk appetite for, or exposure to, market risk: ■■ Nedbank’s iRRBB is positioned for an upward interest rate cycle and is predominantly managed in line with impairment sensitivity for similar rate change expectations. Current exposures are within the board-approved limits and risk appetite. ■■ the focus of the trading businesses is to continue to develop the flow model, by leveraging the dealflow from clients. trading book low risk IrrBB % ordinary shareholders’ equity 1,61% (Dec 14: 1,52%) well positioned trading market risk is low in relation to the total bank operations, with only 0,5% of the total economic capital of the group consumed. Risk levels are monitored within board-approved limits and risk appetite. Focus areas in 2015 were the major regulatory proposals, including the fundamental review of the trading book and CVA governance and system implementation. in 2016 the overall strategic focus of CiB will remain largely unaltered and focused on client- centredness. trading capabilities within current board-approved limit structures will selectively be increased by retaining and managing risks rather than hedging back-to-back in the market. ■■ ■■ equity risk in the banking book is low relative to the rest of the balance sheet. the key strategic investments (eti and Banco Único) are accounted for under the equity method of accounting. the total equity portfolio that is fair-valued is R4 719m (2014: R4 761m). FCtR remains relatively low, even after the acquisition of equity stakes in eti and Banco Único in 2014, as a result of the inclusion of FCtR in qualifying capital and reserves since 1 January 2013. Accordingly, FCtR does not have a material impact on the group’s total regulatory capital adequacy ratio. Nedbank Group’s Pillar 3 document for the year ended 31 December 2015 provides detailed insights into the management of all components of market risk. operational risk Nedbank maintained a stable operational risk environment despite an increased inherent operational risk profile. Strong emphasis was placed on the basics of operational risk management, with a focus on both qualitative and quantitative measures. for 2015 were the it the top and emerging operational risk information/ themes regulatory cybersecurity, risk, environment, outsourcing/third-party risk, financial crime and business continuity planning (national power crisis). conduct intense risk, restrained illustrated by the macroeconomic slow environment, as economic growth, combined with pressure reduction, on rate fluctuations, low commodity prices and pressure to meet targets, will likely increase the exposure to operational risk in 2016. exchange cost operational risk for regulatory purposes. Nedbank continues to work closely with industry bodies and regulators to ensure the group remains abreast of reforms. the development of a second-generation operational risk model with enhanced capabilities (eg to estimate economic capital internal capital and adequacy), of review a methodology and technology, continues to receive focus. to evaluate our including Nedbank Group’s net losses, earnings at risk and operational risk capital to gross income ratio metrics remained within prescribed limits. All single material-loss events of more than R5m are reported to the Group Operational Risk Committee (GORC) and the GRCMC, where emphasis is placed on identifying root causes and enhancing mitigating actions. fraud and events relating to external execution, delivery and process management (eDpM) remained the primary reasons for internal losses in terms of frequency and severity. the eDpM event-type category’s contribution to the operational risk loss profile increased to 49% in 2015 (2014: 40%), while external fraud decreased to 35% in 2015 (2014: 49%). A detailed account of the management of operational risk management is included in the Pillar 3 Risk and Capital Management  Report for the year ended 31 December 2015, available online at nedbankgroup.co.za. Capital adequacy Nedbank Group’s capital ratios are strong across all classes of capital, are above regulatory minimum requirements and are within internal target ranges. Similarly Nedbank Group economic capital adequacy is strong and iCAAp has been maintained. Nedbank’s iCAAp confirms that we are well capitalised above the current ‘A’ or 99,93% target debt rating (solvency standard) in terms of the group’s proprietary economic capital methodology. the group maintained a well-capitalised balance sheet. Our Cet1 ratio of 11,3% (2014: 11,6%) remains around the mid-point of our Basel iii 2019 internal target range. the Cet1 ratio was impacted by risk- weighted assets (RWA) growing 13,7% to R501,2bn (2014: R440,7bn), largely as a result of an increase in credit RWA due to: ■■ ■■ ratings migration across certain wholesale portfolios in line with the deteriorating economic environment; an industrywide CVA capital charge by SARB for OtC ZAR derivatives and OtC derivatives with local counterparties not cleared through a central counterparty, which increased RWA by R6,5bn; and ■■ growth in loans and advances. there are significant developments that may have an impact on the current state of the to measure risk-based approaches Overall capital adequacy was further impacted by investments in the rest of Africa, resulting in a higher capital impairment. 128 NedbaNk limited – ANNUAL report 2015 Further information is available in the Nedbank Group Ltd Annual Results Booklet under the Risk and Balance Sheet Management Review section and will be available in the 2015 Pillar 3 Risk and Capital Management Report available at nedbankgroup.co.za. Leverage the leverage ratio is intended by the Basel Committee on Banking Supervision (Basel Committee) simple, transparent, non-risk-based leverage ratio to supplement the Basel iii risk-based capital requirements, to help avoid the buildup of excessive leverage and to capture both on- and off-balance-sheet exposure. serve as a to gearing (including Nedbank Group’s unappropriated profits) under the revised Basel iii Leverage Ratio Framework and disclosure requirements (which came into effect on 1 January 2015) is 16,3 times (or 6,1%) at 31 December 2015 (2014 pro forma: 15,1 times or 6,6%). the increase in the leverage position is largely as a result of the increase in exposure measure, which was primarily driven by organic on-balance- sheet growth as well as an increase in total derivative exposure. Liquidity and funding risk Nedbank Group remains well funded with a strong liquidity position, underpinned by a significant quantum of long-term funding, an appropriately sized surplus liquid-asset buffer, a strong ratio consistently below 100% and a low reliance on interbank and foreign-currency funding. loan-to-deposit From a Basel iii perspective Nedbank has the successfully LCR, implemented exceeding regulatory the minimum requirement of 60%, which came into effect on 1 January 2015 and the 70% requirement from 1 January 2016. having embedded this ratio into BaU processes, Nedbank is well positioned the minimum requirement throughout the phase-in period, as the LCR requirement increases by 10% per annum to 100% by 1 January 2019. to exceed factor applicable the Basel Committee released its final version of the NSFR in October 2014. On 18 November 2015 SARB released a proposed directive relating to the NSFR, where it proposed that the available stable funding (ASF) to wholesale deposits in the 0 to 6 months bucket be increased from 0% to 35% in order to better reflect the stability of these deposits within the South African context. taking cognisance of the finalised Basel Committee NSFR standard and the proposed directive issued by SARB, all SA Banks are better positioned to achieve compliance from the effective date of 1 January 2018. the key focus going forward, will be on achieving compliance within the context of balance sheet optimisation. Nedbank’s strong funding and liquidity position is illustrated in the Nedbank Group Ltd Results Booklet and Pillar 3 Report for the year ended 2015, available online at nedbankgroup.co.za Common-equity tier 1 11,3% (Dec 14: 11,6%) well capitalised total capital adequacy ratio 14,1% (Dec 14: 14,6%) in a strong position total tier 1 12,0% (Dec 14: 12,5%) within target range Liquidity coverage ratio 88,5% (Dec 14: 66,4%) LCr=> 60% regulatory requirement Long-term funding ratio 28,7% (Dec 14: 25,4%) strong and well diversified Available financial resources:economic capital 120% (Dec 14: 140%; Dec 14 pro forma: 123%) strong and above target range NedbaNk limited – ANNUAL report 2015 129 WORLDCLASS RiSk MANAGeMeNt (continued) RiSk UNiVeRSe the 17 key risks that comprise Nedbank Group’s eRMF and their materiality are reassessed, reviewed and challenged regularly by the board, management and our primary regulator, the South African Reserve Bank. Nedbank’s enterprisewide risk Management Framework (erMF) risk universe Accounting, financial and taxation risk Credit risk Operational risk Financial crime risk Liquidity and funding risk Capital risk insurance risk (including non-banking risks) Market risk trad- ing book Bank- ing book Concentration risk Conduct risk Regulatory risk information technology risk Business and strategic (execution) risk Reputational risk Governance and compli- ance risk transforma- tion, social and environ- mental risk people risk f o s e r u t a e f y e k F M R e e h t 1 the board of directors is ultimately responsible for all risks in the group, approval and oversight of the risk measurement and management system, and the setting of risk appetite. 2 the eRMF provides the foundation and underpins the entire risk management structure and system of Nedbank Group (implementation, monitoring, reporting and remediation). a b c d Strong emphasis in the eRMF is placed on individual accountability and not on undue reliance on committees. Risk management frameworks (for all major risk types), and risk officers, are in place across all businesses and Group technology. provides a set of subrisks where relevant, to each main risk category. Shows the statutory board committees (as required by the Banks and Companies Act) and their role as the final oversight and monitoring functions for the group. FIrSt LINe oF DeFeNCe Board of directors Board mittees com- Group Audit Committee Group Credit Committee Large-exposure Approval Committee Group executive Committee Group operational Committtee Committees Forums s e e t t i m m o c o c x e p u o r G Finance Forum taxation Forum Cluster credit committees (CCCs) Group Risk and Capital Management Committee Directors’ Affairs Committee Related party transactions Committee transformation, Social and ethics Committee Group Operational Risk Committee Financial Crime Committee Group Asset and Liability Committee and executive Risk Management Committee Brand, Client and Conduct Committee Reputational Risk Committee transactional Deposits Forum Regulatory Risk and Compliance Forum Mergers and Acquisitions Forum Regulatory Risk and Compliance Forum transformation human Resources Committee Nedbank employee equity Forum Group transformation Forum Group information technology Committee executive information technology Committee Business Clusters’ risk governance NedbaNk Retail aNd bUSiNeSS baNkiNG, NedbaNk CORPORate aNd iNVeStmeNt baNk, NedbaNk WealtH aNd ReSt OF aFRiCa ■■ Cluster and business unit excos, CCCs, trade Risk Committee (tRC), investment Committee and enterprise risk committees (ercos) and other specialist committees, with the relevant independent group functions. ■■ heads of risk and risk functions, independent of business origination, report directly to business cluster managing executives. Finance Forum CCC Credit approval meetings (CRAMs) erco Balance Sheet Management Committee (BSMC) tRC BSMC investment Committee Separate Wealth Cluster eRMF erco BSMC Brand, Client and Conduct Committee erco enterprisewide human Resources Forum Central func- tions Group Finance Group Strategic planning Balance Sheet Management Group technology Group human Resources Group Marketing, Communications and Corporate Affairs 2ND LINe oF DeFeNCe Group risk Chief risk officer Independent group risk and compliance Group Credit Risk Monitoring Group Credit portfolio Manage- ment Group Operational Risk and Data Management Group Financial Crime and Forensics Group AML, CFt and Sanctions Finance and Operations Group Legal Group insurance Group Market Risk Monitoring Regulatory Change programme Office enterprise Risk Management tHIrD LINe oF DeFeNCe Internal and external audit Independent assurance Group internal Audit external audit independent actuaries 130 NedbaNk limited – ANNUAL report 2015 Group enterprise Governance and Compliance   Chief Governance and Compliance officer includes: ■■ ■■ ■■ ■■ ■■ Group Money-laundering Reporting Office Compliance services and oversight Governance and ethics Banks Act and regulatory compliance Company secretariat risk universe Accounting, financial and taxation risk Credit risk Operational risk Financial crime risk Liquidity and funding risk Capital risk Market risk insurance risk (including non-banking risks) Concentration risk Conduct risk Regulatory risk information technology risk Business and strategic (execution) risk Reputational risk Governance and compli- ance risk transforma- tion, social and environ- mental risk people risk the eRMF specifically allocates the 17 key risks (which individually also include various subrisks) at each of three levels to board committees; executive management committees (at Group exco level and those within business clusters); and individual functions, roles and responsibilities (at group level and across all business clusters, as relevant). 3 e Shows the structure of the executive management committees and their roles/responsibilities for the proper, efficient and effective functioning of the group’s business. Reporting philosophy: provides a reporting structure from business units through to the board. f three-lines-of-defence model: sets out and positions the three-lines-of-defence model across the group and the role and responsibility of each within the overall framework. a primary responsibility and accountability for the risks originating in the businesses are clearly assigned to the respective business cluster leaders and executives. 4 the CRO reports to the Ce, who has ultimate individual accountability for risk. FIrSt LINe oF DeFeNCe Board of directors Board mittees com- Group Audit Committee Group Credit Committee Large-exposure Approval Committee Group executive Committee Group operational Committtee Committees Forums Finance Forum taxation Forum Cluster credit committees (CCCs) Finance Forum CCC Credit approval meetings (CRAMs) 2ND LINe oF DeFeNCe Group risk Chief risk officer tHIrD LINe oF DeFeNCe Internal and external audit Independent assurance transactional Deposits Forum tRC BSMC investment Committee Group Risk and Capital Management Committee Group Operational Risk Committee Financial Crime Committee Group Asset and Liability Committee and executive Risk Management Committee Brand, Client and Conduct Committee Group information technology Committee executive information technology Committee Directors’ Affairs Committee Related party transactions Committee transformation, Social and ethics Committee Group Remuneration Committee Reputational Risk Committee transformation human Resources Committee Nedbank employee equity Forum Group transformation Forum Business Clusters’ risk governance NedbaNk Retail aNd bUSiNeSS baNkiNG, NedbaNk CORPORate aNd iNVeStmeNt baNk, NedbaNk WealtH aNd ReSt OF aFRiCa ■■ Cluster and business unit excos, CCCs, trade Risk Committee (tRC), investment Committee and enterprise risk committees (ercos) and other specialist committees, with the relevant independent group functions. ■■ heads of risk and risk functions, independent of business origination, report directly to business cluster managing executives. Regulatory Risk and Compliance Forum Mergers and Acquisitions Forum Regulatory Risk and Compliance Forum erco Balance Sheet Management Committee (BSMC) Separate Wealth Cluster eRMF erco BSMC Brand, Client and Conduct Committee erco enterprisewide human Resources Forum Central func- tions Group Finance Group Strategic planning Balance Sheet Management Group technology Group human Resources Group Marketing, Communications and Corporate Affairs Group enterprise Governance and Compliance   Chief Governance and Compliance officer Independent group risk and compliance Group Credit Risk Monitoring Group Credit portfolio Manage- ment Group Operational Risk and Data Management Group Financial Crime and Forensics Group AML, CFt and Sanctions Finance and Operations Group Legal Group insurance Group Market Risk Monitoring Regulatory Change programme Office enterprise Risk Management ■■ ■■ ■■ ■■ Group internal Audit external audit independent actuaries includes: ■■ Group Money-laundering Reporting Office Compliance services and oversight Governance and ethics Banks Act and regulatory compliance Company secretariat NedbaNk limited – ANNUAL report 2015 131 WORLDCLASS RiSk MANAGeMeNt (continued) NeDBANkS RiSk UNiVeRSe RiSk type definition Credit risk the risk of borrowers and counterparties failing to meet their repayment commitments, from impaired assets and related impairments, provisions or reserves and risk arising from exposure to related persons. including risks arising Concentration risk in terms of market risk and credit risk, the risk of an excessive concentration of exposure to a single client or group of related clients. in terms of liquidity risk, the risk of overreliance on funding or liquidity from a single depositor or small group of depositors. Market risk in terms of market risk in the trading book, the risk of loss as a result of unfavourable changes in market prices, such as foreign exchange rates, interest rates, equity prices, credit spreads and commodity prices. in terms of market risk in the banking book, the risk of loss in the banking book as a result of unfavourable changes in foreign exchange rates and interest rates. operational risk the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. Financial crime risk the risk of any kind of criminal conduct in terms of common law or any current statutory law and any other conduct (whether an act or omission which Nedbank deems to be dishonest, regardless of whether the bank is the victim or perpetrator) that relates to money or financial services, goods or products resulting in economic or financial loss. regulatory risk the risk of Nedbank failing to comply with applicable regulatory requirements or codes. Regulatory risk centres around changes in regulations that may have a negative effect on the business. Conduct risk the risk associated with Nedbank’s pattern of behaviour in executing its pricing and promotion strategy as well as in respect of the public, markets, laws, best practices, client expectations, regulators and ethical standards. reputational risk the risk of impairment of Nedbank’s image in the community or of the long-term trust placed in the group by its stakeholders as a result of a variety of negative factors that may result in loss of business and/or legal action. Governance and compliance risk in terms of governance risk, the risk of systems and controls failing to enable adequate oversight on a sustainable basis. in terms of compliance risk, the risk of legal or regulatory sanctions, material financial loss or loss of reputation as a result of Nedbank failing to comply with laws, regulations, rules, related self-regulatory organisation standards and codes of conduct. Information technology risk the risk of inadequate systems or inappropriate it investment, development, implementation, support or capacity, with an associated negative impact on the achievement of strategic objectives. tOp 10 RiSkS Nedbank’s risk universe comprises of 17 key risks. Aligned to this, through the risk strategy and planning process, the top 10 risks are agreed as key risk focus areas for the year ahead. Management actions for the top 10 risks have been formally documented in the Group Risk Plan and are monitored and tracked in the Operational Committee, Group Exco and GRCMC. We provide an insight on pages 118 to 123, into what transpired in 2015 regarding each of the top 10 risks, the shaping forces that informed these risks and what the outlook is for 2016. 132 NedbaNk limited – ANNUAL report 2015 RiSk type definition Accounting, financial and taxation risk in terms of accounting risk, the risk of inappropriate accounting information causing suboptimal decisions to be made. in terms of financial risk, the risk of financial targets and key performance indicators not being met. in terms of taxation risk, the risk that effective tax planning, co- ordination and strategy, compliance with tax laws and regulations, proactive identification and management of tax risks are not enforced or a poor relationship with revenue authorities exits, resulting in loss and/or missed opportunities. people risk the risk of inadequacies in human capital management and the management of human resource policies and processes resulting in the inability to attract, manage, motivate, develop and retain competent resources or the failure of employees to adhere to the group’s policies and processes. transformation, social and environmental risk in terms of transformation risk, the risk of Nedbank failing to respond to and address transformation issues adequately, proactively and positively. in terms of social risk, the risk of not adequately contributing to the development of a sustainable and robust social structure. in terms of environmental risk, the risk of a Nedbank activity or process degrading, devaluing or destabilising the environment in such a way that it damages the environment. Business, strategic (incl execution) risk in terms of business risk, the risk of potential changes in general business conditions, such as our competitive market environment, client behaviour and disruptive technological innovation. in terms of strategic risk, the risk of an adverse impact on capital and earnings due to business policy decisions, changes in the economic environment, deficient or insufficient implementation of decisions, or a failure to adapt to changes. in terms of execution risk, the risk of Nedbank’s business plans not being successful when implemented or full implementation not being achieved. Insurance risk (including non- banking risks) in terms of underwriting risk, the risk of a client being placed in the incorrect risk pool. in terms of pricing risk, the risk of the level of risk associated with a pool being mispriced. in terms of non-independence risk, the risk of a single event resulting in claims from multiple clients. Capital risk the risk of Nedbank becoming unable to absorb losses, maintain public confidence and support the competitive growth of the business. Liquidity and funding risk the risk of Nedbank failing to meet its payment obligations when they fall due, replace funds when withdrawn or fund commitments to lend at an acceptable price, at the right time and place, and in the right currency. the eRMF is designed around the three-lines- of-defence model, placing strong emphasis on accountability and responsibility of business management, all supported by appropriate internal control, risk management and governance structures. three-lines-of-defence model First line the board and management of Nedbank Group are ultimately responsible for the implementation and management of risk. Second line Comprises: independent risk oversight and monitoring by the Group Risk and enterprise Governance and Compliance Clusters. the CRO, who reports directly to the Ce, provides: ■■ ■■ ■■ strategic risk management leadership group independent risk oversight key support to various risk committees ■■ management of the RCpO ■■ is responsible for championing effective enterprisewide risk management and control independent model validation some first line functions, eg forensics and physical security ■■ ■■ the Group Chief Governance and Compliance Officer, who reports directly to the Ce, provides: ■■ ■■ ■■ ■■ continuous strategic compliance risk management leadership, independent compliance risk monitoring (of compliance monitoring in the first line), sets the group governance and compliance framework and works closely with the cluster governance and compliance functions on compliance and governance matters. third line Group internal Audit, external auditors and independent actuaries provide additional assurance on the effectiveness of risk management across the organisation. NedbaNk limited – ANNUAL report 2015 133 WORLDCLASS RiSk MANAGeMeNt (continued) 2015 StrAteGIC AND StrAteGY eXeCUtIoN rISKS (strategy is underpinned by sound strategic and strategy execution risk management) 1 ■■ ■■ Strategic and strategy execution risks have been highlighted in the eRMF and in the Group Risk plan among the top 10 risks facing Nedbank, with a heightened focus on execution across the bank to support Nedbank’s roadmap to Winning in 2020. Nedbank believes that key in today’s climate is the ability to mitigate the adverse impact on capital and earnings due to business policy decisions, changes in the economic environment, deficient or insufficient implementation of decisions, or a failure to adapt to changes in the environment. Strategic and execution risks are closely allied in any successful risk management programme and the one cannot be realised without the other being put into effect. ■■ Nedbank is strategically leveraging the ‘regulatory tsunami’. Approximately R3bn has been allocated to regulatory change programmes to ensure worldclass implementation of regulatory requirements. reGULAtorY rISK 2 (regulatory tsunami) ■■ Compliance and regulatory risk have become increasingly significant given the heightened regulatory environment in which Nedbank operates. ■■ ■■ ■■ extensive focus and initiatives are documented in strategy, business and risk plans. Given the extent of the significant regulatory change agenda (‘regulatory tsunami’), a RCpO was established in 2015, under the CRO to ensure that the impact of new or pending regulatory changes are proactively identified and appropriately managed. the RCpO is responsible for ensuring coordinated, comprehensive and timely identification and impact assessment of regulatory changes, and drives the integration of and alignment between regulatory change programmes. Nedbank’s business and risk strategies ensure these programmes are effectively delivered in an efficient, integrated and strategic manner to maximise our success for full regulatory compliance on a sustainable basis. ■■ Basel iii regulatory requirements continued to be phased in through to 2019 with: ongoing transitional minimum capital requirements increasing in line with regulation; the phasing-in of the minimum LCR requirements that came into effect in 2015 starting at 60%; and the group continuing to position itself strategically for NSFR compliance by January 2018. ■■ Nedbank continued to shape its capital position in line with these evolving requirements, which included: BALANCe SHeet rISKS (structure and growth) 3 ■■ redemption of certain old-style capital instruments and the issue of further new-style Basel iii-compliant instruments during the period. An appropriate level of leverage during 2015 continued, with the level of balance sheet gearing being maintained, well above Basel iii and the more conservative SA regulatory minimum requirements. Nedbank also operated well within its own internal targeted levels. ■■ With the phase-in of the LCR requirements this year, Nedbank was well positioned to meet the transitional 2015 minimum LCR requirements through its proactive liquidity risk management and strategies. the group has updated its recovery plan in 2015, which also included an extension of its integrated solvency, liquidity and disaster recovery planning to its London branch and to Nedbank private Wealth. ■■ 134 NedbaNk limited – ANNUAL report 2015 eMeRGiNG/ShApiNG FORCeS OUtLOOk FOR 2016 ■■ ■■ ■■ ■■ Fundamental shift in financial services’ landscape and technology. Fierce competition, mobile and digital transformation – essential to innovate, differentiate and simplify. A need for sound execution of regulatory programmes. Capacity and resources to execute delivery of strategic focus areas and regulatory imperatives separate from business as usual. ■■ the recent significant changes in the regulatory landscape have focused on two key themes, namely: ■■ ■■ ■■ ■■ ■■ ■■ the stability and sustainability of the financial services industry; and client-focused market-conduct-driven regulation. the extent of regulatory change across the industry and its impact on our businesses and clients remain pervasive. As these requirements become more onerous, they are likely to change the shape of bank balance sheets, increase the costs of regulatory compliance, adversely impact the price of credit extension and, as a result, will cause banks to revise their strategies. increasing capital and liquidity requirements will continue to impact the group’s balance sheet and put pressure on bank margins and ROes, for which frontbook pricing will need to be adjusted. the higher minimum capital requirements and likely introduction of tLAC requirements will drive upwards the group’s capital ratios and overall loss-absorbing capacity. LCR compliance is being phased in over several years, with a 60% requirement in 2015 to full compliance by 2019. these requirements will result in larger liquid asset buffers, with higher levels of bank funding being deployed into these portfolios. the requirements of full NSFR compliance by 2018 will result in a continued lengthening of the group’s contractual and behavioural funding profile in order to increase the levels of available stable funding to support lending activities. ■■ Capacity and adequacy of resourcing will be a key priority for the successful execution of the group’s strategy and the many large-scale regulatory programmes. ■■ execution trumps strategy (‘grow transactional banking franchise’ is most critical). ensure operational and programme management excellence. execute on Nedbank RBB’s five key focus areas to deliver on the transactional banking strategy. ■■ Mobile and digital transformation is essential to innovate, differentiate and simplify. ■■ ■■ ■■ ■■ ■■ enhanced project management discipline must support roadmaps to 2020 targets. A journey will be undertaken to redefine a culture for Nedbank to win in 2020 and beyond. in acknowledging the compliance imperative, it remains crucial to deliver a sustainable and effective compliant operating model, underpinned by a direct link to the strategic benefits, with a view to establishing a winning regulatory environment in 2020. the impact of regulatory change on people, process, systems and data remains a key focus for the year ahead to evolve the operating model for implementing regulatory change in an integrated, cost- effective and sustainable manner. Although the group is well positioned to respond to the regulatory changes, these changes are likely to put pressure on levels of return across the financial services industry as a result of, among others, the increased cost of compliance, increased quality and size of capital buffers, increased liquid-asset portfolios and decreased levels of liquidity transformation. these should in turn lead to lower levels of risk. ■■ the FSB has finalised its minimum requirements for tLAC. ■■ ■■ ■■ Nedbank expects that these requirements, in a revised form, are likely to be adopted for SA D-SiBS. Significant changes are expected with the quantification of RWA, with finalisation expected in December 2016. A conceptual framework setting out primary and secondary indicators for identifying unconsolidated entities where significant step-in risk exists for banks has been proposed and is to be finalised in December 2016. Nedbank has embraced the requirements of Basel iii and is continuously looking at how best to respond strategically in order to create a competitive advantage rather than simply complying: these requirements have been embedded within our strategic portfolio tilt focus and continue to shape the group’s balance sheet and impact frontbook pricing. NedbaNk limited – ANNUAL report 2015 135 WORLDCLASS RiSk MANAGeMeNt (continued) 2015 ■■ Nedbank Group does not have material single-name credit concentration risk. CoNCeNtrAtIoN rISK (traditionally what hurts banks most) 4 ■■ ■■ Of the total group credit economic capital 7,5% is attributable to the top 20 largest exposures, excluding banks and government. — 2,3% is attributable to the top 20 largest bank exposures. Commercial property finance (> 40% market share). Nedbank continued to grow wholesale advances much faster than retail, while transactional deposits were slower. BUSINeSS rISK (VUCA environment) 5 ■■ ■■ ■■ the risk environment and risk management across the group remained in good shape despite the VUCA and very challenging regulatory macroenvironment in 2015, with an even more adverse forecast for 2016. Despite the challenging environment our CLR’s remain low. in recognition of these facts, coupled with the ever-present and ever-growing threat posed by financial crime to the financial services industry: focus on financial crime risk management was increased; the risk of financial crime was elevated to a key risk in the eRMF; and risk management frameworks have been formulated for — AML, CFt and sanctions and — Cyber-resilience. CreDIt rISK (given VUCA macroeconomic environment) ■■ the tough economic environment placed financial pressure on our clients, leading to lower levels of credit demand and transactional banking activity. this was particularly prominent in the retail and small-business segments of the market. in our wholesale business stresses in the resources, steel and construction sectors continued to impact growth. 6 ■■ Strategic portfolio tilt has delivered excellent results since it was implemented in 2009, resulting in the improvement of the quality of the book’s credit profile, which is evident in the group and RBB CLR remaining at the bottom-end of their target ranges. While there was some pressure on impairments, particularly in the Nedbank Capital portfolio with CLR increasing to 0,83% (2014:0,14%), driven by lower oil and commodity prices and resulting in high specific impairments, the total CiB CLR remained within their new through-the-cycle target range. operAtIoNAL rISKS (AML, CFt and sanctions, data and It risks, information security and cybercrime) ■■ Maintained a stable operational risk environment despite an increased inherent operational risk profile. 7 ■■ ■■ ■■ Strong emphasis was placed on the basics of operational risk management, with a focus on both qualitative and quantitative measures. there was an enhanced focus on framework testing and assurance during the year. A fundamental review of Nedbank’s cyber-resilience and financial crime risk frameworks was initiated and remain a key focus. 136 NedbaNk limited – ANNUAL report 2015 eMeRGiNG/ShApiNG FORCeS OUtLOOk FOR 2016 ■■ VUCA macroeconomic environment and pressure on resource and commodities prices. ■■ ■■ ■■ Concentration risk is now one of the key risks in Nedbank’s refreshed eRMF. Stress testing and deep dives show low concentration and downside risk to most key sectors. Continued focus on strategic portfolio tilt, with a preference for strong market share in commercial mortgages, given its comparatively better risk-based economics and returns. ■■ ■■ the performance of banks is closely aligned with the macroeconomic environment in which they operate. in the second half of 2015 the outlook for key macroeconomic facts in SA deteriorated: SA macro political events; declining for 2016 GDp expectations to 0,2%; high risk of recession. ■■ Further deterioration is possible as is the risk of SA being downgraded to non-investment grade. this potentially creates a severe-stress scenario. ■■ ■■ elevated financial crime is being experienced. intense competitive pressure is experienced from banks, non-banks and shadow banking. ■■ Despite the difficult macroeconomic environment, intense regulation and strong competition, Nedbank is well positioned to continue to grow and generate value. Competitive differentiating in 2016–2018/2020 in group business and risk plans: — grow transactional banking; and — differentiate by strategically leveraging regulatory change. ■■ ■■ Nedbank’s comprehensive stress testing enables us to be proactive in managing extreme events and difficult environments. the growing threat of financial crime necessitates a risk-based, proactive and integrated approach to financial crime risk management to achieve a competitive advantage and to win in 2020. Underpinning this effort will be the integrated Financial Crime Risk Management Framework, together with detailed frameworks being developed to support management of various types of financial crime. ■■ ■■ ■■ Growth in wholesale banking will continue to be limited by infrastructure constraints in SA, poor global demand and low international oil and commodity prices. Rising interest rates will increase borrowing costs and dampen consumer credit demand. Deep dives and stress testing done in higher- risk portfolios. ■■ ■■ ■■ ■■ Continued focus on prudent risk management and excellence in collections. Strategic portfolio tilt – proactive risk management and selective origination. Leverage relatively faster growth in Africa in our wholesale portfolios. iFRS 9 (impairments) programme – strategic implications of change to iFRS 9. ■■ top and emerging operational risk themes are: information/Cybersecurity intense regulatory environment it risk Conduct risk Outsourcing/third party risk Financial crime Business continuity planning (national power crisis) technological change (eg digital age) follows regulatory change in changing the shape of banking Big data + risk data = eDp as a critical success factor to Winning in 2020. Factors likely to increase the operational risk exposure, include: ■■ inherent risk of information security, cybercrime and elevated financial crime restrained macroeconomic growth slow economic growth pressure on cost reduction exchange rate fluctuations low commodity prices pressure to meet targets ■■ Significant developments may have an impact on current state of risk-based approaches to measure operational risk for regulatory purposes. ■■ importance of delivering on the eDp/RDAR&R (BCBS 239). NedbaNk limited – ANNUAL report 2015 137 WORLDCLASS RiSk MANAGeMeNt (continued) 2015 ■■ Our strategy remains as follows: reSt oF AFrICA rISKS 8 CoNDUCt rISK 9 Own and manage banking and operations in the Southern African Development Community (SADC) and east Africa. provide access to a banking network in West and Central Africa through our investment and alliance with ecobank. in SADC and east Africa we made good progress with our one-bank-model rollout. the foundation was laid for the integration of Banco Único on attaining control in 2016, with a focus on enhancing the control environment. We continue to support eti in technical areas such as balance sheet management, risk and it, where teams contribute through information sharing and technical skills support. integration of our African business into the RCpO scope. A new core banking system, Flexcube, was successfully implemented in Namibia in 2015, improving efficiency of operations. A tCF market conduct programme aligned with the twin peaks model and market conduct regulatory developments is well underway within Nedbank. Conduct risk has been incorporated as a new risk category within the eRMF as part of the eRMF refresh. A conduct risk framework is being formalised to underpin tCF principles, ensuring full integration into business processes. ■■ ■■ ■■ ■■ ■■ ■■ ■■ Accountability for the oversight of tCF was allocated to senior management and committees in the eRMF, having regard to their lens over client-related matters: the Brand and Client Conduct Committee. the transformation, Social and ethics Committee. ■■ Nedbank regards proper compliance risk management as an enabler and source of competitive advantage. the Compliance Risk Management Framework and methodology were reviewed during 2015 to ensure continued alignment with industry best practice and efficiency. CoMpLIANCe rISK 10 ■■ Roles and responsibilities across operations and compliance were clarified. A good and transparent relationship with regulators is of prime importance and was maintained in 2015. A policy and process were implemented to ensure that the group delivers on all its commitments to regulators and an open and clear dialogue is maintained with all our regulators. 138 NedbaNk limited – ANNUAL report 2015 eMeRGiNG/ShApiNG FORCeS OUtLOOk FOR 2016 ■■ ■■ the strategy of increasing our exposure in the rest of Africa will increase the risk profile of the organisation in markets that are more volatile and have less governance at this stage of their development. Significant new regulations are expected for the financial industry, including regulations relating to AML, CFt and sanctions, conduct risk, tCF, iFRS 9, FAtCA and risk data aggregation. A diverse operating and regulatory environment was experienced. Subsidiaries are separate legal entities based in different countries, with their own boards, regulators and legislators. ■■ Regulatory changes are expected: Financial Sector Regulatory Bill (FSRB) – twin peaks. Although tCF is not yet a legislative requirement, Nedbank is proactively ensuring that the tCF outcomes, as well as the recommendations contained in two independent reviews conducted by Deloitte Uk, are implemented. ■■ Changing/evolving role of compliance: regulation changing from rules-based to principles-based; judgement-based compliance becoming more prominent; and enabling competitive compliance is required. ■■ ■■ ■■ increasing digitisation of the business environment. Conduct risk developments. extent of fines and penalties imposed by regulators globally for non-compliance. ■■ We continue to see growth opportunities despite economic headwinds and will continue to grow our existing businesses. ■■ ■■ ■■ A focus remains on improving the control environment and governance, and strengthening of leadership. the integration of Banco Único will commence after attaining control in 2016. increasing regulatory requirements continue and the monitoring and support thereof are integrated into the overall Nedbank Group regulatory programmes. ■■ Our new core banking system will continue to be rolled out to other subsidiaries in 2016/17. ■■ A workstream will be implemented for each of the six tCF outcomes, namely: culture, product and services, communications, post-sales, conduct risk framework and management information and reporting are planned for delivery by December 2016. key focus areas include: ■■ setting the right tone at the top to ensure the market conduct principles are cascaded throughout Nedbank Group; ■■ management of conduct risk throughout the product life cycle; ■■ ■■ ■■ ■■ ■■ ■■ product innovation, design, pricing and strategy; complaints handling, claims and analysis; and empowering clients and keeping them well informed and educated on financial products. embedding the revised Compliance Framework and supporting policies will continue in 2016. Our integrated compliance approach will keep evolving to address the demands of the changing regulatory environment. An increased focus will be placed on enhancing accountability for compliance for all roleplayers, supported by appropriate awareness. ■■ A focus will remain on resource capabilities: war for compliance talent; high compliance staff turnover; and new skills/capabilities required. NedbaNk limited – ANNUAL report 2015 139 RepORt FROM GROUp ReMUNeRAtiON COMMittee ChAiR Composition and attendance pM Makwana (Chair) Np Mnxasana JVR Roberts Mi Wyman l d e u d e h c s e r p 5/5 4/5 4/4 5/5 c o h d A 2/2 2/2 2/2 2/2 executive remuneration and the governance of remuneration in large corporations remained a feature of the corporate governance landscape in 2015. in addition, the issue of income differentials and the steps necessary to address these continued to enjoy prominence in the local and international discourse. income differentials are an important topic and Nedbank remains committed to ensuring that, where differentials exist, these are fair and defensible, based on objective criteria. We will continue to monitor and address this critical issue. Nedbank remains compliant with the relevant remuneration-related legislative and regulatory requirements that apply in its operating jurisdictions, and with those set by the international Financial Stability Board. it is clear that these requirements will continue to evolve and we will remain focused on ensuring that our remuneration practices adapt to remain compliant. Similarly, we will continue enhancing the overall governance of our remuneration arrangements so that we remain appropriately aligned to international best practice. A key feature of our remuneration policy is pay for performance. in the context of Nedbank’s overall performance in 2015, and specifically the growth in headline earnings (he) and economic profit (ep), which are detailed elsewhere in this integrated report, we have increased our short- term incentive (Sti) pool by approximately 3% and have kept our Lti pool flat. the restricted shares issued under our Lti arrangements in 2013 vest in 2016 and the operation of corporate performance targets (Cpts) has resulted in 69,8% of the total of these awards vesting, with the remainder being forfeited. Based on feedback received from our shareholders, we have reviewed our Lti arrangements and several changes to our scheme rules are proposed for implementation in 2016. these relate to our ability to, where circumstances necessitate this, forfeit or claw back awards made, including those already vested. Details of these arrangements are set out online in our full 2015 Remuneration Report, and are also contained in our Notice of AGM for shareholder consideration and voting. in line with the above, we have also made changes to our remuneration policy so that we are able to forfeit or claw back deferred remuneration where this is deemed necessary. this is aligned with emerging international best practice in the management of deferred remuneration. the policy is set out in the detailed 2015 Remuneration Report, and is presented for a non-binding advisory vote at the 2016 AGM. We recommend that these changes, and the changes to the Nedbank 2005 employee Share incentive Scheme rules set out in the Notice of AGM, are approved by shareholders. integrated report Stakeholders will also notice that we have changed the   structure of our 2015 Remuneration Report, following feedback that we have received. included in this is a summarised remuneration report covering the key aspects of our remuneration policy and its implementation. We also include key disclosures in the summary. this is supplemented, for those requiring more  detail, by a Remuneration Report, which can be accessed at nedbankgroup.co.za. full online 2015 mPHO makWaNa ChAiR 140 NedbaNk limited – ANNUAL report 2015 FOCUS AReAS actions taken in 2015 Launching an updated approach to performance management Reviewing variable pay arrangements Focusing on fitness for purpose of our employee benefits this work was dependent on the SAp human Capital Management system, which was launched in Nedbank on 1 November 2015. As part of this a new performance management system was configured and is being launched for the 2016 performance management process. the appropriateness of the corporate performance targets (Cpts) applicable to the Nedbank Lti arrangements was reviewed. this resulted in the Group Remuneration Committee (Group Remco) approving the retention of the current suite of performance conditions for awards to be made in 2016. We will, however, continue to engage with shareholders regarding the performance conditions, with a view to possible amendments for 2017. We have also reviewed our Lti Scheme rules and have proposed amendments thereto for implementation in 2016. these relate to our ability to, where circumstances necessitate this, forfeit or claw back awards made, including those already vested. this will improve our alignment with international best practice. Our defined-contribution pension and provident schemes were migrated from standalone arrangements to the Old Mutual SuperFund arrangements. the SuperFund is an umbrella retirement fund within which pension and provident subfunds have been established for Nedbank. the management committee remains in control of key functions (notably investment strategy and investment choice oversight); however, greater economies of scale were achieved in respect of administration, improving the value for money for members. the move to the SuperFund arrangements, which took place following a full tender process, is also aligned with the trend in the retirement funding environment of greater consolidation to reduce administration costs and optimise the amount of total contributions going directly to retirement savings. remains a Our defined-benefit pension arrangement standalone scheme, given certain challenges in an umbrella fund pertaining to defined-benefit schemes, within which the sponsoring employer retains ultimate accountability for the provision of pensions to members if fund resources cannot meet the obligation. We also reviewed the appropriateness of continuing to offer the standalone Nedgroup Medical Aid Scheme. Our review showed that the scheme remains viable on its current basis and continues to offer members appropriate value for money. related material matters FOCUS FOR 2016 AND BeyOND During 2016 the Remuneration Committee will focus on: 1 2 3 4 5 the implementation of changes to the Lti arrangements related to malus and clawback; a review of our approach to the remuneration of control function employees, notably those in risk, compliance, audit, finance and actuarial functions; the continuation of our refresh of performance management within Nedbank in support of the bank’s Winning in 2020 objectives, and our revised culture initiatives outlined on pages 8 to 9 of the Nedbank Group Ltd integrated report; the appropriateness and fitness for the purpose of our employee benefit arrangements, with special focus on our employee arrangements; and defined-benefit possible revisions to certain Cpts in 2017 shareholder consultation. following the Group Remco continues to operate effectively in the execution of its mandate, and i remain grateful to the members of the Group Remco for their contribution as we continue to engage on these important matters. Pm makwana Group Remuneration Committee Chair NedbaNk limited – ANNUAL report 2015 141 REPORTING BACK ON REMUNERATION abridged Remuneration OUR REMUNERATION REPORT This Report summarises the issues addressed in our full online 2015 Remuneration Report, which is available online at nedbankgroup.co.za. Provided herein are the governing principles in respect of our approach to remuneration as well as an overview of the manner in which they were implemented during 2015. HOW WE GOVERN OUR REMUNERATION We have a Remuneration Policy that provides a framework for the management of total remuneration within the group, and which also supports the Nedbank employee value proposition (EVP). Set out below is a summary of the main aims of our Remuneration Policy, together with our approach to remuneration governance. remuneration policy principles The following aims of our Remuneration Policy are the guiding principles for our approach to remuneration: Our Remuneration Policy as well as its implementation is independently reviewed on an annual basis to ensure consistent application of the policy, and legislative and regulatory compliance. To enable the attraction, motivation and retention of high-calibre people, with the right mix of experience, skills and knowledge to deliver on the strategy. To support and reinforce our desired culture and encourage behaviour consistent with our values, thereby stimulating employee engagement. To create an appropriate balance and alignment between the needs, expectations and risk exposure of our stakeholders, including our staffmembers, clients, shareholders, regulators and communities, to ensure the creation of sustainable long-term value for each of them. To incentivise employees to deliver sustained high levels of performance and excellent execution of our strategic priorities, while being cognisant of the impact this delivery has on our risk profile and exposure. To enable appropriate transparency in the development of remuneration programmes and the allocation of individual remuneration to ensure equity and fairness based on valid and appropriate external and internal benchmarks. To align with the principles of good corporate and remuneration governance, ensuring an appropriate share value for the relevant stakeholders in our business. Our full 2015 Remuneration Policy is set out on pages 1 to 5 of the full online 2015 Remuneration Report, and includes proposed changes to make provision for the implementation of malus and clawback arrangements in our LTI arrangements, as outlined in the Group Remco Chair’s statement. 142 NedbaNk limited – ANNUAL report 2015 Governance is responsible Remuneration Committee Our Group Remco for remuneration governance with its groupwide responsibilities fully defined in its board- approved charter, available online at nedbankgroup.co.za. The Group Remco applies the guiding principles enunciated in the Remuneration Policy as far as it is feasible, but retains the right to apply discretion to deviate from this policy in exceptional circumstances. As has been the case for the past several years, for such there were no requirements deviation in 2015. the The Group Remco ensures that it remains knowledgeable changing about remuneration regulatory environment, both locally and globally. This is supported by regular updates from the Group Reward and Performance team and its external advisors. The 2015 training dealt with global changes in executive remuneration. In addition to the above, the Group Remco has full access to independent executive remuneration consultants, and has utilised Vasdex Associates (Pty) Ltd and PwC during 2015. Group Remco is also provided with market-related remuneration information through the group reward and performance function. The Group Remco met seven times during 2015, details of which are set out on page  104 of the Nedbank Group 2015 Integrated Report. The Group Chairman, CE, Chief Operating Officer (COO) and Group Executive at HR are permanent invitees to the meetings, and they are not present in  discussions own remuneration. The  meetings are also attended by the executive responsible for the reward and performance function in the group as well as any external advisors deemed necessary by the Group Remco from time to time. regarding their All members of the Group Remco act as trustees of the Nedbank Group (2005) Employee Share Trust. The annual trustee meeting for this scheme was held on 24 November 2015. There were no material issues identified in the Group Remco’s self-assessment in 2015, which was conducted to evaluate its effectiveness against the objectives of its charter. Composition of Group Remco The Group Remco consists of four members, including an independent chair. The majority of the members are independent non-executive directors. Name Directorship status Current membership Bruce Hemphill1 Non-executive Director Current member Mpho Makwana Nomavuso Mnxasana Malcolm Wyman Julian Roberts2 Independent Non- executive Director Independent Non- executive Director Senior Independent Non-executive Director Current member and Chair of Group Remco Current member Current member Non-executive Director Past member 1 Bruce Hemphill was appointed to the Group Remco with effect from 25 November 2015. 2 Julian Roberts resigned from the Group Remco with effect from 23 October 2015. NedbaNk limited – ANNUAL report 2015 143 REPORTING BACK ON REMUNERATION (continued) REMUNERATION ELEMENTS Our total remuneration mix (as shown in the diagram below), together with the manner in which it is governed, is set out in the Remuneration Policy on pages 1 to 5 of the full online 2015 Remuneration Report, which also expands on the group’s approach to such elements during 2015. perForMANCe MANAGeMeNt Short-term focus, day-to-day orientation Short-to-medium-term focus, performance orientation Long-term focus, ownership orientation Guaranteed package Short-term incentives (including deferral and forfeiture) Special- purpose short-term arrange- ments Long-term incentives employee ownership plan Variable remuneration framework, and Short-term incentive The aim of STIs is to drive the achievement of sustainable results within an agreed risk appetite to encourage behaviours that are consistent with our values and are aligned with the best interests of our stakeholders. Our STI schemes are structured to support collaborative work across different clusters. The Group Remco has agreed on a set of principles and all group and cluster incentive schemes are designed according to those principles, which are set out on page 12 of the full online Remuneration Report. in respect of The total STI pool approved for distribution by the the Group Remco 2015 financial year was R2 162,5m (2014: R2 100m). In accordance with its charter, the Group Remco also approved individual STI payments (2014: 26) 24 in  excess of 200% of guaranteed package  (GP), outside of those approved in respect of the Group Exco, which are all subject to individual approval by the Group Remco and the board. DEFERRAL OF STIs Compulsory StI deferral Voluntary Bonus Share Scheme r0 to r1m > r1m No deferral from Fifty percent of any amount in excess of R1m is deferred over a period of 30 months, with releases for- feiture occurring in three equal tranches at 6, 18 and 30 months from the date of the award. Deferral is on a posttax basis. STI Employees may select to defer a portion of their voluntarily posttax into  the Matched-share Scheme, subject to the total deferral (including compulsory deferral) not exceeding 50% of the total posttax STI award. In the above instances where deferral applies, the individual must retain the shares in the scheme for a period of 36 months to be eligible for a match in accordance with our Matched- share Scheme, details of which are fully set out on page 9 of the full online 2015 Remuneration Report. For employees with earnings falling within the highest taxation bracket the total STI has the potential to increase by 30% (before share price movement) in the event that the conditions in the Matched-share Scheme are met at the end of the deferral period. Subject to shareholder approval at our AGM, deferred STIs will, from February 2016, be subject both to a malus (release from forfeiture) decision (already a feature of the scheme) and the possibility of clawback, for a combined period of three years from the date on which the award was made. 144 NedbaNk limited – ANNUAL report 2015 Special-purpose short-term variable remuneration We make use of preapproved special-purpose short-term variable remuneration arrangements only in exceptional circumstances, which is typically in the context of hiring senior and key employees. The group does not, as a matter of course, award guaranteed bonuses, and thus none have been awarded during 2015. SCHEME TyPE Scheme description Number of awards ExECUTIVE DIRECTORS (%) Signon bonus Deferred Short-term Incentive (DSTI) awards 20 awards (2014: 12) totalling R19,7m (2014: R6,23m). Included in this are awards made on appointment to key revenue-generating staffmembers. 20 awards (2014: 19) totalling R15,7m (2014: R16,4m). The awards approved is in relation to a number of senior and specialist appointments made in 2015, and the need to implement specific retention initiatives in certain scarce- skills environments. Cash awards made to prospective employees on joining the group are typically awarded to compensate them for loss of certain accrued benefits or to make them whole in terms of their existing contractual obligations. DSTI awards are cash-based awards, comprising an upfront payment (typically 40% of the award), with a deferred component (the remaining 60%) payable subject to minimum time-based and individual performance conditions. Executive directors and prescribed officers are not eligible for DSTIs in the normal course. Scheme governance is set out in the Remuneration Policy. Long-term incentives LTI awards are awarded with the joint aims of aligning participants’ interests with the interests of stakeholders and of retaining key employees. Key considerations for LTI awards are set out on page 4 in our 2015 Remuneration Policy in the full online Remuneration Report. The criteria and quantum of allocations are benchmarked to the market annually. The allocation of LTIs is discretionary and is based on the key eligibility criteria as set out in the Remuneration Policy on page 4 in the full online 2015 Remuneration Report. All LTI allocations are motivated by the Group Exco and approved by Group Remco members in their capacity as trustees of the Nedbank (2005) Employee Share Scheme Trust. Specific individual approval is also required for all LTI awards greater than 100% of GP. Set out below are our various LTI schemes. The operation of the international LTIP has been aligned with the Nedbank Group (2005) Share Option, Matched-share and Restricted-share Scheme (Nedbank Group (2005) Share Incentive Scheme), but operates on a phantom basis. Overview of long-term incentive arrangements under the Nedbank Group (2005) Share incentive Scheme the Option Scheme No awards have been made since 2007 and there are no unvested awards in this scheme. Restricted-share Scheme: annual allocations The Group Remco awards restricted shares (including on-appointment allocations, referred to below) with a three-year vesting period to eligible participants, which vest on the basis set out to the right. Further details of the actual CPTs are set out on page 13 of the full online 2015 Remuneration Report. For 2016 the CPTs will remain unchanged from those which applied in 2015. On-appointment allocations On-appointment, restricted-share allocations are offered at the discretion of the Group Remco to new senior managers and also on an exceptional basis to existing employees who have been appointed to more senior positions and have been recommended for an allocation by the Group Exco. Frequency of awards On-appointment allocations may take place biannually (and by exception on the date of appointment, with specific approval), with awards based on the volume-weighted average share price using the three trading days after the announcement of the annual or interim financial results (as applicable). 20 40 40 ROE Fini 15 Strategic initiative GROUP ExCO/CLUSTER ExCO (%) 40 20 20 20 ROE Fini 15 Strategic initiative No target OTHER LTIP PARTICIPANTS (%) 25 25 50 ROE Fini 15 No target NedbaNk limited – ANNUAL report 2015 145 REPORTING BACK ON REMUNERATION (continued) matched-share Scheme This scheme provides a vehicle for the compulsory deferral of STI awards, and for employees to participate in the scheme by voluntary investment, subject to the fulfilment of specified conditions as set out in the table below: STI PAyMENT Conditions for matching Compulsory deferral > R1m, where deferral takes place in respect of 50% of any amount exceeding R1m, applied on a posttax basis In service on vesting date: three years after the allocation date Average ROE excluding goodwill ≥ COE + 2% over the period Voluntary Bonus Share Scheme ≤ 50% of total posttax STI (inclusive of any compulsory deferral) In service on vesting date: three years after the allocation date Average ROE excluding goodwill ≥ COE + 2% over the period match 50% 50% 50% 50% For employees with earnings falling within the highest taxation bracket, the total STI has the potential to increase by 30% (before share price movement) in the event that the conditions in the Matched-share Scheme are met at the end of the deferral period. Changes to scheme rules Amendments to the rules of the Nedbank Group 2005 Share Incentive Scheme (and which will apply to deferred STIs, the Matched-share Scheme arrangements and the Restricted- share Scheme) have been proposed for the purposes of the inclusion of malus and clawback provisions on all awards made from February 2016. The amendments are set out in the Notice of AGM, and are proposed for approval at the AGM to be held during May 2016. Other long-term incentive scheme in operation Phantom Cash-settled Restricted-share Plan For our international and Rest of Africa operations, LTIs are made on a phantom basis, of which the schemes mirror the Nedbank Group (2005) Share Incentive Scheme in design and structure. These schemes will also be subject to the malus and clawback provisions proposed for the Nedbank 2005 scheme. Full details of all these schemes are set out in the full online 2015 Remuneration Report available online. Nedbank eyethu employee schemes No new awards were made during 2015 in any of the Nedbank Eyethu employee schemes. other employee ownership/empowerment schemes We also have empowerment or ‘indigenisation’ schemes currently approved in several of our Rest of Africa operations. Set out on the following page are the employee ownership/empowerment schemes approved in our international and African operations: 146 NedbaNk limited – ANNUAL report 2015 NEDBANK OPERATION Ownership/Empowerment scheme Scheme details Namibia Ofifiya Black Management Scheme Swaziland Sinakekelwe Employee Share Scheme Malawi Phantom empowerment scheme, using Nedbank Group shares as a reference point The purpose of the scheme is to enable the group to facilitate black economic empowerment in terms of the framework established by the financial sector in Namibia. It facilitates ownership of the group’s shares by senior and middle management employees within Nedbank Namibia and its subsidiaries and aims to attract, retain and incentivise such individuals. Vesting period: Four years The purpose of the scheme is to provide LTIs to beneficiaries, to encourage wealth creation by way of employee share ownership, to align the interests of Nedbank and the beneficiaries, and to attract, retain and reward a skilled high-performing workforce. Vesting period: Five years The purpose of the scheme is to build appropriate local employee ownership or similar financial interest, in Nedbank Malawi. It is aimed at facilitating share ownership by local employees by granting phantom shares to participants, which are linked to the Nedbank share price. Vesting period: Three years Zimbabwe Nedbank MBCA Employee Share Ownership Scheme This scheme is currently in the inception phase and Lesotho Phantom empowerment scheme, using Nedbank Group shares as a reference point further details will be available once this has been completed. The purpose of this scheme is to build appropriate local employee ownership or similar financial interest in Nedbank Lesotho. It is aimed at facilitating share ownership by local employees in the subsidiary by the granting of phantom shares to participants, which are linked to the Nedbank share price. Vesting period: Three years linked Vesting of share awards in 2016 Nedbank Group issued restricted shares in March and August 2013, with vesting thereof in equal proportions to a  combination of time and the group’s meeting of certain performance conditions. Vesting will take place during 2016 as set out in the chart to the right. The vesting that took place in 2013 to 2015 is included for comparison. Full details of the number and value of awards granted during the year in terms of our share-based plans are included in the Nedbank Group 2015 Consolidated Annual Financial at nedbankgroup.co.za. Statements, available VESTING OUTCOMES (%) 100 50 0 0 1 , 7 0 7 0 0 1 , 9 5 8 0 0 1 , 9 7 3 0 0 1 , 5 9 3 2010 2011 2012 2013 2013 2014 2015 2016 0 Award year Vesting year Without CPT With CPT Where necessary, in the case of executive directors and the Company Secretary, the necessary Securities Exchange News Service (SENS) announcements were issued at the prescribed times in this regard. NedbaNk limited – ANNUAL report 2015 147 REPORTING BACK ON REMUNERATION (continued) RISK AND REMUNERATION The board has ensured that there is cooperation between the Group Remco and  the GRCMC to enable appropriate consideration of the overall risk environment when making remuneration decisions. This is implemented through formal discussion by the Group Remco Chair with the GRCMC Chair on the risk aspects of remuneration. This reflects our commitment to achieving a balance between the prudent management of remuneration within the context of both our risk appetite and risk profile, and the need to attract, retain and motivate key talent to enable the delivery of our strategic objectives. Set out briefly below is the manner in which risk is taken into account in the remuneration process. taking account of future and current risks in the remuneration process We are involved in retail, wholesale and investment banking operations, as well as wealth management and other financial services, predominantly in SA and the rest of Africa. We utilise a three-year budgeting, forecasting and planning process, which is integrated with our strategic objective, risk appetite and capital planning, enabling us to have a forward-looking view of the strategic, financial and risk outcomes of remuneration policies. The mandatory deferral of STIs for up to 30 months and the three-year vesting of LTI share allocations (with at least half of the awards subject to CPTs) align with this forward-looking business cycle. The deferral period provides for risk-based outcomes to be monitored over the three-year period subsequent to the deferral and enables malus or, where appropriate, clawback to be applied. We operate a comprehensive internal capital adequacy assessment process blueprint that addresses the nature and types of risk incorporated into the overall framework. The framework integrates with our STI pool arrangements and individual performance scorecard assessments, which in turn inform the distribution of STIs from the derived business STI pools. The STI pools incorporate ex ante or ‘before the fact’ risk adjustments, which is incorporated into the pool allocation process set out in  detail  on page 12 of the full online 2015 Remuneration Report. The STI scheme has been designed to incentivise a combination of profitable returns, appropriate risktaking and growth. It is driven from an EP and a HE basis versus targets, using risk-based economic capital allocation as set out in the Risk and Balance Sheet Review, available online. The board has absolute discretion as to the quantum and nature of any forfeiture, malus, (and from 2016) clawback triggers related to the compulsory deferral of STI awards. In this regard the deferred amount will be forfeited should the employee resign or be dismissed for cause before the release of the outstanding forfeiture obligations, as well as in cases where, at the sole discretion of the board, material irregularities, risk failures or misrepresentation of financial results come to light during the deferral period. The board has absolute discretion as to the nature of any action to be taken against the individual or a group of individuals who may have transgressed. The deferral policy is reviewed annually. Application of corporate performance targets and mitigating the effect of inappropriate performance metrics To avoid the consequences of inappropriate performance metrics, which include extended periods in which no LTI vesting takes place, awards made from 2010 are subject to 50% performance conditions and 50% time-based vesting. For Group Exco and cluster exco members this was changed in 2015 to 60% of the total award being subject to performance conditions and 40% to time-based vesting. All LTI awards made to executive directors from 2014 are subject to performance conditions on 100% of the award. It is a key principle in our Remuneration Policy that there should be appropriate sharing of value among stakeholders. Therefore, while employees should not be prejudiced as a result of remuneration design that remuneration programmes should equally not be designed to favour or benefit the expense of other employees at stakeholders. issues, we are cognisant We have also been unequivocal about our adherence to other aspects of good corporate governance in relation to share plans. In this regard, share awards in either the Restricted-share Plan or the Matched- share Scheme are not, under any circumstances, backdated. Further, no retrospective adjustments are made to performance conditions to mitigate the impact of weak performance. Therefore, we are of the view that our remuneration practices, and the levels at which these terms of occur, are appropriate remuneration governance while also being competitive relative to those of our peer group. in remuneration Further details of our approach to risk and  on pages 11 to 14 of our full online 2015 Remuneration Report. available are ExECUTIVE DIRECTORS AND PRESCRIBED OFFICERS prescribed officers The managing executives of the three income-generating clusters are frontline, included as prescribed officers in the disclosures set out below. The board has approved these executives to be regarded as prescribed officers. executive directors Mike Brown Mfundo Nkuhlu Raisibe Morathi prescribed officers Brian Kennedy Philip Wessels Iolanda Ruggiero1 1 Appointed as a prescribed officer effective 1 May 2015. Disclosures are also made for executive directors or prescribed officers whose services terminated in 2015. These are: ■■ ■■ Graham Dempster (executive director until 11 May 2015) and Dave Macready (prescribed officer until 30 April 2015). Details of share awards to executive directors and prescribed officers are included from page 22 of our full online 2015 Remuneration Report. Details of the service conditions for executive directors and prescribed officers are set out on pages 14 to 17 of  the full online 2015 Remuneration Report. There were no material changes these during 2015. Executive directors and prescribed officers will be subject to the proposed malus and clawback arrangements from 2016. to 148 NedbaNk limited – ANNUAL report 2015 TOTAL REMUNERATION OF ExECUTIVE DIRECTORS AND PRESCRIBED OFFICERS (AUDITED*) Mike Brown Mfundo Nkuhlu raisibe Morathi Graham Dempster7,8 2015 2014 % 2015 2014 % 2015 2014 % 2015 2014 % 6 374 141 6 056 130 4 258 130 3 124 112 3 405 100 3 177 91 1 743 63 3 862 141 910 864 613 452 621 550 320 855 7 425 7 050 5,3 5 000 3 687 35,6 4 125 3 818 8,0 2 125 4 859 8 250 8 000 4 750 4 625 4 500 4 375 7 250 7 000 15 500 15 000 22 925 22 050 3 750 3,3 8 500 4,0 13 500 3 625 8 250 11 937 3 500 8 000 12 125 3 375 7 750 11 568 3,0 13,1 13 500 13 000 3,8 8 750 11 7509 (25,5) 7 500 7 000 36 425 35 050 3,9 22 250 23 687 (6,1) 19 625 18 568 5 750 4 750 10 500 15 359 8 750 2 125 2 125 24 109 1 323 3,2 4,8 7,1 5,7 Brian Kennedy philip Wessels7, 10 Dave Macready5,7 Iolanda ruggiero6,7 2015 2014 % 2015 2014 % 2015 2014 % 2015 2014 % 3 620 3 346 4 146 1 775 1 018 2 926 1 934 executive directors R000 Cash portion of package Other benefits Defined-contribution Retirement Fund Guaranteed remuneration Cash performance incentive Cash performance incentive (delivered in shares) total Sti1 total remuneration2 Value of share-based awards (face value at award) total direct remuneration3 Other payments4 Prescribed officers R000 Cash portion of package Other benefits Defined-contribution Retirement Fund 239 323 113 55 57 164 291 276 391 144 191 547 4 150 8 625 3 945 8 500 Guaranteed remuneration Cash performance incentive Cash performance incentive (delivered in shares) 7 500 7 625 total Sti1 16 250 16 000 total remuneration2 20 400 19 945 Value of share-based awards (face value at award) 7 500 9 5009 5,2 4 650 1 974 1 266 3 637 4 875 4 500 2 040 4 250 3 500 3 875 8 750 8 000 9 974 1,6 2,3 13 400 1 360 3 400 4 666 3 250 7 500 11 137 (21,1) 8 000 10 5009 6 500 total direct remuneration3 Other payments4 27 900 29 445 (5,2) 21 400 20 474 4 666 17 637 54 262 2 250 3 500 2 500 6 000 8 250 6 000 14 250 1 2 3 4 5 6 7 8 In terms of the rules of the Matched-share Scheme, this amount may increase by up to 30% (before share price movement), subject to fulfilment of the CPTs, and the amount remaining invested in the scheme for 36 months. Total remuneration is the sum of Guaranteed Remuneration and Total STI. Total Direct Remuneration is the sum of Total Remuneration and the value of share-based awards made in the following financial year. Other payments are typically non-recurring payment and include leave pay, special payments but excludes gains from vesting share awards, which are set out from page 22 of the full 2015 online Remuneration Report. Dave Macready joined Old Mutual SA on 1 May 2015. Payments reflect part-year service. Iolanda Ruggiero became a prescribed officer on 1 May 2015. Guaranteed remuneration payments are pro-rated to reflect this. Variable remuneration (STI and LTI) is reported on a full-year basis. Comparative year-on-year % not given for items that reflect part-year service. Graham Dempster availed himself of two first-class airtickets granted as an approved incentive, and also received leave pay pursuant to his retirement from the bank. These amounts are reflected in Other Payments. 9 Awards include on appointment awards made in respect of appointment to more senior roles. 10 Philip Wessels was appointed as a prescribed officer on 1 August 2014. NedbaNk limited – ANNUAL report 2015 149 REPORTING BACK ON REMUNERATION (continued) ADDITIONAL REGULATION 43/ PILLAR 3 DISCLOSURES The disclosures required in respect of Regulation 43 of the Banks Act are set out on pages 17 to 19 of the full online 2015 Remuneration Report. relating Specific disclosures to senior managers and material risktakers, the in quantum of the remuneration paid the  year, signon awards, guaranteed bonuses, severance payments and the amount of to remuneration adjustment are included. subject NON-ExECUTIVE DIRECTORS The terms of engagement of the non- executive directors as well as the Group Chairman are fully set out on page 89 of the Nedbank Group 2015 Integrated Report. reflect remuneration The fees of the Group Chairman and the the directors non-executive specific  responsibilities relating to their membership of the board and, where applicable, board committees. The Group Chairman receives a single fee for his role. Non-executive directors are paid a fixed fee for board membership and  receive additional fees for their participation in the board committees. Neither the Group Chairman nor the boardmembers receive any performance-related remuneration or any employee benefits. Non-executive directors are accountable for decisions made regardless of attendance at meetings. They are also required, as a matter of course, to represent stakeholders and to  make the necessary preparations for meetings and other engagements. Group Remco is satisfied that the fee structure applied in respect of non-executive directors remains appropriate. Non-executive directors’ remuneration paid for the years ended 31 December 2015 and 31 December 2014 was as follows: Non-executive directors’ remuneration (audited*) termination date David Adomakoh Tom Boardman Brian Dames Mustaq Enus-Brey Ian Gladman Paul Hanratty Bruce Hemphill Reuel Khoza Mpho Makwana Mantsika Matooane Nomavuso Mnxasana Vassi Naidoo Joel Netshitenzhe Julian Roberts Gloria Serobe Stanley Subramoney Malcolm Wyman total 1 Note 1 2, 2a 3 16 4, 16 5, 16 6 7 8 9 10, 10a 11 12, 16 13 14 15 Board fees (r000) Committee fees (r000) 2015 (R000) 2014 (r000) 121 1 840 270 136 339 207 19 1 623 747 230 685 3 014 235 151 98 95 1 088 10 898 393 393 393 137 393 393 40 393 393 393 29 393 325 137 110 393 4 708 514 2 233 663 273 732 600 59 1 623 1 140 623 1 078 3 043 628 476 235 205 1 481 15 606 360 1 766 301 910 682 168 4 350 1 006 286 784 561 519 746 1 276 13 715 David Adomakoh was appointed as a member of the Group Related Party Transactions Committee (GRPTC) on 11 May 2015. He resigned as a member of the GTSEC on 1 September 2015. He was appointed as a member of the GCC and the Large-exposure Approval Committee (LEAC) on 1 September 2015. Tom Boardman was appointed as Chair of the GRCMC and resigned as Chair and member of the GITCO on 20 February 2015. He was appointed as a member of the GRPTC on 11 May 2015. 2 2a Tom Boardman sits on the board of Nedbank Private Wealth (Isle of Man) Ltd. His board fees are therefore inclusive of the Nedbank Private Wealth (Isle of Man) Ltd fees of £38,000. 3 Mustaq Enus-Brey resigned as a member of the Group Finance and Oversight Committee (GFOC) and as Chair (but remained a member) of the GRCMC on 20 February 2015. He resigned as a member of the GCC, LEAC and GRCMC and retired as a non-executive director on 11 May 2015. Paul Hanratty was appointed as a member of the GCC and LEAC on 11 May 2015. Bruce Hemphill was appointed as a non-executive director and a member of the Group Remco and the Group DAC on 25 November 2015. Reuel Khoza resigned as Chair of the DAC and retired as Chairman and non-executive director of Nedbank Group on 11 May 2015. 4 5 6 7 Mpho Makwana was appointed as a member of the GRPTC on 11 May 2015. 8 Mantsika Matooane was appointed as a member of DAC and GFOC and as Chair of the GITCO on 20 February 2015. 9 10 10a Nomavuso Mnxasana was appointed as member of the DAC and Chair of the GTSEC on 20 February 2015. Vassi Naidoo was appointed as a non-executive director on 1 May 2015 and as Chairman of Nedbank Group on 11 May 2015. The remuneration disclosed above includes a consultancy fee payment to Mr Naidoo for the period 13 April 2015 to 30 April 2015, as Mr Naidoo had dedicated this time to Nedbank affairs in preparation for his appointment as a boardmember. He was appointed as a member of the DAC on 1 May 2015. IT and security expenditure was approved for Vassi Naidoo as a consequence of his appointment as Chairman of Nedbank Group. These enhancements are all necessary for the completion of his duties as Chairman, and to ensure his security. Joel Netshitenzhe was appointed as member of the GRPTC on 11 May 2015. Julian Roberts resigned as a member of the Group Remco and DAC on 23 October 2015 and as a non-executive director on 31 October 2015. Gloria Serobe resigned as Chair (but remained a member) of the GTSEC on 20 February 2015. She resigned as a member of the GCC, LEAC and GTSEC and as a non-executive director of Nedbank Group on 11 May 2015. Stanley Subramoney was appointed as an independent non-executive director on 23 September 2015. He was appointed as a member of the GTSEC, GCC, LEAC and the GAC on 23 October 2015. 11 12 13 14 15 Malcolm Wyman was appointed Chair of the DAC and GRPTC on 11 May 2015. 16 Fees for Julian Roberts, Paul Hanratty, Ian Gladman and Bruce Hemphill were paid to Old Mutual (SA) Ltd. 150 NedbaNk limited – ANNUAL report 2015 The proposed non-executive director fees as set out below were evaluated by a board committee consisting of Mike Brown and Bruce Hemphill with advice from independent experts. Such evaluation was conducted from a number of perspectives, including peer  group comparisons, effective rates per committee and year-on-year increases. Increases to the Chairman’s fee, board fees and several committees have been proposed at between 5,3% and 16,1%. We have also aligned all committee chair premiums to 2,5 times the member fee. The proposed fees for 2016 are also set out in our notice of AGM, for voting by our shareholders. The proposed increases to board fees represent a total increase in the cost of operating the board of 10,6%. boards Chairman of the board Lead Independent Director premium Nedbank Group Ltd Nedbank Ltd Committees Group audit Committee Chair Member Group Finance and Oversight Committee1 Chair Member Group Remuneration Committee Chair Member Group Risk and Capital management Committee Chair Member Group Credit Committee Chair Member Group directors’ affairs Committee3 Chair Member Group it Committee3 Chair Member Group transformation, Social and ethics Committee3 Chair Member Group Related Party transactions Committee2, 3 Chair Member 2016 (r) proposed 2015 (R) 5 000 000 4 750 000 40% of board fee 40% of board fee 245 000 205 000 220 555 184 525 650 000 260 000 – – 350 000 140 000 450 000 180 000 500 000 200 000 196 250 78 500 250 000 100 000 250 000 100 000 75 000 30 000 562 500 225 000 55 000 27 500 312 500 125 000 387 500 155 000 475 500 190 000 140 000 70 000 180 000 90 000 180 000 90 000 55 000 27 500 % 5,3 11,1 11,1 15,6 15,6 12,0 12,0 16,1 16,1 5,3 5,3 40,2 12,1 38,9 11,1 38,9 11,1 36,4 9,1 Details of the individual shareholdings of the non-executive directors are included on pages 22 to 27 of the full online 2015 Remuneration Report. 1 2 3 The Group Finance and Oversight Committee was discontinued during 2015. Fees for the Group Related Party Transactions Committee set at same level as previous Group Finance and Oversight Committee, increased by 9,1%, with adjustments to chair premium at 2,5 times. Large increases for the chairs of these committees are as a result of the adjustments of the chair’s premium to 2,5 times the member’s fee, aligning to the chair’s premium paid for other  committees. NedbaNk limited – ANNUAL report 2015 151 ESTABLISHED AND ADMIRED LEADERSHIP TEAMS BOARD OF DIRECTORS The Nedbank Group board of directors is comprised of the three executive directors and thirteen non-executive directors, nine of whom are independent. bRiaN dameS Independent Non- executive Director bRuCe hemPhill Non-executive Director 56% independent directors (9 members) mike bROwN Chief Executive mPhO makwaNa Independent Non- executive Director iaN GladmaN Non-executive Director VaSSi NaidOO NON-ExECUTIVE CHAIRMAN daVid adOmakOh Independent Non- executive Director maNtSika matOOaNe Independent Non- executive Director Paul haNRatty Non-executive Director* tOm bOaRdmaN Independent Non- executive Director NOmaVuSO mNxaSaNa Independent Non- executive Director 19% executive directors (3 members) * Stepped down from board on 12 March 2016 152 NedbaNk limited – ANNUAL report 2015 Vassi Naidoo 61 David Adomakoh 50 Non-executive Chairman South African Qualifications: CA(SA), ACA and PMD (Harvard Business School) Expertise in auditing and financial services. Experience in doing business in Africa and India, and large corporate experience. Vassi was appointed to the Nedbank Group Ltd and Nedbank Ltd Boards as a non-executive director and Chairman- designate on 1  May  2015 and then as Chairman on 11 May 2015. Vassi was also appointed as a non-executive director of Old Mutual plc in May 2015. Vassi was previously Chief Executive of Deloitte Southern Africa from 1998 to 2006, a member of the Deloitte UK Executive from 2006 to 2009 and a member of Deloitte Global Executive from 2007 to 2011, and thereafter Vice Chairman of Deloitte UK from 2009 to 2014. Vassi is a member of the South African Institute of Chartered Accountants, with honorary life membership granted in 2011 for his contribution to the development of the profession in SA. He is also a member of the Institute of Chartered Accountants in England and Wales. Board committees Member: Group Directors’ Affairs Committee Holds 43 575 Nedbank Group Ltd ordinary shares. Mike Brown 49 Chief executive South African Qualifications: BCom, DipAcc, CA(SA), CD(SA), AMP (Harvard Business School) Expertise in banking and financial services. Mike was appointed as Chief Financial in June 2004 and as Chief Officer Executive in March 2010. Mike was previously an executive director of BoE Ltd and, after the merger between Nedbank Ltd, BoE Ltd, Nedbank Investment Bank Ltd and Cape of Good Hope Bank Ltd, was appointed Head of Commercial Property Finance at Nedbank Ltd. Board committees Member: Large-exposure Approval Committee, Group Credit Committee, Group Risk and Capital Management Committee Holds 408 938 Nedbank Group Ltd ordinary shares. independent Non-executive director Ghanaian Qualifications: BSc (Econs)(Hons) (London School of Economics), Diplome de Langue et de Civilisation (Université Paris-Sorbonne) Expertise in investment banking. Experience in doing business in Africa, banking and economics. David joined the board as an independent non-executive director on 21 February 2014. David is currently the Chairman of Tiso Investment Holdings Proprietary Ltd and a co-founder of Tiso Group, where he served as Group Managing Director. He is a former director of Chase Manhattan Ltd, London; Head of the Chase Manhattan Bank, Southern Africa; Executive Director of Robert Fleming SA; and Head of Africa Corporate Finance at JP  Morgan. He currently serves as a non-executive director of Kagiso Tiso Holdings Proprietary Ltd, and the Chairman of the Investment Committee. He also serves as a non-executive director of Idwala Industrial Holdings, African Explosives Ltd, Aveng (Africa) Ltd and Trident Steel. His experience spans 25 years in executive management and investment banking, and includes principal investing, corporate and project finance advisory work, debt capital raising, and financial derivatives in a number of countries predominantly in Africa and Europe. He has also served on the boards of a number of  SA, Nigerian and Ghanaian companies. He is a founding trustee of the Tiso Foundation, and a World Fellow of the Duke of Edinburgh’s International Award. Board committees Member: Group Related Party Transactions Committee, Group Credit Committee, Large-Exposure Approval Committee tom Boardman 66 independent Non-executive director South African Qualifications: BCom, CA(SA) Expertise in banking and auditing. Large corporate experience. Tom was appointed to the board as an executive director in November  2002, and was Chief from December 2003 to February 2010, after which he was appointed as a non- executive director. From 1 January 2014 Executive RaiSibe mORathi Chief Financial Officer mFuNdO Nkuhlu Chief Operating Officer 81% Non-executive directors (13 members) JOel NetShiteNzhe Independent Non- executive Director StaNley SubRamONey Independent Non- executive Director malCOlm wymaN Senior Independent Non-executive Director NedbaNk limited – ANNUAL report 2015 153 ESTABLISHED AND ADMIRED LEADERSHIP TEAMS (continued) retail housewares Tom was classified as an independent non- executive director. Tom was previously Chief Executive and an executive director of BoE Ltd, one of SA’s leading private and investment banking companies and which was acquired by Nedbank in 2002. He was the founding shareholder and Managing Director of chain Boardmans, which he sold to Pick n Pay Stores Ltd in  1986. Before this he was Managing Director of Sam Newman Ltd and worked for Anglo American Corporation Ltd for three years. He served his articles at Deloitte. He is also a non-executive director of Woolworths Holdings Ltd, Royal Bafokeng Holdings Proprietary Ltd and African Rainbow Minerals Ltd. Tom has also been appointed as a non-executive director of Kinnevik, a investment listed Swedish company. He is a director of the Peace Parks Foundation and the Chairman of the David Rattray Foundation, and serves as a trustee on a number of other charitable foundations. Board committees Chairman: Group Risk and Capital Management Committee, Group Credit Committee, Large-exposure Approval Committee Member: Group Audit Committee, Group Directors’ Affairs Committee, Group Related Party Transactions Committee Holds 15 000 Nedbank Group Ltd ordinary shares. Brian Dames 50 independent Non-executive director South African Qualifications: BSc(Hons), MBA Expertise in energy and resources. Large corporate and industrial experience, doing business in Africa. Brian joined the board as an independent non-executive director on 30 June 2014. Brian is currently Chief Executive of African (AREP). Rainbow Energy and Power Previously Brian served as the Chief Executive of Eskom, the largest power utility in Africa and one of the largest utilities in the world and has extensive experience with global (and specifically with African and South African) energy and resource issues. Brian serves as a member of the Sustainability Energy for All Executive Committee (UN and World Bank initiative), as a non-executive director of the Industrial Development Corporation of South Africa Ltd and as member of the Sol Plaatjie University Finance Committee. Board committees Member: Group Information Technology Committee, Group Credit Committee, Large Exposure Approval Committee Ian Gladman 51 Non-executive director British Qualifications: BA(Hons) History (Christ’s College, Cambridge) Expertise in banking and financial services. Experience in strategy development and corporate finance. Ian joined the board as a non-executive director in June 2012. Ian is currently the Group Strategy Director of Old Mutual plc. Previous positions held by him include Head of Corporate Finance (SA) and Joint Head: Financial Institutions Group, Europe, the Middle East and Africa (EMEA) at UBS, Investment Bank. Board committees Member: Group Credit Committee, Group Risk and Capital Management Committee, Large-exposure Approval Committee paul Hanratty 54* Non-executive director Irish *Stepped down from the board on 12 March 2016. Qualifications: BBusSci(Hons), Fellow of the Institute of Actuaries Expertise in insurance and accounting. Financial services experience. Paul joined the board as a non-executive director on 8 August 2014. Paul is an executive director and the Chief Operating Officer of Old Mutual plc. He  started his career with Old Mutual South Africa (OMSA) and has held a number of roles at Old Mutual. These included Head of Product Development; General Manager: Finance and Actuarial; and Head of the Retail business. He joined the board of the OMSA life business (OMLACSA) in 2003 and became Managing Director of OMSA in 2006 and was appointed as Chairman of OMSA in September 2009. Board committees Member: Group Transformation, Social and Ethics Committee, Group Credit Committee, Large-exposure Approval Committee Bruce Hemphill 52 Non-executive director South African Qualifications: BA, CPE Expertise in insurance and investment banking. Financial services experience. Bruce joined the board as a non-executive director on 25 November 2015. He was appointed as the Group Chief Executive of Old Mutual plc on 1 November 2015. From February 2014 to October 2015 he was Chief Executive of Wealth, Insurance and Non-Bank Financial Services at Standard Bank Group. Prior to that (June 2006 to February 2014) he was Chief Executive of Liberty Group, an African financial services group listed on the JSE, where he led Liberty on an extensive transformation and growth path while delivering significant value to shareholders. Board committees Member: Group Remuneration Committee, Group Directors’ Affairs Committee Mpho Makwana 45 independent Non-executive director South African Qualifications: BAdmin(Hons) Expertise in HR, marketing, Expertise in HR, marketing, communications and strategic planning. Banking, resources and large corporate and industrial experience. Mpho joined the board as an independent non-executive director on 17 November 2011. Mpho is a past Chairman of Eskom Holdings Ltd – he led the team that kept the lights on during the 2010 FIFA World Cup. He is an independent director of Adcock Ingram Ltd, Sephaku Holdings Ltd and eNx Group Ltd and Chairman of ArcelorMittal SA Ltd. He serves in various non-profit initiatives, amongst these as a Trustee on the Board of the Nelson Mandela Children's Fund. Board committees Chairman: Group Remuneration Committee Member: Group Transformation, Social and Ethics Committee, Group IT Committee, Group Audit Committee, Group Directors’ Affairs Committee, Group Related Party Transactions Committee Mantsika Matooane 40 independent Non-executive director South African Qualifications: MBA (Henley Business School, UK), PhD in Computer Science (University of Cambridge, UK) Expertise in IT and innovation. Banking experience. Mantsika joined the board as an independent non-executive director on 15 May 2014. Mantsika currently serves as a non-executive director of JSE Ltd and NMG Consultants and Actuaries Proprietary Ltd. Board committees Chairman: Group Information Technology Committee, Member: Group Directors’ Affairs Committee Holds 2 261 Nedbank Group Ltd ordinary shares. 154 NedbaNk limited – ANNUAL report 2015 Nomavuso Mnxasana 59 independent Non-executive director South African Qualifications: BCompt(Hons), CA(SA) Expertise in accounting and auditing. Banking experience. Nomavuso joined the board as an independent non-executive director in October 2008. She is currently a director atIndustrial Development Corporation of  South Africa Ltd, JSE Ltd andArcelor Mittal SA Ltd. She was a senior partner and member of the executive committee of SizweNtsaluba before serving as Group Audit and Risk Executive at Imperial Holdings Ltd. Board committees Chairman: Group Transformation, Social and Ethics Committee Member: Group Audit Committee, Group Remuneration Committee, Group Risk and Capital Management Committee, Group Directors’ Affairs Committee Holds 7 420 Nedbank Group Ltd ordinary shares. raisibe Morathi 46 Chief Financial Officer South African Qualifications: BCompt(Hons), CA(SA), HDip Tax, AMP (INSEAD) Expertise in banking and accounting. Insurance and large corporate experience. Raisibe was appointed as Chief Financial Officer of the group in September 2009, and held senior positions in banking and insurance over the past 21 years. Before joining Nedbank Group Raisibe was an executive director of one of the listed insurance companies. She previously held several executive positions at the Industrial Development Corporation of SA Ltd, the last position being Chief Operating Officer. Board committees Member: Group Credit Committee, Large- exposure Approval Committee Holds 229 557 Nedbank Group Ltd ordinary shares. Joel Netshitenzhe 59 independent Non-executive director South African Qualifications: MSc in Financial Economics (University of London – SOAS, UK) Expertise in economics, public policy, communications and strategic planning. Public sector, strategic research and large corporate experience. an Institute Joel joined the board as an independent non- executive director in August 2010. He  is director currently of executive the  Mapungubwe for Strategic Reflection (Mistra). He has been a member of the National Executive Committee of the African National Congress since 1991, and serves on the African National Congress’s Economic Transformation and Political Education subcommittees. He was a member of the National Planning Commission from 2010 to 2015, and served as Head of Policy Coordination and Advisory Services in the Presidency from 2001 until December 2009. He was previously Chief Executive of the Government Communication and Information System and also served as Head of Communication in the President’s Office. He is a non-executive director on the board of Life Healthcare Group Holdings Ltd. Board committees Member: Group Risk and Capital Management Committee, Group Related Party Transactions Committee, Group Information Technology Committee Mfundo Nkuhlu 49 Chief Operating Officer South African Qualifications: BA(Hons), Strategic Management in Banking (INSEAD), AMP (Harvard Business School) Expertise in banking, accounting, strategic planning and economic. Expansion into Africa experience. Mfundo was appointed as Chief Operating Officer in January 2015. Mfundo joined the group as Head of Nedbank Africa in 2004 and became Head of Corporate Banking in 2005. He became a member of the Group Executive Committee (Group Exco) in 2008 and Managing Executive Nedbank Corporate in 2009. He was appointed to the Boards of Nedbank Ltd and Nedbank Group Ltd on 01 January 2015. He also serves on the Board of Ecobank Transactional Incorporated (ETI) in which Nedbank holds a 20.7% interest, effectively from 01 August 2015. As a member of the Group Exco, Mfundo was closely involved in the oversight of the business strategies across Nedbank and delivered strong and consistent performance joining in Nedbank Corporate. Before the executive Nedbank, Mfundo was responsible revenue and economic analysis at the South African Revenue Service (SARS) and Chief Director in the dti responsible for Africa and NEPAD. for strategy, Board committees Member: Group Credit Committee Holds 149 962 Nedbank Group Ltd ordinary shares. Stanley Subramoney 57 independent Non-executive director South African Qualifications: BCompt(Hons), CA(SA) Expertise in accounting, auditing, expansion into Africa. Economic and social development and large corporate experience. Stanley qualified as a Chartered Accountant (SA) in 1987 and was appointed audit partner at PwC, serving a number of the firm’s large clients both in the public and private sectors. During his 27 years in the audit profession as audit partner and later as member of the Exco of PwC he led large and complex assignments, attended audit committee meetings of key clients, was the technical partner, trained board and audit committee members on the roles and responsibilities of the board and on governance, and gained valuable experience across the various sectors. He represented the southern African firm in a number of PwC’s African and global structures. These roles provided Stanley with a wide international view and exposure to global clients. At the age of 42 he was appointed Deputy CEO for PwC Southern Africa and member of the southern Africa executive committee. During his time as the strategy leader for PwC Southern Africa, Stanley led the Government and Public Sector Industry Group for Southern Africa. He was the Chairman of Business Skills for South Africa Foundation, a non-profit organisation that has provided business skills training to over 18 000 entrepreneurs from disadvantaged communities. He is Chairman of the Nepad Business Foundation – a Pan-African business foundation that seeks to put Africa on a path of sound sustainable economic development. He is also on the board of Business Unity South Africa (‘BUSA’) and Chairman of its audit committee. Board committees Member: Group Audit Committee, Group Credit Committee, Large-exposure Approval Committee, Group Transformation, Social and Ethics Committee Holds 2 300 Nedbank Group Ltd ordinary shares. Malcolm Wyman 69 Senior independent Non-executive director British Qualifications: CA(SA), AMP (Harvard Business School) Expertise in accounting, financial services and strategic planning. Large corporate and expansion into Africa experience. Malcolm joined the board as an independent non-executive director in August 2009 and was appointed as the Senior Independent Director on 6 May 2011. Malcolm was previously an executive director and the Chief Financial Officer of SABMiller plc, listed on the London Stock Exchange, until August 2011. He was also previously a non- executive director of Tsogo Sun Holdings Ltd until August 2014. He is a non-executive director and Chairman of the Audit Committee of Imperial Tobacco Group plc as well as Serco Group plc, which are both listed on the London Stock Exchange. Board committees Chairman: Group Audit Committee, Group Directors’ Affairs Committee, Group Related Party Transactions Committee Member: Group Risk and Capital Management Committee, Group Remuneration Committee NedbaNk limited – ANNUAL report 2015 155 NOTICE OF OUR ANNUAL GENERAL MEETING NedbaNk limited (incorporated in the republic of SA) reg No 1951/000009/06 JSe share code: NBKp; ISIN: ZAe0000043667 (‘Nedbank’ or ‘the company’) This notice is sent to holders of Nedbank non-redeemable non-cumulative non-participating preference shares (‘perpetual preference shares’) and the holders of the Class A and Class B redeemable cumulative preference shares (‘redeemable preference shares’) (collectively hereafter referred to as ‘the preference shares’) for information only. In terms of article 44.8 of the memorandum of incorporation (‘MoI’) of Nedbank, the holders of the perpetual preference shares will not be entitled to be present or to vote, either in person or by proxy, at any meeting of the company by virtue of or in respect of the perpetual preference shares, unless either or both of the following circumstances prevail at the date of the meeting: ■■ ■■ the preference dividend or any part thereof remains in arrears and unpaid after 6 (six) months from the due date thereof; and a resolution of the company is proposed (in which event the preference shareholders will be entitled to vote only on such resolution) that directly affects the rights attached to the preference shares or the interests of the holders thereof, including a resolution for the winding up of the company or for the reduction of its capital. In terms of articles 45.9 and 46.9 of the MoI of Nedbank, the holders of the redeemable preference shares are entitled to receive notice and attend the annual general meeting, but will not be entitled to speak or vote thereat, unless the circumstances as recorded in these articles prevail at the date of the meeting. Notice is hereby given to shareholders recorded in the securities register of Nedbank on Thursday, 24 March 2016, that the annual general meeting of shareholders will be held in the Executive Boardroom, Ground Floor, Block A, Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, on Wednesday, 4 May 2016, at 16:30 to deal with such business as may lawfully be dealt with at the meeting and to consider and, if deemed fit, pass, with or without modification, the ordinary and special resolutions set out hereunder in the manner required by the Companies Act, 71 of 2008 (as amended) (‘the Companies Act’), as read with the Listings Requirements of JSE Limited (’JSE Listings Requirements‘), which meeting is to be participated in and voted at by shareholders recorded in the company’s securities register on the record date of Friday, 22 April 2016. The quorum requirement for the ordinary and special resolutions set out below is sufficient persons being present to exercise, in aggregate, at least 25% of all voting rights that are entitled to be exercised on the resolutions, provided that at least three shareholders of the company are present at the annual general meeting. The percentage of voting rights required to pass the ordinary resolutions is more than 50% of the voting rights exercised, and the percentage of voting rights required to pass the special resolutions is at least 75% of the voting rights exercised thereon. Meeting participants (including proxies) will be required to provide reasonably satisfactory identification before being entitled to attend or participate in the meeting. Forms of identification include valid identity documents, driving licences and passports. AGENDA 1 presentation of annual financial statements and reports The annual financial statements of the company, incorporating inter alia the Directors’ Report and the Auditors’ Report, for the financial year ended 31 December 2015, have been distributed and will be presented to the shareholders as required in terms of the Companies Act. The complete set of the consolidated audited annual financial statements, together with the reports, are contained in the annual report. 2 ordinary dividends To note the interim dividend of 7 258 cents per ordinary share declared by the board of directors on 9 September 2015 and the final dividend of 9  073 cents per ordinary share declared by the board of directors on 12 February 2016. 3 Dividends on perpetual preference shares To note preference dividend number 25 of 38,22487 cents per share declared for the period from 1 January 2015 to 30 June 2015, paid on Monday, 31  August  2015 to shareholders of the non-redeemable non-cumulative non-participating preference shares recorded in the books of the company at the close of business on Friday, 28 August 2015 and preference dividend number 26 of 40,01711 cents per preference share declared for the period from 1 July 2015 to 31 December 2015 and payable on Monday, 4 April 2016. 4 Dividends on redeemable preference shares To note and confirm the preference dividend of R116 662,28 declared and paid on 19 February 2015 and R113 856,74 declared and paid on 30 July 2015 on the class A redeemable cumulative preference shares and the preference dividend of R206 843,39 declared and paid on 19 February 2015 and R279 566.78, declared and paid on 30 July 2015 on the class B redeemable cumulative preference shares, respectively in accordance with the terms of the preference share subscription and participation agreement entered into between Nedbank, IBL Asset Finance and Services Ltd, Imperial Holdings Ltd and Associated Motor Holdings (Pty) Ltd. 154 NedbaNk limited – ANNUAL report 2015 RESOLUTIONS 5 Ordinary resolution 1 Election of directors of the company appointed during the year During the year the board of directors appointed Messrs S Subramoney and JB Hemphill as non-executive directors of the company. These directors retire in terms of the company’s MoI and, being eligible, make themselves available for election. Biographical details are set out in the 2015 Nedbank Annual Report. 5.1 ‘Resolved that Mr S Subramoney be and is hereby elected as a director of the company.’ 5.2 ‘Resolved that Mr JB Hemphill be and is hereby elected as a director of the company.’ 6 Ordinary resolution 2 Reelection of directors retiring by rotation The following directors retire by rotation in terms of the company’s MoI, which requires not less than one third of the directors to retire at each annual general meeting. These directors, being eligible, make themselves available for reelection, each by way of a separate vote. Biographical details of the directors to be reelected are set out in the 2015 Nedbank Annual Report. 6.1 ‘Resolved that Mr ID Gladman be and is hereby reelected as a director of the company.’ 6.2 'Resolved that Mrs RK Morathi be and is hereby reelected as a director of the company.’ 6.3 ‘Resolved that Mr MI Wyman be and is hereby reelected as a director of the company.’ 7 Ordinary resolution 3 Reappointment of external auditors Following an evaluation of the performance of Deloitte & Touche (with Mr M Jordan as designated registered auditor) and KPMG Inc (with Mr S Malaba as designated registered auditor, following the conclusion of Ms H Berrange’s term of five years), the Nedbank Group Ltd Audit Committee and Board recommends the reappointment of the auditors on a joint basis. If either resolution 7.1 or resolution 7.2 is not passed, the resolution which is passed shall be effective. 7.1 ‘Resolved that Deloitte & Touche be and are hereby reappointed as auditors to hold office from the conclusion of the annual general meeting until the conclusion of the next annual general meeting of Nedbank.’ 7.2 ‘Resolved that KPMG Inc be and are hereby reappointed as auditors to hold office from the conclusion of the annual general meeting until the conclusion of the next annual general meeting of Nedbank.’ 8 Ordinary resolution 4 Control of authorised, but unissued shares ‘Resolved that the authorised, but unissued shares in the authorised share capital of Nedbank be and are hereby placed under the control of the directors to issue these shares, in such numbers and on such terms and conditions and at such times and at such prices as they deem fit, subject to the provisions of the Companies Act, the Banks Act, 94 of 1990 (as amended) (‘the Banks Act’) and the JSE Listings Requirements. 9 Advisory endorsement of remuneration policy ‘To endorse through a non-binding advisory vote the remuneration policy of the company (excluding the remuneration of the non-executive directors for their services as directors) and its implementation as set out in the Remuneration Report included in the 2015 Nedbank Annual Report.’ 10 Special resolution 1 Remuneration of non-executive directors ‘Resolved that the non-executive directors’ fees for their services as directors, in accordance with the company’s remuneration policy, as set out in the Remuneration Report contained in the 2015 Nedbank Annual Report, be and are hereby approved.’ NEDBANK LIMITED – ANNUAL REPORT 2015 157 11. Special resolution 2 General authority to provide financial assistance to related and interrelated companies ‘Resolved that, subject to the provisions of the Companies Act, 71 of 2008 (‘the Companies Act’), the shareholders of the company hereby approve, as a general approval, for a period of two years, the company providing direct or indirect financial assistance (‘financial assistance’) as contemplated in sections 44 and 45 of the Companies Act on such terms as may be authorised by the board of directors of the company in accordance with the following: 1) 2) the financial assistance can be provided to any related or inter-related company, corporation or any other person (a ‘recipient’) (which, for the avoidance of doubt, excludes financial assistance provided to any directors or prescribed officers of the company or of any such recipients); and nothing in these terms and conditions will limit the provision by the company of the financial assistance that does not require approval by way of a special resolution of the shareholders in terms of sections 44 and 45 of the Companies Act or falls within any exemption provided in these sections.’ Section 44 of the Companies Act essentially requires, subject to limited exceptions, approval by way of special resolution for the provision of financial assistance for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or interrelated company, or for the purchase of any securities of the company or a related or interrelated company. Section 45 of the Companies Act essentially requires, subject to limited exceptions, approval by way of special resolution for the provision of financial assistance, among others, to companies ‘related’ to and ‘interrelated’ with the company. Both sections 44 and 45 provide, among others, that the regulated financial assistance may only be provided pursuant to a special resolution passed by shareholders within the previous two years. The provision of any direct or indirect financial assistance by the company will always be subject to the board being satisfied that, immediately after providing such financial assistance, the company will satisfy the solvency and liquidity test referred to in section 45(3)(b)(i) of the Companies Act, and that the terms under which such financial assistance is to be given are fair and reasonable to the company, as referred to in section 45(3)(b)(ii) of the Companies Act. The directors would like the authority to be able to provide financial assistance to companies ‘related’ and ‘interrelated’ to the company. Such authorisation is generally required for providing loans and guarantees and other financial assistance to subsidiaries and group companies, which is often necessary or desirable for the conduct of Nedbank’s business. Voting by proxy A shareholder entitled to attend and vote at the annual general meeting may appoint a proxy or proxies to attend, speak and vote or abstain from voting in his/her/its/their stead. A proxy need not be a shareholder of the company. Completed proxy forms are requested to be received at the office of the transfer secretaries no later than 24 hours before the time appointed for the holding of the annual general meeting. By order of the board tSb Jali Company Secretary Sandown 1 March 2016 Registered office transfer secretaries in Sa Nedbank Ltd Reg No 1951/000009/06 Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, 2196 PO Box 1144 Johannesburg, 2000 Tel: +27 (0)11 294 4444 Computershare Investor Services (Pty) Ltd Ground Floor 70 Marshall Street Johannesburg, 2001 PO Box 61051 Marshalltown, 2107 Tel: +27 (0)11 370 5000 Fax: +27 (0)11 688 5238 Email: proxy@computershare.co.za 158 NedbaNk limited – ANNUAL report 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 DecemberFORM OF PROXY NedbaNk limited (incorporated in the republic of SA) reg No 1951/000009/06 JSe share code: NBKp ISIN: ZAe000043667 (‘Nedbank’ or ‘the company’) To be used by the holders of voting rights on ordinary shares. I/We __________________________________________________________________________________________________________________________________ of (address) ____________________________________________________________________________________________________________________________ being the holder(s) of ____________________________________________________________________ordinary shares in the company, appoint (see notes 1): 1 __________________________________________________________________________________________________________________ or failing him/her 2 __________________________________________________________________________________________________________________ or failing him/her the chair of the annual general meeting as my/our proxy to act for me/us and on my/our behalf at the annual general meeting that will be held in the Executive Boardroom, Ground Floor, Block A, Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, on Wednesday, 4 May 2016, at 16:30, for the purpose of considering and, if deemed fit, passing with or without modification as ordinary and special resolutions to be proposed thereat and at any adjournment thereof, and to vote for and/or against such resolutions and/or to abstain from voting in respect of the ordinary shares registered in my/our name(s), in accordance with the following instructions: Number of votes (one vote per ordinary share) For against abstain Ordinary Resolutions Ordinary resolution 1 5.1 Election of Mr S Subramoney, who was appointed as a non-executive director since the previous annual general meeting of shareholders Election of Mr JB Hemphill, who was appointed as a non-executive director since the previous annual general meeting of shareholders 5.2 Appointment of Deloitte & Touche as external auditors Appointment of KPMG Inc as external auditors Reelection as a director of Mr ID Gladman, who is retiring by rotation Reelection as a director of Mrs RK Morathi, who is retiring by rotation Reelection as a director of Mr MI Wyman, who is retiring by rotation Ordinary resolution 2 6.1 6.2 6.3 Ordinary resolution 3 7.1 7.2 Ordinary resolution 4 Placing of authorised but unissued shares under the control of the directors Advisory endorsement of Remuneration Policy Special resolutions Special resolution 1 Remuneration of non-executive directors Special resolution 2 General authority to provide financial assistance to related and interrelated companies 8 9 10 11 On a show of hands a person entitled to vote is only entitled to one vote irrespective of the number of the relevant Nedbank shares he/she holds or represents. On a poll, a person entitled to vote at the annual general meeting present in person or by proxy/proxies is entitled to that proportion of the total votes in the company that the aggregate amount of the nominal value of the Nedbank shares held or represented by him/her bears to the aggregate amount of the nominal value of all the Nedbank shares issued by the company and carrying the right to vote. A proxy/proxies may delegate his/her/their authority in terms of this proxy to another person. This proxy form will lapse and cease to be of force and effect immediately after the annual general meeting of the company to be held in the Executive Boardroom, Ground Floor, Block A, Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton on Wednesday, 4 May 2016, at 16:30 or at any adjournment thereof, unless it is revoked earlier Signed at (place) _____________________________________________________ on (date) ___________________________________________________________ 2016 Signature _____________________________________________________________________________________________________________________________________ Assisted by me _______________________________________________________________________________________________________________________________ (where applicable) Please read the notes on the reverse side hereof. NOTES TO FORM OF PROXY SUMMARY OF RIGHTS OF A HOLDER TO BE REPRESENTED BY PROXY AS CONTAINED IN SECTION 58 OF THE COMPANIES ACT AND NOTES TO FORM OF PROXY. 1 2 Each holder entitled to attend and vote at the annual general meeting is entitled to appoint one or more individuals as proxy/proxies (who need not be person(s) entitled to vote at the annual general meeting) to attend, participate in, speak and vote or abstain from voting in place of that holder at the annual general meeting. The proxy/proxies may delegate the authority received from the holder to a further person, subject to any restriction set out in this form of proxy. 3 A proxy appointment must be in writing, dated and signed by the holder appointing the proxy/proxies. 4 A holder may insert the name of a proxy or the names of two alternative proxies of the holder’s choice in the space provided, with or without deleting ‘the chair of the annual general meeting’. The person whose name stands first on this form of proxy and who is present at the annual general meeting will be entitled to act as proxy to the exclusion of the persons whose names follow. Further, a holder may appoint more than one proxy to exercise voting rights attached to different securities held by that holder. 5 A holder’s instructions to the proxy/proxies have to be indicated by the insertion of the relevant number of votes exercisable by that holder in the appropriate box provided. Failure to comply with this will be deemed to authorise the chair of the annual general meeting, if the chair is the authorised proxy, to vote in favour of the ordinary and special resolutions at the annual general meeting, or the appointed proxy/proxies to vote or to abstain from voting at the annual general meeting, without direction as he/she/they deem(s) fit, in respect of all the holder’s votes exercisable thereat. 6 A holder or his/her proxy/proxies is/are not obliged to vote in respect of all the ordinary shares held by such holder or represented by such proxy/proxies, but the total number of votes for or against the ordinary and special resolutions and in respect of which any abstention is recorded may not exceed the total number of votes to which the holder or his/her proxy/proxies is/are entitled. 7 Documentary evidence establishing the authority of a person signing this form of proxy in a representative capacity has to be attached to this form of proxy, unless previously recorded by the company’s transfer secretaries or waived by the chair of the annual general meeting. Examples of satisfactory identification include a valid identity document, a valid driving licence or a valid passport. 8 Any alterations or corrections to this form of proxy shall be initialled by the signatory/signatories. 9 The completion and lodging of this form of proxy shall not preclude the relevant holder from attending the annual general meeting and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof, should such holder wish to do so, in which case this proxy shall be suspended accordingly. Investor Services (Pty) Ltd (‘Computershare’), 70 Marshall  Street, Johannesburg, 2001 (PO Box 61051, Marshalltown, 2107). The forms of proxy are requested to be received no later than 16:30 on Tuesday, 3 May 2016. Forms of proxy can also be submitted by fax to Computershare (fax number +27 (0)11 688 5238 or email: proxy@computershare.co.za), subject to the proxy instructions meeting all other criteria. Any form of proxy not received by the company or the company’s transfer secretaries in accordance with the above, must be handed to the Company Secretary at the annual general meeting before a proxy/proxies may exercise any voting rights of a holder at the annual general meeting. 11 This form of proxy may be completed by: 11.1 those holders who are holding Nedbank shares in a certificated form; or 11.2 those holders who are recorded in the subregister as holding Nedbank shares in dematerialised electronic form in their own name; or 11.3 persons who are not shareholders but who are entitled to exercise any voting rights (irrespective of the form, title or nature of the securities to which those voting rights are attached) as at the record date at this annual general meeting. 12 Holders of Nedbank ordinary shares (whether certificated or dematerialised) through a nominee should timeously make the if applicable, necessary arrangements with that nominee or, participant (previously referred to as central securities depository participant) or broker on how they wish their votes to be cast on their behalf at the annual general meeting. As far as holdings in a participant are concerned, these will be guided by the terms of the agreement entered into between shareholders and their participant or broker. 13 Holders attending the annual general meeting will be afforded the opportunity of putting questions to the directors and management. A perforated question form has been included for this purpose. 14 If this form of proxy has been delivered to the company in accordance with paragraph 10, as long as that appointment remains in effect, any notice that is required by the Companies Act or the company’s MOI to be delivered by the company to a holder must be delivered by the company to the holder or, alternatively, if a holder has directed the company to do so in writing and has paid any reasonable fees charged by the company for doing so, to such holder’s proxy/proxies. 15 Save if a holder provides in this proxy form that a proxy appointment is irrevocable, a holder may revoke the proxy appointment by: (i) cancelling it in writing, or making a later inconsistent appointment of a proxy/proxies; and (ii) delivering a copy of the revocation instrument to the proxy/proxies and to the Company Secretary’s office at Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, 2196, for attention Jackie Katzin, to be received before the replacement proxy/proxies exercise(s) any rights of the holder at the annual general meeting of the company or any adjournment thereof. 10 Forms of proxy have to be lodged with or posted to the Company Secretary’s office (for the attention of Ms Jackie Katzin, Block A, Ground Floor, Nedbank 135 Rivonia Campus, 135 Rivonia Road, Sandown, Sandton, 2196 or PO Box 1144, Johannesburg, 2000) or the company’s transfer secretaries in South Africa, namely Computershare 16 The revocation of a proxy appointment constitutes a complete and final cancellation of the proxy’s/proxies’ authority to act on behalf of the holder as of the later of: (i) the date stated in the revocation instrument, if any; or (ii) the date on which the revocation instrument was delivered as required in paragraph 15 above. TERMS uSEd IN OuR REPORT Advanced internal ratings-based approach The advanced Internal Ratings-Based (AIRB) Approach is subject to supervisory approval where a bank may use its internal developed credit risk measurement systems to calculate the capital requirements for credit risk. Small and medium enterprises corporate This asset class covers all exposures to small and medium enterprises (SME) that are classified as corporate, based on criteria prescribed by the Regulator. Advanced measurement approach The Advanced Measurement Approach (AMA) allows a bank to calculate its regulatory capital charge (using internal models) based on internal risk variables and profiles. This is the only risk-sensitive approach for operational risk allowed in Basel II. Assets under management These are assets managed by Nedbank Group, beneficially owned by clients and therefore not reported on the consolidated balance sheet; advances that have been either fully or partially utilised by a borrower. Automated teller machine An automated teller machine (ATM) is a cash machine or a free-standing cash dispensing device that may also provide other information or services for clients who have a card and a personal identification number, a password or other personal identification. Banks This asset class covers all exposures to counterparties treated as banks. Basel capital accord The new Basel Capital Accord (Basel II) of the Bank for International Settlements is an improved capital adequacy framework accomplished by closely aligning banks’ capital requirements with improved modern risk management practices and sophisticated risk assessment capabilities. It further ensures the risk sensitivity of the minimum capital requirements by including supervisory reviews and market discipline through enhanced disclosure. Basel asset classes (as categorised in the BA 200 return) Corporate Corporate exposures Corporate exposures are a debt obligation of a corporation, partnership or proprietorship. Banks are permitted to distinguish separately exposures to small and medium-sized enterprises. Specialised lending high-volatility commercial real estate High-volatility commercial real estate (HVCRE) lending is the financing of commercial real estate that exhibits higher-loss-rate volatility compared with other types of specialised lending. Specialised lending income-producing real estate Income-producing real estate (IPRE) refers to a method of providing funding for real estate (such as office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cashflows generated by the asset. The primary source of these cashflows would generally be lease or rental payments or the sale of the asset. Specialised lending object finance Object finance (OF) refers to a method of funding the acquisition of physical assets (eg ships, aircraft, satellites, rolling stock, and fleets) where the repayment of the exposure is dependent on the cashflows generated by the specific assets that have been financed and pledged. Specialised lending commodities finance Commodities finance (CF) refers to structured short-term lending to finance receivables of exchange-traded commodities (eg crude oil, metals or crops), where the exposure will be repaid from the proceeds of the sale of the commodity. inventories, or reserves, Specialised lending project finance Project finance (PF) is a method of funding where the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations, for example power plants, chemical-processing plants and mines. Purchased receivables corporate This asset class covers all receivables classified as corporate exposures that are purchased for inclusion in asset-backed securitisation structures, but banks may also use this approach with the approval of national supervisors for appropriate on-balance-sheet exposures that share the same features. Public sector entities This asset class covers all exposures to enterprises that are wholly or majority owned by the central government, eg Eskom and Transnet. Local governments and municipalities This asset class covers all exposures to metropolitan councils, district councils and municipalities. Sovereign (including central government and central bank) This asset class covers all exposures to counterparties treated as central government. Securities firms This asset class covers all exposures to enterprises regulated by a recognised authority and trading in securities. Retail exposures Retail mortgages (including home equity line of credit) This asset class covers all mortgage advances or credit lines to individuals that are fully secured by a mortgage over residential property. Retail revolving credit This involves exposures to individuals that are revolving, unsecured, and committed (both contractually and in practice). In this context, revolving exposures may be defined as those in respect of which clients’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay up to a limit established by the bank. Retail other This asset class covers all non-revolving exposures (excluding mortgage advances) to individuals. Small and medium enterprises retail This asset class covers all exposures to SMEs that are classified as retail, based on criteria prescribed by the regulator. Purchased receivables – retail This asset class covers all receivables classified as retail exposures and are purchased for inclusion in asset-backed securitisation structures, but banks may also use this approach with the approval of national supervisors for appropriate on-balance-sheet exposures that share the same features. Black economic empowerment transaction Nedbank Group’s black economic empowerment (BEE) transaction, which focused primarily on the issuing of shares to BEE partners for the purposes of broad-based black economic empowerment (BBBEE), equating to approximately 9,3% (43 618 748 shares) of total share capital and equating to black ownership of 11,5% of the value of Nedbank Group’s SA businesses in 2005. Nedbank Namibia’s BEE transaction, which focused primarily on the issuing of shares to BEE partners and affinity groups for the purposes of BEE in Namibia, equating to approximately 0,14% (665 680 shares) of total share capital of Nedbank Group Ltd and equating to black ownership of 11,13% of the value of NedNamibia Holdings Ltd, Nedbank Group’s Namibian business in 2006. borrowing group A group of clients and their underlying loans and advances according to the per person definition of the ‘Regulations Related to Banks’. NedbaNk LIMITed – ANNUAL RepoR t 2015 159 TERMS uSEd IN OuR REPORT (continued) Capital adequacy ratio The capital adequacy of SA banks is measured in terms of the SA Banks Act requirements. One calculateds the ratio by dividing the primary (tier 1), secondary (tier 2) and tertiary (tier 3) capital by the risk-weighted assets. Group capital adequacy ratio Group capital adequacy is the ratio of group net qualifying capital and  reserve funds to total group risk-weighted assets as calculated according to the SA Banks Act requirements. Primary (tier 1) capital Primary capital consists of issued ordinary share capital and perpetual preference share capital, qualifying perpetual callable hybrid capital, retained earnings and reserves, less regulatory deductions. Core tier 1 capital Core tier 1 capital is primary capital less any amount in non-core tier 1 capital, being perpetual preference share capital and qualifying, perpetual, callable hybrid capital. Secondary (tier 2) capital Secondary capital is made up of subordinated dated debt and certain types of perpetual callable debt, the excess amount in respect of eligible provisions, and 50% of any revaluation surplus less regulatory deductions. Tertiary (tier 3) capital Tertiary capital consists of capital obtained by way of unsecured subordinated loans, subject to any conditions that may be prescribed. Cashflow Financing activities Activities that result in changes to the capital structure of the group. Investment activities Activities relating to the acquisition, holding and disposal of property and equipment and long-term investments. Operating activities Activities that are not financing or investing activities and arise from the operations conducted by the group. Direct taxation direct taxation includes normal taxation on income, capital gains tax (CGT) and secondary tax on companies (STC). Dividend/Distribution cover Headline earnings per share divided by the dividend/distribution declared per share. Dividend/Distribution declared per share dividend/distribution declared per share is the actual interim dividend paid/capitalisation award issued and the final dividend declared/ capitalisation award declared for the period under consideration, expressed in cents. Dividend/Distribution paid/capitalised per share dividend/distribution paid/capitalised per share is the actual final dividend paid/capitalisation award issued for the prior year and the interim dividend issued for the year under consideration, paid/capitalisation award expressed in cents. Dividend yield dividend/Capitalisation award declared per ordinary share as a percentage of the closing share price of ordinary shares. Downturn expected loss A stress-tested value for expected loss under downturn economic conditions that could have unfavourable effects on a bank’s credit exposures. dti codes The Codes of Good Practice as promulgated on 9 February 2007 under section 9(1) of the Broad-based Black Economic Empowerment Act, 53 of 2003, establish the rules, targets and stipulations for the measurement of BBBEE within SA based on three scorecard classifications for organisations: emerging microenterprise (EME), qualifying small enterprise (QSE), or generic enterprise. Nedbank is scored as a generic enterprise under the published codes. earnings per share basic earnings basis Income attributable to equity holders for the period divided by the weighted average number of ordinary shares in issue (net of shares held by group entities) during the period. Credit loss ratio Credit loss ratio is the impairments charge as a percentage of average advances. Headline earnings basis Headline earnings divided by the weighted average number of shares in issue (net of shares held by group entities) during the period. defaulted advance This is any advance or group of advances that has triggered the relevant definition of default criteria for that portfolio that are in line with the amended Banks Act regulations relating to banks. For retail portfolios it is transaction-centred and therefore a default would be specific to an account (specific advance). For wholesale portfolios it is client- or borrower- centred, meaning that in the event any transaction within a borrowing group defaults, then all transactions within the borrowing group would be defaulted. definition of default At a minimum, a default is deemed to have occurred where a material obligation is overdue for more than 90 days or an obligor exceeds an advised limit for more than 90 days. Deferred taxation assets deferred taxation assets are the amounts of income taxation recoverable in future periods in respect of: ■■ deductible temporary differences due to differences between the taxation and accounting treatment of transactions; and ■■ the carry forward of unused taxation losses. Deferred taxation liabilities deferred taxation liabilities are the amounts of income tax payable in future periods due to differences between the tax and accounting treatment of transactions. Fully diluted basis The relevant earnings figure is adjusted for the assumed adjustments to income that would have been earned on the issue of shares issued from dilutive instruments. The resultant earnings are divided by the weighted average number of ordinary shares and other dilutive instruments (ie potential ordinary shares) outstanding at the period-end, assuming they had been in issue for the period. earnings yield Headline earnings per share as a percentage of the closing price of ordinary shares. economic capital Economic capital (eCap) is the quantification of risk and an internal assessment of the amount of capital required to protect the group against economic losses with a desired level of confidence (solvency standard or default probability) over a one-year time horizon. In other words, it is the magnitude of economic losses the group could withstand while still remaining solvent. economic profit or loss Headline earnings after adjusting for cost of capital. effective taxation rate The taxation charge in the income statement, excluding taxation relating to non-trading and capital items, as a percentage of profit before taxation. efficiency ratio (cost-to-income ratio) Total expenses as a percentage of income from normal operations (net interest income plus non-interest revenue). 160 NedbaNk LIMITed – ANNUAL RepoR t 2015 exposure at default Exposure at default (EAd) is an estimation of the extent to which a bank may be exposed to a counterparty in the event of, and at the time of, that counterparty’s default. expected loss Expected loss (EL) is the expected value of portfolio losses due to default over a specified time horizon. Foreign exchange translation gains/losses The results and assets/liabilities of all foreign entities controlled by the group that have a rand-functional currency are translated at the closing exchange rate and the differences arising are recognised in the income statement as foreign exchange translation gains/losses. Headline earnings Headline earnings is not a measure of maintainable earnings. For purposes of the definition and calculation, the guidance given on headline earnings, as issued by the SA Institute of Chartered Accountants in circular 07/02 of december 2002, has been used. Headline earnings consist of the earnings attributable to ordinary shareholders excluding non-trading and capital items. International Financial Reporting Standards International Financial Reporting Standards (IFRS), as adopted by the International Accounting Standards Board (IASB), and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB. Nedbank Group’s consolidated financial results are prepared in accordance with IFRS. Impairments charge to average advances This is the impairments charge on loans and advances for the year divided by average advances; also known as the credit loss ratio or impairment ratio. Impairment of loans and advances Impairment of loans and advances arises where there is objective evidence that the group will not be able to collect an amount due. The impairment is the difference between the carrying amount and the estimated recoverable amount. Indirect taxation This is value-added tax (VAT) and other taxes, levies and duties paid to government, excluding direct taxation. ‘Jaws’ ratio This is the difference between the rate of growth in total income from normal operations and the rate of total expense growth. Johannesburg Interbank Agreed Rate The Johannesburg Interbank Agreed Rate (JIBAR) is the rate that SA banks charge each other for wholesale money. King II (the code) The King Report on Corporate Governance 2002 sets out principles of good corporate governance for SA companies and organisations. King III The revised King Code and Report on Corporate Governance for South Africa 2009 sets out revised principles of good corporate governance for SA companies. London Interbank offered Rate The London Interbank Offered Rate (LIBOR) is the rate that banks participating in the London money market offer each other for short-term deposits. Market capitalisation This is the group’s closing share price multiplied by the number of shares in issue including shares held by group entities. Net asset value per share This is total equity attributable to equity holders of the parent divided by the number of shares in issue, excluding shares held by group entities. Net interest income to average interest-earning assets (net interest margin) This is net interest income expressed as a percentage of average net interest-earning banking assets. Net interest-earning banking assets are used, as these closely resemble the quantum of assets earning income that is included in net margin. Non-interest revenue to total expenses This is non-interest revenue as a percentage of total expenses from normal operations. Non-interest revenue to total income This is non-interest revenue as a percentage of total income from normal operations. Non-trading and capital items These comprise the following: ■■ surpluses and losses on disposal of long-term investments, subsidiaries, joint ventures and associates; impairment of goodwill arising on acquisition of subsidiaries, joint ventures and associates; surpluses and losses on the sale or termination of an operation; capital cost of fundamental reorganisation or restructuring having a material effect on the nature and focus of the operations of the reporting entities; impairment of investments, property and equipment, computer software and capitalised development costs; and ■■ ■■ ■■ ■■ ■■ other items of a capital nature. off-balance-sheet assets These are assets managed on behalf of third parties on a fully discretionary basis. price/earnings ratio This is the closing price of ordinary shares divided by headline earnings (for the previous 12 months) per share. properties in possession Properties in possession (PIPS) are acquired through payment defaults on loans secured by properties. Return on ordinary shareholders’ equity Return on ordinary shareholders’ equity (ROE) is headline earnings expressed as a percentage of average equity attributable to equity holders of the parent. Return on ordinary shareholders’ equity excluding goodwill ROE excluding goodwill is headline earnings expressed as a percentage of average equity attributable to equity holders of the parent less goodwill. Return on total assets Return on total assets (ROA) is headline earnings expressed as a percentage of average total assets. Risk-weighted assets Risk-weighted assets (RWA) are determined through the application of risk weights to balance sheet assets and off-balance-sheet financial instruments according to the relative credit risk of the counterparty. The risk weighting for each balance sheet asset and off-balance-sheet financial instrument is regulated by the SA Banks Act or by regulations in the respective countries of the other banking licences. South African Reserve Bank regulations related to banks and the BA returns1 The regulations relating to banks were amended with effect from 1 January 2008, based on the revised Basel Capital Accord (Basel II). The new Basel Capital Accord of the Bank of International Settlements is an improved capital adequacy framework accomplished by closely aligning banks’ capital requirements with improved modern risk management practices and sophisticated risk assessment capabilities. It further ensures the risk sensitivity of the minimum capital requirements by including supervisory reviews and market discipline through enhanced disclosure. 1 The new Banks Act regulatory returns. NedbaNk LIMITed – ANNUAL RepoR t 2015 161 TERMS uSEd IN OuR REPORT (continued) Segmental reporting Operational segment A distinguishable component of the group, based on the market on which each business area focuses, which is subject to risks and returns that are different from those of other operating segments. Geographical segment A distinguishable component of the group that is engaged in providing services within a particular economic environment and is subject to risks and returns that are different from those of components operating in other economic environments. Securitisation exposures This asset class covers all exposures to tradable, interest-bearing commercial paper, which is secured by an underlying asset, eg mortgage loans. Share-based payments These are the transfers of a company’s equity instruments by its shareholders to parties that have supplied goods or services to the company (including employees). Shares held by group entities (treasury shares) These are ordinary shares in Nedbank Group Ltd acquired/held by group companies, including ordinary shares held in share trusts as part of the BEE transaction. Self-service terminal A self-service terminal (SST) is similar to an ATM, but is designed for non- cash transactions. the Standardised Approach The Standardised Approach (TSA) is an approach to calculating regulatory credit risk requirements that sets out specific risk weights specified by the Regulator in lieu of the AIRB Approach. tangible net asset value per share This is total equity attributable to equity holders of the parent less goodwill, computer software and capitalised development costs, divided by the number of shares in issue, excluding shares held by group entities. total collateral This is the total monetary value of all collateral held by a bank as security for an advance(s), limited to exposure. total credit extended This is the total of all advances extended by a bank, including unutilised facilities and other off-balance-sheet exposures. total equity attributable to equity holders of the parent This is ordinary share capital, share premium and reserves. Weighted average number of shares This is the number of shares in issue increased by shares issued during the period, weighted on a time basis for the period during which they participated in the income of the group, less shares held by group entities, weighted on a time basis for the period during which the entities held these shares. These definitions should be read in conjunction with the group’s accounting policies, which also clarify certain terms used. 162 NedbaNk LIMITed – ANNUAL RepoR t 2015 ABBREVIATIONS, ACRONYMS ANd INITIALISMS uSEd IN OuR REPORT ABCP ACES ACT AFd AFT AGM AIEA AIRB ALCO AM AMA AML ANW APE asset-backed commercial paper Advisory Committee on Environment and Society Arts & Culture Trust Agence Française de développement/French development Agency African Task Force annual general meeting average interest-earning assets Advanced Internal Ratings-based Asset and Liability Committee asset management Advanced Measurement Approach anti-money-laundering adjusted net worth annualised premium equivalent ASISA Association for Savings and Investment South Africa ATM AuM Bau automated teller machine assets under management business as usual BBBEE broad-based black economic empowerment BBP BCBS BCM black business partner Basel Committee on Banking Supervision business continuity management BCMC Balance Sheet Management Committee BEE BEEL BES BIS BoF bps BSME BTV BuSA BWO CA CAGR black economic empowerment best estimate of expected loss Board Ethics Statement Bank for International Settlements branch of the future basis points black small and medium enterprises balance to original value Business unity South Africa black-women-owned chartered accountant 1 compound annual growth rate 2 compound average growth rate CAR capital adequacy ratio CASA ratio current and savings account ratio CBSS CCC CCMA Compulsory Bonus Share Scheme cluster credit committee Commission for Conciliation, Mediation and Arbitration CCMG Contact Centre Management Group CCR CdP CE CEF CEM CEO CET1 CFd CFE CFO CFT counterparty credit risk Carbon disclosure Project chief executive commissions and fees Current Exposure Method chief executive officer common equity tier 1 contract for difference consumer financial education chief financial officer combating the financing of terrorism CGCO Chief Governance and Compliance Officer CGu CIB CIBC CLF CLR CMBS CNHR COd COE cash-generating unit Corporate and Investment Banking (name of cluster) Canadian Imperial Bank of Commerce committed liquidity facility credit loss ratio commercial mortgage-backed securitisation cost of non-hedgeable risk commercial operation date cost of equity COId Act Compensation for Occupational Injuries and diseases Act COO COP CPI CPPP CPT CRE chief operating officer Conference of the Parties consumer price index community-public-private partnership corporate performance target commercial real estate CRISA Code for Responsible Investing in South Africa CRO CRS CSI CVA CVF CVP dAC dBSA dEL chief risk officer Common Reporting Standard corporate social investment credit valuation adjustment Competing Values Framework client value proposition directors' Affairs Committee development Bank of Southern Africa downturn expected loss dHEPS diluted headline earnings per share dLGd d-SIB dSTI downturn loss given default domestic systemically important bank deferred short-term incentive NedbaNk LIMITed – ANNUAL RepoR t 2015 163 ABBREVIATIONS, ACRONYMS ANd INITIALISMS uSEd IN OuR REPORT (continued) dti dVA EAd EAP ECL EdGE EdP EdPM EdTF EE EELN EGC department of Trade and Industry debit value adjustment(s) exposure at default 1 economically active population 2 employee assistance programme expected credit card loss Excellence in design for Greater Efficiencies Executive development Programme execution, delivery and process management Enhanced disclosure Task Force employment equity Energy Efficiency Leadership Network enterprise governance and compliance EITCO Executive IT Committee EL EME EMM eNaTIS EP EPV ERA erco ERI expected loss 1 emerging macroenterprise 2 exempted microenterprise Ekhurhuleni Metropolitan Municipality electronic national administration traffic information system 1 economic profit 2 Equator Principle employee value proposition ethics risk assessment enterprise risk committee ethics responsibility index ERMF Enterprisewide Risk Management Framework ERP ESd ESG ETI ETL EVE EVP EWP exco FAIS enterprise resource planning enterprise supplier development environment, social and governance Ecobank Transnational Incorporated expected tail loss economic value of equity employee value proposition Employee Wellbeing Programme executive committee Financial Advisory and Intermediary Services FAIS Act Financial Advisory and Intermediary Services Act FATCA Foreign Account Tax Compliance Act (uS) FCA FCT FCTR Financial Conduct Authority foreign currency translation 1 foreign currency translation reserve(s) 2 foreign currency translation risk FIC Financial Intelligence Centre FICA FRTB FSB FSC FSCA FTE FVOCI FVTPL GAC GAI GCC GdP GFOC GHG GIA GITCO GOI GORC GP GPC Financial Intelligence Centre Act Fundamental Review of the Trading Book Financial Services Board Financial Sector Code Financial Sector Conduct Authority fulltime employee fair value through other comprehensive income fair value through profit and loss Group Audit Committee Governance Assessment Instrument Group Credit Committee gross domestic product Group Finance and Oversight Committee greenhouse gas(es) Group Internal Audit (department name) Group Information Technology Committee gross operating income Group Operational Risk Committee guaranteed package Group Procurement Committee GRCMC Group Risk and Capital Management Committee GRI Global Reporting Initiative Group Exco Nedbank Group Executive Committee GRPTC GSC GTSEC HCM Hdu HE HEPS HQLA HR Group Related-party Transactions Committee Group Sustainability Committee Group Transformation, Social and Ethics Committee Human Capital Management (SAP) historically disadvantaged university headline earnings headline earnings per share high-quality liquid asset(s) human resources HVCRE high-volatility commercial real estate IAS IASB IBSA ICAAP ICAS IET IFC IFRS IFRS IC International Accounting Standard(s) International Accounting Standards Board Insurance and Banking Staff Association Internal Capital Adequacy Assessment Process Independent Counselling and Advisory Services Infrastructure, Energy and Telecommunications International Finance Corporation International Financial Reporting Standard(s) International Financial Stability Board Interpretation Committee 164 NedbaNk LIMITed – ANNUAL RepoR t 2015 IIA ILAAP IMA IMF INE IOd IPRE IRB IRBA IRP IRRBB IT JIBAR KICL KPI KYC LCR LEAC LGd LHS LId LTI LTIFR LTIP M&A Md MFC MI Institute of Internal Auditors Internal Liquidity Adequacy Assessment Process Internal Model Approach International Monetary Fund independent non-executive 1 injuries on duty 2 Institute of directors income-producing real estate Internal Ratings-based Independent Regulatory Board for Auditors Integrated Resource Plan interest rate risk in the banking book information technology Johannesburg Interbank Agreed Rate Key Issues Control Log key performance indicator Know Your Client liquidity coverage ratio NGO NGR NII NIM NIR NP NPS NPW NSFAS NSFR NSS NWu OBS OCI OHS non-governmental organisation Nedbank Group Rating net interest income net interest margin non-interest revenue non-performing Net Promoter Score Nedbank Private Wealth National Student Financial Aid Scheme net stable funding ratio Nedbank Staff Survey North-West university Ombudsman for Banking Services other comprehensive income occupational health and safety OMART Old Mutual Alternative Risk Transfer Fund OMSA Old Mutual South Africa/Old Mutual (South Africa) Ltd Large-exposure Approval Committee Opcom Operational Committee loss given default lefthand scale lead independent director long-term incentive lost-time injury frequency rate Long-term Incentive Plan mergers and acquisitions managing director Motor Finance Corporation management information MISTRA Mapungubwe Institute for Strategic Reflection MRC NAV NBI NBS NCA minimum required capital net asset value National Business Initiative Network for Business Sustainability National Credit Act NCAA National Credit Amendment Act NCC NCd NCIB NCR NEd NEI NEO Nedbank Contact Centre negotiable certificate of deposit Nedbank Corporate and Investment Banking National Credit Regulator non-executive director Nedbank ethics indicator Nedbank Ethics Officer ORMF ORSA OSE OTC PASA PAYE Pd Operational Risk Management Framework Own Risk and Solvency Assessment(s) ordinary shareholders' equity over the counter Payments Association of South Africa pay as you earn probability of default Pd-LGd probability of defaullt PGN PIC PIP PIT POPI POPIA POS PPP PRA PRMA PRI PVFP PVNBP PWCE PWd QNB Professional Guidance Note Public Investment Corporation property in possession point in time protection of personal information Protection of Personal Information Act point of sale public-private partnership Prudential Regulatory Authority Post-retirement Medical Aid (Old Mutual) Principles for Responsible Investment present value of future profits present value of new-business premiums programme-wide credit enhancement persons with disabilities Qatar National Bank NedbaNk LIMITed – ANNUAL RepoR t 2015 165 ABBREVIATIONS, ACRONYMS ANd INITIALISMS uSEd IN OuR REPORT (continued) QSE RAF RAS RAT RAu RBB 1 qualifying small enterprise 2 qualifying small entity Risk Appetite Framework risk as strategic (opportunity) risk as threat risk as uncertainty Retail and Business Banking (name of cluster) RCoGP Revised Codes of Good Practice RCPO RCSA Regulatory Change Programme Office risk and control self-assessment RdA & RR risk data aggregation and risk reporting RdR REIPPP Retail distribution Review Renewable Energy Independent Power Producer Procurement Remco Remuneration Committee RFP RFQ RHS RI request for proposal request for quotation righthand scale Responsible Investment RMBS residential-mortgage-backed securitisation RoA ROE ROI RPTC RRB RRP RSP RWA SAdC SAEEC SAICA SAM SANdF SANEA Rest of Africa 1 return on equity 2 return on ordinary shareholders' equity 3 return on ordinary shareholders' funds return on investment Related Party Transaction Committee Retail Relationship Banking resolution and recovery planning restricted share plan risk-weighed asset(s) Southern African development Community South African Energy Efficiency Convention South African Institute of Chartered Accountants Solvency Assessment and Management South African National defence Force South African National Energy Association SAP HCM SAP Human Capital Management SAPS SAQA SARB South African Police Service South African Qualifications Authority South African Reserve Bank SASBO South African Society of Banking Officials SEMS SME SPV SSA SST STI STT TCF Social and Environmental Management System small and medium enterprise(s) special-purpose vehicle Sub-Saharan Africa self-service terminal short-term incentive securities transfer tax 1 Treating Clients Fairly (SA) 2 Treating Customers Fairly (uK) TLAC total loss-absorbing capacity TRAHRCO Transformation and Human Resources Committee TRC TSR TTC uAE uJ uKZN uNEP FI uNFCCC uNGC uNISA uP VaR Trade Risk Committee total shareholder's return through the cycle united Arab Emirates university of Johannesburg university of KwaZulu-Natal united Nations Environment Programme Finance Initiative united Nations Framework Convention on Climate Change united Nations Global Compact university of South Africa university of Pretoria value at risk VIF (business) value of in-force (business) VNB VuCA VWAP value of new business volatile, uncertain, complex and amgigous volume-weighted average price WESSA Wildlife and Environment Society of South Africa WIPHOLd Woman Investment Portfolio Holdings WWF-SA World Wide Fund for Nature South Africa XVA X-axis valuation adjustment 166 NedbaNk LIMITed – ANNUAL RepoR t 2015 COMPANY dETAILS NEdBANK LIMITEd Incorporated in the Republic of SA Registration number 1951/000009/06 Registered address Nedbank 135 Rivonia Campus, 135 Rivonia Road Sandown, Sandton, 2196, SA PO Box 1144, Johannesburg, 2000, SA transfer secretaries in SA Computershare Investor Services (Pty) Ltd 70 Marshall Street, Johannesburg, 2001, SA PO Box 61051, Marshalltown, 2107, SA INSTRuMENT COdES Nedbank Limited non-redeemable non-cumulative preference shares JSE share code ISIN NBKP ZAE000043667 Company Secretary: TSB Jali Sponsor: Nedbank Corporate and Investment Banking This announcement is available on the group’s website at nedbankgroup.co.za, together with the following additional information: ■■ ■■ Financial results presentation to analysts. Link to a webcast of the presentation to analysts. For further information please contact Nedbank Group Investor Relations at nedbankgroupir@nedbank.co.za. NedbaNk LIMITed – ANNUAL RepoR t 2015 167 dISCLAIMER Nedbank has acted in good faith and has made every reasonable effort to ensure the accuracy and completeness of the information contained in this document, including all information that may be defined as ‘forward- looking statements’ within the meaning of uS securities legislation. Forward-looking statements may be identified by words such as ‘believe’, ‘anticipate’, ‘expect’, ‘plan’, ‘estimate’, ‘intend’, ‘project’, ‘target’, ‘predict’ and ‘hope’. Forward-looking statements are not statements of fact, but statements by the management of Nedbank based on its current estimates, projections, expectations, beliefs and assumptions regarding the group’s future performance. No assurance can be given that forward-looking statements will prove to be correct and undue reliance should not be placed on such statements. The risks and uncertainties inherent in the forward-looking statements contained in this document include, but are not limited to: changes to International Financial Reporting Standards and the interpretations, applications and practices subject thereto as they apply to past, present and future periods; domestic and international business and market conditions such as exchange rate and interest rate movements; changes in the domestic and international regulatory and legislative environments; changes to domestic and international operational, social, economic and political risks; and the effects of both current and future litigation. Nedbank does not undertake to update any forward-looking statements contained in this document and does not assume responsibility for any loss or damage whatsoever and howsoever arising as a result of the reliance by any party thereon, including, but not limited to, loss of earnings, profits, or consequential loss or damage. 

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