Creating value by using our financial expertise to do good Annual Report for the year ended 31 December 2018 Nedbank Limited Annual Report 2018 i Contents About this report Financial highlights Ten-year review: Consolidated statement of comprehensive income Ten-year review: Consolidated statement of financial position Consolidated annual financial statements Responsibility of our directors Certification from our company secretary Report from the Group Audit Committee Directors’ Report Independent auditors’ report to the shareholders of Nedbank Limited Audited consolidated financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cashflows Notes to the consolidated financial statements Section A: Accounting policies A1 Principal accounting policies A2 Change in accounting policies: Financial instruments A3 Correction of prior-period errors and reclassifications A4 Key assumptions concerning the future and key sources of estimation A5 New standards and interpretations not yet adopted Section B: Segmental and performance-related information B1 Segmental reporting B2 Dividends B3 Share capital B4 Holders of additional tier 1 capital instruments B5 Revenue B5.1 Net interest income B5.2 Non-interest revenue B6 Total operating expenses B7 Taxation B7.1 Indirect taxation B7.2 Direct taxation B7.3 Deferred taxation B8 Non-trading and capital items Section C: Core banking assets C1 C2 Loans and advances Impairments charge on financial instruments C3 Government and other securities C4 Other short-term securities C5 Credit analysis of other short-term securities, and government and other securities C6 Cash and cash equivalents C7 Derivative financial instruments Section D: Core banking liabilities D1 Amounts owed to depositors D2 Long-term debt instruments Nedbank Limited Annual Report 2018 2 3 4 6 8 8 8 9 14 17 22 22 23 24 26 27 27 27 28 34 35 35 35 35 40 41 42 42 45 46 47 48 48 48 49 51 52 52 58 75 75 75 76 76 81 81 82 D3 Contractual maturity analysis for financial liabilities Section E: Investments E1 E2 E3 Investment securities Investments in associate companies Investments in subsidiary companies and related disclosure E4 Interests in structured consolidated entities E5 Securitisations E6 Related parties Section F: Generic assets F1 F2 Property and equipment Intangible assets Section G: Other assets G1 Long-term employee benefits G2 Non-current assets held for sale G3 Other assets Section H: Financial instruments H1 Consolidated statement of financial position – categories of financial instruments H2 Fair-value measurement – financial instruments H3 Assets and liabilities not measured at fair value for which fair value is disclosed H4 Financial instruments designated as fair value through profit or loss H5 Offsetting financial assets and financial liabilities H6 Collateral Section I: Share-based payments I1 I2 Description of arrangements Effect on profit and financial position I3 Movements in number of instruments I4 Instruments outstanding at the end of the year by exercise price I5 Instruments granted during the year Section J: Other liabilities J1 Provisions and other liabilities J2 Contingent liabilities and undrawn facilities J3 Commitments Section K: Risk and balance sheet management K1 Financial risk management K2 Capital management K3 K4 Liquidity gap Interest rate risk in the banking book K5 Historical value at risk (99%, one-day) by risk type Section L: Cashflow information L Cashflow information Section M: Additional information M1 Foreign currency conversion M2 Events after the reporting period M3 Directors’ emoluments M4 Preference shareholder analysis Compliance with IFRS – financial statement notes 83 84 84 84 86 88 88 90 93 93 98 101 101 109 109 109 115 117 128 129 130 132 134 135 137 137 139 140 140 140 142 142 143 143 143 143 145 145 146 146 148 148 148 149 158 159 2018 highlights Headline earnings of R10 884m ▼ 3,8% (R11 311m in 2017) NIR/expenses ratio 75,6% (76,0% in 2017) Return on equity 16,6% (17,8% in 2017) Common-equity tier 1 ratio 11,6% (12,6% in 2017) Credit loss ratio 54 bps (47 bps in 2017) Return on assets 1,19% (1,21% in 2017) Nedbank Limited Annual Report 2018 1 About this report Our consolidated annual financial statements provide a detailed analysis of our statutory accounting records. These financial statements are independently audited as indicated in the independent auditors’ report and provide indepth disclosure and transparency on the financial performance of the group. The notes to the consolidated annual financial statements are classified in the following sections: Section A: Accounting policies This section briefly outlines the basis of preparation and key accounting policy elections applied in the preparation of the group’s consolidated annual financial statements. Section B: Segmental and performance-related information Refer to this section for information on the group’s financial performance. This section contains the group’s operational segmental report and performance-related notes that provide an analysis of the group’s consolidated statement of comprehensive income. Section C: Core banking assets This section provides information about the group’s core banking assets, including loans and advances, and an analysis of the related impairments charge. Information is also provided on the group’s investments in government and other securities, and other short-term securities. The group’s cash and cash equivalents and derivative financial instruments are also analysed in this section. Section D: Core banking liabilities Information about the group’s core banking liabilities, including long-term debt instruments, can be found in this section. A contractual maturity analysis of financial liabilities is also provided. Section E: Investments This section provides an analysis of the group’s investments in investment securities, associate companies and subsidiaries. Related information, such as related-party disclosure, information on structured entities and securitisation vehicles can also be found here. Section F: Generic assets This section provides an analysis of non-core assets such as property and equipment, goodwill and other intangible assets. Section G: Other assets Refer to this section for disclosure on the group’s long-term employee benefits, non-current assets and liabilities held for sale and other assets. Section H: Financial instruments Additional disclosure on the group’s financial instruments can be found in this section. Refer to this section for the categorisation of financial assets and liabilities, the fair-value hierarchy and other fair-value-related disclosures. The group’s disclosure on collateral and offsetting of financial assets and liabilities can also be found in this section. Section I: Share-based payments This section details the group’s share-based payments schemes and their effect on the group’s financial position. Section J: Other liabilities This section provides an analysis of the group’s non-core liabilities, including provisions and other liabilities, contingent liabilities, undrawn facilities and commitments. Section K: Risk and balance sheet management Refer to this section for the group’s liquidity gap disclosure and details on the historical value at risk and interest rate risk in the banking book. Section L: Cashflow information This section contains notes to the group’s statement of cashflows. Section M: Additional information This section contains additional disclosure that may be relevant to understanding the group’s consolidated annual financial statements, such as a foreign currency conversion guide and information on events after the reporting period and directors’ emoluments. 2 Nedbank Limited Annual Report 2018 Financial highlights for the year ended 31 December Rm Headline earnings reconciliation Profit attributable to equity holders of the parent Non-trading and capital items Non-trading and capital items Taxation on non-trading and capital 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 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 2018 2017 10 765 (119) (164) 45 11 160 (151) (210) 59 10 884 11 311 3,57 0,54 44,6 58,9 68 846 16,6 727 347 971 623 1,19 471 132 11,6 12,7 15,7 3,57 0,47 44,1 58,1 67 425 17,8 706 613 910 068 1,21 431 207 12,6 13,8 16,7 27,9 358,3 39 044 27,9 358,3 40 575 84,05248 86,56389 41,82076 42,23172 43,39039 43,17350 84,99426 87,37944 875 915 810 48,6 840 955 820 50,0 Rm Rm Rm Rm Rm % % % % Rm % Rm Rm % Rm % % % m m cents cents cents cents cents cents cents cents m Nedbank Limited Annual Report 2018 3 Ten-year review Consolidated statement of comprehensive income Rm Interest and similar income Interest expense and similar charges Net interest income Impairments charge on financial instruments 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 Profit before direct taxation Direct taxation Profit for the year Profit attributable to: – Ordinary and preference shareholders – Non-controlling interest – ordinary shareholders – Non-controlling interest – preference shareholders Profit for the year Headline earnings 2018 72 739 46 774 25 965 3 547 22 418 20 884 43 302 27 616 804 14 882 (164) 14 718 (83) 14 635 3 854 10 781 10 765 16 10 781 10 884 2017 71 311 46 111 25 200 3 030 22 170 19 907 42 077 26 192 858 15 027 (210) 14 817 (96) 14 721 3 563 11 158 11 160 (2) 11 158 11 311 2016 69 862 45 344 24 518 4 254 20 264 19 361 39 625 25 283 810 13 532 (289) 13 243 (20) 13 223 3 286 9 937 9 896 41 9 937 10 143 2015 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 The group adopted IFRS 9 on 1 January 2018 and prepared the information for the year ended 31 December 2018 in accordance with IFRS 9. Information for 2009 to 2017 has been prepared in accordance with IAS 39 and has not been restated. On 1 January 2013 the group adopted IFRS 10, IFRS 11 and IFRS 12 and restated 2012 information. The information for 2012 to 2018 was prepared in accordance with IFRS 10, IFRS 11 and IFRS 12. Information for 2009 to 2011 was not restated for the adoption of these three standards. 4 Nedbank Limited Annual Report 2018 2014 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 2013 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 2012 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 2011 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 2010 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 2009 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 Nedbank Limited Annual Report 2018 5 Ten-year review Consolidated statement of financial position Rm 2018 2017 2016 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 associate companies 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 Additional tier 1 capital instruments Non-controlling interest attributable to: – ordinary shareholders – preference shareholders Total equity Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Other liabilities held for sale Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments Total liabilities Total equity and liabilities 7 931 57 844 22 412 96 123 725 792 12 040 105 6 787 305 786 40 8 367 4 764 19 789 8 538 8 823 73 472 30 698 48 749 695 744 7 332 75 5 303 388 224 37 7 976 5 761 18 145 7 341 20 241 68 218 18 044 50 687 691 925 8 164 440 4 258 287 225 266 8 197 5 042 18 139 5 928 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 4 881 971 623 910 068 900 061 860 733 28 19 182 49 636 68 846 3 561 3 416 23 561 76 407 19 761 806 487 10 414 272 224 2 648 55 410 895 216 971 623 28 19 182 48 215 67 425 3 561 2 600 7 561 74 154 23 561 742 859 14 047 191 351 3 423 51 482 835 914 910 068 28 19 182 42 698 61 908 3 561 2 000 28 18 532 37 610 56 170 3 561 253 223 67 722 13 469 750 319 12 717 53 391 3 328 52 062 832 339 900 061 59 954 33 996 708 036 9 911 87 763 3 009 44 977 800 779 860 733 The group adopted IFRS 9 on 1 January 2018 and prepared the information for the year ended 31 December 2018 in accordance with IFRS 9. Information for 2009 to 2017 has been prepared in accordance with IAS 39 and has not been restated. On 1 January 2013 the group adopted IFRS 10, IFRS 11 and IFRS 12 and restated 2012 information. The information for 2012 to 2018 was prepared in accordance with IFRS 10, IFRS 11 and IFRS 12. Information for 2009 to 2011 was not restated for the adoption of these three standards. 6 Nedbank Limited Annual Report 2018 2014 2013 2012 2011 2010 2009 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 27 17 422 34 787 52 236 3 561 17 467 35 004 13 811 31 279 566 047 4 204 340 2 932 12 1 098 69 87 6 571 2 847 13 199 4 188 699 155 27 17 422 30 524 47 973 3 561 12 587 37 575 14 660 26 194 520 116 4 528 241 2 832 508 1 029 362 84 6 171 1 992 12 641 3 830 11 514 31 715 14 314 29 991 493 107 3 989 629 3 549 8 565 66 488 6 082 2 027 11 862 3 634 7 469 21 955 14 077 31 667 471 447 3 613 440 2 999 5 933 48 82 5 394 1 965 11 068 3 328 6 823 14 408 12 871 35 754 446 428 3 917 580 3 012 12 922 36 102 4 754 1 783 10 437 3 151 645 350 613 540 576 490 544 990 27 17 422 26 140 43 589 3 561 27 14 422 24 856 39 305 3 561 27 14 422 20 281 34 730 3 560 183 141 136 121 110 55 980 15 479 634 623 8 404 35 287 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 36 67 367 1 880 30 295 598 064 645 350 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 10 799 467 924 5 218 162 1 514 1 298 20 082 506 997 544 990 Nedbank Limited Annual Report 2018 7 CONSOLIDATED ANNUAL FINANCIAL STATEMENTS Responsibility of our directors Nedbank Limited Reg No 1951/000009/06. Prepared under the supervision of the Nedbank Group CFO, Raisibe Morathi CA(SA). Audited in terms of the Companies Act, 71 of 2008 (as amended). The directors are responsible for the preparation and fair presentation of the consolidated financial statements of Nedbank Limited (comprising the statement of financial position at 31 December 2018, the statement of comprehensive income, the statement of changes in equity and statement of cashflows for the year then ended) 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 (IASB) and International Financial Reporting Standards Interpretations 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, 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 THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS The consolidated annual financial statements of Nedbank Limited, as identified in the first paragraph, were approved by the Nedbank Limited Board of Directors on 4 March 2019 and are signed on its behalf by: V Naidoo Chairman Sandown 4 March 2019 MWT Brown Chief Executive Certification from our company secretary In terms of section 88(2)(e) of the Companies Act, I certify that, to the best of my knowledge and belief, Nedbank Limited has filed with the Commissioner all such returns and notices as are required by the Companies Act, and that all such returns and notices are true, correct and up to date. J Katzin Company Secretary Sandown 4 March 2019 8 Nedbank Limited Annual Report 2018 Report from the Group Audit Committee The Nedbank Group Audit Committee (‘GAC’) is pleased to present its report for the 2018 financial year. This report has been prepared based on the requirements of the South African Companies Act, 71 of 2008, as amended (‘Companies Act’), the King Code of Governance for South Africa (‘King IV’), the JSE Listings Requirements and other applicable regulatory requirements. The committee carried out its responsibilities, including those relating to the audit and financial reporting obligations of the group, as set out in its board- approved charter. GAC’s main objective is to assist the board in fulfilling its oversight responsibilities, and in the evaluation of the adequacy and efficiency of accounting policies, internal controls and financial and corporate reporting processes. In addition, GAC assesses the effectiveness of the internal auditors, the independence and effectiveness of the external auditors, and considers and recommends the appointment of the external auditors. The report aims to provide details on how GAC satisfied its various statutory obligations during the period, as well as on some of the significant matters that arose and how GAC addressed those to assist in ensuring the integrity of Nedbank’s financial reporting. Composition and governance Members of the committee satisfy the requirements to serve as members of an audit committee, as provided in section 94 of the Companies Act, and have adequate knowledge and experience to carry out their duties. All members are independent non- executives. The composition of the committee and the attendance of meetings by its members for the 2018 financial year are set out below: Members S Subramoney (Chairman) EM Kruger HR Brody NP Dongwana NP Mnxasana PM Makwana * Apologies received. Attendance Formal Ad hoc 6/6 4/5* 6/6 5/6* 0/1* 1/1 5/5 3/3 4/5* 2/5* 1/1 1/1 Errol Kruger was appointed as a member during the year, while Nomavuso Mnxasana’s membership ended following her retirement from the Nedbank Group board. Mpho Makwana remains a boardmember, but has by rotation retired as a member of GAC. All members of GAC are independent non-executive boardmembers meeting all King IV diversity requirements. 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 Group Chief 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 to provide the committee with greater insight into specific issues or areas of the group. The GAC Chairman has regular contact with the management team to discuss relevant matters directly. The CIA and the external auditors have direct access to the committee, including closed sessions without management held during the year, on any matter that they regard as relevant to the fulfilment of the committee’s responsibilities. The GAC Chairman meets with the CIA and external auditors separately between GAC meetings. In addition, the GAC meeting agenda allows for a meeting solely with the members of the GAC. Six formal GAC meetings [including the South African Reserve Bank (SARB) trilateral meeting] were held in respect of the 2018 financial year, aligned with the key reporting and regulatory timelines, and at least four additional ad hoc meetings were held as part of the vigorous tender process that was followed for the selection of Ernst & Young (EY) as the new external auditors. The ad hoc meetings were also used to further discuss, monitor and address the impact of allegations of misconduct against the current external auditors on Nedbank. A further ad hoc meeting was held to review financial submissions (at time of managed separation) to the former holding company. The key focus areas for the six formal meetings were: 9 May 2018 20 June 2018 Review and approval of Nedbank Limited’s audit report on Banks Act returns and discussion of the 2018 external audit strategy presentation and report from GIA. Annual trilateral meeting with representatives of the Bank Supervision Department of the SARB for discussion of, among other things, key external audit findings, internal-audit matters and reporting responsibilities in terms of the regulations. 25 July 2018 Review of the interim results for the six months to 30 June 2018 as well as the press and SENS announcements. 23 October 2018 Review of the third-quarter performance, external-audit strategy and GIA Q3 plan for 2019. In terms of Nedbank’s MAFR plan, recommendation of the appointment of EY together with Deloitte & Touche, as joint external auditors for December 2019. 17 January 2019 Review of unaudited preliminary results and key financial and accounting judgements. 27 February 2019 Discussion and review of year-end reports from GIA and the external auditors, feedback from subsidiary audit committees, the Group Credit Committee (GCC), Group Risk and Capital Management Committee (GRCMC), Group Information Technology Committee (GITCO) and other relevant committees. Review and approval of annual financial statements and related SENS and results announcements. Nedbank Limited Annual Report 2018 9 Report from the Group Audit Committee continued The GAC Chairman reports to the board on committee activities and the matters discussed at each meeting, highlighting any key items that the committee believes require action and providing recommendations for its resolution. The performance of GAC is reviewed annually as part of the effectiveness review of the board and all its committees. The latest review concluded that GAC continued to operate effectively and successfully discharged its responsibilities and duties. External auditor independence matters The 2018 financial year was a significant year in terms of external auditor independence matters and the oversight of the external audit process. In April 2018 GAC was informed of the suspension and subsequent resignation of the KPMG lead partner. KPMG undertook a full assurance review on audits signed off by the lead partner in 2016 and 2017, and reported to GAC that it was satisfied that the quality of the Nedbank audit remained robust. As reported previously, GAC has a well-established policy on auditor independence and audit effectiveness. The reputational risk issues in the audit industry and the continued focus on independence resulted in a further ad hoc meeting in August, where KPMG and Deloitte presented on their governance processes and controls with regard to auditor independence and audit quality. GIA also presented on its oversight role to assist GAC in assessing auditor effectiveness and audit quality, which indicated that, overall, the stakeholders were satisfied with the effectiveness of the external auditors despite the ongoing reputational and other issues affecting both KPMG and Deloitte, as well as the audit profession. The SARB topic for presentation and discussion at the SARB/ board meeting was ‘Auditor independence and audit quality measures’. A thorough review of existing processes and procedures was performed, and some of the enhancements made to strengthen the processes to assess auditor independence were the following: (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) Prohibiting (from 1 January 2019) the provision of non-audit services by the joint auditors, except where those services are related to their role as external auditors, for example the provision of limited assurance regarding Nedbank’s key performance indicators included in the Nedbank Group Integrated Report. Reducing the maximum threshold of all non-audit services permissible to 25% of the statutory audit fee, from the previous 50% limit. Prohibiting audit service providers from performing services, as detailed in section 90 of the Companies Act. Including independence probity checks of banking relationships with Nedbank in the firms’ independence processes. Implementing formal engagements between the GAC Chairman and the engagement quality reviewers of the firms. External auditor tender In June 2017 the Independent Regulatory Board of Auditors published a rule prescribing that auditors of public-interest entities in SA must comply with mandatory audit firm rotation (‘MAFR’), which means that, with effect from 1 April 2023, audit firms may not serve as the appointed auditor of a public- interest entity for more than 10 consecutive years. During 2018, GAC formally implemented the applicable MAFR requirements, including that Nedbank has to have joint auditors under the Banks Act and SARB regulations. GAC is responsible for appointing the external auditors and making the final recommendation to the shareholders at the annual general 10 Nedbank Limited Annual Report 2018 meeting (AGM). The GAC notified the board of directors of its process and outcome. Several ad hoc committee meetings were held to oversee the comprehensive process. GAC, based on the tender process, will make a recommendation to shareholders at the May 2019 AGM. GAC will continue to monitor the MAFR requirements as Deloitte also has to retire by rotation from the Nedbank audit no later than 2023 after having served as the external auditors for 45 years. GAC nominated Deloitte & Touche and EY as the external auditors for Nedbank Limited and Nedbank Group Limited, with Mr Lito Nunes remaining as the designated registered audit partner for Deloitte and Mr Farouk Mohideen being the newly appointed designated registered audit partner for EY. The appointment is effective after the AGM. The appointment of EY was approved by the Prudential Authority. This appointment is subject to shareholders approval. KPMG will retire by rotation on conclusion of its external audit responsibilities for the year ending 31 December 2018 after serving as Nedbank’s external auditors for 45 years. This is expected to be at the conclusion of the AGM. Other external auditor matters GAC is responsible for the appointment, compensation and oversight of the external auditors for the group, namely Deloitte & Touche and KPMG in 2018. During the period GAC: (cid:122) (cid:122) (cid:122) (cid:122) considered and recommended to shareholders the appointment of Deloitte & Touche and KPMG, and the approval of their audit fees for the year under review; considered and recommended to shareholders the appointment of EY and Deloitte & Touche for 2019; continued to monitor allegations of misconduct against the external auditors and received positive declarations from the firms and noted that the independent inquiries have not been concluded or that the findings have not been communicated; approved the external auditors’ 2018 annual plan and related scope of work, confirming suitable reliance on GIA and the appropriateness of key audit risks identified; (cid:122) 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, with the annual review of the quality of the audit and the performance of the joint external auditors having been undertaken by means of questionnaires completed by key finance staff, GIA members and members of GAC; (cid:122) (cid:122) (cid:122) (cid:122) ensured that the 2018 and 2019 appointment and the independence of the external auditors were in compliance with the Companies Act and all other regulatory and legal requirements, which included receiving from the external auditors all decision letters and explanations issued by the Independent Regulatory Board for Auditors or any other regulator, and any summaries relating to monitoring procedures or deficiencies (if applicable) issued by the external auditors to confirm the suitability for appointment of the external auditors and designated individual partners; confirmed that no reportable irregularities were identified and reported by the external auditors in terms of the Auditing Profession Act, 26 of 2005; considered reports from subsidiary audit committees and from management on the activities of subsidiary entities and formally engaged with the chairpersons of subsidiary audit committees; and reviewed the findings and recommendation of the external auditors and confirmed that there were no unresolved matters. Internal Audit Internal Audit performs an independent assurance function and forms part of the third line of defence. The CIA has a functional reporting line to the GAC Chairman and an administrative reporting line to the CRO. GIA provides independent, objective assurance to the board of directors of Nedbank Group Limited and Nedbank Limited through the authority of GAC that the governance processes, including professional ethics, management of risk and systems of internal control, are adequate and effective to mitigate, in line with GIA’s methodology, the significant control risks, both current and emerging, that threaten the achievement of the group’s objectives. The refresh of GIA is now well advanced with the new CIA having occupied the position since June 2017. The focus of the GIA refresh was to build an appropriate mix of core internal-audit expertise, technical expertise, business acumen and position parity; to align its mandate; and to meet expectations of its stakeholders, including regulators. A new GIA executive layer was appointed in 2018, and the rollout of a new GIA Rest of Africa (RoA) operating model embedded. A number of culture shifts were made thus far, including a greater strategic emphasis on the GIA plan. GAC reviewed and approved the annual internal-audit charter, and evaluated the independence, effectiveness and performance of GIA in compliance with its charter as follows: (cid:122) Received reports from the CIA, assessed the effectiveness of the group internal-audit function and reviewed and approved the annual GIA plan. (cid:122) (cid:122) Ensured that the CIA had a direct reporting line to the Chairman of GAC and noted the administrative reporting line to the CRO. Satisfied itself as to the appropriateness of the expertise, experience and resources of the CIA and the internal-audit function. (cid:122) 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. (cid:122) Monitored and challenged, where appropriate, action taken by management with regard to adverse internal-audit findings. (cid:122) (cid:122) Ensured that GIA complied with the reporting and independence requirements of its charter. Satisfied itself that GIA had conformed with the key principles of the International Institute of Internal Auditors’ standards for professional practice of internal auditing. The rating in this regard was the highest attainable in terms of compliance with the standards. Significant audit matters GAC has considered the appropriateness of the key audit matters reported in the external-audit opinion and considered the significant audit matters relating to the annual financial statements and how these were addressed by the committee: Significant matter How GAC addressed the matter Impairment of loans and advances Valuation of financial instruments held at fair value Associate investment in ETI¹ GAC reviewed and discussed the reports from the GCC regarding the level and appropriateness of impairments, provisioning methodologies and related key judgements in determining the impairment balances. Emphasis was placed on the impact of IFRS 9: Financial Instruments, on impairment models, key judgements by management and key disclosures. No material changes were made to the preliminary disclosures in respect of the opening balance sheet adjustment in the 2017 financial statements. GAC reviewed 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. Emphasis was placed on the impact of IFRS 9: Financial Instruments, on classification and measurement business models and key judgements by managements. GAC received regular reports from management in connection with the financial performance of Ecobank Transnational Incorporated (ETI) and the accounting considerations for Nedbank. GAC noted the improved financial performance of ETI during the 2018 reporting period and management’s assessment that no adjustment of the impairment provision is required, based on observable indications that the impairment loss previously recognised no longer exists or may have decreased. Fraud risk in relation to revenue recognition – non-interest revenue Fraud risk in relation to management override of controls GAC received regular feedback from the CFO in connection with controls over the financial reporting system and, where applicable, key judgements applied in the recognition of revenue. GAC received regular feedback from the CFO in connection with key judgements applicable to management estimates and from GIA in connection with the overall control environment and the ‘tone at the top.’ ¹ The significant matter ‘Associate investment in ETI’ relates only to the consolidated results of Nedbank Group Limited. Nedbank Limited Annual Report 2018 11 Report from the Group Audit Committee continued Financial legal, compliance and regulatory reporting requirements (cid:122) 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. GAC is satisfied with the appropriateness of the expertise and experience of the CFO and the resources, expertise, succession and experience of Nedbank’s finance function. GAC reviewed the adequacy of the regulatory reporting processes as required by the Banks Act of SA, which includes evaluation of the quality of reporting and the adequacy of systems and processes, and consideration of any findings regarding the financial regulatory reports by the external auditors. (cid:122) GAC received regular reports from the Group Chief Compliance Officer in respect of the compliance monitoring plan, and reviewed feedback from management regarding legal matters that could have a material impact on the group. (cid:122) Annual financial statements and integrated reporting process. (cid:122) GAC reviewed all formal announcements relating to Nedbank’s financial performance and found the reporting process and controls that led to the compilation of the financial information to be effective and appropriate. GAC also assessed and confirmed the appropriateness of the going-concern assumption used in the annual financial statements, considering management budgets and the capital and the liquidity profiles. (cid:122) GAC reviewed and discussed the integrated report, reporting process and governance and financial information included in the integrated report after considering recommendations from the Group Transformation, Social and Ethics Committee, Group Remuneration Committee, Group Risk and Capital Management Committee and the Group Directors’ Affairs Committee. (cid:122) 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 AGM. (cid:122) GAC reviewed the solvency and liquidity tests and recommended interim- and final-dividend proposals for approval by the board. (cid:122) GAC reviewed the investment in ETI and assessed the relevant impairment indicators. (cid:122) GAC reviewed and approved the high-level project plan and progress updates on the implementation of IFRS 16: Leases. Internal control, risk management and information technology GAC is responsible for reviewing the effectiveness of systems for internal control, financial reporting and risk management, and for considering the major findings of any internal investigations into control weaknesses, fraud or misconduct, and management’s response thereto. GAC receives regular reports provided as part of 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. GAC receives regular reports from GITCO regarding the monitoring of the adequacy and effectiveness of the group’s information system controls and from the GCC regarding its oversight of the adequacy and effectiveness of the credit monitoring processes and systems. GAC also receives regular reports on issues in the group’s key issues control log from the CRO and regular reports regarding compliance matters (including the Companies Act and Banks Act) from the Group Chief Compliance Officer. Having considered, analysed, reviewed and debated information provided by management and GIA and the external auditors, GAC considered that the internal controls of the group had been effective in all material aspects throughout the year under review. Coordinated assurance The group’s Three-lines-of-defence Model is in line with Basel recommendations and requirements of the Banks Act and banking regulations, and aligns with the principles and outcomes of King IV (especially Principle 15 and the standards listed there). This model meets the requirements for Nedbank Group and Nedbank Limited to provide assurance through a coordinated approach. An Executive Coordinated Assurance Forum has been established with an aim to: (cid:122) (cid:122) support the CRO in embedding and operationalising the Coordinated Assurance (CA) model in Nedbank; and ensure that CA is ‘practical’ and effective, with alignment achieved on the approach across the risk, compliance and audit functions. The establishment of the CA Forum better integrates the assurance providers within the risk, compliance and audit disciplines. Through this integrated approach all stakeholders are provided with the opportunity to understand each other’s views through collaboration and agree on the group’s CA principles. GAC is therefore of the view that the arrangements in place for the CA model are adequate and achieve the objective of a more effective, integrated approach across the disciplines of risk management, compliance and audit. Future accounting developments The International Accounting Standards Board (IASB) published IFRS 16: Leases with an effective implementation date of 1 January 2019. IFRS 16 replaces the current IAS 17 on-balance-sheet (finance lease) and off-balance-sheet (operating lease) model with an on-balance-sheet model for all leases. GAC received presentations from management on the accounting policy choices and practical expedients selected on adoption of IFRS 16. In addition, GAC assessed the appropriateness of the disclosure in the 2018 financial statements. 12 Nedbank Limited Annual Report 2018 Key focus areas for 2019 (cid:122) 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. (cid:122) Continued role as a joint oversight committee along with the Group Remuneration Committee on the unwinding of the postretirement medical aid (PRMA). (cid:122) Ensuring a smooth transition and onboarding of the newly appointed external auditors to ensure minimal disruptions to the 2019 year-end audit process. (cid:122) Continued monitoring of the Chairman’s College forum to ensure that regular engagement is led by the GAC Chairman and the chairpersons of the subsidiary audit committees. (cid:122) (cid:122) The monitoring of accounting implications arising from the reported issues in the Nedbank Zimbabwe subsidiary. The monitoring of the implementation of IFRS 17: Insurance Contracts, which replaces the current limited guidance contained in IFRS 4: Insurance Contracts. IFRS 17 will come into effect for Nedbank on 1 January 2022. Conclusion GAC is satisfied that it has complied with all statutory duties as well as other duties given to it by the board under its terms of reference. GAC reviewed the group annual financial statements for the year ended 31 December 2018 and recommended them for approval to the board on 4 March 2019. On behalf of GAC Stanley Subramoney Group Audit Committee Chair 4 March 2019 Nedbank Limited Annual Report 2018 13 Directors’ Report for the year ended 31 December 2018 The board of directors is pleased to present the annual financial statements of Nedbank Limited for the year ended 31 December 2018. Nature of business Nedbank Limited (‘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 22 to 159 of the annual financial statements, which have been prepared under the supervision of the Nedbank Chief Financial Officer, Raisibe Morathi, and audited in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS IC, 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, and the JSE Listings Requirements. Year under review The year under review is fully covered in the Reflections from our Chairman, Reflections from our Chief Executive and Reflections from our Chief Financial Officer sections of the 2018 Nedbank Group Limited Integrated Report, available at nedbankgroup.co.za. Share capital Details of the authorised and issued share capital, together with details of shares issued during the year, appear in note B3 to the annual financial statements. Ownership The holding company of Nedbank is Nedbank Group Limited (‘Nedbank Group’). Nedbank Group holds 100% of the issued ordinary shares of the company. Further details of preference shareholders appear in note M4 to the annual financial statements. Dividends Details of the dividends appear in note B2 to the annual financial statements. Directors Biographical details of the current directors appear online at nedbankgroup.co.za. 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 Remuneration Report available at Nedbankgroup.co.za. During the period under review the following changes occurred on the Nedbank board: (cid:122) (cid:122) (cid:122) Ian Gladman resigned as non-executive director on 15 October 2018; Bruce Hemphill resigned as non-executive director on 11 June 2018; Rob Leith resigned as non-executive director on 15 October 2018 and was subsequently reappointed as non-executive director on 1 January 2019; (cid:122) Nomavuso Mnxasana retired as independent non-executive director on 10 May 2018; and (cid:122) Peter Moyo was appointed as non-executive director on 11 June 2018. Vassi Naidoo’s designation changed from non-executive Chairman to independent non-executive Chairman on 1 January 2019. In terms of Nedbank’s memorandum of incorporation not less than one-third of the directors are required to retire at each Nedbank AGM and may offer themselves for election or reelection. The directors so retiring are firstly those directors appointed by the Nedbank board since the last AGM, and thereafter those longest in office since their last election. Peter Moyo was appointed by the board of directors subsequent to the Nedbank AGM on 8 May 2018, and in terms of the memorandum of incorporation his appointment terminates at the close of the AGM to be held on 7 May 2019. He is available for election. Similarly, Rob Leith was appointed to the board of directors subsequent to the AGM on 8 May 2018 and his appointment terminates at the close of the AGM on 7 May 2019. He is also available for election. Mike Brown, Brian Dames, Raisibe Morathi and Stanley Subramoney are also required to seek reelection at the AGM. The aforementioned directors make themselves available for reelection and separate resolutions will be submitted for approval at the AGM to be held on 7 May 2019. 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 unless otherwise agreed by the board. Malcolm Wyman was appointed to the board on 1 August 2009 and will retire at the conclusion of the Nedbank Group AGM on 10 May 2019. 14 Nedbank Limited Annual Report 2018 Details of the members of the board who served during the year and at the reporting date are given below: Name HR Brody Position as director Independent non-executive director MWT Brown Chief Executive BA Dames Independent non-executive director NP Dongwana Independent non-executive director Non-executive director Non-executive director ID Gladman JB Hemphill EM Kruger RAG Leith Date appointed as director Date resigned/retired as director (where applicable) 1 July 2017 17 June 2004 30 June 2014 1 June 2017 7 June 2012 15 October 2018 25 November 2015 11 June 2018 Independent non-executive director 1 August 2016 Non-executive director 13 October 2016 15 October 2018 (Reappointed on 1 January 2019) PM Makwana Independent non-executive director 17 November 2011 L Makalima (formerly Manzini) Independent non-executive director 1 June 2017 MA Matooane Independent non-executive director 15 May 2014 NP Mnxasana Independent non-executive director 1 October 2008 10 May 2018 RK Morathi Chief Financial Officer and executive director 1 September 2009 MP Moyo V Naidoo Non-executive director Chairman 11 June 2018 1 May 2015 JK Netshitenzhe Independent non-executive director 5 August 2010 MC Nkuhlu Chief Operating Officer and executive director 1 January 2015 S Subramoney Independent non-executive director 23 September 2015 MI Wyman (British) Lead independent director 1 August 2009 Retires on 10 May 2019 Directors’ interests Nedbank Group holds the issued ordinary shares. The Company Secretary’s addresses and the registered office are as follows: The directors’ interests in ordinary shares in Nedbank Group and non-redeemable, non-cumulative, non-participating preference shares in Nedbank at 31 December 2018 are set out online in the full supplementary Remuneration Report. 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. Group Audit Committee and Group Transformation, Social and Ethics Committee reports The Group Audit Committee Report appears on pages 9 to 13 and the Group Transformation, Social and Ethics Committee Report is included in the 2018 Nedbank Group Integrated Report. Company Secretary and registered office Following Thabani Jali’s retirement, Jackie Katzin was appointed as Company Secretary on 1 January 2019. The board has satisfied itself that, in respect of the period under review, Thabani Jali was suitably competent, qualified and experienced, and adequately and effectively performed the role and duties of a company secretary. The board conducted a similar assessment of Jackie Katzin prior to approving her appointment and was similarly satisfied with the results thereof. The Company Secretary has direct access to, and ongoing communication with, the Chairman of the board and the Chairman and the Company Secretary meet regularly throughout the year. Jackie Katzin is not a director of the company. Business address Registered address Postal address Nedbank 135 Rivonia Campus 135 Rivonia Road Sandown Sandton 2196 SA 135 Rivonia Road Sandown Sandton 2196 SA PO Box 1144 Johannesburg 2000 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 Report 2018 15 Directors’ Report for the year ended 31 December 2018 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 Remuneration Report, which can be found at nedbankgroup.co.za. Subsidiary companies Details of principal subsidiary companies are reflected in note E3 to the annual financial statements at nedbankgroup.co.za. Special resolutions by subsidiaries (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) 16 January 2018 by Mercury Securities Proprietary Limited regarding the deletion of the word ‘audited’ in the phrase ‘audited annual financial statements’. 13 March 2018 by Depfin Investments Proprietary Limited regarding the conversion of 1 400 000 par value preference shares to no par value shares and the reclassification of 400 000 of the 1 400 000 class series 50C par value preference shares to class series 50C no par value preference shares. 27 March 2018 by Esimio Trading 101 Proprietary Limited regarding the deletion of the word ‘audited’ in the phrase ‘audited annual financial statements’. 15 May 2018 by Depfin Investments Proprietary Limited regarding the conversion of 4 000 ordinary shares to 48 000 000 000 000 000 no par value preference shares. 21 May 2018 by Peoples Mortgage Proprietary Limited regarding the deletion of the word ‘audited’ in the phrase ‘audited annual financial statements’. 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 The directors are not aware of any other material events that have occurred between the reporting date and 4 March 2019. 16 Nedbank Limited Annual Report 2018 Independent Auditors’ Report to the shareholders of Nedbank Limited Report on the audit of the Nedbank Limited consolidated financial statements Opinion We have audited the consolidated financial statements of Nedbank Limited (the Group) set out on pages 22 to 157 which comprise the consolidated statement of financial position at 31 December 2018, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cashflows for the year then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Nedbank Limited at 31 December 2018, 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements in South Africa. 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 South Africa. The IRBA Code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How the matter was addressed in the audit Impairment of loans and advances Refer to Note C2 of the consolidated financial statements for selected disclosures applicable to this matter. Our response to the key audit matter included performing the following audit procedures: Loans and advances, which represent 74,7% of total assets, and the associated impairment provisions, are significant in the context of the consolidated financial statements. (cid:122) The Group adopted IFRS 9 from 1 January 2018 which requires impairment losses to be evaluated on an expected credit loss (ECL) basis. The determination of impairment provisions for expected losses requires significant judgement, and we have identified the audit of ECL impairment provisions to be a key audit matter. The key areas where we identified greater levels of management judgement and therefore increased levels of audit focus in the Group’s implementation of IFRS 9 are: Accuracy of ECL models The ECL model applies to financial assets measured at amortised cost, debt instruments measured at fair value through other comprehensive income (FVOCI), lease receivables and certain loan commitments, as well as financial guarantee contracts. Under IFRS 9 loss allowances are measured on either of the following bases: (cid:122) (cid:122) 12 month ECLs that result from possible default events within the 12 months after the reporting date. Lifetime ECLs that result from all possible default events over the expected life of a financial instrument. Identifying relevant controls that address the impairment risks identified and evaluating the design and implementation, and in some cases the operating effectiveness, of these controls. We focused on controls over the identification of impairment losses; the governance processes in place for credit models, inputs and overlays; the credit forums where key judgements are considered; and governance processes over allowances for loan impairments and other credit risk allowances. (cid:122) To challenge the accuracy of models we: ○ ○ ○ performed an assessment of changes to definitions and methodologies (at a parameter and ECL calculation level); re-performed the IFRS 9 model build at a parameter level as well as the assessment of its components, eg probability of default, loss given default, exposure at default, significant increase in credit risk; and re-performed the ECL, SICR and stage migration calculations. (cid:122) We challenged the write off point used by management and the adjustments that were recorded to revise write off points for certain portfolios based on historical post write off recovery data. We also challenged key judgements including adjustments to modelled LGDs, discount rates and modification gains or losses. The Group is required to recognise an allowance for either 12 month or lifetime ECLs, depending on whether there has been a significant increase in credit risk (SICR) since initial recognition. Indicators of SICR in the retail portfolio may include short-term forbearance, direct debit cancellation, extension to the terms granted and previous arrears within the past months. (cid:122) We evaluated the forward looking models and focused on reviewing the suitability of the macroeconomic scenario forecasts generated as well as any changes made to processes or governance. We tested how scenarios have performed against actuals and how they compare based on our knowledge of the industry. Indicators of a SICR in the wholesale portfolio may include any of the following: significant increase in the credit spread, significant adverse changes in business, financial and/or economic conditions in which the client operates, actual or expected forbearance or restructuring, significant change in collateral value or early signs of liquidity and cashflow problems. (cid:122) We challenged the completeness, accuracy and validity of qualitative adjustments made to model results. In-model adjustments are typically audited through our independent assessment of models as we compare our model output to the final provision incorporating adjustments. Nedbank Limited Annual Report 2018 17 Independent Auditors’ Report to the shareholders of Nedbank Limited continued Key audit matter How the matter was addressed in the audit (cid:122) With regard to wholesale portfolio exposures: ○ We selected a sample of performing loans and advances and performed a detailed independent assessment of the expected credit losses, this included benchmarking internal ratings of loans and advances against external ratings and the ratings produced by a challenger model; ○ For a sample of loans and advances that had been individually evaluated and impaired, challenged the valuation of impairment losses by developing an independent expectation of the amount of the allowance. This involved challenging the collateral value and assessing the reasonableness of expected cashflows; and ○ When performing work on the valuation of allowances, considered any collateral held. Where management used specialists to perform the valuations, evaluated their competence, capabilities and objectivity in performing these valuations. Impairment of loans and advances The measurement of ECLs reflects a probability-weighted outcome, the time value of money and the Group’s best available forward-looking information. The abovementioned probability- weighted outcome considers the possibility of a credit loss occurring and the possibility of no credit loss occurring, even if the possibility of a credit loss is low. Credit losses are measured as the present value of all cash shortfalls (ie the difference between the cashflows due to the entity in accordance with the contract and the cashflows that the group expects to receive). ECLs are discounted at the original effective interest rate of the financial asset. The assessment of the ECL of a financial asset or a portfolio of financial assets entails estimations of the likelihood of defaults occurring and of the default correlations between counterparties. The group measures ECL using probability of default (PD), exposure at default (EAD) and loss given default (LGD). These three components are multiplied together and adjusted for the likelihood of default. The calculated ECL is then discounted using the original effective interest rate of the financial asset. The assessment of SICR and the calculation of ECL both incorporate forward looking information. The Group has performed historical analyses and identified the key economic variables impacting credit risk and ECL for each portfolio. These economic variables and their associated impact of the PD, EAD and LGD vary by financial instrument. The Group’s economics unit provides a forecast of economic variables and an overview of the economy quarterly or more often if necessary. Significant judgement and estimates are applied in this process of incorporating forward looking information into the SICR assessment and ECL calculation. The determination of the loan write-off points for the retail portfolio is subject to judgement. Changes to the write-off points impacts the non-performing loans ratio and resultant expected credit loss. Valuation of financial instruments carried at fair value Refer to Note H2 of the consolidated financial statements for selected disclosures applicable to this matter. Our response to the key audit matter included performing the following audit procedures: At 31 December 2018, financial assets at fair value through profit or loss (FVTPL) represented 12,6% of total assets and financial liabilities at FVTPL of 4,7% of total liabilities. Of the financial instruments (both assets and liabilities) carried at fair value, 6,3% were classified as level 3 in the fair value hierarchy as prescribed by IFRS 13 Fair Value Measurement. Financial instruments that are classified as level 2 or level 3 in the fair value hierarchy will have some element of estimation uncertainty inherent in their value, and the uncertainty is higher for level 3 financial instruments which, by their nature, are unobservable. These portfolios include unlisted equity investments, loans and advances, investment securities and certain derivative financial instruments which are difficult to price as a result of applying highly complex or non-standard valuation models or subjective inputs that are not readily available. This risk applies to both individual financial instruments and also to portfolio valuation adjustments which are applied to adjust portfolios for risks that are not included in the model valuation. These portfolio adjustments are subjective in nature and may rely on inputs that are unobservable. (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) In addition certain financial instrument valuation techniques are subject to ever developing market practices which may increase the estimation uncertainty. As part of the audit, identified relevant controls over valuation of financial instruments carried at fair value and evaluated the design and implementation, and where relevant the operating effectiveness, of these controls. We focused on controls over model governance, independent price verification and the daily profit or loss attribution processes. Evaluated the models used by management and rates applied at year-end, and used valuation tools to re-perform valuations across a range of financial instruments. For portfolio valuation adjustments, focused on the appropriateness of any changes made to the valuation methodology and inputs during the year. Additionally, these were benchmarked to current market best practices to assess the appropriateness of the methodologies applied. For portfolios of loans held at fair value, challenged the key valuation inputs, which included interest rate yield curves and adjustments for liquidity and credit risk. For unlisted private equity investments and investment securities, challenged the key inputs and assumptions driving the valuation, and evaluated the models used. Considered sensitivities to key factors including: ○ ○ Evaluated the appropriateness of the pricing multiples available from comparable listed companies, adjusted for comparability differences, size and liquidity; and Evaluated the reasonability of the cashflows and discount rates used by comparing them to similar financial instruments. 18 Nedbank Limited Annual Report 2018 Key audit matter How the matter was addressed in the audit Valuation of financial instruments carried at fair value As the determination of the fair value of certain financial instruments is a key source of estimation uncertainty, is subject to significant judgement and represents a material balance, this matter was a considered to be a key audit matter in our audit of the consolidated financial statements. (cid:122) Evaluated the disclosures made relating to the valuation of financial instruments in relation to the fair value categorisation and hierarchy, to ensure consistency with the requirements of the relevant accounting standards and with the methodologies applied by management. (cid:122) Where new valuation methodologies have been applied evaluated whether the model valuation methodologies used for material valuation risks are appropriate, utilising independent valuation experts. Evaluated the appropriateness of key assumptions and observable input sources and, where proxies were used, evaluated the appropriateness of these proxies. Information technology (IT) environment (Consolidated financial statements) The Group’s key financial accounting and reporting processes are highly dependent on the automated controls over the Group’s information systems. Significant audit effort is spent on the audit of these systems as part of the audit process, as it is critical for the control environment of the Group and therefore it is seen as a key audit matter. Our response to the key audit matter included performing the following audit procedures, which included the use of IT auditors: (cid:122) We evaluated the design and tested the operating effectiveness of IT controls over the applications, operating systems and databases that are relevant to financial reporting. The IT environment is complex and pervasive to operations due to the large volume of transactions processed in numerous locations daily and the reliance on automated and IT dependent manual controls. Gaps in the IT control environment could result in the financial accounting and reporting records being materially misstated. The Group has a Managed Evolution technology project that includes rationalising, standardising and simplifying large IT systems. Appropriate IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. Such controls contribute to mitigating the risk of potential fraud or errors as a result of the introduction of new systems, interfaces between systems and changes to applications and data. (cid:122) We evaluated user access and segregation of duties and relevant application controls within business processes. This included testing the reliability and continuity of the IT systems, the integrity of system interfaces, the completeness and accuracy of data feeds, automated calculations and specific input controls. (cid:122) We evaluated and reviewed system migrations and implementation of the related technology changes, including change management controls that were material to financial reporting. Where control deficiencies were identified, we tested remediation activities performed by management and compensating controls in place. (cid:122) We evaluated the reliability and continuity of the IT systems, to the extent necessary within the scope of our audit. For that purpose we included IT-auditors in our audit team. For relevant IT-dependent controls within the financial reporting process we identified supporting general IT controls and evaluated their design, implementation, and operating effectiveness. Nedbank Limited Annual Report 2018 19 Independent Auditors’ Report to the shareholders of Nedbank Limited continued Other information The directors are responsible for the other information. The other information comprises the Report from the Group Audit Committee, the Certification from our company secretary and the Directors’ Report as required by the Companies Act of South Africa, and About this report, Financial highlights, Ten- year review: Consolidated statement of comprehensive income and Ten-year review: Consolidated statement of financial position. The other information does not include the consolidated financial statements and our auditors’ report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditors’ report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the consolidated financial statements The directors are responsible for the preparation and fair presentation of the 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. In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: (cid:122) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:122) Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. (cid:122) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. (cid:122) Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. 20 Nedbank Limited Annual Report 2018 Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. (cid:122) Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (cid:122) Obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory requirements In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that Deloitte & Touche has been the auditor of Nedbank Limited for 45 years and KPMG Inc. has been the auditor of Nedbank Limited for 45 years. KPMG Inc. Registered Auditor Per: Pierre Fourie Chartered Accountant (SA) Director 4 March 2019 Deloitte & Touche Registered Auditor Per: Lito Nunes Chartered Accountant (SA) Partner 4 March 2019 Nedbank Limited Annual Report 2018 21 AUDITED CONSOLIDATED FINANCIAL STATEMENTS Consolidated statement of comprehensive income for the year ended 31 December Interest received on financial instruments measured at amortised cost and debt instruments at fair value through other comprehensive income (FVOCI) Interest received on other financial instruments and similar income Interest and similar income Interest expense and similar charges Net interest income Impairments charge on financial instruments 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 of associate companies Profit before direct taxation Direct taxation Profit for the year Other comprehensive (losses)/income (OCI) 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 Debt investments at FVOCI – net change in fair value Items that may not subsequently be reclassified to profit or loss (Losses)/Gains on property revaluations Remeasurements on long-term employee benefit assets Total comprehensive income for the year Profit attributable to: – Ordinary and preference shareholders – Non-controlling interest – ordinary shareholders Profit for the year Total comprehensive income attributable to: – Ordinary and preference shareholders – Non-controlling interest – ordinary shareholders Total comprehensive income for the year Notes B5.1.1 B5.1.1 B5.1.2 C2.1 B5.2 B6 B7.1 B8 B7.2.1 B7.2.3 2018 Rm 2017 Rm 72 438 301 72 739 46 774 25 965 3 547 22 418 20 884 43 302 27 616 804 14 882 (164) 14 718 (83) 14 635 3 854 10 781 (368) 70 7 (100) (345) 63 791 7 520 71 311 46 111 25 200 3 030 22 170 19 907 42 077 26 192 858 15 027 (210) 14 817 (96) 14 721 3 563 11 158 493 (29) (14) 161 375 10 413 11 651 10 765 16 10 781 10 397 16 10 413 11 160 (2) 11 158 11 653 (2) 11 651 22 Nedbank Limited Annual Report 2018 Consolidated statement of financial position at 31 December Assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances1,2 Other assets Current taxation assets Investment securities1 Non-current assets held for sale Investments in associate companies1 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 Holders of preference shares Holders of additional tier 1 capital instruments Non-controlling interest attributable to ordinary shareholders Total equity Derivative financial instruments Amounts owed to depositors1,3 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 Notes 2018 Rm 2017 Rm 2016 Rm (Restated)1 (Restated)¹ C6 C4 C7 C3 C1.1 G3 E1 G2 E2 B7.3 F1 G1.1 C6 F2 B3.1 B3.2 B4 C7 D1 J1.1 B7.3 G1.1 D2 7 931 57 844 22 412 96 123 725 792 12 040 105 6 787 305 786 40 8 367 4 764 19 789 8 538 8 823 73 472 30 698 48 749 695 744 7 332 75 5 303 388 224 37 7 976 5 761 18 145 7 341 20 241 68 218 18 044 50 687 695 064 8 164 440 4 258 287 225 266 8 197 5 042 18 139 5 928 971 623 910 068 903 200 28 19 182 49 636 68 846 3 561 561 3 416 23 76 407 19 761 806 487 10 414 272 224 2 648 55 410 28 19 182 48 215 67 425 3 561 561 2 600 7 74 154 23 561 742 859 14 047 191 351 3 423 51 482 28 19 182 42 698 61 908 3 561 2 000 253 67 722 13 469 753 458 12 717 53 391 3 328 52 062 895 216 835 914 835 478 971 623 910 068 903 200 1 Refer to note A3: Correction of prior-period errors and reclassifications. 2 3 Included in loans and advances are loans to fellow subsidiaries amounting to R34,7bn (2017: R29,2bn). Included in amounts owed to depositors are deposits from fellow subsidiaries amounting to R36,3bn (2017: R22,2bn). Nedbank Limited Annual Report 2018 23 Consolidated statement of changes in equity for the year ended 31 December Rm Balance at 31 December 2016 Additional tier 1 capital instruments issued Preference share dividend Additional tier 1 capital instruments interest paid Dividend to shareholders Distribution of subsidiaries to shareholder Preference share held by group entities Total comprehensive income for the year Profit attributable to ordinary and preference equity holders Exchange differences on translating foreign operations Fair-value adjustments on available-for-sale assets Gains on property revaluations Remeasurements on long-term employee benefit assets Transfer (from)/to reserves Share-based payments reserve movement Other movements Balance at 31 December 2017 Impact of adopting IFRS 9, net of taxation Impact of adopting IFRS 15, net of taxation Balance at 1 January 2018 Additional tier 1 capital instruments issued Preference share dividend Additional tier 1 capital instruments interest paid Dividend to shareholders Total comprehensive income for the year Profit attributable to ordinary and preference equity holders Exchange differences on translating foreign operations Movement in fair-value reserve Losses on property revaluations Remeasurements on long-term employee benefit assets Transfer (from)/to reserves and other movements Share-based payments reserve movement Reserves Number of ordinary shares Ordinary share capital Ordinary share premium Foreign currency translation reserve1 Property revaluation reserve2 Share- based payments reserve3 Other non- distributable reserves4 27 876 479 28 19 182 121 1 698 (769) 106 (29) 161 – (29) 161 (109) 82 (94) 27 876 479 28 19 182 92 1 750 (781) 27 876 479 28 19 182 92 1 750 (781) (99) – 7 7 70 (100) – – 70 (100) (114) 32 170 8 15 Balance at 31 December 2018 27 876 479 28 19 182 162 1 536 (579) ¹ This represents the cumulative foreign exchange differences that arise on the translation of an entity with a different functional currency than the presentation currency of the parent company. The cumulative reserve relating to a subsidiary or associate company that is disposed of is included in the determination of profit/loss on disposal of the subsidiary or associate company. ² 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. ³ 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 Limited to various share schemes to acquire Nedbank Group Limited shares, which is recognised directly in equity. The reconciliation shown in this note is the cumulative share-based payment charge for all share schemes. ⁴ Represents other non-distributable revaluation surplus on capital items and non-distributable reserves transferred from other distributable reserves to comply with various banking regulations. 24 Nedbank Limited Annual Report 2018 Reserves FVOCI reserve6 Other distributable reserves7 Total equity attributable to equity holders of the parent Available- for-sale reserve5 (6) 41 548 (371) (218) (4 665) (688) (14) – 11 535 (14) 3 (17) 17 – 603 11 160 375 24 (1) 47 164 (2 706) (254) – 603 44 204 – 7 7 (355) (301) (6 050) 10 420 10 765 (345) (26) Preference share capital and premium Holders of preference shares 3 561 Non-controlling interest attributable to ordinary shareholders 253 Holders of additional tier 1 capital instruments 2 000 600 (244) (2) (2) 7 7 16 16 – 561 – – 3 561 561 2 600 3 561 561 2 600 750 – – – 66 Total equity Rm 67 722 600 (371) (218) (4 665) (1 031) 561 11 651 11 158 (29) (14) 161 375 – (94) (1) 74 154 (2 086) (254) 71 814 750 (355) (301) (6 050) 10 413 10 781 70 7 (100) (345) (34) 170 61 908 – (371) (218) (4 665) (787) – 11 653 11 160 (29) (14) 161 375 – (94) (1) 67 425 (2 086) (254) 65 085 – (355) (301) (6 050) 10 397 10 765 70 7 (100) (345) (100) 170 – 610 47 892 68 846 3 561 561 3 416 23 76 407 ⁵ This comprises 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 or loss for the period and are not included in the determination of headline earnings per share. ⁶ This comprises all fair-value adjustments relating to investments in debt instruments and equity investments that are subsequently measured at FVOCI. The expected credit loss allowance relating to such debt instruments is also recognised in OCI and accumulated in this reserve. When the debt instrument is derecognised the cumulative gain or loss is reclassified from equity to profit or loss. For investments in equity instruments the cumulative gain or loss is not recycled, but may be reclassified within equity on derecognition. ⁷ 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. Nedbank Limited Annual Report 2018 25 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 of investment banking assets Acquisition of associate companies2 Acquisition of investment securities2 Disposal of investment securities2 Disposal of investments in subsidiary companies net of cash Cashflows utilised by financing activities Issue of additional tier 1 capital instruments Issue of long-term debt instruments Redemption of long-term debt instruments Dividends paid to ordinary shareholders Preference share dividends paid Additional tier 1 capital instruments interest paid Effects of exchange rate changes on opening cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year3 Cash and cash equivalents at the end of the year3 Notes 2018 Rm 2017 Rm (Restated)² L1 L2 L3 L4 L5 L6 L8 L7 D2.1 D2.1 22 789 22 183 93 276 (72 058) 342 1 229 90 472 (70 207) 710 1 208 (10 105) (19 139) (64 500) 54 395 (24 144) 5 005 12 684 (3 653) 9 031 (6 232) 3 044 (3 913) (869) (6 197) (4 133) (3 571) 16 5 (548) (2 255) 683 4 36 (1 857) 697 (1 506) (2 047) (4 346) 750 9 404 (5 495) (6 050) (355) (301) 600 7 340 (7 939) (3 758) (371) (218) 1 1 752 26 968 (11 412) 38 380 C6 27 720 26 968 ¹ Represents amounts less than R1m. 2 During the year the group reviewed the classification of certain investments on the statement of financial position. As a result of this review the group’s private- equity investments have been reclassified from investments in private-equity associates, associate companies and joint arrangements to investment securities better to reflect the measurement of these investments at fair value. To provide comparability the prior-year balances have been restated. An amount of R1 459m, previously disclosed under acquisition of private-equity associates, associate companies and joint arrangements, has been reclassified to acquisition of investment securities and an amount of R661m, previously disclosed under disposal of private-equity associates, associate companies and joint arrangements, has been reclassified to disposal of investment securities. 3 Including mandatory reserve deposits with central banks. 26 Nedbank Limited Annual Report 2018 Notes to the consolidated financial statements for the year ended 31 December SECTION A: ACCOUNTING POLICIES A1 Principal accounting policies The group’s principal accounting policies in preparing the consolidated financial statements of Nedbank Limited are disclosed in the individual sections of the financial statements. This section details the basis of preparation and key accounting policy elections. A1.1 Basis of preparation The financial statements have been prepared on a going-concern basis. With the exception of the adoption of IFRS 9: Financial Instruments and IFRS 15: Revenue from Contracts with Customers (effective on 1 January 2018), these financial statements have been prepared on a basis consistent with the prior year. The amendments to standards not yet effective at 1 January 2018, except IFRS 16: Leases, are not expected to have a significant impact on implementation. 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 IFRS as issued by the IASB 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, and the JSE Listings Requirements. The financial information presented in the consolidated financial statements comprises that of the parent company, Nedbank Limited, together with its subsidiaries, including consolidated structured entities 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. The financial statements are presented in SA rand, the functional currency of Nedbank Limited, and are rounded to the nearest million rands. A1.2 Accounting policy elections The following accounting policy elections have been made by the group: Asset/liability Option Election and implication (cid:122) (cid:122) (cid:122) (cid:122) Property and equipment Investment in venture capital divisions Financial instruments Investments in subsidiaries and associate companies in separate financial statements Note/section F1 International Accounting Standard (IAS) 16 permits the use of the cost or fair-value model for the subsequent measurement of property and equipment (choice per category). (cid:122) (cid:122) Land and buildings are stated at revalued amounts, being fair value less subsequent depreciation and impairment. Revaluation surpluses are recognised in equity, through other comprehensive income. When the property is disposed of, the cumulative revaluation surplus is transferred directly to retained income. 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. IFRS 9 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 and associates can be accounted for in the separate financial statements at cost, in accordance with IFRS 9 or in terms of IAS 28. (cid:122) Computer equipment, furniture and other equipment and vehicles are carried at cost less accumulated depreciation. (cid:122) (cid:122) (cid:122) (cid:122) From 1 July 2018, the Investment Committee has elected to apply the equity method of accounting to Investment Banking’s private- equity associates and joint-venture entities. As this election is made on an asset-by-asset basis on initial recognition, private-equity associates and joint-venture entities for which the FVTPL election was made prior to 1 July 2018 remain at FVTPL. In addition, Property Partners’ private- equity associates and joint-venture entities continue to be measured at FVTPL. Regular-way purchases or sales of financial assets are recognised and derecognised using trade date accounting. The group has elected to recognise investments in subsidiary companies at cost in the separate financial statements. The group has elected to change its accounting policy for investments in associate companies in the separate financial statements to recognise these investments in terms of IAS 28, ie using the equity method of accounting. Refer to note A3 for further details. E2 H E2 Nedbank Limited Annual Report 2018 27 Notes to the consolidated financial statements continued for the year ended 31 December A2 Change in accounting policies: financial instruments IFRS 9: Financial Instruments (IFRS 9) was issued in July 2014 and has replaced IAS 39: Financial Instruments: Recognition and Measurement (IAS 39). The standard was effective and implemented by the group from 1 January 2018. This standard incorporates amendments to the classification and measurement of financial instruments [see part (ii)], hedge accounting guidance and the accounting requirements for the impairment of financial assets measured at amortised cost and FVOCI [see part (iii)]. The group has elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9. IFRS 15 replaces all existing revenue recognition requirements in IFRS and applies to all revenue arising from contracts with clients, unless the contracts are in the scope of the standards on leases, insurance contracts and financial instruments. For notes disclosures the consequential amendments to IFRS 7: Financial Instruments: Disclosures have also been applied only to the current period. Notes disclosures for the comparative period repeat those disclosures made in the previous year. Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the group. The group’s approach to transition is discussed and the resultant net impact on opening reserves on 1 January 2018 is provided in part (i). (i) Transition approach As permitted by the transitional provisions of IFRS 9, the group has elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and financial liabilities at the date of transition have been recognised in the opening retained earnings and other reserves at 1 January 2018. The following table illustrates the impact on opening reserves on transition to IFRS 9. Further information relating to this impact is provided in part (ii) and part (iii). Rm Ordinary share capital and share premium Retained earnings Other reserves Total equity attributable to equity holders of the parent Preference share capital and premium Holders of preference shares Non-controlling interest attributable to holders of additional tier 1 capital instruments Non-controlling interest attributable to ordinary shareholders Total equity Balance at 31 December 2017 IFRS 9 transitional adjustments IFRS 15 transitional adjustments 19 210 47 164 1 051 67 425 3 561 561 2 600 7 74 154 (2 706) 620 (2 086) (254) (254) (2 086) (254) Adjusted balance at 1 January 2018 19 210 44 204 1 671 65 085 3 561 561 2 600 7 71 814 28 Nedbank Limited Annual Report 2018 The group has concluded that the loyalty points awarded to clients are consideration payable in terms of IFRS 15 guidance. IFRS 15 requires revenue to be decreased by the amount expected to be payable to clients, which is recognised as a liability until payment is effected. Under IFRS 15, as clients earn loyalty points, the fee and commission income (NIR) earned from card transactions is reduced by the expected cost of the loyalty points against a loyalty points liability. On redemption of the loyalty points the actual costs incurred are offset against the liability. Under IAS 18 costs of our rewards programme were previously recognised as an expense and recognition of deferred NIR, whereas they are now recognised as a reduction in NIR. As required by IFRS 15, because the group has applied the standard retrospectively from 1 January 2018, the following financial statement line items have been impacted when compared with IAS 18 and IFRIC 13: Non-interest revenue Total operating expenses Direct taxation Profit for the year As reported 2018 (IFRS 15) Adjustments 20 884 (27 616) (3 854) 10 781 308 (259) (14) 35 Applying IAS 18 21 192 (27 875) (3 868) 10 816 The table above reflects the difference in treatment of loyalty points between IFRS 15 and IAS 18, including measurement differences. Nedbank Limited Annual Report 2018 29 Notes to the consolidated financial statements continued for the year ended 31 December A2 Change in accounting policies: financial instruments continued (ii) Classification and measurement of financial instruments The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 January 2018 are as follows: Rm Amortised cost FVTPL Available for sale Non-financial assets Total assets Financial liabilities at amortised cost FVTPL Non-financial liabilities Equity Total equity and liabilities Carrying amount 31 December 2017 (Restated)¹ IFRS 9: ECL remeasurement IFRS 9: Classification and measurement IFRS 15: Revenue Carrying amount 1 January 2018 706 567 177 918 3 781 21 802 910 068 726 709 104 240 4 965 74 154 910 068 (2 567) 775 (1 792) 202 (1 994) (1 792) 54 (258) 60 (144) (112) 31 (63) (144) 704 054 177 660 3 781 22 637 908 132 726 799 104 240 5 250 71 843 908 132 – 254 (254) – The following table illustrates the original assessment categories under IAS 39, the new measurement categories under IFRS 9 for each class of the group’s financial assets at 1 January 2018 and the reclassifications between the IAS 39 measurement categories and the IFRS 9 measurement categories: Carrying amount 31 December 2017 (Restated)¹ IFRS 9: ECL remeasurement IFRS 9: Classification and measurement IFRS 15: Revenue Carrying amount 1 January 2018 Rm Financial assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Investment securities Investments in associate companies Mandatory reserve deposits with central banks Current and deferred taxation assets Other non-financial assets 8 823 73 472 30 698 48 749 695 744 7 332 5 303 224 18 145 112 21 466 (2) (3) (2 546) (16) 775 Total assets 910 068 (1 792) Financial liabilities Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Current and deferred taxation liabilities Other non-financial liabilities Equity Total equity and liabilities 23 561 742 859 14 047 51 482 542 3 423 74 154 910 068 202 (1 994) (1 792) 8 823 73 470 30 698 48 785 692 694 7 316 5 564 224 18 145 947 21 466 – 908 132 347 (93) (254) – 23 561 742 747 14 596 51 482 480 3 423 71 843 908 132 39 (504) 261 60 (144) (112) 31 (63) (144) 1 Refer to note A3: Correction of prior-period errors and reclassifications. 2 Macro fair-value hedge accounting solution – The implementation of IFRS 9 allowed Nedbank to change the accounting designation of assets and liabilities previously designated as FVTPL to amortised cost, which facilitated the implementation of macro fair-value hedge accounting. On initial application of IFRS 9 on 1 January 2018 Nedbank elected to revoke the existing designation of R72bn of loans classified in FVTPL and R60bn of deposits and long-term debt classified in FVTPL under the fair-value option of IAS 39 and reclassified the underlying assets and liabilities in amortised cost. 30 Nedbank Limited Annual Report 2018 FVOCI Debt instruments 18 582 18 582 Amortised cost 682 994 59 367 3 351 745 712 726 799 59 791 IFRS 9 measurement categories FVTPL Equity instruments Mandatory at fair value Designated as fair value Non-financial assets, liabilities and equity 430 430 2 478 115 240 3 053 117 718 3 053 44 449 786 590 – – 44 449 – 22 637 22 637 5 250 71 843 77 093 IFRS 9 measurement categories FVOCI FVTPL Amortised cost2 Debt instruments3 Equity instruments Mandatory at fair value4 Designated as fair value Non-financial assets, liabilities and equity 8 823 26 659 32 249 652 520 7 316 18 145 18 582 430 46 811 30 698 16 536 21 592 2 081 3 053 745 712 18 582 430 117 718 3 053 724 295 10 813 51 482 23 561 18 452 2 436 786 590 – – 44 449 – 224 947 21 466 22 637 1 347 480 3 423 71 843 77 093 3 Held for distribution (FVOCI) – As CIB strategically moves to increase its originate-to-distribute business model to enhance ROE and NIR, R17,8bn of loans and advances will be classified in FVOCI in terms of the IFRS 9 business model requirements. Inclusive of transitional fair-value adjustment of R820m, the portfolio has a carrying value of R18,6bn. 4 Fair value through profit or loss (FVTPL) – Altogether R887m of gross loans and advances and associated impairments of R474m were reclassified from amortised cost in FVTPL, because these loans include features other than ‘payments solely of principal and interest’. A total of R2bn of loans and advances at amortised cost was included in a portfolio that has a sales business objective (at 1 January 2018) and reclassified to mandatory at fair value. Nedbank Limited Annual Report 2018 31 Notes to the consolidated financial statements continued for the year ended 31 December A2 Change in accounting policies: financial instruments continued The following table illustrates the IFRS 9 classification and measurement transitional impact: Hedge accounting1 FVOCI business model2 FVTPL business model and contractual cashflows3 Review of effective interest rate guidance4 Classification and measurement Assets Cash, government and other securities, and derivative financial instruments Loans and advances Current and deferred taxation assets Investment securities Total assets Total equity Amounts owed to depositors and other liabilities Current and deferred taxation liabilities Total liabilities Total liabilities and equity 39 (297) 72 (186) (105) (112) 31 (81) (186) 820 (227) 593 593 – 593 (369) 31 261 (77) (77) – (77) (658) 184 (474) (474) – (474) 39 (504) 60 261 (144) (63) (112) 31 (81) (144) 1 Macro fair-value hedge accounting solution – Nedbank’s decision to revoke the FVTPL classification on 1 January 2018 increased government and other securities by R39m, decreased loans and advances by R297m and decreased amounts due to depositors by R112m. Nedbank implemented macro fair-value hedge accounting for fixed-rate exposures (loans and advances, bonds and deposits) that are centrally risk-managed with interest rate derivatives from 1 January 2018. 2 Held for distribution (FVOCI) – The transitional fair-value adjustment of R820m increases the portfolio to a carrying value of R18,6bn. The fair value of these loans is calculated using an income approach, which discounts the contractual cashflows using market-derived discount curves adjusted for the lifetime ECLs using the IFRS 9 impairment models. 3 Held for sale (FVTPL) – The loans with features other than ‘payments solely of principal and interest’ were reclassified in investment securities and remeasured to fair value on transition, which was R152m lower than the amortised cost. The loans with a sales business model objective have been reclassified in FVTPL on adoption of IFRS 9, together with the associated impairments of R71m. On reclassification the fair value was R44m higher than the amortised cost. 4 Review of effective interest rate guidance – On adoption of IFRS 9 the group reviewed a number of accounting policies, including those on the effective interest rate and the derecognition of loans and advances and modification thereof. As a result of the review, the group determined that the judgement applied under IAS 39 and IAS 18 to recognise certain initiation fees upfront in NIR was no longer appropriate. Therefore, the group changed the recognition of these initiation fees from upfront recognition in non-interest revenue to amortisation in interest income, using the effective-interest-rate method. On adoption of IFRS 9 and IFRS 15 the cumulative impact of the change in the effective interest rate is R658m (before tax) and R474m (after tax). The group assessed whether this change in judgement was a prior-period error and whether it should be corrected retrospectively as IAS 8 requires material prior-period errors to be corrected retrospectively from the earliest period presented. The group determined that the retrospective correction of the recognition of the initiation fees upfront is immaterial with respect to prior-period loans and advances of R710bn, interest income of R75bn, non-interest revenue of R24bn and the related year-on-year growth rates. 32 Nedbank Limited Annual Report 2018 (iii) Impairments The following table illustrates the closing specific and portfolio impairment allowances in terms of IAS 39 and the opening impairment allowances in terms of IFRS 9: IAS 39 impairment provisions at 31 December 2017 IFRS 9 ECL provision at 1 January 2018 Portfolio impairment Specific impairment Total IAS 39 provision Reclassi- fication in FVTPL Stage 1: 12-month ECL allowance Stage 2: Lifetime ECL allowance – not credit- impaired Stage 3: Lifetime ECL allowance – credit- impaired Total ECL on 1 January 2018 ECL impact 4 750 6 605 11 355 (545) 2 495 3 696 7 165 13 356 (2 546) 461 494 127 123 1 226 1 687 314 808 24 1 252 526 24 1 379 649 2 100 2 047 4 147 (501) 1 246 1 203 2 449 199 13 212 (44) – – – – 256 308 2 418 91 734 660 26 2 3 15 80 615 208 1 506 136 1 381 2 252 (565) 318 834 (26) 25 1 229 459 28 2 153 686 (4) (774) (37) 1 336 2 252 4 322 (676) 841 53 1 64 3 761 1 501 3 002 (553) 79 2 3 16 89 (2) (3) (16) 58 202 (202) 7 223 13 579 (2 769) Rm Financial assets Loans and advances Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Other loans to clients Net finance lease and instalment debtors Preference shares and debentures Other short-term securities Government and other securities Other assets Financial liabilities Provisions and other liabilities Total 4 750 6 605 11 355 (545) 2 595 Total ECL recognised on FVOCI loans and advances Total ECL allowance per statement of financial position Total – – – – – 22 144 166 2 573 2 595 – 3 617 3 761 7 223 13 413 7 223 13 579 Nedbank Limited Annual Report 2018 33 Notes to the consolidated financial statements continued for the year ended 31 December A3 Correction of prior-period errors and reclassifications During the year the group restated and corrected prior-year information. The impact of the relevant restatements and prior- period errors on the group’s statement of financial position is detailed below: Rm Restated Restatements reported Restated Restatements reported 2017 2016 As previously As previously 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 securities2 Non-current assets held for sale Investments in associate companies2 Deferred taxation assets Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central banks Intangible assets 8 823 73 472 30 698 48 749 695 744 7 332 75 5 303 388 224 37 7 976 5 761 18 145 7 341 6 107 3 053 (3 053) 8 823 73 472 30 698 48 749 689 637 7 332 75 2 250 388 3 277 37 7 976 5 761 20 241 68 218 18 044 50 687 695 064 8 164 440 4 258 287 225 266 8 197 5 042 18 145 7 341 18 139 5 928 3 139 2 350 (2 350) 20 241 68 218 18 044 50 687 691 925 8 164 440 1 908 287 2 575 266 8 197 5 042 18 139 5 928 Total assets 910 068 6 107 903 961 903 200 3 139 900 061 Equity and liabilities Ordinary share capital Ordinary share premium Reserves Total equity attributable to equity holders of the parent Preference share capital and premium Holders of preference shares Holders of additional tier 1 capital instruments Non-controlling interest attributable to ordinary shareholders Total equity Derivative financial instruments Amounts owed to depositors1 Provisions and other liabilities Current taxation liabilities Deferred taxation liabilities Long-term employee benefit liabilities Long-term debt instruments Total liabilities 28 19 182 48 215 67 425 3 561 561 2 600 7 74 154 23 561 742 859 14 047 191 351 3 423 51 482 835 914 – – 6 107 28 19 182 48 215 67 425 3 561 561 28 19 182 42 698 61 908 3 561 – 2 600 2 000 7 253 74 154 23 561 736 752 14 047 191 351 3 423 51 482 67 722 13 469 753 458 12 717 53 391 3 328 52 062 – – 3 139 28 19 182 42 698 61 908 3 561 2 000 253 67 722 13 469 750 319 12 717 53 391 3 328 52 062 6 107 829 807 835 478 3 139 832 339 Total equity and liabilities 910 068 6 107 903 961 903 200 3 139 900 061 1 During 2018 a detailed review was performed on offsetting, which indicated that at 31 December 2017 an asset was incorrectly set off against a liability with the same counterparty. To correct this at 31 December 2017 loans and advances and amounts owed to depositors were restated by R6 107m (2016: R3 139m). The correction had no impact on the group’s statement of comprehensive income, statement of changes in equity and statement of cashflows. This prior-period error had no impact on information previously reported for Nedbank Group, because the asset and liability are eliminated as intragroup balances. 2 During the year the group reviewed the classification of certain investments on the statement of financial position. As a result of this review the group’s private-equity investments have been reclassified from investments in private-equity associates, associate companies and joint arrangements to investment securities better to reflect the measurement of these investments at fair value. To provide comparability the prior-year balances have been restated by R3 053m (2016: R2 350m). The investments in private-equity associates, associate companies and joint arrangements were renamed investments in associate companies. The reclassification had no impact on the group’s statement of comprehensive income and statement of changes in equity. 34 Nedbank Limited Annual Report 2018 A4 Key assumptions concerning the future and key sources of estimation The group’s key accounting policy elections are set out in note A1.2 of the consolidated financial statements. Detailed accounting policies are disclosed in the notes to the consolidated financial statements. Certain of these policies, as well as estimates made by management, are considered to be important to 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. Further information on accounting policies that include estimates that are particularly sensitive in terms of judgements and the extent to which estimates are used are provided within the notes to the consolidated financial statements. Other accounting policies involve significant amounts of judgements and estimates, but the total amounts involved are not significant to the financial statements. Management has agreed the accounting policies and critical accounting estimates with the board and Nedbank Group Audit Committee. A5 New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 31 December 2018 reporting period and have not been early adopted by the group. The group’s assessment of the impact of the new standards can be found in the following notes: (cid:122) IFRS 16: Leases (refer to note J3). There are no other standards that are not yet effective and that would be expected to have a material impact on the group in the current or future reporting periods and on foreseeable future transactions. SECTION B: SEGMENTAL AND PERFORMANCE-RELATED INFORMATION B1 Segmental reporting Accounting policy 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 components 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 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 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. Description of segments 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 Group Limited’s case is the Group Executive Committee. The measure of segment profit is headline earnings. Nedbank Corporate and Investment Banking Nedbank CIB 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 CIB’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 the 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 from R10m up to R700m. Nedbank Limited Annual Report 2018 35 Notes to the consolidated financial statements continued for the year ended 31 December B1 Segmental reporting continued Nedbank Wealth Nedbank Wealth provides insurance, asset management and wealth management solutions to clients ranging from entry-level to high-net-worth individuals. Insurance provides life and short-term insurance solutions for individuals and businesses, including simple risk, funeral, vehicle, personal accident, credit life and investments. Asset Management offers local and international unit trusts, cash management and multimanagement solutions. Wealth Management provides specialist services to meet the needs of high-net-worth clients locally and internationally, as well as trust and estate planning, stockbroking and financial planning for the broader Nedbank client base. Nedbank Wealth has operations in SA, London, Jersey, Guernsey, the United Arab Emirates and on the Isle of Man. Centre Centre is an aggregation of business operations that provide various support services to Nedbank Group Limited, and 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. Centre also includes Group Balance Sheet Management, which is responsible for capital management, funding and liquidity risk management, the management of banking book interest rate risk, margin management and strategic portfolio tilt. Statement of financial position (Rm) Assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances2 Other assets Intergroup assets Total assets Equity and liabilities Total equity Derivative financial instruments Amounts owed to depositors2 Provisions and other liabilities Long-term debt instruments Intergroup liabilities Total equity and liabilities Total Fellow subsidiaries 2018 2017 2018 2017 27 720 57 844 22 412 96 123 725 792 41 732 – 26 968 73 472 30 698 48 749 695 744 34 437 – (1 456) (16 742) (270) – 10 524 (27 324) 497 (2 363) (14 920) 833 1 5 956 (25 266) 971 623 910 068 (34 771) (35 759) 76 407 19 761 806 487 13 558 55 410 – 74 154 23 561 742 859 18 012 51 482 – (8 052) (230) 10 155 (36 795) 151 (7 940) 197 (596) (29 202) 129 1 653 971 623 910 068 (34 771) (35 759) 36 Nedbank Limited Annual Report 2018 Nedbank Corporate and Investment Banking Nedbank Retail and Business Banking Nedbank Wealth Centre¹ 2018 2017 2018 2017 2018 2017 2018 2017 4 719 53 946 22 653 51 131 358 639 16 719 5 025 60 750 29 840 21 312 356 029 14 676 3 105 3 692 326 763 10 762 14 984 305 198 6 078 11 257 1 562 18 833 6 31 111 19 630 2 354 16 652 1 29 413 18 412 507 807 487 632 355 614 326 225 71 142 66 832 33 555 19 986 348 310 15 878 979 89 099 30 437 23 236 338 792 11 690 1 350 82 127 28 471 27 812 322 520 3 534 1 089 295 294 1 798 1 321 507 807 487 632 355 614 326 225 4 225 5 39 495 24 764 2 653 71 142 3 885 2 35 081 23 016 4 848 66 832 19 790 1 807 23 44 992 (1 245) 21 945 (15 481) 71 831 18 208 86 007 6 177 53 191 (91 752) 71 831 18 260 10 990 24 27 436 (852) 20 537 (11 257) 65 138 19 960 126 74 288 10 710 48 682 (88 628) 65 138 Nedbank Limited Annual Report 2018 37 Notes to the consolidated financial statements continued for the year ended 31 December Statement of comprehensive income (Rm) Net interest income/(loss) Impairments charge on financial instruments Income/(Loss) from lending activities Non-interest revenue Operating income/(loss) Total operating expenses Indirect taxation Profit/(Loss) from operations3 Share of losses of associate companies Profit/(Loss) before direct taxation3 Direct taxation3 Profit/(Loss) after direct taxation3 Profit attributable to non-controlling interest: – Ordinary shareholders – Preference shareholders – Additional tier 1 capital instruments noteholders Total Fellow subsidiaries 2018 2017 2018 2017 25 965 3 547 22 418 20 884 43 302 27 616 804 14 882 (83) 14 799 3 899 10 900 16 – – 25 200 3 030 22 170 19 907 42 077 26 192 858 15 027 (96) 14 931 3 622 11 309 (2) – – (1 227) (28) (1 199) (3 886) (5 085) (1 600) (101) (3 384) (3 384) (885) (2 499) (323) (267) (950) (61) (889) (3 159) (4 048) (1 420) (103) (2 525) (2 525) (663) (1 862) 14 (338) (252) Headline earnings/(loss) 10 884 11 311 (1 909) (1 286) Selected ratios Average interest-earning banking assets (Rm)4 Return on total assets (%)2,4 Return on ordinary shareholders’ equity (%)4 Net interest income to average interest-earning banking assets (%)4 Non-interest revenue to total income (%) Non-interest revenue to total operating expenses (%) Credit loss ratio – banking advances (%)4 Efficiency ratio (%) Effective taxation rate (%) Revenue (Rm)5 Contribution to group economic profit (Rm)4 Number of employees (permanent staff)4 727 347 1,19 16,6 3,57 44,6 75,6 0,54 58,9 26,3 46 849 1 827 30 877 706 613 1,21 17,8 3,57 44,1 76,0 0,47 58,1 24,3 45 107 2 036 28 193 (32 031) (27 130) (5 113) (1 300) 2 617 (4 109) (1 374) (793) ¹ Includes all group eliminations. 2 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. 3 These items are presented on a headline earnings basis and therefore exclude the impact of non-trading and capital items. 4 This metric has not been audited by the group’s external auditors. 5 Revenue is calculated as net interest income plus non-interest revenue. Depreciation costs of R1 394m (2017: R1 319m) and amortisation costs of R938m (2017: R777m) for property, equipment, computer software and capitalised development are charged on an activity-justified transfer pricing methodology by the segment owning the assets to the segment utilising the benefits thereof. 38 Nedbank Limited Annual Report 2018 Nedbank Corporate and Investment Banking Nedbank Retail and Business Banking Nedbank Wealth Centre¹ 2018 2017 2018 2017 2018 2017 2018 2017 7 246 103 7 143 8 521 15 664 6 572 86 9 006 (83) 8 923 2 197 6 726 7 216 193 7 023 7 164 14 187 6 044 83 8 060 (96) 7 964 1 665 6 299 18 692 3 433 15 259 12 591 27 850 20 032 275 7 543 7 543 2 114 5 429 17 790 3 222 14 568 12 312 26 880 19 136 302 7 442 7 442 2 082 5 360 12 (16) 50 58 1 113 39 1 074 3 484 4 558 3 012 108 1 438 1 438 305 1 133 1 003 26 977 3 390 4 367 2 880 117 1 370 1 370 302 1 068 141 141 174 315 (400) 436 279 279 168 111 4 273 267 6 714 6 315 5 379 5 302 1 133 1 068 (433) 141 (350) 491 200 691 (448) 459 680 680 236 444 280 252 (88) 341 863 1,36 20,0 340 065 1,31 20,7 2,12 54,0 129,7 0,04 41,9 24,6 15 767 1 976 2 681 2,12 49,8 118,5 0,06 42,3 20,9 14 380 2 039 2 756 328 676 1,58 18,9 5,69 40,2 62,9 1,06 64,0 28,0 31 283 1 359 19 430 306 225 1,68 19,1 5,81 40,9 64,3 1,06 63,6 28,0 30 102 1 394 20 081 48 216 1,69 26,8 2,31 75,8 115,7 0,13 65,5 21,2 4 597 536 2 173 46 639 1,62 27,5 2,15 77,2 117,7 0,09 65,6 22,0 4 393 522 2 231 40 623 40 814 315 (744) 3 976 341 (545) 3 918 Nedbank Limited Annual Report 2018 39 Notes to the consolidated financial statements continued for the year ended 31 December B2 Dividends B2.1 Ordinary shares 2018 Final declared for 2017 – paid 2018 Interim declared for 2018 Ordinary dividends paid 2018 Final ordinary dividend declared for 2018 ¹ Total dividend declared for 2018 = 20 448 cents per share. 2017 Final declared for 2016 – paid 2017 Interim declared for 2017 Ordinary dividends paid 2017 Final ordinary dividend declared for 2017 ² Total dividend declared for 2017 = 19 371 cents per share. B2.2 Preference shares Dividends declared 2019 Nedbank – Final (dividend no 32) declared for 2018 – payable March 2019 2018 Nedbank – Final (dividend no 30) declared for 2017 – paid March 2018 Nedbank – Interim (dividend no 31) declared for 2018 – paid August 2018 Total of dividends declared Nedbank (MFC) – participating preference shares1 Millions of shares Cents per share 28 28 10 941 10 762¹ 28 9 686¹ 28 28 8 304 8 430² 16 734 28 10 941² Rm 3 050 3 000 6 050 2 700 2 315 2 350 4 665 3 050 Number of shares Cents per share Amount Rm 358 277 491 42,23172 151,3 358 277 491 358 277 491 43,17350 41,82076 154,7 149,8 304,5 50,0 354,5 157,6 155,5 313,1 58,0 371,1 2017 Nedbank – Final (dividend no 28) declared for 2016 – paid April 2017 Nedbank – Interim (dividend no 29) declared for 2017 – paid September 2017 358 277 491 358 277 491 43,98905 43,39039 Total of dividends declared Nedbank (MFC) – participating preference shares1 1 Profit share calculated semi-annually. 40 Nedbank Limited Annual Report 2018 B3 Share capital Accounting policy Ordinary share capital, preference share capital or any financial instrument issued by the group is classified as equity when: (cid:122) (cid:122) (cid:122) (cid:122) 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. 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 B2 to the financial statements. Treasury shares When the group acquires its own share capital, the amount of the consideration paid, including directly attributable costs, 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. B3.1 Ordinary share capital Authorised 30 000 000 (2017: 30 000 000) ordinary shares of R1 each Issued 27 876 479 (2017: 27 876 479) fully paid ordinary shares of R1 each 2018 Rm 30 28 28 2017 Rm 30 28 28 Subject to the restrictions imposed by the Companies Act, the unissued shares are under the control of the directors until the forthcoming annual general meeting. B3.2 Preference share capital and premium Nedbank Limited preference share capital and premium Authorised 1 000 000 000 (2017: 1 000 000 000) non-redeemable, non-cumulative, non-participating 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 (2017: 358 277 491) non-redeemable, non-cumulative, non-participating 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 2018 Rm 2017 Rm 1 1 1 1 1 1 1 1 1 1 3 561 3 561 3 561 3 561 ¹ Represents amounts less than R1m. Preference shares are classified as equity instruments by Nedbank Limited (‘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. Nedbank Limited Annual Report 2018 41 Notes to the consolidated financial statements continued for the year ended 31 December B3 Share capital continued 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. B4 Holders of additional tier 1 capital instruments The group issued new style (Basel III compliant) additional tier 1 (AT 1) capital instrument as follows: Instrument code Date of issue Call date Instrument terms Subordinated callable notes (rand- denominated) NEDT1A NEDT1B NED04U NED07U Total 20 May 2016 25 November 2016 30 June 2017 19 October 2018 21 May 2021 26 November 2021 1 July 2022 20 October 2023 3-month JIBAR + 7,00% per annum 3-month JIBAR + 6,25% per annum 3-month JIBAR + 5,65% per annum 3-month JIBAR + 4,64% per annum 2018 Rm 2017 Rm 1 523 506 619 768 3 416 1 500 500 600 2 600 The AT 1 notes represent perpetual, subordinated instruments, with no redemption date. The instruments are redeemable subject to regulatory approval at the sole discretion of the issuer, Nedbank Limited, from the applicable call date and following a regulatory event or following a tax event. The payment of interest is at the discretion of the issuer and interest payments are non-cumulative. In addition, if certain conditions are reached, the regulator may prohibit Nedbank from making interest payments. B5 Revenue Accounting policy Interest income and expense In terms of IFRS 9 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. Interest income and expense 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. IFRS 15 Revenue from Contracts with Customers IFRS 15 replaces all existing revenue requirements in IFRS and applies to all revenue arising from contracts with clients, unless the contracts are in the scope of the standards on leases, insurance contracts and financial instruments. The standard is effective and implemented by the group from 1 January 2018. The group has applied the standard retrospectively with the cumulative effect of initial application recognised in opening retained earnings at 1 January 2018 and accordingly the group will not restate comparative figures. 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 group performed an assessment to determine the impact of the new standard on the group’s statement of financial position and performance, which resulted in the measurement of the group’s client loyalty programmes being reviewed. The group has concluded that the loyalty points awarded to clients are consideration payable to our client’s customers in terms of IFRS 15. IFRS 15 requires revenue to be decreased by the amount expected to be payable to clients, which is recognised as a liability until payment is effected. The liability for the amount expected to be paid to clients under the loyalty programme increases by R353m on transition and R254m on an after-tax basis. 42 Nedbank Limited Annual Report 2018 Accounting policy (cid:122) Revenue The group assesses the contract and determines whether the fees identified in the contract are in the scope of IFRS 15. If so, the revenue will be recognised only when the group can: ○ ○ ○ ○ identify the contract; identify the performance obligation; determine the transaction price; and recognise the revenue as and when the performance obligation is satisfied. The group is able to identify the contract when both the client and the group have accepted the terms of the agreement. The contract will also identify all the services (performance obligations) the group will render to the client. Based on this, the transaction price is allocated to each identified performance obligation. The group recognises the revenue once the performance obligation is satisfied, which may occur over time or at a point in time. (cid:122) Commission and fees income 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 performance obligation is recognised when the significant performance obligation has been performed. Income earned from the provision of services is recognised over time as the performance obligation is fulfilled. 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 in terms of IFRS 9. Fees charged for servicing a loan are recognised in revenue as the performance obligation is provided, which in most instances occurs monthly when the fees are levied. (cid:122) Principal versus agent When the group acts as a principal, it is deemed to be purchasing and selling financial instruments on its own behalf and therefore reports profits and losses as part of net trading income. When the group acts as an agent, the net commission or markup earned is reported as fee income and costs incurred on behalf of the principal are not reported in the statement of comprehensive income. Where costs are not directly reimbursed, or not included in the cost basis used for calculating a markup, it may be appropriate to gross up and separately report the costs within ‘commission and fees expense’. (cid:122) Directly attributable and incremental costs The types of expenses that are netted off against non-interest revenue are those incremental costs that are directly attributable to the revenue generated. The group defines incremental expenses as those that would not have been incurred had it not been for the acquisition of a contract that generated the revenue. (cid:122) Commitment fees The group typically earns commitment fees on lending facilities, such as credit facility fees and revolving-credit-facility fees. The fees are typically charged for making the facilities available to the client. The group recognises commitment fees as follows: ○ Commitment fees that arise from instruments that are not classified and measured at FVTPL, ie financial instruments that are classified and measured at amortised cost or FVOCI – — Where drawdown is considered to be unlikely, ie remote or uncertain, the related commitment fees should be recognised as revenue in terms of IFRS 15 on a time-proportionate basis and over the period that the facility is provided. — Where drawdown is probable, the related commitment fee is recognised as part of the effective interest rate over the life of the facility. ○ Commitment fees that relate to a loan commitment that is measured and classified as FVTPL will be included in the cashflows used to determine the fair value of the loan commitment. Nedbank Limited Annual Report 2018 43 Notes to the consolidated financial statements continued for the year ended 31 December B5 Revenue continued Accounting policy (cid:122) Non-refundable upfront fees Non-refundable upfront fees normally relate to the issuing or administration of a loan facility. These fees will be recognised as revenue when the performance obligation is satisfied. This is applicable when the non-refundable performance obligation can be satisfied over time or at a point in time. To apply this principle the group first assesses if the contract is satisfied over time. Should this be the case, the revenue is spread over the period of the contract on a time proportionate basis. If the performance obligation is not satisfied over time and instead satisfied at a point in time, the revenue is recognised when the service is complete and no further performance obligations are required according to the contract. The group recognises non-refundable upfront fees that are an integral part of a loan in net interest income through the unwinding of the effective interest rate. (cid:122) Insurance income Insurance income comprises premiums written on insurance contracts entered into during the year, with the earned portion of premiums received recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten. Premiums are disclosed gross of commission payable and reinsurance premiums. Claims incurred consist of claims and claims-handling expenses paid during the financial year for the movement in provision for outstanding claims. Outward reinsurance premiums are accounted for in the same accounting period as premiums for the related direct insurance. (cid:122) 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. (cid:122) 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. (cid:122) Revenue on investment management contracts Fees charged for investment management services in conjunction with investment management contracts are recognised as revenue over time when the performance obligation is fulfilled. 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. (cid:122) Other 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 the transaction can be measured reliably. It is probable that the economic benefits of the transaction 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 losses are determined after deducting the interest component, which is recognised separately in interest income and expense. Gains or losses on derecognition of any financial assets or financial liabilities are included in non-interest revenue. 44 Nedbank Limited Annual Report 2018 B5.1 Net interest income B5.1.1 Interest and similar income Home loans (including properties in possession) Commercial mortgages Finance lease and instalment debtors Credit cards Overdrafts Term and other loans Government and other securities Short-term funds and securities Interest and similar income may be analysed as follows: – Interest and similar income from financial instruments at amortised cost – Interest and similar income from financial instruments at FVOCI – Interest and similar income from financial instruments at FVTPL B5.1.2 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 at amortised cost – Interest expense and similar charges from financial instruments at FVTPL 2018 Rm 13 452 15 427 12 772 2 448 1 635 20 429 4 334 2 242 72 739 72 125 313 301 72 739 2018 Rm 27 517 906 7 950 5 323 5 078 46 774 46 774 – 46 774 2017 Rm 13 334 15 106 11 893 2 305 1 628 21 261 2 959 2 825 71 311 63 791 7 520 71 311 2017 Rm 27 068 908 7 520 5 518 5 097 46 111 40 837 5 274 46 111 Nedbank Limited Annual Report 2018 45 Notes to the consolidated financial statements continued for the year ended 31 December B5 Revenue continued B5.2 Non-interest revenue Commission and fees income Administration fees Card income Cash-handling fees Exchange commission Guarantee income Insurance commission2 Other commission Other fees Service charges Commission and fees expense Card income Insurance commission Other commission Service charges Insurance income2 Fair-value adjustments (note B5.2.1) Fair-value adjustments Hedged-accounted portfolios Fair-value adjustments – own debt Net trading income Foreign exchange Debt securities Equities Commodities Private-equity income Realised gains, interest and other income Unrealised losses Dividends received from unlisted investments Investment income Dividends received on investments Long-term-asset sales Net sundry income Rents received Rental income from properties in possession Other sundry income 2018 Rm 2017 Rm 18 109 16 799 549 5 638 1 025 434 239 742 4 015 1 425 4 042 (2 584) (2 054) (236) (289) (5) 350 (4) (32) 28 – 3 930 1 394 2 482 12 42 674 502 (158) 330 17 12 5 392 16 ¹ 376 551 5 500 950 366 224 709 3 434 1 154 3 911 (2 093) (1 855) (233) (3) (2) 555 105 (30) – 135 3 426 1 259 2 158 (30) 39 683 413 (430) 700 46 10 36 386 12 ¹ 374 ¹ 2 Represents amounts less than R1m. During 2018 management reclassified certain internal insurance commission allocations earned by Nedbank Retail and Business Banking previously reported as part of commission and fee income to insurance income to ensure that the amount is appropriately eliminated against the cost recognised in Nedbank Wealth. Comparative figures have been restated accordingly (R184m). 20 884 19 907 46 Nedbank Limited Annual Report 2018 B5.2.1 Analysis of fair-value adjustments Fair-value adjustments can be analysed as follows: – Held for trading – Financial assets designated as FVTPL – Financial assets mandatorily at fair value – Financial liabilities designated as FVTPL B6 Total operating expenses Staff costs Remuneration and other staff costs Short-term incentives Long-term employee benefits (note G1.1.2)¹ Share-based payments expense – employees Computer processing Depreciation of computer equipment Amortisation of computer software Operating lease charges for computer equipment Development costs Other computer processing expenses2 Communication and travel Depreciation of vehicles Other communication and travel expenses Occupation and accommodation Depreciation of 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 Non-audit services – other services Other fees and assurance costs2 Furniture, office equipment and consumables Depreciation of furniture and other equipment Operating lease charge for furniture and other equipment Other office equipment and consumables BBBEE share-based payments expenses Other sundries 2018 Rm 63 (6) (61) (4) 2018 Rm 15 288 12 503 2 385 (338) 738 3 918 721 938 334 171 1 754 724 3 721 2017 Rm (700) 805 105 2017 Rm 14 562 11 839 2 149 (15) 589 3 547 701 777 398 158 1 513 737 3 734 2 127 2 076 390 825 912 1 452 3 202 157 128 29 381 781 914 1 606 2 917 138 116 22 3 045 2 779 562 280 11 271 3 340 526 234 12 280 2 219 27 616 26 192 Certain expenses incurred by the company on behalf of subsidiary companies are recovered from subsidiary companies. 1 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 G1. 2 During the year management reclassified interbank fees from other computer processing expenses to other fees and assurance costs to appropriately reflect the nature of these expenses. As a result R308m previously included in other computer processing expenses have been reclassified to be included in other fees and assurance costs. Nedbank Limited Annual Report 2018 47 Notes to the consolidated financial statements continued for the year ended 31 December B7 Taxation Accounting policy 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 is also recognised in equity, and, to the extent that it relates to items recognised in other comprehensive income (OCI), in which case it is also 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). 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 are reversed. 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 or OCI. Deferred taxation liabilities are recognised for all taxable 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 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. B7.1 Indirect taxation Value-added taxation¹ Transaction-based 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, 89 of 1991. B7.2 Direct taxation B7.2.1 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 (overprovision)/underprovision Total taxation on income Taxation on non-trading and capital items 48 Nedbank Limited Annual Report 2018 2018 Rm 612 192 804 3 723 40 160 83 4 006 (107) 3 899 (45) 3 854 2017 Rm 655 203 858 3 669 (45) (120) 107 3 611 11 3 622 (59) 3 563 B7.2.2 Taxation rate reconciliation Standard rate of SA normal taxation Non-taxable income Non-deductible expenses Prior-year overprovision Effective taxation rate B7.2.3 Income tax recognised in other comprehensive income 2018 Exchange differences on translating foreign operations Debt investments at fair value through OCI (FVOCI) – net change in fair value Remeasurements on long-term employee benefit assets Gains on property revaluations 2017 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 B7.2.4 Future taxation relief 2018 Rm 28,0 (1,7) 0,7 (0,7) 26,3 2017 Rm 28,0 (3,8) 0,1 24,3 Gross Taxation Net of taxation 70 11 (480) (122) (29) (19) 521 232 (4) 135 22 5 (146) (71) 70 7 (345) (100) (29) (14) 375 161 The group has estimated taxation losses of R122m (2017: R337m) that can be set off against future taxable income, of which R11m (2017: R117m) has been applied to the deferred taxation balance. B7.3 Deferred taxation The analysis of deferred tax assets and deferred tax liabilities is as follows: Deferred taxation assets — Deferred taxation assets to be recovered after more than 12 months Deferred taxation liabilities — Deferred taxation liabilities to be recovered after more than 12 months Net deferred taxation liabilities The gross movement on the deferred income taxation account, is as follows: — Balance at the beginning of the year — Statement of comprehensive income charge — Tax charge/(credit) relating to components of other comprehensive income — Tax charge/(credit) directly to equity — Reclassification between taxation types and categories Balance at the end of the year 2018 Rm 40 40 (224) (224) (184) (314) (135) 153 85 27 (184) 2017 Rm 37 37 (351) (351) (314) (125) 65 (212) (8) (34) (314) Nedbank Limited Annual Report 2018 49 Notes to the consolidated financial statements continued for the year ended 31 December B7 Taxation continued B7.3 Deferred taxation continued The movement in deferred taxation assets and liabilities during the year, without taking into consideration the offsetting of balances with the same tax jurisdiction is as follows: Deferred taxation assets Balance at 31 December 2016 (Credited)/Charged to the income statement Credited to other comprehensive income Reclassification between taxation types and categories Balance at 31 December 2017 (Credited)/Charged to the income statement Charged to other comprehensive income Charged/(Credited) directly to equity Reclassification between taxation types and categories Credit impairments 1 456 1 456 (106) 124 Deferred revenue Medical aid Provisions Taxation losses 270 (64) 206 21 186 221 32 (39) 214 (21) 100 (214) 79 501 402 (34) 869 443 (92) 27 1 247 2 32 34 (31) 3 Total 2 450 402 (39) (34) 2 779 306 100 218 (187) 3 216 Balance at 31 December 2018 1 474 413 Accel- erated asset allow- ances Property revalu- ations Deferred acquis- ition costs Pension fund Capital invest- ments Share- based pay- ments Available for sale FVOCI Total Deferred taxation liabilities Balance at 31 December 2016 (Credited)/Charged to the income statement (Credited)/Charged to other comprehensive income (Credited)/Charged directly to equity Balance at 31 December 2017 (Credited)/Charged to the income statement Charged/(Credited) to other comprehensive income Charged/(Credited) directly to equity Reclassification between taxation types and categories Balance at 31 December 2018 (522) (599) (499) (708) (153) (93) (41) (96) (52) (147) 2 (71) (107) (45) (563) (670) (595) (867) (300) (136) (366) (107) (42) 62 12 (1) (3) 5 37 38 (2 575) (337) (173) (8) – (3 093) (441) (4) 53 22 85 35 214 43 (38) (223) (133) 214 (929) (563) (702) (660) (238) (81) – (227) (3 400) 50 Nedbank Limited Annual Report 2018 B8 Non-trading and capital items Accounting policy Profit from operations before non-trading and capital items Non-trading and capital items and fair-value adjustments of investment properties are disclosed separately on the face of the statement of comprehensive income, being remeasurements excluded from the calculation of headline earnings in accordance with the guidance contained in SAICA Circular 4/2018: 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, equipment and intangible assets and fair-value adjustments of investment properties. Rm Profit attributable to ordinary and preference equity holders Non-trading and capital items IAS 16 loss on disposal of property and equipment IAS 36 impairment of property, equipment and intangible assets Headline earnings 2018 2017 Gross 164 29 135 Net of taxation 10 765 119 22 97 10 884 Gross Net of taxation 210 47 163 11 160 151 35 116 11 311 Nedbank Limited Annual Report 2018 51 Notes to the consolidated financial statements continued for the year ended 31 December SECTION C: CORE BANKING ASSETS Accounting policy Refer to Section H: Financial instruments for the group’s accounting policies regarding financial assets and liabilities. C1 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. C1.1 Categories of loans and advances Mortgage loans Home loans Commercial mortgages Net finance lease and instalment debtors (note C1.4) Gross investment Unearned finance charges Credit cards Other loans and advances Properties in possession Overdrafts Personal loans Term and other loans1 Overnight loans Foreign client lending Preference shares and debentures Factoring accounts Deposits placed under reverse repurchase agreements Fair-value hedge-accounted portfolios Impairment of loans and advances (note C2) Comprises: – Loans and advances to clients – Loans and advances to banks 2018 (IFRS 9) Rm 2017 Rm (IAS 39) (Restated)¹ 307 741 297 851 143 586 164 155 138 441 159 410 118 089 108 920 153 099 (35 010) 16 501 297 994 91 18 581 20 005 205 065 13 864 10 614 15 153 5 815 8 758 48 140 245 (31 325) 15 719 284 609 99 15 827 18 125 168 301 20 426 20 596 18 494 5 461 17 280 740 325 (14 533) 707 099 (11 355) 725 792 695 744 729 430 10 895 689 435 17 664 740 325 707 099 1 Refer to note A3: Correction of prior-period errors and reclassifications. The balances previously presented as other term loans, other loans and remittances in transit have been aggregated in term and other loans. 52 Nedbank Limited Annual Report 2018 C1.2 Sectoral analysis Individuals Financial services, insurance and real estate1 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 1 Refer to note A3: Correction of prior-period errors and reclassifications. C1.3 Geographical analysis SA1 Rest of Africa Europe Asia United States of America Other 1 Refer to note A3: Correction of prior-period errors and reclassifications. C1.4 Net finance lease and instalment debtors 2018 (IFRS 9) Rm 265 435 239 842 10 895 58 863 8 771 31 025 7 180 27 528 29 009 7 468 11 081 43 228 2017 Rm IAS 39) (Restated)¹ 248 661 210 689 17 664 54 840 8 054 32 413 9 001 26 785 21 921 4 892 11 034 61 145 740 325 707 099 693 363 17 282 23 198 4 828 537 1 117 676 199 9 146 17 260 3 746 250 498 740 325 707 099 Rm No later than one year Later than one year and no later than five years Later than five years 2018 (IFRS 9) Unearned finance charges Gross 2017 (IAS 39) Unearned finance charges Net Net Gross 32 501 (7 485) 25 016 31 944 (7 097) 24 847 102 526 18 072 (23 390) (4 135) 79 136 13 937 94 126 14 175 (21 047) (3 181) 73 079 10 994 153 099 (35 010) 118 089 140 245 (31 325) 108 920 Nedbank Limited Annual Report 2018 53 Notes to the consolidated financial statements continued for the year ended 31 December C1 Loans and advances continued C1.5 Classification of loans and advances The following table represents loans and advances at amortised cost and FVOCI (debt): Rm Mortgage loans Net finance lease and instalment debtors Credit cards Properties in possession Overdrafts Personal, term and other loans1 Overnight loans Preference shares and debentures Factoring accounts Deposits placed under reverse repurchase agreements Fair-value hedge-accounted portfolios 1 Refer to note A3: Correction of prior-period errors and reclassifications. The balances previously presented as term loans and other loans to clients have been aggregated in personal, term and other loans. Defaulted loans and advances – not impaired Stage 3/Defaulted loans and advances – impaired Total 2018 (IFRS 9) 303 331 118 089 16 501 91 18 581 225 251 13 864 15 153 5 815 – 55 716 731 2017 (IAS 39) (Restated)¹ 297 851 108 920 15 719 99 15 827 207 022 20 426 18 494 5 461 17 280 – 707 099 54 Nedbank Limited Annual Report 2018 Subject to 12-month expected credit losses (stage 1) 2018 (IFRS 9) 258 863 96 941 13 294 14 542 205 756 13 090 14 658 5 611 55 Neither past due nor impaired 2017 (IAS 39) (Restated)¹ 279 791 98 951 13 029 14 321 201 315 20 426 18 494 5 208 17 280 Subject to lifetime expected credit losses (stage 2) – not credit-impaired Subject to lifetime expected credit losses (stage 3) – not credit-impaired Past due but not individually impaired Defaulted 2018 (IFRS 9) 35 041 16 310 1 415 3 091 14 237 774 142 154 2017 (IAS 39) 2018 (IFRS 9) 2017 (IAS 39) 9 955 6 246 1 233 715 1 785 194 9 427 4 838 1 792 91 948 5 258 353 50 8 105 3 723 1 457 99 791 3 922 59 622 810 668 815 71 164 20 128 22 757 18 156 22 757 22 757 815 17 341 18 156 Nedbank Limited Annual Report 2018 55 Notes to the consolidated financial statements continued for the year ended 31 December C1 Loans and advances continued C1.6 Credit quality of loans and advances Rm Subject to 12-month expected credit losses (stage 1) (IFRS 9)/ Neither past due nor impaired (IAS 39) Mortgage loans Net finance lease and instalment debtors Credit cards Overdrafts Personal, term and other loans3 Overnight loans Preference shares and debentures Factoring accounts Deposits placed under reverse repurchase agreements Fair-value hedge-accounted portfolios Subject to lifetime expected credit losses (stage 2) – not credit-impaired (IFRS 9)/Past due but not individually impaired (IAS 39) Mortgage loans Net finance lease and instalment debtors Credit cards Overdrafts Personal, term and other loans3 Overnight loans Preference shares and debentures Factoring accounts 622 810 258 863 96 941 13 294 14 542 205 756 13 090 14 658 5 611 – 55 71 164 35 041 16 310 1 415 3 091 14 237 774 142 154 Total NGR 1—12 2018 (Restated)¹ 2018 (Restated)¹ 2017 2017 668 815 277 581 294 486 279 791 98 951 13 029 14 321 201 315 20 426 18 494 5 208 17 280 – 20 128 9 955 6 246 1 233 715 1 785 – – 194 93 071 3 859 1 705 3 821 153 919 9 838 9 990 1 378 8 482 2 891 46 1 149 4 778 538 79 112 884 3 390 1 640 3 600 123 949 17 299 15 674 616 15 434 57 48 8 1 – Subject to lifetime expected credit losses (stage 3) – credit-impaired (IFRS 9)/Defaulted (IAS 39) 22 757 18 156 – Mortgage loans Net finance lease and instalment debtors Credit cards Properties in possession Overdrafts Personal, term and other loans3 Preference shares and debentures Factoring accounts 9 427 4 838 1 792 91 948 5 258 353 50 8 105 3 723 1 457 99 791 3 922 – 59 Total credit quality of loans and advances 716 731 707 099 286 063 294 543 Provision for impairment of off-balance-sheet items4 Subject to 12-month expected credit losses (stage 1) (IFRS 9) Subject to lifetime expected credit losses (stage 2) – not credit-impaired (IFRS 9) Subject to lifetime expected credit losses (stage 3) – credit-impaired (IFRS 9) 201 82 57 62 – – – – – 26 20 6 Total credit quality 716 932 707 099 286 089 294 543 1 Refer to note A3: Correction of prior-period errors and reclassifications. 2 Loans and advances in this category do not have assigned AIRB ratings. 3 The balances previously presented as term loans and other loans to clients have been aggregated in personal, term and other loans. 4 Provision for impairment of off-balance-sheet items includes the ECL allowance recognised with respect to financial guarantees and loan commitments (R166m), credit balances and zero balances of the various loans and advances products. 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. 56 Nedbank Limited Annual Report 2018 NGR 13—20 NGR 21—25 NP1—NP3 Unrated2 2018 2017 2018 2017 2018 2017 2018 2017 22 316 35 063 – 314 867 158 653 81 214 8 216 10 466 45 926 2 956 998 4 592 1 846 2 238 1 615 282 107 44 190 322 393 159 741 88 548 8 567 10 541 43 087 3 082 4 668 4 159 26 056 12 260 5 407 132 2 103 5 852 196 63 43 – – 6 031 4 533 3 022 180 8 473 3 74 36 626 19 890 10 857 1 282 839 3 607 40 111 – 348 449 317 105 58 942 87 49 38 – 26 13 13 8 252 14 347 3 173 255 8 933 103 17 750 8 292 5 900 1 099 671 1 594 194 – 52 813 – – 22 714 9 384 4 838 1 792 91 948 5 258 353 50 22 714 62 62 2 2 83 64 19 17 819 7 836 3 723 1 457 31 791 3 922 59 17 904 – 520 20 1 277 167 – 55 – 43 43 24 397 22 507 68 1 822 – 337 269 68 563 – 24 734 – 348 536 317 105 58 968 52 813 22 776 17 904 563 24 734 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-sized 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. Refer to note C2.6 for the group’s definition of ‘default’. Nedbank Limited Annual Report 2018 57 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments Credit risk Credit risk arises from lending and other financing activities that constitute the group’s core business and is managed across the group in terms of its board-approved Group Credit Risk Monitoring Framework (GCRMF). This framework covers the macrostructures for credit risk management and incorporates selected excerpts from the group credit policy, credit approval mandates, credit risk monitoring and governance structures. It is a key component of the group’s ERMF, Capital Management and RAF, and it is reviewed on a quarterly basis. The GCRMF includes the two AIRB Approach technical forums (ie wholesale and retail) and the ad hoc Group Credit Ratings Committee, which reports into the Group Credit Committee (GCC). Also included is the Large-exposure Approval Committee (LEAC), whose function is the approval of credit applications in excess of the large-exposure threshold imposed by the Banks Act, 94 of 1990. The GCC also acts as the designated committee appointed by the board to monitor, challenge and ultimately approve all material aspects of the group’s AIRB rating and risk estimation systems and processes. The current membership includes seven non-executive directors and three executive directors. The board and the GCC are required by the banking regulations to have a general understanding of the AIRB system and the related reports. The GCC also needs to ensure the independence of Group Credit Risk Monitoring (GCRM), which includes the Credit Model Validation Unit (CMVU) and Model Risk Management (MRM), from the business units originating the credit in the bank. GCRM monitors the business units’ credit portfolios, risk procedures, policies and credit standards, maintains the Group Credit Risk Framework and validates AIRB credit models. GCRM reports to executive management, cluster credit committees and ultimately the board’s GCC on a regular basis. Additionally, GCRM ensures consistency in the rating processes, and has ultimate responsibility for independent credit model validation through the CMVU, the group’s independent risk control unit, as per the banking regulations. GCRM and Group Credit Portfolio Management (GCPM) champion the Basel III AIRB methodology across the group. KEY ASSUMPTIONS CONCERNING THE FUTURE AND KEY SOURCES OF ESTIMATION Allowances for loan impairment and other credit risk provisions Allowances for loan impairment represent management’s estimate of the losses incurred in the loan portfolios at the reporting date. 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. Overlays may be applied to model outputs to cater for additional factors and the valuation of these overlays can be subjective. The impairment allowance reflected in the financial statements for these portfolios is considered to be reasonable and supportable. IFRS 9 outlines a three-stage model for impairment based on changes in credit quality since initial recognition, as summarised below: (cid:122) A financial instrument that is not credit-impaired on initial recognition is classified as stage 1 and has its credit continuously monitored by the group. (cid:122) Where a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to stage 2, but not yet deemed to be credit-impaired. Note C2.5 describes how the group determines when a significant increase in credit risk has occurred. (cid:122) Where the financial instrument is credit-impaired, the financial instrument is moved to stage 3. Note C2.6 describes how the group defines ‘credit-impaired’ and ‘default’. (cid:122) Financial instruments in stage 1 have their ECLs measured at an amount equal to the portion of lifetime ECLs that result from default events possible within the next 12 months. Instruments at stages 2 and 3 have their ECLs measured based on ECLs on a lifetime basis. Refer to note C2.8 for a description of inputs, assumptions and estimation techniques used in measuring the ECLs. 58 Nedbank Limited Annual Report 2018 (cid:122) A pervasive concept in measuring the ECL in accordance with IFRS 9 is that forward-looking information should be considered. Note C2.7 includes an explanation of how the group has incorporated this in the ECL models. (cid:122) Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECLs are measured on a lifetime basis. For individually significant loans with 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. C2.1 Movement in impairments on financial instruments Rm Balance at the beginning of the year Stage 1 ECL allowance Stage 2 ECL allowance Stage 3 ECL allowance Statement of comprehensive income charge net of recoveries Stage 1 ECL allowance Stage 2 ECL allowance Stage 3 ECL allowance Adjusted for: – Recoveries – Interest in suspense – Amounts written off/Other transfers Closing balance Stage 1 ECL allowance Stage 2 ECL allowance Stage 3 ECL allowance Split by measurement category Loans and advances Loans and advances at FVOCI Non-loans and advances Off-balance-sheet allowance 2018 (IFRS 9) 13 579 2 595 3 761 7 223 3 547 79 (46) 3 514 (2 249) 1 229 434 (3 912) 14 877 2 654 3 527 8 696 14 877 14 533 122 21 201 Nedbank Limited Annual Report 2018 59 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.2 Impairments on loans and advances by classification Total impairment – 2018 (IFRS 9) Home loans Commercial mortgages Properties in possession Credit cards Overdrafts Personal, term and other loans Net finance lease and instalment debtors Preference shares and debentures Overnight loans Factoring accounts Trade, other bills and banker’s acceptances Financial guarantees and loan commitments Balance at the beginning of the year Rm Impairments charge/ (release) Rm Amounts written off against the impairment/ Other transfers Rm 2 269 834 28 2 174 692 4 176 3 002 79 115 30 2 157 239 95 (8) 1 097 174 1 690 1 915 (82) 1 7 (322) 38 (2) (855) (123) (1 811) (679) (77) 7 (9) (1) 2 Total Rm 2 188 967 18 2 416 743 4 055 4 238 2 40 22 1 166 13 558 5 128 (3 832) 14 856 The total of R14 856m includes the ECL relating to loans and advances at amortised cost (R14 533m), loans and advances at FVOCI (R122m) and off-balance-sheet items (R201m). Total impairment – 2017 (IAS 39) 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 1 987 966 33 1 308 555 4 599 2 313 52 1 11 814 71 (64) (33) 1 002 253 1 243 1 564 160 42 4 238 (371) (94) 24 (931) (159) (1 741) (1 428) 3 1 687 808 24 1 379 649 4 101 2 449 212 46 (4 697) 11 355 60 Nedbank Limited Annual Report 2018 Total impairment 2018 (IFRS 9) Rm 2017 (IAS 39) Rm Stage 1: 12-month ECL allowance 2018 (IFRS 9) Rm Stage 2: Lifetime ECL allowance (not credit- impaired) 2018 (IFRS 9) Rm Stage 3: Lifetime ECL allowance (credit- impaired) 2018 (IFRS 9) Rm Portfolio impairment 2017 (IAS 39) Rm Specific impairment 2017 (IAS 39) Rm 11 693 7 695 1 812 2 626 2 485 7 255 5 210 1 387 519 1 038 598 192 138 20 181 78 193 71 384 124 629 207 131 216 101 30 586 354 109 20 25 11 80 55 41 14 112 495 142 39 82 9 36 12 18 10 37 772 385 78 591 29 88 114 35 17 156 538 268 133 31 65 11 134 47 235 266 213 46 38 178 43 102 66 13 430 14 856 11 355 2 633 3 506 4 750 8 717 6 605 14 705 118 24 4 5 14 856 11 053 186 100 3 7 6 11 355 3 430 67 9 2 563 51 11 4 4 4 541 93 100 3 7 6 8 712 6 512 93 4 1 2 633 3 506 4 750 8 717 6 605 C2.3 Sectoral analysis Individuals 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 C2.4 Geographical analysis SA Other African countries Europe Asia United States of America Other C2.5 Assessment of significant increase in credit risk (SICR) (stage 2) Stage 2 is comprised of all performing financial instruments that have experienced a significant increase in credit risk since initial recognition. The group recognises lifetime ECLs for stage 2 financial instruments. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the group reverts to recognising 12 months of ECLs as the financial instrument has migrated back to stage 1. At each reporting date the group assesses whether there has been a significant increase in credit risk for exposures since initial recognition by comparing the probability of default (PD), over the remaining expected life, at the reporting date with that on the date of initial recognition. The assessment considers borrower-specific quantitative and qualitative information, and the impact of forward-looking macroeconomic factors. The assessment is performed monthly and the following factors are considered: (cid:122) (cid:122) (cid:122) Established thresholds for SICR are based on a percentage change in lifetime PD relative to initial recognition. A set of portfolio-specific qualitative criteria that are indicative of a significant increase in credit risk are used to supplement the lifetime PD comparison. Instruments that are more than 30 days past due are generally considered to have experienced a significant increase in credit risk. The group has not used the low-credit-risk exemption for any financial instruments in the year ended 31 December 2018. Nedbank Limited Annual Report 2018 61 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.6 Definition of ‘default’ For the purposes of determining ECLs under IFRS 9 defaulted loans and advances (DLAA) cover credit facilities that have triggered default as defined by SA banking regulations. For retail portfolios this is product-centred, and a default would be specific to a borrower account. This also applies to specialised lending exposures. For all other portfolios it is client- or borrower-centred, meaning that, should any transaction within a borrowing group default, all credit exposures to the borrower would be treated as having defaulted. The group considers that default has occurred and classifies the financial asset as impaired when it is more than 90 days past due or one or more events have occurred after the date of initial recognition of the instrument that have a negative impact on the estimated future cashflows of the instrument. This includes, but is not limited to, events that indicate the borrower is experiencing financial difficulty, there is default or delinquency in interest or principal payments and/or there is a high probability of the borrower entering a business rescue or liquidation process. ‘Default’ and ‘credit-impaired’ are mutually inclusive and the same definition applies to both terms. When a financial asset has been identified as defaulted/credit-impaired, the stage 3 ECLs are measured as the difference between the asset’s gross carrying amount and the present value of estimated future cashflows discounted at the instrument’s original effective interest rate. C2.7 Forward-looking information incorporated in the ECL models To account for forward-looking information the ECL input parameters (PD, LGD and EAD) are modelled on a segment level considering macroeconomic drivers. Most portfolios are linked to macroeconomic drivers such as the prime rate, GDP growth, household debt to income and credit growth. The incorporation of forward-looking information into the ECL models allows for a range of possible macroeconomic outcomes to capture any non-linearities. The parameter inputs used to estimate the ECL are modelled on four macroeconomic scenarios: base (expected), positive, mild stress and high stress. Scenarios are provided by Nedbank Group Economic Unit and incorporate historical trends, statistical models and expert judgement. The macroeconomic scenarios are updated quarterly, with the option of an out-of-cycle update based on significant macroeconomic events impacting our macroeconomic forecasts. There is a robust internal governance process to review and approve the forecast macroeconomic factors, which includes approval by a board committee. The ECL under each macroeconomic scenario is the product of the PD, LGD and EAD for that specific scenario. The final estimate for the ECL at each future reporting date is calculated to reflect an unbiased and probability-weighted amount, with the scenario weights estimated based on the likelihood of occurrence. The probability-weighted PD, as applied in the calculation of ECL at reporting date, is also used in the assessment of SICR. The ranges for macroeconomic variables are determined by using the annual average forecast over the three-year period per scenario. 1 January 2018 31 December 2018 Macroeconomic variable (%) 2019 2020 2021 2019 2020 2021 Prime interest rate Gross domestic product Consumer price inflation Household debt to income 9,8–10,8 (0,3)–1,4 4,5–6,5 71,4–73,4 9,7–11,3 0,7–2,5 4,5–7,1 72,1–75,3 10,2–10,9 1,1–2,4 4,7–6,1 73,4–77,7 9,9–11,0 (0,6)–2,7 3,3–5,9 70,4–74,1 10,4–11,3 0,7–2,6 4,1–6,4 72,4–76,3 10,5–11,7 1,0–2,4 4,5–6,3 74,1–78,1 The macroeconomic factors beyond the forecast three-year period equate to a long-run average expectation. C2.8 Measuring ECL – Explanation of inputs, assumptions and estimation techniques The impairment calculations under IFRS 9 require the recognition of credit losses based on forward-looking ECL. Dependent on whether the financial instrument has shown an SICR since initial recognition, either a 12-month (stage 1) or a lifetime (stage 2) ECL is recognised. A stage 1 ECL results from a default event that is possible within 12 months, whereas a stage 2 ECL includes a lifetime ECL that results from a possible default event over the remaining life of the financial instrument. The ECL is calculated as the product of the core model components: PD, LGD and EAD. For portfolios with adequate historical information, the modelling parameters are calculated on a segment level and forward- looking information is incorporated. The ECL is estimated for each individual account. Out-of-model adjustments can be made to account for any additional client or portfolio information not captured in the model, which are typically temporary in nature. For portfolios where the abovementioned approach is not possible due to a lack of sufficient data, a simplified approach is followed to estimate ECL. The ECL is discounted back from the point of default using the effective interest rate (EIR), or a reasonable estimate thereof, to arrive at the ECL at reporting date. 62 Nedbank Limited Annual Report 2018 C2.9 Scenario analysis The most significant macroeconomic variables for the group have been weighted and stressed against the final weighted ECL. The different scenarios are a weighting of the different macroeconomic scenarios (for example unemployment, interest rate and gross domestic product). These are determined by Nedbank Group Economic Unit and reviewed quarterly to incorporate any changes in the macroeconomic environment. When product lines do not have any sensitivity to macroeconomic weightings, the group will use the weighted ECL for all the scenarios. Rm 2018 (IFRS 9) Weighted economics Base Mild High Positive C2.10 Credit risk exposure Difference to weighted economic scenario Percentage difference to weighted economic scenario (133) 31 610 (485) (0,9%) 0,2% 4,1% (3,3%) Total ECL allowance 14 856 14 723 14 887 15 466 14 371 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 PD only). The comprehensive PD 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. Refer to note C2.6 for the group’s definition of ‘default’. Maximum exposure to credit risk – Financial instruments not subject to impairment 2018 (IFRS 9) Other short-term securities Derivative financial instruments Government and other securities Loans and advances Investment securities Maximum exposure to credit risk1 36 344 22 412 28 495 23 596 6 787 117 634 1 This amount excludes the impact of any collateral held or credit enhancements. Credit-impaired financial assets and related collateral held to mitigate potential losses are disclosed below: Collateral held as security and other credit enhancements relating to credit-impaired financial assets Rm Gross exposure Impairment allowance Carrying amount Fair value of collateral held 2018 (IFRS 9) Home loans Commercial mortgages Properties in possession Credit cards and overdrafts Personal, term and other loans Net finance lease and instalment debtors Preference shares and debentures Factoring accounts 6 518 2 909 91 2 740 5 256 4 839 354 50 1 364 433 18 1 913 2 429 2 492 8 5 154 2 476 73 827 2 827 2 347 354 42 9 667 2 725 106 291 702 3 573 375 51 22 757 8 657 14 100 17 490 Nedbank Limited Annual Report 2018 63 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.10 Credit risk exposure continued The following table discloses the distribution of loan-to-value (LTV) ratios of credit-impaired financial assets: LTV distribution Rm 2018 (IFRS 9) Lower than 50% 50% to 75% 76% to 100% Higher than 100% Total C2.11 Loss allowance Reconciliation of loss allowance relating to financial assets subsequently measured at amortised cost (IFRS 9) The following table presents a reconciliation from the opening balance to the closing balance of the loss allowance, and how significant changes in the gross carrying amount of financial instruments contributed to changes in the loss allowance: Not credit-impaired Subject to 12-month ECL Gross carrying amount Allowance for ECL Amortised cost 582 593 156 921 2 572 2 062 (92 942) 21 461 (42 410) (8 722) (147) 616 754 6 002 622 756 2 393 221 (1 860) (2 800) 42 2 630 (28) 580 079 154 947 – – (95 378) 21 240 (40 580) (5 939) (189) 614 180 6 030 2 602 620 210 Loans and advances Rm 2018 Balance at the beginning of the year New financial assets originated or purchased Financial assets derecognised (excluding writeoffs) Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances (refer to note C2.2) Total credit and zero balances Balance at the end of the year 64 Nedbank Limited Annual Report 2018 Gross carrying amount of credit-impaired financial assets Home loans Commercial mortgages Properties in possession Credit cards and overdrafts 748 1 271 3 382 1 117 6 518 205 1 192 1 405 107 2 909 1 27 63 91 1 999 636 7 98 2 740 Term loans 5 082 233 3 79 5 397 Net finance lease and instalment debtors Preference shares and debentures Other loans to clients Factoring accounts 147 5 24 176 92 208 913 3 626 4 839 354 354 50 50 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount Allowance for ECL Amortised cost Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 75 861 3 760 (22 505) (20 030) 45 544 (7 719) 71 151 12 71 163 (346) (189) 2 164 (1 883) 1 3 507 (8) 3 499 72 163 – – – (22 193) (19 841) 43 410 (5 846) (1) 67 692 20 67 712 18 388 7 226 (3 171) (4 640) (1 431) (3 133) 16 440 255 22 708 49 22 757 (3 137) 281 (31) (303) 4 683 8 719 (1) 8 718 11 199 – – (35) (4 922) (1 400) (2 830) 11 784 255 14 051 50 Gross carrying amount 676 842 156 921 – (3 171) (120 087) – 1 (1) 108 710 613 6 063 Allowance for ECL Amortised cost 13 558 2 062 – (3 137) 2 328 1 1 – 43 14 856 (37) 663 441 154 947 – (35) (122 493) (1) – (1) 65 695 923 6 100 14 101 716 676 14 819 702 023 Nedbank Limited Annual Report 2018 65 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.11 Loss allowance continued Changes in model and macroeconomic factors1 Change in macroeconomic factors Model reground 1 Represents the change in the allowance related to changes in risk, including changes to macroeconomic factors, level risk, associated parameters, and models as reflected in the closing balance. Not credit-impaired Subject to 12-month ECL Gross carrying amount 117 166 9 730 (2 463) 5 752 (6 997) (1 601) 121 587 134 121 721 Allowance for ECL Amortised cost 262 56 325 18 (205) (240) 216 (1) 215 116 904 9 674 – (2 788) 5 734 (6 792) (1 361) – 121 371 135 121 506 Not credit-impaired Subject to 12-month ECL Gross carrying amount 144 170 37 765 (32 184) 7 482 (19 141) (849) (100) 137 143 Allowance for ECL Amortised cost 308 152 (110) 104 (58) (95) 301 143 862 37 613 – – (32 074) 7 378 (19 083) (754) (100) 136 842 – 137 143 301 136 842 Home loans Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Commercial mortgages Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets derecognised (excluding writeoffs) Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year 66 Nedbank Limited Annual Report 2018 Not credit-impaired Credit-impaired Subject to 12-month ECL Subject to lifetime ECL Subject to lifetime ECL – excluding purchased/ originated credit-impaired Subject to lifetime ECL – purchased/ originated credit-impaired (12) 161 18 2 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost Gross carrying amount Allowance for ECL Amortised cost 14 557 615 (856) (5 104) 8 531 (1 785) 15 343 4 15 347 (30) (13) 307 (271) 608 608 13 942 – – (826) (5 091) 8 224 (1 514) – 14 735 4 14 739 6 577 1 392 (274) (1 009) (648) (1 533) 3 386 8 6 507 11 6 518 (258) (173) (5) (103) 511 1 364 1 364 5 185 – (16) (836) (643) (1 430) 2 875 8 5 143 11 5 154 Gross carrying amount 138 300 9 730 (274) (4 328) – 1 – 8 143 437 149 143 586 Allowance for ECL Amortised cost 2 269 56 (258) 122 – (1) – – 2 188 (1) 2 187 136 031 9 674 (16) (4 450) – 2 – 8 141 249 150 141 399 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount Allowance for ECL Amortised cost Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 11 799 208 (2 778) (7 087) 19 382 (1 623) 177 (89) 60 (123) 19 693 233 19 693 233 11 591 – – – (2 955) (6 998) 19 322 (1 500) – 19 460 – 19 460 1 806 318 (10) (722) (395) (242) 2 472 (27) (59) (15) (2) 218 2 909 433 2 909 433 1 488 – – 17 (663) (380) (240) 2 254 – 2 476 – 2 476 Gross carrying amount 157 775 37 765 – (10) (35 684) – (1) – (100) 159 745 – 159 745 Allowance for ECL Amortised cost 834 152 – (27) 8 – – – – 967 – 967 156 941 37 613 – 17 (35 692) – (1) – (100) 158 778 – 158 778 Nedbank Limited Annual Report 2018 67 Notes to the consolidated financial statements continued for the year ended 31 December Impairments charge on financial instruments continued C2 C2.11 Loss allowance continued Not credit-impaired Subject to 12-month ECL Gross carrying amount Allowance for ECL Amortised cost 1 (1) – – 2 (2) – – (2) 1 – 2 (1) – – – Not credit-impaired Subject to 12-month ECL Gross carrying amount 19 190 3 341 2 484 918 (2 787) (1 180) 21 966 5 868 27 834 Allowance for ECL Amortised cost 525 118 1 092 37 (467) (735) 570 (27) 543 18 665 3 223 – 1 392 881 (2 320) (445) – 21 396 5 895 27 291 Not credit-impaired Subject to 12-month ECL Gross carrying amount 173 505 48 829 (14 580) 3 700 (4 103) (1 547) (45) Allowance for ECL Amortised cost 696 987 504 20 (374) (1 031) 172 809 47 842 – (15 084) 3 680 (3 729) (516) (45) 204 957 – 205 759 802 205 759 802 204 957 Properties in possession Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to lifetime ECL (credit-impaired) Net balances Total credit and zero balances Balance at the end of the year Credit cards and overdrafts Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Personal, term and other loans Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year 68 Nedbank Limited Annual Report 2018 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost Gross carrying amount Allowance for ECL Amortised cost Gross carrying amount Allowance for ECL Amortised cost 1 (1) – – (1) – – 1 – – – – 98 1 (9) 1 91 91 25 (7) 18 18 73 – 1 (2) 1 73 – 73 98 1 1 (9) – 91 – 91 28 – – (10) – 18 – 18 70 1 1 1 – 73 – 73 – – Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount 4 004 (756) (851) 2 840 (737) 4 500 8 4 508 Allowance for ECL Amortised cost 642 (1) (33) 481 (413) 676 (8) 668 3 362 – – (755) (818) 2 359 (324) – 3 824 16 3 840 Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 2 145 1 699 (886) (321) (67) (53) 1 917 (33) 2 702 38 2 740 (840) (77) (4) (13) 1 148 1 913 (1) 1 912 446 – (46) (244) (63) (40) 769 (33) 789 39 828 Gross carrying amount 25 339 3 341 (886) 1 407 – – – (33) 29 168 5 914 35 082 Allowance for ECL Amortised cost 2 866 118 (840) 1 014 – 1 – – 3 159 (36) 3 123 22 473 3 223 (46) 393 – (1) – (33) 26 009 5 950 31 959 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount Allowance for ECL Amortised cost Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 24 490 1 233 (9 551) (3 673) 4 491 (1 521) (290) (19) 497 (597) 14 236 824 14 236 824 23 257 – – (9 261) (3 654) 3 994 (924) – 13 412 – 13 412 4 064 2 247 (1 268) (232) (27) (388) 3 068 39 5 256 (1 092) (230) (1) (123) 1 628 2 429 5 256 2 429 1 817 – (176) (2) (26) (265) 1 440 39 2 827 – 2 827 Gross carrying amount 202 059 48 829 (1 268) (24 363) – – – (6) 225 251 – 225 251 Allowance for ECL Amortised cost 4 176 987 (1 092) (16) – – – – 4 055 – 4 055 197 883 47 842 (176) (24 347) – – – (6) 221 196 – 221 196 Nedbank Limited Annual Report 2018 69 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.11 Loss allowance continued Not credit-impaired Subject to 12-month ECL Net finance lease and instalment debtors Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Preference shares and debentures Rm Balance at the beginning of the year New financial assets originated or purchased Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Overnight loans Rm Balance at the beginning of the year New financial assets originated or purchased Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year 70 Nedbank Limited Annual Report 2018 Gross carrying amount 91 412 46 976 (31 553) 2 691 (9 254) (3 331) (1) 96 940 Allowance for ECL Amortised cost 660 616 693 39 (721) (639) 648 90 752 46 360 – (32 246) 2 652 (8 533) (2 692) (1) 96 292 – 96 292 96 940 648 Not credit-impaired Subject to 12-month ECL Gross carrying amount 13 475 7 181 (6 136) 320 (4) (178) 14 658 14 658 Allowance for ECL Amortised cost 26 34 (64) 1 (37) 42 2 2 13 449 7 147 (6 072) 319 (4) (141) (42) 14 656 – 14 656 Not credit-impaired Subject to 12-month ECL Gross carrying amount 18 288 2 472 (8 067) 425 (28) 13 090 13 090 Allowance for ECL Amortised cost 23 9 (6) 1 (3) 24 24 18 265 2 463 (8 061) 424 (25) – – 13 066 – 13 066 Not credit-impaired Credit-impaired Total Gross carrying amount 13 840 (3 422) (2 400) 10 172 (1 880) Subject to lifetime ECL Allowance for ECL Amortised cost 841 (51) (32) 784 (444) 12 999 – – (3 371) (2 368) 9 388 (1 436) – 15 212 – 15 212 16 310 1 098 16 310 1 098 Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 3 653 1 501 (726) (2 331) (291) (917) 5 210 241 4 839 (919) 895 (6) (62) 1 083 2 492 4 839 2 492 2 152 – 193 (3 226) (285) (855) 4 127 241 2 347 – 2 347 Gross carrying amount 108 905 46 976 (726) (37 306) – 1 (1) 240 118 089 – 118 089 Allowance for ECL Amortised cost 3 002 616 (919) 1 537 1 1 – – 4 238 – 4 238 105 903 46 360 193 (38 843) (1) – (1) 240 113 851 – 113 851 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount 4 799 (4 169) (320) 4 (173) 141 141 Allowance for ECL Amortised cost 53 (28) (1) (25) 1 – – 4 746 – (4 141) (319) 4 (148) (1) 141 – 141 Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 3 (62) 351 354 354 62 – – – – 65 – – 289 – 354 – 354 Gross carrying amount 18 274 7 181 (10 302) – – – – 15 153 – 15 153 Allowance for ECL Amortised cost 79 34 (154) – – – 43 2 – 2 18 195 7 147 (10 148) – – – (43) 15 151 – 15 151 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount 1 968 (797) (425) 28 774 774 Allowance for ECL Amortised cost 92 (78) (1) 3 16 16 1 876 – (719) (424) 25 – – 758 – 758 Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost – – – – – – – – – – – – – – Gross carrying amount 20 256 2 472 (8 864) – – – – 13 864 – 13 864 Allowance for ECL Amortised cost 115 9 (84) – – – – 40 – 40 20 141 2 463 (8 780) – – – – 13 824 – 13 824 Nedbank Limited Annual Report 2018 71 Notes to the consolidated financial statements continued for the year ended 31 December C2 Impairments charge on financial instruments continued C2.11 Loss allowance continued Not credit-impaired Subject to 12-month ECL Gross carrying amount 5 386 626 (443) 173 (96) (35) 5 611 5 611 Allowance for ECL Amortised cost 11 2 4 1 (2) (6) 10 10 5 375 624 – (447) 172 (94) (29) – 5 601 – 5 601 Not credit-impaired Subject to 12-month ECL Gross carrying amount Allowance for ECL Amortised cost 1 (1) – – 1 1 1 – – (1) (1) – (1) Factoring accounts Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to 12-month ECL Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Trade, other bills and banker’s acceptances Rm Balance at the beginning of the year Repayments net of readvances, capitalised interest and fees Foreign exchange and other movements Net balances Total credit and zero balances Balance at the end of the year Financial guarantees and loan commitments Rm Balance at the beginning of the year New financial assets originated or purchased Financial assets written off Repayments net of readvances, capitalised interest and fees Transfers to lifetime ECL (not credit-impaired) Transfers to lifetime ECL (credit-impaired) Net balances Total credit and zero balances Balance at the end of the year 72 Nedbank Limited Annual Report 2018 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Gross carrying amount 404 (176) (170) 96 154 154 Allowance for ECL Amortised cost 12 (9) (1) 2 4 4 392 – – (167) (169) 94 – – 150 – 150 Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost 45 (8) (19) (3) 35 50 50 7 (5) 6 8 8 38 – (8) (14) (3) – 29 – 42 – 42 Gross carrying amount 5 835 626 (8) (638) – – – – 5 815 – 5 815 Allowance for ECL Amortised cost 30 2 – (10) – – – – 22 – 22 5 805 624 (8) (628) – – – – 5 793 – 5 793 Not credit-impaired Credit-impaired Total Subject to lifetime ECL Subject to lifetime ECL (excluding purchased/originated) Gross carrying amount Allowance for ECL Amortised cost Gross carrying amount Allowance for ECL Amortised cost Gross carrying amount Allowance for ECL Amortised cost 1 (1) – – (1) 1 – – – – – – – – – – – – – – – – 1 – (1) – – – 2 (1) – 1 – 1 (1) 1 (1) (1) – (1) Not credit-impaired Credit-impaired Subject to 12-month ECL Subject to lifetime ECL Subject to lifetime ECL – excluding purchased/ originated credit-impaired Subject to lifetime ECL – purchased/ originated credit-impaired 58 88 (43) (30) (17) 56 56 62 (34) 30 (10) 48 48 37 (1) (1) 27 62 62 157 88 (1) (78) – – 166 – 166 Nedbank Limited Annual Report 2018 73 Notes to the consolidated financial statements continued for the year ended 31 December Impairments charge on financial instruments continued C2 C2.12 Financial assets writtenoff Key assumptions concerning the future and key sources of estimation Writeoff and postwriteoff recoveries IFRS 9 provides more detailed guidance on the point at which a loan and advance should be written off. In terms of IFRS 9 a loan and advance is written off when the group has no reasonable expectations of recovering the asset partially or in its entirety. This assessment is judgemental and includes both qualitative and quantitative information, including trends based on historical recoveries. The IFRS 9 writeoff requirements are applied prospectively from 1 January 2018, ie amounts written off under IAS 39 are not reassessed based on the IFRS 9 criteria. As a consequence, Nedbank Retail and Business Banking has extended the point of writeoff for certain asset groups. This has resulted in an increase in the gross loans and advances for Personal Loans (R773m), MFC (R905m) and Card (R181m), ie R1 859m in total, and an increase in stage 3 (specific) impairments of R1 762m, being Personal Loans (R735m), MFC (R855m) and Card (R172m), compared with the writeoff definition applied under IAS 39. The extended point of writeoff means that Card will write off after a client has had four months with no payment at legal stage, which translates into approximately 12 months in default; Personal Loans will write off after a client has missed the last 12 payments, and MFC will write off after approximately 11 months in default. The point of writeoff has remained unchanged on the adoption IFRS 9 for other products, which are generally only considered for writeoff once the underlying security has been fully realised. The group writes off financial assets, in whole or in part, when practical recovery efforts have been exhausted and the group has concluded that there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include: (cid:122) where enforcement activity is ceased; and (cid:122) where the group’s recovery method is foreclosing on collateral and the value of the collateral is such that there is no reasonable expectation of recovering in full. The following contractual amounts outstanding on financial assets were written off during the period, and are still subject to enforcement activity: Rm Contractual amount outstanding – 2018 C2.13 Modification of financial assets 2018 3 030 The group modifies the terms of loans provided to clients due to commercial renegotiations or in cases of distressed loans, with the aim of maximising recovery. Such restructuring activities include extended payment terms, payment holidays and payment forgiveness. Restructuring policies and practices are based on indicators or criteria that, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition when the modification is not substantial and does not result in derecognition of the original assets. The group monitors the subsequent performance of the assets. The group may determine that the credit risk has significantly improved after restructuring and the assets are then moved from lifetime ECL (stage 2 and stage 3) to 12-month ECL (stage 1). This is the case for assets that have performed in accordance with the new terms for six or more consecutive months. The group continues to monitor whether there is a subsequent significant increase in credit risk in relation to such assets. The following table includes a summary of financial assets with lifetime ECLs of which the cashflows were modified during the year as part of the group’s restructuring activities and their respective effects on the group’s financial performance: Rm Modification during the year for which the loss allowance reflects lifetime ECL Amortised cost before modification Net modification loss Modification since initial recognition of the financial asset for which the loss allowance has changed during the year to reflect 12-month ECL Gross carrying amount at the end of the year Impact of modification on the ECL allowances associated with these assets 2018 1 884 150 96 2 74 Nedbank Limited Annual Report 2018 C3 Government and other securities C3.1 Analysis Government and government-guaranteed securities Other dated securities¹ Impairment of government and other securities C3.2 Sectoral analysis Financial services, insurance and real estate Banks Manufacturing, wholesale and trade Transport, storage and communication Government and public sector Other sectors ¹ Includes securitised assets. See note E5. C4 Other short-term securities C4.1 Analysis Negotiable certificates of deposit Treasury bills and other bonds C4.2 Sectoral analysis Banks Government and public sector Other sectors 2018 Rm 2017 Rm 70 336 25 793 (6) 32 502 16 247 96 123 48 749 11 701 1 301 8 585 1 012 72 225 1 299 96 123 16 533 1 891 5 721 446 23 748 410 48 749 2018 Rm 2017 Rm 7 559 50 285 57 844 7 488 50 208 148 57 844 12 859 60 613 73 472 11 570 60 434 1 468 73 472 C5 Credit analysis of other short-term securities, and government and other securities Credit ratings Other short-term securities Negotiable certificates of deposit Treasury bills and other Government and other securities Government and government- guaranteed securities Other dated securities Impairment of government and other securities Investment grade Subinvestment grade Not rated Total 2018 Rm 2017 Rm 2018 Rm 2017 Rm 2018 Rm 2017 Rm 2018 Rm 2017 Rm 56 946 72 674 898 798 – – 57 844 73 472 7 559 12 859 7 559 12 859 49 387 59 815 898 798 50 285 60 613 94 066 40 083 957 7 863 1 100 803 96 123 48 749 69 724 25 172 612 7 330 70 336 32 502 24 348 14 911 345 533 1 100 803 25 793 16 247 (6) (6) – 151 012 112 757 1 855 8 661 1 100 803 153 967 122 221 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 on 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 credit-rating scales of external credit-rating agencies. According to the NGR scale, investment grade can be equated to a Standard & Poor’s and Fitch rating of at least BB+ and a Moody’s rating of at least Ba1. The group’s investment grade includes credit ratings from NGR01 to NGR12 and subinvestment grade includes credit ratings from NGR13 to NGR25. Nedbank Limited Annual Report 2018 75 Notes to the consolidated financial statements continued for the year ended 31 December C6 Cash and cash equivalents Coins and banknotes 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 2018 Rm 2017 Rm 7 384 547 ¹ 7 931 19 789 7 162 1 661 ¹ 8 823 18 145 27 720 26 968 ¹ Represents amounts less than R1m. Money at call and short notice constitute amounts withdrawable in 32 days or fewer. 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. C7 Derivative financial instruments Accounting policy 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 assets and financial liabilities’. 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. (cid:122) 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. The group manages its interest rate risk exposure by entering into interest rate swaps. The interest rate risk exposure is frequently updated due to new loans being originated, contractual repayments, and early prepayment made by clients in each period. As a result the group adopted a macro fair-value hedge strategy to hedge the designated risk profile by designating new swap agreements into the macro fair-value hedge-accounting solution at each month- end. The group uses the macro fair-value hedge to recognise fair value changes related to the interest rate risk to reduce the profit or loss volatility that would otherwise arise from changes in fair value of the interest swaps alone. 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), and demonstrate actual effectiveness (retrospective effectiveness) on a monthly 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 hedged risk during the period for which the hedge is designated. For actual effectiveness to be achieved the quantitative hedge effectiveness test must be successful. (cid:122) 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 measurement of both the hedging instrument and the hedged item are recognised in profit and loss, for so long as the hedging relationship is effective at each testing date. Any hedge ineffectiveness is recognised in profit or loss. If the derivative expires, is sold, terminated or exercised, no longer meets the criteria for fair-value hedge accounting, or the designation is revoked, then hedge accounting is discontinued. The fair-value adjustment to the hedged item is amortised to profit or loss over the life of the designated relationship in line with accounting standards. The unamortised fair-value adjustment of the hedged items is immediately recognised in profit or loss in the event that the hedged item is repaid or sold. (cid:122) 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 accounting are recognised immediately in non-interest revenue. 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: (cid:122) The economic characteristics and risks of the embedded derivative are not closely related to those of the host contract. (cid:122) A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. (cid:122) 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: (cid:122) under IFRS 9 if it is a financial instrument; and (cid:122) in accordance with other appropriate accounting standards if it is not a financial instrument. 76 Nedbank Limited Annual Report 2018 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 FVTPL and measured at fair value. Principal types of derivatives 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 swaps, options, futures and forwards. 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. C7.1 Total carrying amount of derivative financial instruments Gross carrying amount of assets Gross carrying amount of liabilities Net carrying amount 2018 Rm 22 412 (19 761) 2017 Rm 30 698 (23 561) 2 651 7 137 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 C7.2 – C7.6. C7.2 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. Hedging derivatives Interest rate derivatives Interest rate swaps Other derivatives Equity derivatives Options written Options purchased Futures¹ Commodity derivatives Options written Options purchased Caps and floors Swaps Futures Notional principal Rm – 2018 Positive value Rm Negative value Rm Notional principal Rm 2017 Positive value Rm Negative value Rm 21 056 12 478 7 463 10 169 3 424 2 693 171 104 – 8 2 410 10 169 2 309 2 518 104 4 2 410 8 578 7 463 1 115 175 171 4 3 270 3 270 36 977 18 856 16 102 16 102 4 773 30 10 – 10 – 10 16 102 2 754 15 10 5 18 121 16 102 2 019 15 10 5 Exchange rate derivatives 428 912 213 585 215 327 345 313 199 368 145 945 Forwards Futures Currency swaps Options purchased Options written 276 630 2 365 122 971 13 058 13 888 138 186 62 341 13 058 138 444 2 365 60 630 13 888 209 472 9 86 481 41 629 7 722 114 463 3 43 273 41 629 95 009 6 43 208 7 722 Interest rate derivatives 5 472 217 2 750 743 2 721 474 4 287 739 2 161 724 2 126 015 Interest rate swaps Forward rate agreements Futures Caps Floors Credit default swaps Total return swaps 2 681 528 2 744 365 11 048 12 210 5 116 14 475 3 475 1 321 222 1 412 580 128 4 840 3 433 8 325 215 1 360 306 1 331 785 10 920 7 370 1 683 6 150 3 260 2 121 763 2 150 254 199 2 212 2 300 11 011 – 1 052 967 1 097 340 199 506 2 300 8 412 1 068 796 1 052 914 1 706 2 599 Total notional principal 5 924 878 2 979 324 2 945 554 4 673 329 2 383 233 2 290 096 ¹ Includes contracts for difference with positive notionals of R758m (2017: R1 199m) and negative notionals of R157m (2017: R463m). The equity forward agreement has positive notionals of R2 507m (2017: R1 556m) and negative notionals of R2 507m (2017: R1 556m). Nedbank Limited Annual Report 2018 77 Notes to the consolidated financial statements continued for the year ended 31 December C7 Derivative financial instruments continued C7.3 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. Net carrying amount Rm 2018 Carrying amount of assets Rm 2017 Carrying amount of liabilities Rm Net carrying amount Rm 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 Options written Options purchased Swaps 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 return swaps – (269) (750) 329 152 100 (403) 440 19 44 1 101 741 39 284 497 (460) 1 719 1 655 141 (6) (8) 2 (6) (59) 539 329 210 601 440 27 134 7 740 4 035 102 3 106 497 13 532 12 570 690 42 7 206 17 808 750 58 501 403 8 90 6 639 3 294 63 2 822 460 11 813 10 915 549 6 50 5 212 76 (1 021) 1 021 – (133) (243) 264 (154) – 3 510 2 014 (84) 1 266 884 (570) (138) – 1 323 138 1 323 1 021 302 465 243 222 1 021 302 332 264 68 14 875 11 365 8 867 33 5 091 884 6 853 117 3 825 570 3 898 14 168 10 270 3 437 334 1 (8) 13 121 – 13 151 843 1 4 13 156 9 714 509 – 12 – 35 Total carrying amount 2 651 22 412 19 761 7 137 30 698 23 561 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 R86m (2017: R61m). 78 Nedbank Limited Annual Report 2018 C7.4 Analysis of derivative financial instruments Hedging derivatives Other derivatives Interest rate derivatives Equity derivatives Commodity derivatives Exchange rate derivatives Interest rate derivatives Rm Derivative assets 2018 Maturity analysis Under one year One to five years Over five years 2017 Maturity analysis Under one year One to five years Over five years Derivative liabilities 2018 Maturity analysis Under one year One to five years Over five years 2017 Maturity analysis Under one year One to five years Over five years Notional principal of derivatives 2018 Maturity analysis Under one year One to five years Over five years 2017 Maturity analysis Under one year One to five years Over five years 251 288 511 90 – 539 601 814 509 309 23 – 1 323 332 370 438 426 75 – 808 501 814 509 449 16 4 881 1 369 1 490 7 740 10 051 2 609 2 215 14 875 3 927 1 863 849 6 639 8 340 1 758 1 267 Total 6 869 5 252 10 291 22 412 1 226 3 505 8 801 13 532 1 492 4 115 8 561 12 666 7 256 10 776 14 168 30 698 1 101 3 244 7 468 11 813 5 824 5 620 8 317 19 761 1 103 3 207 5 960 10 706 5 490 7 365 138 138 – 75 3 195 3 270 1 323 465 11 365 10 270 23 561 15 055 5 086 915 21 056 28 632 6 683 1 662 36 977 2 645 48 320 382 73 489 35 041 3 477 826 1 377 878 616 513 3 815 908 1 456 501 652 469 2 693 428 912 5 472 217 5 924 878 22 8 273 102 42 960 29 251 2 815 165 1 056 382 416 192 3 116 921 1 106 108 450 300 30 345 313 4 287 739 4 673 329 The maturity analysis in this note is prepared based on contractual maturities. Nedbank Limited Annual Report 2018 79 Notes to the consolidated financial statements continued for the year ended 31 December C7 Derivative financial instruments continued C7.5 Derivatives designated as fair-value hedges in terms of the group’s fair-value hedge accounting solution (2018) 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, loans, deposits and capital market issuances. 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 or loss on a monthly basis if the hedge-accounting criteria are met. IAS 39 does not specify a single method for assessing hedge effectiveness. The method an entity adopts for assessing hedge effectiveness depends on its risk management strategy. The group considers the linear regression method as the appropriate hedge effectiveness test to be used for prospective and retrospective hedge effectiveness testing. Linear regression is a statistical method that investigates the strength of the statistical relationship between the hedged item and the hedging instrument. Linear-regression analysis involves determining a ‘line of best fit’ (slope) and then assessing the ‘goodness of fit’ (R-square) of this line. It provides a means of expressing, in a systematic fashion, the extent to which one variable, ‘the dependent’, will vary with changes in another variable, ‘the independent’. In the context of assessing hedge effectiveness it establishes whether changes in the hedged item and hedging instrument are highly correlated. The total day-to-day movement of the hedged item (due to the hedged risk) is regressed against the total day-to-day movement of the designated external swaps to calculate the hedge effectiveness, ie the degree of offset between the movements in the external swap and the hedged item (due to hedged risk). Given the respective methodologies applied to perform retrospective and prospective hedge effectiveness testing, the number of data points considered for linear regression will not be consistent between retrospective and prospective testing and will not remain constant for all retrospective tests performed. This is in line with the requirements as per IAS39 as it proves hedge effectiveness retrospectively throughout the reporting periods for which the hedge was designated (IAS39.99 paragraphs 89 to 102) and prospectively up to the next possible rebalancing date as documented as part of the risk management strategy for this particular hedging relationship (IAS39.99 paragraphs 89 to 102). During 2018 the hedge accounting solution was rebalanced on a monthly basis; therefore hedge effectiveness testing was performed on a monthly basis. The following table contains details of the hedged banking book exposures covered by the group’s macro fair-value hedge accounting: Loans and advances Rm Retail assets Wholesale assets and government bonds Retail deposits Wholesale deposits and capital market issuances 2018 Notional amount of hedged items Accumulated amount of fair-value adjustments on the hedged item Assets Liabilities Assets Liabilities 42 330 56 584 (75) 124 45 089 75 465 91 26 117 Total 98 914 120 554 49 Effectiveness testing was performed on a monthly basis with a prospective effectiveness R-square range of 98% to 100% and retrospective effective range of 84% to 100%. The table below contains the fair-value change of the hedged item and hedging instrument per month for the various hedge accounting solutions. Rm Change in the fair value of hedged items Change in the fair value of the hedging instruments Jan 2018 Feb 2018 Mar 2018 Apr 2018 May 2018 Jun 2018 Jul 2018 Aug 2018 Sept 2018 Oct 2018 Nov 2018 Dec 2018 (106) 333 100 (107) (316) (444) 377 (723) 73 (257) 883 353 107 (332) (91) 120 321 457 (362) 724 (37) 276 (834) (285) Net fair value change 1 1 9 13 5 13 15 1 36 19 49 68 The following table contains the impact on profit or loss: Rm Profit on hedged items Profit on hedging instruments Movement in fair value that was recognised in profit or loss 80 Nedbank Limited Annual Report 2018 2018 166 64 230 C7.6 Derivatives designated as fair-value hedges in terms of the group’s fair-value hedge accounting solution (2017) 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 C3). 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 or loss. The group recognised the following gains and losses on hedging instruments and hedged items: Rm Profit on hedged items Loss on hedging instruments 2017 139 (143) (4) SECTION D: CORE BANKING LIABILITIES Accounting policy Refer to Section H: Financial instruments for the group’s accounting policies regarding financial assets and liabilities. D1 Amounts owed to depositors D1.1 Classifications Current accounts Savings deposits Other deposits and loan accounts Call and term deposits Fixed deposits Cash management deposits Other deposits and loan accounts1 Foreign currency liabilities Negotiable certificates of deposit Deposits received under repurchase agreements2 Macro fair-value hedge-accounted portfolios Comprises: – Amounts owed to depositors – Amounts owed to banks 2018 Rm 2017 Rm (Restated)¹ 77 421 10 221 588 120 289 217 64 890 72 527 161 486 22 994 86 408 21 443 (120) 72 571 9 695 540 099 279 251 54 955 66 628 139 265 21 295 74 584 24 615 806 487 742 859 747 325 59 162 696 019 46 840 806 487 742 859 1 Refer to note A3: Correction of prior-period errors and reclassifications. 2 The group has pledged government and other securities (note C3) and negotiable certificates of deposit (note C4) amounting to R22 295m (2017: R28 538m) as collateral for deposits received under repurchase agreements, of which R9 600m (2017: 10 134m) relates to sell-/buybacks. These amounts represent assets that have been transferred, but that do not qualify for derecognition under IFRS 9. The associated liabilities of R21 443m (2017: R24 615m), of which R9 241m (2017: R9 807m) relates to sell-/buybacks, are disclosed in note D1. 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. Nedbank Limited Annual Report 2018 81 Notes to the consolidated financial statements continued for the year ended 31 December D1 Amounts owed to depositors continued D1.2 Sectoral analysis Banks Government and public sector Individuals Business sector1 D1.3 Geographical analysis SA1 Rest of Africa Europe Asia United States of America 1 Refer to note A3: Correction of prior-period errors and reclassifications. D2 Long-term debt instruments Instrument type Subordinated debt¹ Maturity dates Interest rates Callable notes (rand-denominated – floating) Callable notes (rand-denominated – fixed) 6 July 2022 to 1 July 2025 8 April 2024 to 1 July 2025 JIBAR plus 0,47% to 3,50% 10,49% to 11,29% 2018 Rm 2017 Rm (Restated)¹ 59 162 72 896 212 478 461 951 46 840 50 242 209 537 436 240 806 487 742 859 763 759 5 683 18 559 8 477 10 009 716 155 3 927 8 573 6 535 7 669 806 487 742 859 2018 Rm 2017 Rm 3 976 7 019 891 891 Basel III subordinated debt² Callable notes (rand-denominated – floating) Securitised liabilities³ Callable notes (rand-denominated – floating) Senior unsecured debt⁴ Senior unsecured notes – fixed Senior unsecured notes – floating Unsecured debentures Total long-term debt instruments in issue 15 March 2022 to 1 December 2028 JIBAR plus 3,75% to 4,00% 9 065 4 520 25 May 2018 to 25 February 2042 JIBAR plus 0,58% to 3,00% 2 069 2 672 9 September 2019 to 19 November 2027 21 February 2017 to 31 July 2026 30 November 2029 8,79% to 11,39% JIBAR plus 0,85% to 2,25% Zero coupon 18 833 18 638 20 546 30 17 716 26 55 410 51 482 ¹ During 2018 two subordinated debt instruments were repaid and no subordinated debt was issued. ² During 2018 two Basel III subordinated debt instruments were issued. A sum of R4,5bn was issued with variable rates ranging between JIBAR plus 2,45% and JIBAR plus 3,05%. These instruments are redeemable by 1 December 2028. ³ During 2018 five securitised liabilities were repaid and no securitised liabilities were issued. ⁴ During 2018 two senior unsecured debt instruments were repaid and eight senior unsecured debt instruments were issued. A sum of R172m was issued at a fixed interest rate of 9,41%, repayable on 9 November 2023. A sum of R4,7bn was issued at variable interest rates ranging between JIBAR plus 1,20% and JIBAR plus 1,90%, repayable by 15 February 2028. D2.1 Movement in carrying amount Balance at the beginning of the year Changes arising from cash movements Issue of long-term debt instruments Redemption of long-term debt instruments Interest paid Changes arising from non-cash movements Accrued interest and premium discount Fair-value adjustments Balance at the end of the year 82 Nedbank Limited Annual Report 2018 2018 Rm 51 482 (1 155) 9 404 (5 495) (5 064) 5 083 5 116 (33) 2017 Rm 52 062 (5 638) 7 340 (7 939) (5 039) 5 058 5 025 33 55 410 51 482 D3 Contractual maturity analysis for financial liabilities Statement of financial position amount > 3 months < 6 months > 6 months < 1 year < 3 months Rm > 1 year < 5 years > 5 years Non- determinable maturity Total 2018 Long-term debt instruments Amounts owed to depositors Current accounts Savings deposits Other deposits and loan accounts Foreign currency liabilities Negotiable certificates of deposit Deposits received under repurchase agreements Macro fair-value hedge- accounted portfolios Derivative financial instruments – liabilities Provisions and other liabilities Contingent liabilities and undrawn facilities Guarantees on behalf of clients Letters of credit and discounting transactions Irrevocable unutilised facilities and other 2017 Long-term debt instruments Amounts owed to depositors Current accounts Savings deposits Other deposits and loan accounts1 Foreign currency liabilities Negotiable certificates of deposit Deposits received under repurchase agreements Derivative financial instruments – liabilities Provisions and other liabilities Contingent liabilities and undrawn facilities Guarantees on behalf of clients Letters of credit and discounting transactions Irrevocable unutilised facilities and other 55 410 806 487 2 299 550 022 6 182 74 853 4 562 86 554 39 949 74 671 23 403 10 962 27 357 77 421 10 221 77 423 10 221 76 395 824 419 77 423 10 221 588 120 406 234 47 998 55 018 52 281 11 082 27 357 599 970 22 994 16 646 1 444 866 4 041 86 408 18 050 25 411 30 670 18 349 21 443 21 448 (120) (120) 19 761 2 821 1 530 1 512 5 627 8 271 22 997 92 480 21 448 (120) 19 761 13 558 272 13 286 13 558 895 216 555 142 82 565 92 900 120 247 42 636 40 643 934 133 31 973 8 936 133 800 31 973 8 936 133 800 – 174 709 – – – – – 174 709 51 482 742 859 1 136 548 178 2 360 76 387 5 776 68 077 39 253 65 760 22 919 7 893 71 444 766 295 – 72 571 9 695 72 573 9 696 540 099 406 656 59 159 33 762 47 525 7 893 21 295 17 525 1 427 2 344 74 584 17 094 15 801 31 971 18 235 24 615 24 634 23 561 5 102 2 335 3 264 5 489 7 372 72 573 9 696 554 995 21 296 83 101 24 634 23 562 18 012 18 012 18 012 835 914 554 416 81 082 77 117 110 502 38 184 18 012 879 313 26 710 3 006 101 336 26 710 3 006 101 336 – 131 052 – – – – – 131 052 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Provisions and other liabilities are included in this table to provide a reconciliation with the statement of financial position and also include current and deferred taxation liabilities and long-term employee benefit liabilities. Derivatives are not profiled on an undiscounted basis. Nedbank Limited Annual Report 2018 83 Notes to the consolidated financial statements continued for the year ended 31 December SECTION E: INVESTMENTS E1 Investment securities Accounting policy Refer to Section H: Financial instruments for the group’s accounting policies regarding financial assets and liabilities. Private-equity investments Private-equity associates – Property Partners Private-equity associates – Investment Banking Private-equity (unlisted) – Property Partners Private-equity (unlisted) – Investment Banking Listed investments Unlisted investments Strate Limited Other Carrying amount Dividends received Cumulative gains/(losses) 2018 Rm 5 371 1 361 913 1 551 1 546 16 1 400 143 1 257 2017 Rm (Restated)¹ 4 018 2 409 644 332 633 15 1 270 143 1 127 2018 Rm 140 30 24 65 21 5 8 6 2 2018 Rm 94 58 (16) 8 44 6 6 Total listed and unlisted investments 6 787 5 303 153 100 1 Refer to note A3: Correction of prior-period errors and reclassifications. Refer to note H2.2.1 for the classification of investment securities in terms of the fair-value hierarchy. The group has designated two investments at FVOCI as these investments are held with strategic intent. The fair value of these investments was R433m at 31 December 2018. R1m was recognised as dividend income that related to these investments. No equity investments designated at FVOCI have been derecognised in the current year. E2 Investments in associate companies Accounting policy 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. The group accounts for its investments in associate companies (other than investments in associate companies designated at FVTPL) using the equity accounting method, ie cost plus the group’s share of postacquisition changes in net asset value. The group’s share of postacquisition profit or loss and postacquisition movements in OCI are recognised in the income statement and OCI respectively. The group applies the equity method of accounting from the date on which significant influence commences until the date on which 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 should be used, with adjustments made for the effects of any significant transactions or events occurring between the ends of 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 in 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. The carrying amounts of such investments are then reduced to recognise any impairment by applying the impairment methodology described in note F. 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 G2. 84 Nedbank Limited Annual Report 2018 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 is to account for the transaction at book values as reflected in the consolidated financial statements of the selling entity. Associate companies 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 as FVTPL, 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. From 1 January 2018 the group no longer recognises investments in associate companies held in its private-equity portfolios at FVTPL. These investments are equity-accounted. E2.1 Movement in carrying amount Carrying amount at beginning of year Share of associate companies’ (losses)/profits after taxation for the current year Acquisition of investments in associate companies Other movements Carrying amount at end of year 1 Refer to note A3: Correction of prior-period errors and reclassifications. E2.2 Analysis of carrying amount Associate investments – on acquisition: Net asset value Share of retained earnings since acquisition Other movements 1 Refer to note A3: Correction of prior-period errors and reclassifications. E2.3 Analysis of investments in associate companies Percentage holding Nature of activities 2018 % Measurement method Acquisition date Year-end 2018 Rm 224 (83) 548 97 786 2018 Rm 743 (160) 203 786 2017 Rm (Restated)¹ 225 (96) 95 224 2017 Rm (Restated)¹ 195 (77) 106 224 Group Carrying amount 2018 Rm 2017 Rm (Restated)¹ Unlisted Private equity: Tracker Technology Holdings Proprietary Limited Private equity: other investments Strategic investments Vehicle tracking 17,7 Equity- accounted November 2018 June 506 Various 30,0 Property development Equity- accounted Equity- accounted October 2018 February 42 238 786 224 224 1 Refer to note A3: Correction of prior-period errors and reclassifications. 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 above. During the year the group reviewed the classification of certain investments on the statement of financial position. As a result of this review the group’s private-equity investments have been reclassified from investments in private-equity associates, associate companies and joint arrangements to investment securities better to reflect the measurement of these investments at fair value. To provide comparability the prior-year balances have been restated accordingly (R3 053m). The investments in private-equity associates, associate companies and joint arrangements were renamed investments in associate companies. Nedbank Limited Annual Report 2018 85 Notes to the consolidated financial statements continued for the year ended 31 December E3 Investments in subsidiary companies and related disclosure Accounting policy Subsidiary undertakings and consolidated structured entities Subsidiary undertakings are those entities, including 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 to the entity and reassesses the consolidation requirements on a continuous basis. The consolidated financial statements include the assets, liabilities and results of the company plus subsidiaries, including 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 their 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. 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. Company Investments in group companies are accounted for at cost less impairment losses in the separate financial statements. The carrying amounts of these investments are reviewed annually and impaired, when necessary, by applying the impairment methodology described in note F. 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 either in profit or loss or OCI. Changes in the fair value of a contingent consideration that has been classified as equity are not recognised. The acquiree’s identifiable assets, 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 for: (cid:122) (cid:122) (cid:122) 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 before the acquisition date, which previously have been recognised in OCI, are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of. 86 Nedbank Limited Annual Report 2018 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. Investments in foreign operations Nedbank Limited’s presentation currency is SA rand. The assets and liabilities, including goodwill and fair-value adjustments, of group entities (including equity-accounted associates) that have functional currencies other than that of the company (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 other comprehensive income 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. Key assumptions concerning the future and key sources of estimation Derecognition 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. E3.1 Analysis of investments in subsidiary companies Non-banking companies2 Depfin Investments Proprietary Limited Ned Investment Trust Boe Private Equity Investments Limited Pyraned Limited Group Issued capital Effective holding 2018 Rm 2017 Rm ¹ ¹ ¹ 6 ¹ ¹ ¹ 6 2018 % 100 100 100 100 2017 % 100 100 100 100 1 Represents amounts less than R1m. 2 These entities are free of any restrictions imposed on the distribution of funds, save for compliance with any local regulations. Unless otherwise stated: (cid:122) all entities are domiciled in SA; (cid:122) the financial statements of the subsidiaries used in the preparation of consolidated financial statements are as of the same date or same period as that of the consolidated financial statements; and (cid:122) 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 Total headline earnings 2018 Rm 10 918 (34) 2017 Rm 11 348 (37) 10 884 11 311 Nedbank Limited Annual Report 2018 87 Notes to the consolidated financial statements continued for the year ended 31 December E3 Investments in subsidiary companies and related disclosure continued E3.1 Analysis of investments in subsidiary companies continued General information required in terms of the Companies Act, 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 Limited 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. E4 Interests in structured consolidated entities E4.1 Consolidated structured entities The group holds certain interests in consolidated structured entities to ringfence 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: (cid:122) Old Mutual Alternative Risk Transfer Fund (OMART) (refer to note H1) (cid:122) Securitisation vehicles (refer to note F5) – Greenhouse Funding (RF) Limited – Greenhouse Funding III (RF) Limited – Precinct Funding 1 (RF) Limited – Precinct Funding 2 (RF) Limited The following judgements have been applied in determining that the group has control over the following structured entities: Securitisation The group originated 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. Securitisation vehicles consist of the residential mortgage-backed securitisation programmes Greenhouse Funding (RF) Limited and Greenhouse Funding III (RF) Limited and the commercial mortgage-backed securitisation programmes Precinct Funding 1 (RF) Limited and Precinct Funding 2 (RF) Limited. 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 Limited has rights to the residual return of the vehicle. The group has concluded that it controls these entities. The group has set up securitisation vehicles that acquire the rights, title, interest and related security of commercial and residential mortgage bonds from Nedbank Limited. The creation of the these vehicles facilitated the group having appropriately collaterised instruments that can be pledged against the group’s committed liquidity facility provided by SARB, if required. The group has concluded that it controls these entities. Refer to note E5 for further information on the securitisation activities of the group. E5 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 or other residual interests (retained interests). Active securitisation transactions Nedbank Limited uses securitisation primarily as a funding diversification tool and to add flexibility in mitigating structural liquidity risk. The group currently has three active traditional securitisation transactions: (cid:122) Greenhouse Funding III (RF) Limited (‘Greenhouse III’), a residential-mortgage-backed securitisation programme. (cid:122) (cid:122) Precinct Funding 1 (RF) Limited (‘Precinct Funding 1’), a commercial-mortgage-backed securitisation programme. Precinct Funding 2 (RF) Limited (‘Precinct Funding 2’), a commercial-mortgage-backed securitisation programme. Greenhouse Funding III (RF) Limited (‘Greenhouse III’) Greenhouse III is a securitisation vehicle through which the rights, title, interest and related security in respect of residential home loans were acquired from Nedbank Limited under a segregated-series medium-term-note programme. Greenhouse III is a residential-mortgage-backed securitisation programme implemented during 2014. Greenhouse III securitised R2bn worth of home loans originated by Nedbank Limited through the issuance of senior notes to the capital market and subordinated notes and a subordinated loan provided by Nedbank Limited. The notes issued by Greenhouse III are listed on the JSE and rated by Moody’s. The home loans transferred to Greenhouse III continue to be recognised as financial assets held by Nedbank Limited. 88 Nedbank Limited Annual Report 2018 Greenhouse III makes use of an internal risk management policy, and uses the Nedbank Group credit risk monitoring process to govern lending activities to external parties. Nedbank Limited provided Greenhouse III with an interest-bearing subordinated loan at the commencement of the programme to provide 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 maturity date, provided that all outstanding notes have been redeemed in full and all secured creditors have been settled. In the Greenhouse III structure Nedbank holds the class D note, amounting to R100m. These notes are subordinated to the higher-ranking notes in terms of the priority of payments. Precinct Funding 1 (RF) Limited (‘Precinct Funding 1’) Precinct Funding 1 was a commercial-mortgage-backed securitisation programme (‘CMBS’). The originator, seller and servicer of the commercial property mortgage loan portfolio was Nedbank CIB Property Finance, the market leader in commercial property finance in SA. The Precinct Funding 1 CMBS Programme was implemented during 2013. Precinct Funding 1 securitised R2,5bn worth of commercial property loans originated by Nedbank Limited through the issuance of senior notes to the capital market and subordinated notes and a subordinated loan provided by Nedbank Limited. The notes issued by Precinct Funding 1 were listed on the JSE and rated by Moody’s. The class A and class B notes were placed with third-party investors and the junior notes and subordinated loan retained by Nedbank Limited. The maturity date of the Precinct Funding 1 securitisation transaction was 29 January 2018. As such all the outstanding notes issued by Precinct Funding 1 were redeemed in full. Precinct Funding 2 (RF) Limited (‘Precinct Funding 2’) Precinct Funding 2 is a commercial-mortgage-backed securitisation programme (‘CMBS’). The originator, seller and servicer of the commercial property mortgage loan portfolio is Nedbank CIB Property Finance, the market leader in commercial property finance in SA. The Precinct Funding 2 CMBS Programme was implemented during 2017. Precinct Funding 2 securitised R1bn worth of commercial property mortgage loans originated by Nedbank Limited through the issuance of senior notes to the capital market and subordinated notes and a subordinated loan provided by Nedbank Limited. The notes issued by Precinct Funding 2 are listed on the JSE and rated by Moody’s. The class A and class B notes were placed with third-party investors and the junior notes and subordinated loan retained by Nedbank Limited. In comparison with Precinct Funding 1, the Precinct Funding 2 structure allows for more flexibility to replace loans. However, loan replacements are subject to certain portfolio covenants and eligibility criteria. Precinct Funding 2 makes use of an internal risk management policy and uses the Nedbank Group Limited 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 Limited provided Precinct Funding 2 with an interest-bearing subordinated loan at the commencement of the programme to provide 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 maturity date, provided that all outstanding notes have been redeemed in full and all secured creditors have been settled. Nedbank holds the class C and class D notes of Precinct Funding 2 amounting to R80m. These notes are subordinated to the higher-ranking 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: Rm Loans and advances to clients: – Residential mortgage loans Less: Impairments – Commercial mortgage loans Less: Impairments Total 2018 2017 Carrying amount of assets Associated liabilities Carrying amount of assets Associated liabilities 1 264 (6) 979 (1) 1 089 979 1 462 (5) 1 321 1 321 1 350 2 236 2 068 2 778 2 671 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 2018 89 Notes to the consolidated financial statements continued for the year ended 31 December E6 Related parties E6.1 Relationship with parent and significant investors The group’s parent company is Nedbank Group Limited, which is incorporated in South Africa and no longer has an ultimate parent (controlling shareholder) following Old Mutual plc’s managed separation process, as Old Mutual Limited unbundled its direct shareholding in Nedbank Group Limited to approximately 19,9% on 15 October 2018. At 31 December 2018 Old Mutual Limited held 24,51% of Nedbank Group Limited’s ordinary shares. The above shareholding is inclusive of funds held on behalf other beneficial owners. Old Mutual Limited remains a related party of the group due to its significant shareholding in Nedbank Group Limited. The ultimate controlling party at 31 December 2017 was Old Mutual plc, incorporated in the United Kingdom. Nedbank Group Limited holds 100% (2017: 100%) of Nedbank Limited’s ordinary shares. Material subsidiaries of the group are identified in note E3.1 and associate companies of the group are identified in note E2.3. E6.2 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. 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) 2018 Directors’ fees Remuneration – paid by subsidiaries Short-term employee benefits Gain on exercise of share instruments 2017 Directors’ fees Remuneration – paid by subsidiaries Short-term employee benefits Gain on exercise of share instruments Number of share instruments 2018 Outstanding at the beginning of the year Granted Forfeited Exercised Transferred1 Outstanding at the end of the year 2017 Outstanding at the beginning of the year Granted Forfeited Exercised Transferred1 Outstanding at the end of the year Key manage- ment personnel Directors 21 99 54 45 120 20 88 49 39 108 213 119 94 213 176 103 73 176 Total 21 312 173 139 333 20 264 152 112 284 527 433 137 574 (160 522) 950 914 235 704 (6 868) (292 073) (8 223) 1 478 347 373 278 (6 868) (452 595) (8 223) 504 485 879 454 1 383 939 539 664 160 984 (173 215) 1 208 100 303 964 (18 131) (329 173) (213 846) 1 747 764 464 948 (18 131) (502 388) (213 846) 527 433 950 914 1 478 347 1 Represents the net movement in share instruments of members appointed to and resigning from Group Exco. 90 Nedbank Limited Annual Report 2018 E6.3 Related-party transactions Transactions between Nedbank Limited and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between Nedbank Limited and its other related parties are disclosed below. All of these transactions were entered into in the normal course of business. Outstanding balances (Rm) Nedbank Group Limited and the Old Mutual group1 Deposits owing to Old Mutual Life Assurance Company (SA) Limited Bank accounts owing to Nedbank Group Limited Bank balances owing to Old Mutual Life Assurance Company (SA) Limited Net bonds, derivatives and other financial instruments payable to/receivable from Old Mutual Life Assurance Company Proprietary Limited Bonds due to Old Mutual group subsidiaries2 Fellow subsidiaries of Nedbank Group Limited and subsidiaries of the Old Mutual group1 Loan due from Nedbank Group fellow subsidiaries Loan due from Old Mutual Asset Managers Proprietary Limited Loans owing to Nedgroup Securities Proprietary Limited Loans due from/(owing to) Nedbank Malawi Limited Loans due/(owing to) from Nedbank Group fellow subsidiaries Deposits due from Nedgroup Securities Proprietary Limited Bank balances due from Nedgroup Securities Proprietary Limited Deposits owing to Syfrets Securities Limited Deposits due from/(owing to) other fellow subsidiaries Bank balances owing to Nedbank Group fellow subsidiaries Deposits owing to other Old Mutual subsidiaries Bank balances owing to other Old Mutual subsidiaries Equity derivatives with Nedbank Group fellow subsidiaries Forward exchange rate contracts with various Nedbank Group fellow subsidiaries Interest rate contracts with various Nedbank Group fellow subsidiaries 1 Outstanding balances at 31 December 2017 represent amounts due from/(owing to) the group’s parent, ultimate controlling party, fellow subsidiaries and Nedbank Group fellow subsidiaries. Outstanding balances at 31 December 2018 represent amounts due from/(owing to) the group’s parent, fellow subsidiaries and companies within the Old Mutual group that are related to the group because of Old Mutual Limited’s significant shareholding in Nedbank Group Limited. 2 Represents bonds due to Old Mutual subsidiaries, previously not included in this analysis. Associates Loans due from associates Deposits owing to associates Bank balances due from/(owing to) associates Key management personnel Mortgage bonds due from key management personnel Deposits owing to key management personnel Deposits owing to, net of loans due from, entities under the influence of key management personnel1 Bank balances due from key management personnel Bank balances owing to key management personnel Bank balances owing to entities under the influence of key management personnel Key management personnel – directors Key management personnel – other Share-based payments reserve 1 Increase mainly due to resignation of a boardmember, resulting in an offsetting loan balance from a counterparty under the influence of the former boardmember no longer being included in the December 2018 net balance. Due from/(Owing to) 2018 2017 (240) (207) (7 837) 2 353 (1 749) 457 836 6 570 28 2 766 55 (1) (8 676) 952 (3 328) (7 070) (3 095) 2 (4) 2 164 (220) 31 17 (13) (1 372) 3 (7) (32) (51) (93) (144) (1 350) (205) (6 672) (1 020) (921) 381 1 666 4 590 19 1 813 14 (989) (650) (3 254) (8 692) (2 758) (2) (4) 2 2 066 (168) (39) 20 (16) (127) 3 (9) (103) (41) (86) (127) 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 (10) (32) (1 358) (2) (43) (1 619) Nedbank Limited Annual Report 2018 91 Notes to the consolidated financial statements continued for the year ended 31 December E6 Related parties continued E6.3 Related-party transactions continued Transactions (Rm) Nedbank Group Limited and the Old Mutual group1 Interest expense to Old Mutual Life Assurance Company Proprietary Limited Dividend declared to Nedbank Group Limited Fellow subsidiaries of Nedbank Group Limited and subsidiaries of the Old Mutual group1 Interest income from Old Mutual Asset Managers (SA) Proprietary Limited2 Interest income from other Old Mutual subsidiaries Interest expense to other Old Mutual subsidiaries Interest income from Nedbank Group fellow subsidiaries Interest income from Syfrets Securities Limited Interest income from Nedgroup Securities Proprietary Limited Interest expense to Syfrets Securities Limited Interest expense to other Nedbank Group fellow subsidiaries Interest expense to Old Mutual Asset Managers (SA) Proprietary Limited2 Interest expense to Nedgroup Securities Proprietary Limited Management fee income from Nedbank Group fellow subsidiaries Management fee expense to Nedbank Group fellow subsidiaries Fees received for provision of information technology services from subsidiaries of Old Mutual Limited 1 Transactions for the period to 15 October 2018 represent income/(expense) from the group’s parent, ultimate controlling party, fellow subsidiaries and Nedbank Group fellow subsidiaries. Transactions for the period after 15 October 2018 represent income/(expense) from fellow subsidiaries and companies within the Old Mutual group that are related to the group because of Old Mutual Limited’s significant shareholding in Nedbank Group Limited. 2 Prior to 26 June 2018 this entity was a subsidiary of Old Mutual plc. Associates Interest income from 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 BEE transaction expenses) Key management personnel – directors Key management personnel – other Share-based payments expense (included in staff costs) Long-term employee benefit plans Interest expense to Nedgroup Pension Fund Interest expense to Nedgroup Medical Aid Fund Interest expense to other funds The Nedbank Group Pension Fund has an insurance policy (Optiplus policy) with Old Mutual Life Assurance Company (SA) Limited in respect of its pension plan obligations. Nedbank Limited has an insurance policy (Symmetry policy) with Old Mutual Life Assurance Company (SA) Proprietary Limited in respect of its postretirement medical aid obligations. The group has an interest in the OMART cell captive 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 G1.1) Included in long-term employee benefit assets – Optiplus policy obligation – Postretirement medical aid obligation – Disability obligation Included in long-term employee benefit liabilities 92 Nedbank Limited Annual Report 2018 Income/(Expense) 2018 2017 (352) (2 700) (547) (3 050) 7 69 (810) 236 593 4 (826) (187) (1) (1) 384 (108) 277 3 (16) 2 10 (2) (123) 1 1 (31) (54) (85) (1) (1) (115) 38 59 (1 131) 135 306 4 (1 011) (435) (1) 444 (83) 167 2 (14) 2 132 (2) (82) 1 1 (24) (27) (51) (1) (161) 760 1 148 665 2 573 (760) (1 430) (463) (2 653) 765 1 440 618 2 823 (765) (1 440) (454) (2 659) SECTION F: GENERIC ASSETS Accounting policy 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 annually, for impairment. The recoverable amount of an asset is the higher of its fair value less cost to sell and its VIU. 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 VIU 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 cash-generating unit (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. Borrowing costs Borrowing costs directly attributable to 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. F1 Property and equipment Accounting policy 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 equity under the heading ‘Revaluation reserve’. However, 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. 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: Non-current Assets Held for Sale and Discontinued Operations 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. Nedbank Limited Annual Report 2018 93 Notes to the consolidated financial statements continued for the year ended 31 December F1 Property and equipment continued Depreciation continued 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 Derecognition 5 years 6 years 10 years 20 years 10 years 50 years 5 years 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. 94 Nedbank Limited Annual Report 2018 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 incurred by the group, such as commission paid,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 in which 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 is 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. Nedbank Limited Annual Report 2018 95 Notes to the consolidated financial statements continued for the year ended 31 December F1 Property and equipment continued Gross carrying amount Balance at 1 January Acquisitions Increases arising from revaluations¹ Transfers to non-current assets held for sale Disposals Writeoff of accumulated depreciation on revaluations Transfers to equipment Transfers from intangible assets (note F2) Effect of movements in foreign exchange rates and other movements Balance at 31 December Accumulated depreciation and impairment losses Balance at 1 January Depreciation charge for the year Transfers to non-current assets held for sale Writeoff of accumulated depreciation on revaluations Disposals Transfers to equipment Effect of movements in foreign exchange rates and other movements Balance at 31 December Carrying amount At 1 January At 31 December Land Buildings 2018 Rm 761 (17) 744 2017 Rm 825 8 (65) (7) 761 2018 Rm 6 255 620 24 (96) (9) (169) 4 1 2017 Rm 6 254 317 183 (236) (150) (83) (30) 6 630 6 255 1 677 390 (9) (75) (86) (1) – 761 744 – 1 896 825 761 4 578 4 734 1 521 381 (25) (83) (92) (25) 1 677 4 733 4 578 ¹ 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 Commercial property Residential property Market-comparable approach and discounted cashflow Market comparable approach and replacement value Income capitalisation rates Price per square metre Total land and buildings In accordance with IFRS 13: Fair Value Measurement the measurement of the group’s properties is 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 R2 917m (2017: R2 758m). 96 Nedbank Limited Annual Report 2018 Computer equipment 2018 Rm 2017 Rm 5 086 584 4 646 652 Furniture and other equipment 2018 Rm 2 544 465 2017 Rm 2 388 359 2018 Rm 30 1 2017 Rm 28 6 Vehicles Total (144) (138) (118) (72) (6) (1) 142 1 (74) 169 3 5 669 5 086 3 063 3 382 721 2 865 701 1 623 280 (139) (136) 2 (48) (109) 86 4 (131) 2 544 1 540 234 (59) (92) 3 966 3 382 1 884 1 623 1 704 1 703 1 781 1 704 921 1 179 848 921 25 18 3 (3) 18 12 7 (3) 30 18 3 (1) (2) 18 10 12 2018 Rm 14 676 1 670 7 – (364) (9) – 146 5 16 131 6 700 1 394 – (9) (326) – 5 7 764 7 976 8 367 2017 Rm 14 141 1 334 191 (301) (361) (83) – – (245) 14 676 5 944 1 319 (25) (83) (288) – (167) 6 700 8 197 7 976 Parameters 8,0–13,0% (2017: 8,0–13,0%) Land Buildings 2018 Rm 739 5 744 2017 Rm 756 5 761 2018 Rm 4 724 10 4 734 2017 Rm 4 568 10 4 578 Nedbank Limited Annual Report 2018 97 Notes to the consolidated financial statements continued for the year ended 31 December F2 Intangible assets Accounting policy 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 identifiable net assets recognised. 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. 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. On disposal of a subsidiary the goodwill attributable to the subsidiary is included in the determination of the profit or loss on disposal. Goodwill and goodwill impairment Goodwill arises on the acquisition of subsidiaries and associates. 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 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 tested annually 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 costs 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 development costs (not yet commissioned) 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 and sufficient resources to complete development. The expenditure capitalised includes the cost of materials and directly attributable employee and other direct costs. Computer development expenditure is amortised only once the relevant software is available for use in the manner intended by management. Capitalised software is stated at cost less accumulated amortisation and impairment losses. 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 10 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 annually. 98 Nedbank Limited Annual Report 2018 Key assumptions concerning the future and key sources of estimation Goodwill 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 the 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 VIU 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 Limited. The goodwill impairment testing performed in 2016 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 Limited’s goodwill would not result in impairment. 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 expenditure arising during the research phase is expensed as incurred. The decision to recognise internally generated intangible assets requires significant judgement, particularly in the following areas: (cid:122) Evaluation of whether or not activities should be considered research activities or development activities. (cid:122) Assumptions about future market conditions, client demand and other developments. (cid:122) 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. (cid:122) 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. (cid:122) 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: (cid:122) 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. (cid:122) 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. Nedbank Limited Annual Report 2018 99 Notes to the consolidated financial statements continued for the year ended 31 December F2 Intangible assets continued Development costs (not yet commis- Rm Goodwill Software sioned) Total 2018 Cost Balance at the beginning of the year Acquisitions Development costs commissioned to software Impairment losses1 Disposals and retirements Transfers to property and equipment (note F1) Foreign currency translation and other movements 1 636 (19) 10 754 357 2 297 (16) (29) (14) 2 395 2 100 (2 297) (128) (146) 14 785 2 457 – (144) (48) (146) (14) Balance at the end of the year 1 617 13 349 1 924 16 890 Accumulated amortisation 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 2017 Cost Balance at the beginning of the year Acquisitions Development costs commissioned to software Impairment losses1 Disposals and retirements Foreign currency translation and other movements 224 224 1 412 1 393 1 633 3 7 217 938 (16) (15) 8 124 3 537 5 225 9 709 220 1 259 (109) (306) (19) 3 1 4 2 392 1 920 1 577 2 140 (1 259) (58) (5) 7 444 938 (16) (14) 8 352 7 341 8 538 12 919 2 360 – (167) (303) (24) Balance at the end of the year 1 636 10 754 2 395 14 785 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 224 224 1 409 1 412 6 762 777 (299) (23) 7 217 2 947 3 537 5 (2) 3 1 572 2 392 6 991 777 (299) (25) 7 444 5 928 7 341 1 Impaired intangible assets consist of projects mainly within the Nedbank Retail and Business Banking Cluster. The main indicators of the impairment of a project are the decommissioning of the project and/or the project not reaching full functionality. When one of these indicators is present, the project is tested for impairment by comparing its recoverable amount with its carrying amount. Where the recoverable amount of a project is lower than its carrying value, the project is impaired. 100 Nedbank Limited Annual Report 2018 F2.1 Analysis of goodwill by segment Nedbank Corporate and Investment Banking Nedbank Retail and Business Banking Other 2018 Rm 757 629 7 2017 Rm 776 629 7 1 393 1 412 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 VIU. The VIU 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 VIU of the various CGUs was based on the following assumptions: – Risk-free 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 recoverable amount1 2018 2017 8,77 0,82–1,06 6,10 5,20 3 13,77–15,22 8,59 0,13–0,74 6,00 0,00–4,60 3 7,85–13,04 2018 Rm 2017 Rm 1 393 103 083 1 412 102 860 1 The comparative figure has been adjusted by R50,3bn to include CGUs relating to Nedbank Corporate and Investment Banking. SECTION G: OTHER ASSETS G1 Long-term employee benefits Accounting policy 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 OCI. 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. Nedbank Limited Annual Report 2018 101 Notes to the consolidated financial statements continued for the year ended 31 December G1 Long-term employee benefits continued 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. Key assumptions concerning the future and key sources of estimation The group provides pension plans for employees. 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. Postemployment and other 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 Pension 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 2018. Postemployment benefits Defined-benefit pension funds Nedgroup Pension Fund (including the Optiplus policy). Nedbank UK 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. 102 Nedbank Limited Annual Report 2018 Other long-term employee benefits Disability fund Nedbank Group Disability Fund (including the OMART policy). Insurance policies held with related parties Optiplus (Nedgroup Pension Fund), OMART (Nedbank Group Disability Fund) and PRMA (Symmetry) annuity policies are insurance policies, the proceeds of which can be used only 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. G1.1 Analysis of long-term employee benefit assets and liabilities Rm Notes Assets Liabilities 2018 Postemployment benefits Other long-term employee benefits – disability fund 2017 Postemployment benefits Other long-term employee benefits – disability fund G1.1.1 G1.1.1 4 301 463 4 764 5 307 454 5 761 (2 185) (463) (2 648) (2 969) (454) (3 423) 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 R463m (2017: R454m). The value of the OMART asset held by the group is R463m (2017: R454m). Rm G1.1.1 Net asset/(liability) recognised 2018 Present value of defined-benefit obligation Fair value of plan assets1 Funded status Unrecognised due to paragraph 65 limit Net fund asset2 Net fund liability3 2017 Present value of defined-benefit obligation Fair value of plan assets1 Funded status Unrecognised due to paragraph 65 limit Net fund asset2 Net fund liability3 Pension and provident funds Medical aid funds Contribution asset (4 074) 5 767 1 693 (70) 1 623 3 153 (1 530) (4 616) 7 780 3 164 (64) 3 100 3 866 (766) (1 429) 1 148 (281) (281) 1 148 (1 429) (2 203) 1 441 (762) (762) 1 441 (2 203) 774 774 774 774 – – Total (5 503) 7 689 2 186 (70) 2 116 5 075 (2 959) (6 819) 9 221 2 402 (64) 2 338 5 307 (2 969) 1 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 R760m (2017: R765m) and for medical aid to the value of R1 148m (2017: R1 441m). 2 The pension and provident fund net asset refers to the sum of pension and provident funds with a net positive fund value of R1 623m (2017: R3 100m) plus non-qualifying insurance policies taken on the funds of R760m (2017: R765m). The medical aid fund net asset refers to non-qualifying insurance policies taken on the fund of R1 148m (2017: R1 441m). 3 The medical aid fund net liability refers to the sum of medical aid funds with a negative fund value of R281m (2017: R762m) Nedbank Limited Annual Report 2018 103 Notes to the consolidated financial statements continued for the year ended 31 December G1 Long-term employee benefits continued G1.1 Analysis of long-term employee benefit assets and liabilities continued G1.1.2 Postemployment benefits Rm Analysis of postemployment benefit assets and liabilities 2018 Pension funds Nedgroup Fund Nedbank UK Fund Medical aid funds Nedgroup scheme for Nedbank employees Nedgroup scheme for BoE employees Contribution asset Total 2017 Pension funds Nedgroup Fund Nedbank UK Fund Medical aid funds Nedgroup scheme for Nedbank employees Nedgroup scheme for BoE employees Present value of obligation Fair value of plan asset Surplus/ (Deficit) Unrecog- nised due to paragraph 65 limit Net asset/ (liability) 4 074 3 698 376 1 429 1 356 73 5 503 4 616 4 248 368 2 203 2 068 135 5 767 5 321 446 1 148 1 070 78 774 7 689 7 780 7 350 430 1 441 1 441 1 693 1 623 70 (281) (286) 5 774 2 186 3 164 3 102 62 (762) (627) (135) (70) (70) – (70) 1 623 1 623 – (281) (286) 5 774 2 116 (64) 3 100 (64) – 3 102 (2) (762) (627) (135) Total 6 819 9 221 2 402 (64) 2 338 104 Nedbank Limited Annual Report 2018 Rm Present value of defined-benefit obligation 2018 Balance at the beginning of the year Current service cost Interest cost Contributions by plan participants Actuarial losses¹ Benefits paid Impact of foreign currency exchange rate changes Settlement2 Balance at the end of the year 2017 Balance at the beginning of the year Current service cost Interest cost Contributions by plan participants Actuarial losses¹ Benefits paid Impact of foreign currency exchange rate changes Transfer of Nedbank (Swaziland) Limited and Nedbank (Lesotho) Limited to Nedbank Group Limited Balance at the end of the year Fair value of plan assets 2018 Balance at the beginning of the year Expected return on plan assets Actuarial gains Contributions by the employer Refund of contributions Contributions by plan participants Benefits paid Scheme-settled administration costs Impact of foreign currency exchange rate changes Settlement2 Balance at the end of the year 2017 Balance at the beginning of the year Expected return on plan assets Actuarial gains/(losses)¹ Contributions by the employer Contributions by plan participants Benefits paid Scheme-settled administration costs Impact of foreign currency exchange rate changes Transfer of Nedbank (Swaziland) Limited and Nedbank (Lesotho) Limited to Nedbank Group Limited Balance at the end of the year – 5 503 Pension and provident funds Medical aid funds Contribution asset 4 616 13 366 5 (513) (450) 9 28 4 074 4 954 22 403 5 (169) (401) 5 (203) 4 616 7 780 573 (635) 17 5 (450) (7) 35 (1 551) 5 767 7 485 635 243 24 5 (401) (7) (1) (203) 7 780 2 203 42 150 142 (85) (1 023) 1 429 2 133 98 214 (163) (79) 2 203 – (39) 813 1 441 133 (216) 30 (155) (85) 1 148 774 1 343 131 (24) 69 (78) 1 441 – Total 6 819 55 516 5 (371) (535) 9 (995) 7 087 120 617 5 (332) (480) 5 (203) 6 819 9 221 667 (851) 860 (155) 5 (535) (7) 35 (1 551) 7 689 8 828 766 219 93 5 (479) (7) (1) (203) 9 221 1 The R480m (2017: R551m) recognised in OCI is the sum of the actuarial loss on the plan liabilities and the actuarial gain/loss on plan assets less taxation, before the IAS 19 paragraph 65 limit. 2 During the year Nedbank closed the postretirement medical aid (PRMA) benefit to new members. In June 2018 Nedbank settled the existing obligations to active employees through: (cid:122) an actuarial computed ‘no worse off’ lump sum allocation into the employee’s defined-contribution fund membership account; or (cid:122) an enhanced lump sum allocation into the employee’s defined-contribution fund membership account, with no further ongoing contribution obligations. The settlement resulted in a lump sum allocation of R766m This includes R28m that was added directly to the defined-benefit fund obligation for the active members remaining members of the defined-benefit pension fund. This was funded from defined-benefit pension fund assets of R1 551m. A contribution asset of R813m was also created. As a result of the settlement, the PRMA defined-benefit obligation decreased by an estimate of R1 023m. Therefore, a net gain of R257m (reduction in PRMA obligation less lump sum allocations) was recognised in the statement of comprehensive income. Nedbank Limited Annual Report 2018 105 Notes to the consolidated financial statements continued for the year ended 31 December G1 Long-term employee benefits continued G1.1 Analysis of long-term employee benefit assets and liabilities continued G1.1.2 Postemployment benefits continued Rm Net (income)/expense recognised 2018 Current service cost Interest (received)/cost Scheme-settled plan administration costs Asset recognition – benefit of rule change allocated to the fund Effect of application of asset ceiling Gain on settlement2 2017 Current service cost Interest (received)/cost Scheme-settled plan administration costs Past service cost Effect of application of asset ceiling Movements in net asset/(liability) recognised 2018 Balance at the beginning of the year Net income/(expense) recognised in the statement of comprehensive income Net remeasurements – debit for the year Contributions paid by the employer Refund of contributions Impact of foreign currency exchange rate changes Settlement2 Settlement of active members2 Balance at the end of the year 2017 Balance at the beginning of the year Net income/(expense) recognised in the statement of comprehensive income Net remeasurements – debit 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 (%) 2018 Equity instruments Debt instruments Property Cash International Other 2017 Equity instruments Debt instruments Property Cash International Actual return on plan assets (Rm) 2018 2017 106 Nedbank Limited Annual Report 2018 Pension and provident funds Medical aid funds Contribution asset Total 13 (207) 7 5 3 (179) 22 (232) 8 5 1 (196) 3 100 179 (122) 17 (28) 28 (1 551) 1 623 39 39 42 17 (257) (198) 98 83 181 – (762) 198 (358) 30 (155) 766 (281) (39) 813 774 2 504 (790) 196 373 24 3 (181) 141 68 55 (151) 7 5 3 (257) (338) 120 (149) 8 5 1 (15) 2 338 338 (480) 860 (155) (28) 28 (785) 2 116 1 714 15 514 92 3 3 100 (762) – 2 338 29,10 33,52 4,61 5,92 26,85 48,00 20,00 6,00 18,00 6,00 2,00 32,24 31,28 4,84 7,93 23,39 0,32 100,00 100,00 – 100,00 27,10 25,62 4,11 19,34 23,83 84,00 16,00 23,16 34,24 3,48 19,24 19,88 100,00 100,00 – 100,00 (63) 878 (83) 107 (39) – (185) 985 Principal actuarial assumptions (%) 2018 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) 2017 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) Sensitivity analysis Defined-benefit obligation Range Used in valuation 2,75–9,40 2,75–9,40 2,30–5,60 6,60–6,60 0,56–5,60 9,80–9,80 10 5,80–5,80 6 7,80–7,80 60 60 2,45–8,80 2,45–8,80 2,25–5,80 6,80–6,80 0,55–5,80 9,60–9,60 9,60 6,00–6,00 6,00 7,50–7,50 60 60 The defined-benefit obligation has been recalculated to show the effect of the discount rate and inflation rate assumptions on the defined-benefit obligation by adding and subtracting one percent to each assumption. This sensitivity analysis is for the Nedgroup Pension Fund. Rm 2018 Defined-benefit obligation Change (%) 2017 Defined-benefit obligation Change (%) Medical aid accrued liability Main result 3 702 Discount rate plus one percent Discount rate minus one percent Inflation rate plus one percent Inflation rate minus one percent 3 496 (5,6) 3 927 6,1 4 247 4 025 4 509 (5,2) 6,2 3 943 6,5 4 519 6,4 3 479 (6,0) 4 014 (5,5) The sensitivity analysis provided below shows the impact of changes to these assumptions on the accrued liability value at 31 December 2018. Rm Medical aid accrued liability Change (%) Main result 1 430 Medical subsidy rate plus one percent Medical subsidy rate minus one percent Discount rate plus half a percent Discount rate minus half a percent 1 529 6,9 1 344 (6,0) 1 383 (3,3) 1 481 3,6 The sensitivity analysis provided below shows the impact of changes to these assumptions on the accrued liability value at 31 December 2017. Rm Medical aid accrued liability Change (%) Pension funds Main result 2 204 Medical subsidy rate plus one percent Medical subsidy rate minus one percent Discount rate plus half a percent Discount rate minus half a percent 2 536 15,1 1 933 (12,3) 2 058 (6,6) 2 367 7,4 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 2018 8,89% 8,89% 6,09% 5,21% 2017 8,45% 8,45% 6,42% 5,51% Nedbank Limited Annual Report 2018 107 Notes to the consolidated financial statements continued for the year ended 31 December G1 Long-term employee benefits continued G1.1 Analysis of long-term employee benefit assets and liabilities continued G1.1.2 Postemployment benefits continued Medical aid funds The overall expected long-term rate of return on plan assets is 9,4%. 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. Experience adjustments on present value of defined-benefit obligations for the past five years (Rm) Rm 2018 2017 2016 2015 2014 Experience adjustments on fair value of plan assets for the past five years (Rm) 2018 2017 2016 2015 2014 Estimate of future contributions Contributions expected for ensuing year Fund surplus/(deficit) for the past five years Rm Pension funds 2018 2017 2016 2015 2014 Medical aid funds 2018 2017 2016 2015 2014 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) (291) (48) (64) (89) 55 25 (142) 163 (97) 113 (42) (216) (24) (40) (14) (24) (433) 115 (161) 24 13 (216) (24) (40) (14) (24) 25 Present value of obligation Fair value of plan asset Surplus/ (Deficit) 4 074 4 616 4 954 5 065 5 024 1 429 2 203 2 133 1 832 1 772 5 767 7 780 7 485 7 576 7 053 1 148 1 441 1 343 1 254 1 170 2018 (60) (256) (42) (441) 1 693 3 164 2 531 2 511 2 029 (281) (762) (790) (578) (602) 2017 59 333 (46) (271) 108 Nedbank Limited Annual Report 2018 G2 Non-current assets held for sale Accounting policy 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. Immediately before classification as held for sale, all assets and liabilities are remeasured in accordance with the group’s 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. Non-current assets held for sale Previously included in Properties sold not yet transferred¹ Property and equipment ¹ Commitments for the sale of properties have commenced and are anticipated to be concluded within the following 12 months. Transfer of the properties is expected to take place during the following year. G3 Other assets Sundry debtors and other accounts Impairment of other assets 2018 Rm 305 305 2017 Rm 388 388 12 055 (15) 12 040 7 332 7 332 SECTION H: FINANCIAL INSTRUMENTS Accounting policy Financial instruments recognised in the statement of financial position include all financial assets and financial liabilities, including derivative instruments, but excluding investments in subsidiaries, associate companies and joint arrangements (other than investments held by venture capital divisions), employee benefit assets and liabilities, and leases. Financial instruments are accounted for under IAS 32: Financial Instruments – Presentation, IAS 39: Financial Instruments – Recognition and Measurement, IFRS 9: Financial Instruments, IFRS 7: Financial Instruments – Disclosures and IFRS 13: Fair Value Measurement. Financial assets and financial liabilities Measurement basis of financial instruments There are two bases of measurement, namely amortised cost and fair value. Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual terms of the instrument. Regular-way purchase and sales of financial assets are recognised on the trade date, ie the date on which the group commits to purchase or sell the asset. At initial recognition the group measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability, such as fees and commissions. Transaction costs of financial assets or financial liabilities carried at FVTPL are expensed in profit or loss. Immediately after initial recognition an ELC allowance is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI, which results in an accounting loss being recognised in profit or loss when an asset is newly originated. Amortised cost and effective interest rate The amortised cost of a financial instrument is the amount at which the financial instrument is measured on initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective-interest-rate method of any difference between the initial contractual amount and the maturity amount, less any cumulative impairment losses. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (ie its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation does not consider ECLs and includes transaction costs, premiums or discounts, fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired financial assets (assets that are credit-impaired at initial recognition) the group calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of the ECLs in estimated future cashflows. When the group revises the estimates of future cashflows, the carrying amount of the respective financial asset or financial liability is adjusted to reflect the new estimate, discounted using the original effective interest rate. Any changes are recognised in profit or loss. Nedbank Limited Annual Report 2018 109 Notes to the consolidated financial statements continued for the year ended 31 December Interest income Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for: (cid:122) purchased or originated credit-impaired financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset; and (cid:122) financial assets that are not purchased or originated credit-impaired, but have subsequently become credit-impaired (or ‘stage 3’), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (ie net of the ECL allowance). Fair value The fair value of a financial instrument is the amount that would be received on selling the asset or paid on transferring 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 H2. Financial assets (i) Classification and measurement From 1 January 2018 Nedbank applies IFRS 9 and classifies its financial assets in the following measurement categories: (cid:122) FVTPL; (cid:122) FVOCI; and (cid:122) amortised cost. The classification requirements of investments in debt and equity instruments are described below: Debt instruments The classification of investments in debt instruments depends on: (cid:122) the business model within which the financial assets are held and managed; and (cid:122) the contractual cashflow characteristics of the financial assets, ie whether the cashflows represent ‘solely payments of principal and interest’. Financial assets are measured at amortised cost if they are held within a business model of which the objective is to hold those assets for the purpose of collecting contractual cashflows and those cashflows comprise solely payments of principal and interest (ie ‘hold to collect’ business model). Financial assets are measured at FVOCI if they are held within a business model of which the objective is achieved by both collecting contractual cashflows and selling financial assets and those contractual cashflows comprise solely payments of principal and interest (ie ‘hold to collect and sell’ business model). Movements in the carrying amount of these financial assets are taken through OCI, except for impairment gains or losses, interest revenue and foreign exchange gains or losses, which are recognised in profit or loss. Where the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss. The remaining financial assets are measured at FVTPL. All derivative instruments that are either financial assets or financial liabilities will continue to be classified as held for trading and measured at FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cashflows are solely payments of principal and interest. The group reclassifies debt investments when, and only when, its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. Investments in equity instruments For equity investments that are held neither for trading nor for contingent consideration the group may irrevocably elect to present subsequent changes in the fair value of these equity investments in OCI. Where the equity investment is derecognised, the cumulative gain or loss previously recognised in OCI is not reclassified from equity to profit or loss. However, it may be reclassified in equity. Alternatively, where the group does not make the abovementioned election, fair-value changes are recognised in profit or loss. This election is made on an investment-by-investment basis. On initial recognition the group may irrevocably designate a financial asset otherwise meeting the requirements for measurement at amortised cost or FVOCI, or as FVTPL, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. 110 Nedbank Limited Annual Report 2018 Financial liabilities The accounting for financial liabilities remains largely unchanged under IFRS 9, except for financial liabilities designated as FVTPL. Changes in the fair value of these financial liabilities that are attributable to the group’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. However, it may be reclassified in equity. On the initial application of IFRS 9 an entity may revoke its previous designation of financial assets and financial liabilities measured at FVTPL (fair-value option), with the loans being reclassified in amortised cost or FVOCI, depending on the entity’s business model for the asset. (ii) Impairments Impairments in terms of IFRS 9 are determined based on an ECL model, as opposed to the incurred loss model of IAS 39. The ECL model applies to financial assets measured at amortised cost and debt instruments at FVOCI, lease receivables and certain loan commitments, as well as financial guarantee contracts. Under IFRS 9 loss allowances are measured on either of the following bases: (cid:122) 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and (cid:122) lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. The group is required to recognise an allowance for either 12-month or lifetime ECLs, depending on whether there has been a significant increase in credit risk (SICR) since initial recognition. Indicators of an SICR in the retail portfolio may include any of the following: (cid:122) Short-term forbearance. (cid:122) Direct debit cancellation. (cid:122) Extension to the terms granted. (cid:122) Previous arrears within the past months. Indicators of an SICR in the wholesale portfolio may include any of the following: (cid:122) Significant increase in the credit spread. (cid:122) Significant adverse changes in business, financial and/or economic conditions in which the client operates. (cid:122) Actual or expected forbearance or restructuring. (cid:122) Significant change in collateral value. (cid:122) Early signs of liquidity and cashflow problems, such as a delay in the servicing of trade creditors/loans. Measurement of ECLs The measurement of ECLs reflects a probability-weighted outcome, the time value of money and the entity’s best available forward-looking information. The abovementioned probability-weighted outcome considers the possibility of a credit loss occurring and the possibility of no credit loss occurring, even if the possibility of a credit loss occurring is low. Credit losses are measured as the present value of all cash shortfalls (ie the difference between the cashflows due to the entity in accordance with the contract and the cashflows that the group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. The assessment of the ECL of a financial asset or portfolio of financial assets entails estimations of the likelihood of defaults occurring and of default correlations between counterparties. The group measures ECL using probability of default (PD), exposure at default (EAD) and loss given default (LGD). These three components are multiplied together and adjusted for the likelihood of default. The calculated ECL is then discounted using the original effective interest rate of the financial asset. The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The group has performed historical analyses and identified the key economic variables impacting credit risk and ECL for each portfolio. These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. The Nedbank Group Economic Unit unit provides a forecast of economic variables and an overview of the economy quarterly or more often if necessary. Significant judgement and estimates are applied in this process of incorporating forward-looking information into the SICR assessment and ECL calculation. Credit-impaired financial assets At each reporting date the group assesses whether financial assets carried at amortised cost and debt securities at FVOCI are credit-impaired. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cashflows of the financial asset have occurred. The group’s definition of credit-impaired is aligned to our internal definition of default. Presentation of impairment Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets, and the amortised cost is presented on the face of the statement of financial position. For debt securities at FVOCI the loss allowance is recognised in OCI, instead of reducing the carrying amount of the asset. For off-balance-sheet exposures, such as financial guarantee contracts, the loss allowance is presented in ‘Provisions and other liabilities’ on the face of the statement of financial position. Nedbank Limited Annual Report 2018 111 Notes to the consolidated financial statements continued for the year ended 31 December (iii) Modification of loans The group may renegotiate or otherwise modify the contractual cashflows of loans to clients. When this happens, the group assesses whether the new terms are substantially different to the original terms. In the normal course of business restructures a combination of qualitative and quantitative factors needs to be considered to establish whether the change to the contractual cashflows is substantial. However, in a distressed restructure the group needs to determine whether it is merely attempting to recover the original cashflows in the most optimal manner, and as such the original cashflows have not expired, or whether the risks and rewards associated with the cashflows have been altered fundamentally enough for the original instrument to be derecognised. The group is of the view that the abovementioned principle can be applied by type of modification for retail exposures, as we assume there is a homogenous business process and objective underlying each type of modification. The application to wholesale exposures should be dealt with on a case-by-case basis through consultation by the business unit with the group’s IFRS Advisory Division, as it may be necessary to take into account whether the modification is considered substantial based on the unique facts and circumstances. Should the terms be substantially different, the group derecognises the original financial asset and recognises a ‘new’ financial asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes and for determining whether a significant increase in credit risk has occurred. However, the group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make originally agreed payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition. Should the terms not be substantially different, the renegotiation or modification does not result in derecognition, and the group recalculates the gross carrying amount based on the revised cashflows of the financial asset and recognises a modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified cashflows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). Revolving products A revolving credit facility (RCF) may be seen as financial instrument that is either: (cid:122) one continuous instrument, with one origination date that could be many years in the past; or (cid:122) a series of one-year instruments, each of which would have a different origination date. With respect to revolving credit facilities, the key consideration of whether the issuing of a new card, change in credit limit, or conducting a credit review results in derecognition of the loan or facility is the robustness of the process followed and the resulting impact on credit risk management. Where the process is not considered to be sufficiently robust, ie it is purely procedural in nature, the original RCF will not be derecognised and the date of origination will remain the date at which the facility was first contractually extended (or was subject to a robust process that resulted in derecognition). If the process is considered to be robust, the date of origination would be the date of derecognition of the previous facility or loan. The group considers the following factors to determine whether a review (annual or otherwise) is robust, ie would result in derecognition: (cid:122) The effectiveness of the review in mitigating or managing credit risk until the next scheduled review. (cid:122) Evidence that specific action is taken as a result of the outcome of the review, for example: ○ changes in facility limits; ○ repricing of the facility; ○ changes in required collateral or security; ○ changes to the terms and conditions of the facility; or ○ withdrawal of the facility. (cid:122) The review is performed at a facility or client level (or client group). (cid:122) The review is done holistically, taking into account the income derived from the facility and the other income generated from the client in comparison to the risk taken. (cid:122) Increased monitoring or scrutiny of the facility, for example additional controls and/or approvals, is put in place until the next review. (iv) Derecognition other than a modification 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: (cid:122) the contractual rights to the cashflows arising from the financial asset have expired; or (cid:122) the group transfers the financial asset, including substantially all the risks and rewards of ownership of the asset; or (cid:122) the group 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. 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. 112 Nedbank Limited Annual Report 2018 The group enters into transactions where it retains the contractual rights to receive cashflows from assets but assumes a contractual obligation to pay those cashflows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition when the group; (cid:122) has no obligation to make payments unless it collects equivalent amounts from the assets; (cid:122) is prohibited from selling or pledging the assets; and (cid:122) has an obligation to remit any cash it collects from the assets without material delay. Collateral (shares and bonds) furnished by the group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met. This also applies to certain securitisation transactions in which the group retains a subordinated residual interest. Financial liabilities (i) Classification and measurement Financial liabilities are classified as subsequently measured at amortised cost, except for: (cid:122) Financial liabilities at FVTPL: This classification is applied to derivative financial liabilities, financial liabilities held for trading and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated as FVTPL are presented partially in OCI (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially in profit or loss (the remaining amount of change in the fair value of the liability). (cid:122) Financial liabilities arising from the transfer of financial assets that did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the group recognises any expenses incurred on the financial liability. (cid:122) Financial guarantee contracts and loan commitments. (ii) Derecognition 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. 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 depositors, deposits from banks, or other money market deposits. Securities purchased under agreements to resell are recorded as loans and advances to banks or clients. The difference between the sale and repurchase price is treated as interest and recognised over the duration of the agreements using the effective-interest-rate 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. Cash and cash equivalents Cash and cash equivalents represents cash on hand and demand deposits and cash equivalents that are short term (ie with 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 banks. 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. Nedbank Limited Annual Report 2018 113 Notes to the consolidated financial statements continued for the year ended 31 December 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. 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 at 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. For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. However, for contracts that include both a loan and an undrawn commitment, and where the group cannot separately identify the ECLs on the undrawn commitment component from those on the loan component, the ECLs on the undrawn commitment are recognised together with the loss allowance for the loan. To the extent that the combined ECLs exceed the gross carrying amount of the loan, the ECLs are recognised as a provision. Derivatives and hedging activities Nedbank has elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9. Nedbank has not provided comparative information for periods before the date of initial application of IFRS 9 for the new disclosures introduced by IFRS 9 as a consequential amendment to IFRS 7, as permitted by IFRS 7 paragraph 44Z. Key assumptions concerning the future and key sources of estimation Fair value of financial instruments Certain of the group’s financial instruments are carried at FVTPL, 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 FVOCI. FVOCI 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 OCI and presented in equity. The fair value of a financial instrument is the amount that would be received on selling the asset or paid on transferring the liability in an orderly transaction at the measurement date between knowledgeable and 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 disclosed in note I2 to the financial statements. In particular, the areas that involve the greatest amount of judgement and complexity include the following: (cid:122) Assessing whether instruments are trading with sufficient frequency and volume that they can be considered liquid. (cid:122) 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. (cid:122) The inclusion of credit valuation adjustment (CVA) and debit valuation adjustment (DVA) in the fair-value measurement of derivative instruments. (cid:122) 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 therefore changes in these assumptions will arise as the market develops. Securitisations The group sponsors the formation of structured entities primarily for the purpose of securitising financial assets for funding diversification purposes and to add flexibility in mitigating structural liquidity risk. Where it is difficult to determine whether the group controls a structured entity, the group makes judgements in terms of IFRS 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 and separately. 114 Nedbank Limited Annual Report 2018 H1 Consolidated statement of financial position – categories of financial instruments At FVTPL FVOCI Notes Total Rm Mandi- torily at fair value Rm Desig- nated|¹ Rm Debt Instru- ments Rm Equity Instru- ments Rm Financial instru- ments at amortised cost Rm Non- financial assets, liabilities and equity Rm 2018 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 associate companies 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 Holders of preference shares Holders of additional tier 1 capital instruments 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 C6 C4 C7 C3 C1.1 G3 E1 G2 E2 B7.3 F1 G1.1 C6 F2 B3.1 5 467 18 426 36 344 22 412 28 495 18 129 6 354 7 931 57 844 22 412 96 123 725 792 12 040 105 6 787 305 786 40 8 367 4 764 19 789 8 538 7 931 21 500 67 628 683 770 10 776 433 19 789 1 264 105 305 786 40 8 367 4 764 8 538 971 623 111 734 5 467 18 426 433 811 394 24 169 28 19 182 49 636 28 19 182 49 636 68 846 – – – – – 68 846 B3.2 3 561 561 B4 3 416 23 76 407 19 761 806 487 10 414 272 224 2 648 55 410 C7 D1 J1.1 B7.3 G1.1 D2 – 19 761 21 579 466 3 561 561 3 416 23 – – – – 76 407 784 908 4 795 55 410 5 153 272 224 2 648 895 216 41 806 971 623 41 806 – – – – – – 845 113 8 297 845 113 84 704 1 Refer to note H4 in respect of financial instruments designated as FVTPL. Nedbank Limited Annual Report 2018 115 Notes to the consolidated financial statements continued for the year ended 31 December H1 Consolidated statement of financial position – categories of financial instruments continued Total Rm Held for trading Rm Desig- nated|¹ Rm Notes At FVTPL Available- for-sale financial assets Rm Held-to- maturity invest ments Rm Loans and receiv- ables Rm Financial liabilities at amortised cost Rm Non- financial assets, liabilities and equity Rm 2017 Assets Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances2 Other assets Current taxation assets Investment securities2 Non-current assets held for sale Investments in associate companies2 Deferred taxation assets Property and equipment Long-term employee benefit assets Mandatory reserve deposits with central bank Intangible assets C6 C4 C7 C3 C1.1 G3 E1 G2 E2 B7.3 F1 G1.1 8 823 73 472 46 811 1 468 25 193 30 698 30 698 6 265 19 598 10 271 57 934 3 351 24 437 4 873 430 48 749 695 744 7 332 75 5 303 388 224 37 7 976 5 761 C6 F2 18 145 7 341 8 823 4 425 618 212 7 332 18 145 75 388 224 37 7 976 5 761 7 341 Total assets 910 068 103 372 74 546 3 781 49 630 656 937 – 21 802 B3.1 28 19 182 48 215 67 425 – – – – – B3.2 3 561 561 B4 2 600 7 74 154 Equity and liabilities Ordinary share capital Ordinary share premium Reserves Total equity attributable to equity holders of the parent Preference share capital and premium Holders of preference shares Holders of additional tier 1 capital instruments 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 – – – – – – 74 154 C7 23 561 23 561 D1 742 859 23 201 54 694 664 964 J1.1 14 047 2 436 10 611 1 000 191 351 3 423 B7.3 G1.1 D2 51 482 348 835 914 49 198 55 042 191 351 3 423 51 134 – – – – – – 726 709 4 965 726 709 79 119 Total equity and liabilities 910 068 49 198 55 042 1 Refer to note H4 in respect of financial instruments designated as FVTPL. 2 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. 116 Nedbank Limited Annual Report 2018 28 19 182 48 215 67 425 3 561 561 2 600 7 H2 Fair-value measurement – financial instruments H2.1 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 on selling the asset or paid on 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: (cid:122) (cid:122) (cid:122) (cid:122) 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 backtested 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: (cid:122) Anticipated future projected trading positions. (cid:122) Historical events. (cid:122) (cid:122) Scenario testing to evaluate plausible future events. 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 H2.7. 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: (cid:122) (cid:122) (cid:122) 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. 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. Nedbank Limited Annual Report 2018 117 Notes to the consolidated financial statements continued for the year ended 31 December H2 Fair-value measurement – financial instruments continued H2.1 Valuation of financial instruments continued 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. 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: (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) using recent arm’s-length market transactions between knowledgeable, willing parties; reference to the current fair value of another instrument that is substantially 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: (cid:122) (cid:122) 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: (cid:122) will incorporate all relevant factors that market participants would consider in determining a price and (cid:122) 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. 118 Nedbank Limited Annual Report 2018 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: (cid:122) (cid:122) (cid:122) 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: (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) 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: (cid:122) (cid:122) (cid:122) (cid:122) reliable; based on consensus within reasonably 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. 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: (cid:122) 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. (cid:122) 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. (cid:122) 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. (cid:122) 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. (cid:122) 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. (cid:122) (cid:122) (cid:122) (cid:122) (cid:122) Equity prices: Prices (and indices of prices) of traded equity instruments are readily observable on JSE Limited 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. (cid:122) 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. (cid:122) Inception profit (day 1 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. Nedbank Limited Annual Report 2018 119 Notes to the consolidated financial statements continued for the year ended 31 December H2 Fair-value measurement – financial instruments continued H2.1 Valuation of financial instruments continued 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: (cid:122) 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 as FVTPL is adjusted by reference to the movement in the appropriate spreads. The resulting gain or loss is recognised in profit or loss in the consolidated statement of comprehensive income. (cid:122) 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 be traded either through an exchange or over the counter (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 through model calibration procedures. Other inputs are not observable, but can generally be estimated from historical data or other sources. 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, depending 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 as FVTPL. 120 Nedbank Limited Annual Report 2018 The fair value of these financial liabilities is determined by discounting the contractual cashflows using a Nedbank Limited- 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: (cid:122) (cid:122) 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: (cid:122) (cid:122) 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 transactions 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 used 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 middle-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. 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: Valuation technique Key inputs Assets Other short-term securities Derivative financial instruments Government and other securities Loans and advances Investment securities Liabilities Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Discounted-cashflow model Discounted-cashflow model Black-Scholes model Multiple valuation techniques Discounted-cashflow model Discounted-cashflow model Discounted-cashflow model Adjusted net asset value Dividend yield method Discount rates Discount rates Risk-free rates and volatilities Valuation multiples Discount rates Interest rate curves Money market rates and interest rates Underlying price of market-traded instruments Dividend growth rates Discounted-cashflow model Black-Scholes model Multiple valuation techniques Discounted-cashflow model Discounted-cashflow model Discounted-cashflow model Discount rates Risk-free rates and volatilities Valuation multiples Discount rates Discount rates Discount rates 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 is set out in note H2.7. Nedbank Limited Annual Report 2018 121 Notes to the consolidated financial statements continued for the year ended 31 December H2 Fair-value measurement – financial instruments H2.2 Fair-value hierarchy H2.2.1 Financial assets Total financial assets recognised at amortised cost Total financial assets recognised at fair value Total financial assets 947 454 811 394 136 060 27 720 57 844 22 412 96 123 725 792 10 776 6 787 27 720 21 500 67 628 683 770 10 776 – 36 344 22 412 28 495 42 022 – 6 787 Rm 2018 Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Investment securities Note C6 C4 C7 C3 C1 G3 E1 Rm 2017 Cash and cash equivalents Other short-term securities Derivative financial instruments Government and other securities Loans and advances1 Other assets Investment securities1 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Note C6 C4 C7 C3 C1 G3 E1 At fair value though profit or loss Level 3 5 545 Mandatorily at fair value Level 1 25 559 Level 2 80 630 36 344 38 22 374 25 505 2 990 18 129 16 793 5 545 Total financial assets recognised at amortised cost Total financial assets recognised at fair value Total financial assets 888 266 706 567 181 699 26 968 73 472 30 698 48 749 695 744 7 332 5 303 26 968 25 193 28 862 618 212 7 332 – 48 279 30 698 19 887 77 532 – 5 303 Summary of fair-value hierarchies Rm Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Investment securities1 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Total financial assets recognised at fair value Total financial assets classified as level 1 2018 2017 2018 2017 36 344 22 412 28 495 42 022 – 6 787 48 279 30 698 19 887 77 532 – 5 303 38 25 505 5 173 16 15 136 060 181 699 25 559 5 188 122 Nedbank Limited Annual Report 2018 At fair value though profit or loss (cont) At FVOCI Designated Debt instruments Equity instruments level 1 Level 2 Level 3 level 1 – 5 467 – – Level 2 18 426 Level 3 Level 1 Level 2 Level 3 – – – 433 5 467 18 426 At fair value though profit or loss 433 Held for trading Designated Available for sale Level 2 70 405 1 468 10 231 57 901 Level 3 4 086 Level 1 Level 2 Level 3 – 3 371 410 33 3 351 805 4 053 20 410 Level 1 5 133 5 133 Level 2 98 239 46 811 30 698 1 132 19 598 Level 3 Level 1 – 55 40 15 Total financial assets classified as level 2 Total financial assets classified as level 3 2018 2017 2018 2017 36 344 22 374 2 990 42 022 48 279 30 698 14 714 77 499 793 825 104 523 172 015 5 978 5 978 33 4 463 4 496 Nedbank Limited Annual Report 2018 123 Notes to the consolidated financial statements continued for the year ended 31 December H2 Fair-value measurement – financial instruments continued H2.2 Fair-value hierarchy continued H2.2.1 Financial assets continued Reconciliation to categorised statement of financial position Rm Level 1 Level 2 Level 3 Mandatorily at fair value 2018 25 559 80 630 5 545 Held for trading 2017 5 133 98 239 Designated as FVTPL 2018 2017 5 467 55 70 405 4 086 FVOCI: Debt instruments 2018 FVOCI: Equity instruments 2018 Available for sale 2017 18 426 433 433 3 371 410 3 781 111 734 103 372 5 467 74 546 18 426 Reconciliation to statement of financial position Rm Total financial assets1 Total non-financial assets Total assets 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. H2.2.2 Financial liabilities Note 2018 2017 H1 H1 947 454 24 169 888 266 21 802 971 623 910 068 Mandatorily at fair value Designated At FVTPL Rm 2018 Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments Total financial liabilities recog- nised at amort- ised cost Total financial liabilities recog- nised at fair value Total financial liabilities Note Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 886 919 845 113 41 806 474 41 332 – – – – C7 19 761 19 761 8 19 753 D1 806 487 784 908 21 579 21 579 J1.1 5 261 4 795 466 466 D2 55 410 55 410 – At FVTPL Held for trading Designated Total financial liabilities recog- nised at amort- ised cost Total financial liabilities recog- nised at fair value Total financial liabilities Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 2017 830 949 726 709 104 240 2 405 46 793 – – 55 042 – Derivative financial instruments Amounts owed to depositors1 Provisions and other liabilities Long-term debt instruments C7 23 561 23 561 D1 742 859 664 964 77 895 23 561 23 201 J1.1 13 047 10 611 2 436 2 405 31 D2 51 482 51 134 348 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. 124 Nedbank Limited Annual Report 2018 54 694 348 Summary of fair-value hierarchies 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 Rm 2018 2017 2018 2017 2018 2017 2018 2017 Derivative financial instruments Amounts owed to depositors Provisions and other liabilities Long-term debt instruments 19 761 21 579 466 – 23 561 77 895 2 436 348 8 466 2 405 19 753 21 579 23 561 77 895 31 348 41 806 104 240 474 2 405 41 332 101 835 – – Reconciliation to categorised statement of financial position Rm Level 1 Level 2 Reconciliation to statement of financial position Rm Total financial liabilities1 Total equity and non-financial liabilities Total equity and liabilities Mandatorily at fair value 2018 474 41 332 41 806 Held for trading 2017 2 405 46 793 49 198 Designated as FVTPL 2018 2017 55 042 55 042 – Note 2018 2017 H1 H1 886 919 84 704 830 949 79 119 971 623 910 068 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. 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. H2.3 Details of changes in valuation techniques There have been no significant changes to valuation techniques. H2.4 Transfers between levels of the fair-value hierarchy There were no significant transfers between level 1 and level 2 of the fair-value hierarchy during 2018. 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. Nedbank Limited Annual Report 2018 125 Notes to the consolidated financial statements continued for the year ended 31 December H2 Fair-value measurement – financial instruments continued H2.5 Level 3 reconciliation Assets Rm 2018 At FVTPL – Mandatorily at fair value Opening balance at 1 January 4 302 Investment securities1 4 302 At FVOCI – Equity instruments Investment securities 410 410 Gains in non- interest revenue in profit for the year 211 211 – Total financial assets classified as level3 4 712 211 Gains relating to investments in equity instruments at FVOCI and debt instruments at FVOCI in OCI for the year Purchases Issues Sales Settlements Transfers from level 2 Closing balance at 31 December – 3 3 3 – 2 201 (181) 2 201 (181) (988) (988) – 5 545 5 545 – – – – 20 20 433 433 – 2 201 (181) (988) 20 5 978 1 Certain investments have been reclassified from debt instruments to Investment securities in the current year to align business model principles introduced by IFRS 9. Therefore the 2018 opening balance does not correspond with the 2017 closing balance. Gains/ (Losses) in non- interest revenue in profit for the year Gains in fair-value adjustments on available- for-sale assets in OCI for the year Opening balance at 1 January Purchases and issues Sales and settlements Transfers from level 2 Closing balance at 31 December 25 25 3 108 77 3 031 410 410 – 130 45 85 – 3 543 130 – – – – – (25) 1 625 1 625 – (25) (777) (89) (688) – 1 625 (802) – – – – – – 4 086 33 4 053 410 410 4 496 Rm 2017 Held for trading Derivative financial instruments Designated as fair value Loans and advances Investment securities1 Available for sale Investment securities Total financial assets classified as level3 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Gains and losses include, but are not limited to, fair-value gains or losses, translation gains or losses and trading gains or losses. 126 Nedbank Limited Annual Report 2018 H2.6 Unrealised gains The unrealised gains arising on instruments classified as level 3 include the following: Private-equity gains 2018 Rm 211 211 2017 Rm 130 130 H2.7 Effect of changes in significant unobservable assumptions to reasonable possible alternatives The fair value of financial instruments is, 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. When 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 the fair value of changes in unobservable input parameters to reasonably possible alternative assumptions: Amount recognised in the statement of financial position Rm Favourable change in value Rm Unfavourable change in value Rm 5 978 788 (620) Variance in fair value % Between (10) and 13 Valuation technique Significant unobservable input Discounted cashflows, adjusted net asset value, earnings multiples, third-party valuations and dividend yields Valuation multiples, correlations, volatilities and credit spreads Discounted cashflows Discounted cashflows, adjusted net asset value, earnings multiples, third-party valuations and dividend yields Credit spreads and discount rates Valuation multiples, correlations, volatilities and credit spreads Between (12) and 9 Between (12) and 9 5 978 788 (620) 33 4 463 3 417 (4) (525) 4 496 420 (529) 2018 Assets Investment securities Total financial assets classified as level 3 2017 Assets Loans and advances Investment securities1 Total financial assets classified as level 3 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Nedbank Limited Annual Report 2018 127 Notes to the consolidated financial statements continued for the year ended 31 December H3 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 and are measured at amortised cost. The calculation of the fair value of the financial instruments incorporates the group’s best estimate of the value at which the 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 2018 Financial assets Other short-term securities Government and other securities Loans and advances Financial liabilities Long-term debt instruments 2017 Financial assets Other short-term securities Government and other securities Loans and advances1 Financial liabilities Long-term debt instruments Carrying value Fair value Level 1 Level 2 Level 3 772 898 760 518 44 554 21 460 694 504 21 500 67 628 683 770 55 410 55 410 21 460 66 844 672 214 56 226 56 226 – 44 554 – 21 460 22 290 672 214 – 27 944 28 282 – 27 944 28 282 666 160 661 408 25 193 28 862 612 105 51 134 51 134 25 130 28 825 607 453 23 993 – 23 993 – 29 962 607 453 25 130 4 832 – 607 453 52 028 23 975 28 053 – 52 028 23 975 28 053 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Loans and advances Loans and advances, recognised in note C1.1, 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 disposal 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 IFRS 9 ECLs, 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 the periods 2019 to 2021 (2017: for the periods 2018 to 2020) are based on the latest available internal data and are applied to the projected cashflows of the first three years. 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 used 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 3), where an instrument is not quoted or the market is considered to be inactive. See note C3 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 C4 for further detail. 128 Nedbank Limited Annual Report 2018 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 variable-rate liabilities and hedge-accounted fixed-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. H4 Financial instruments designated as fair value through profit or loss The group has satisfied the criteria for designation of financial instruments as FVTPL 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 Asset and Liability Committee (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 IFRS 9. 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 FVTPL and are held at fair value. Various instruments are designated as FVTPL, 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. H4.1 Financial assets designated as FVTPL Rm Negotiable certificates of deposit Government guaranteed Other dated securities Mortgage loans Net finance lease and instalment debtors Leases and debentures Preference shares Loans and advances (secured and unsecured) Other loans Investment securities2 Listed investments Unlisted investments Maximum exposure to credit risk 2018 2017 2 188 3 278 1 1 468 319 9 952 24 030 20 691 54 57 5 548 7 554 3 053 15 1 805 5 467 74 546 1 Positive amounts represent gains while negative amounts represent losses. 2 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. Nedbank Limited 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 FVTPL are determined at inception of the deal. The credit spread is calculated as the difference between the benchmark interest rate and the interest rate the client is charged. 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 FVTPL. A breakdown of the financial assets that are designated as FVTPL can be found in note H1. A detailed explanation of how each financial asset is valued can be found in note H2. Nedbank Limited Annual Report 2018 129 Notes to the consolidated financial statements continued for the year ended 31 December H4 Financial instruments designated as fair value through profit or loss continued H4.2 Financial liabilities designated as FVTPL 2017 Rm Long-term debt instruments2 Call and term deposits2 Negotiable certificates of deposit2 Change in fair value due to change in credit risk¹ Fair value Contractually payable at maturity Current period Cumulative 348 37 683 17 011 55 042 348 37 616 17 011 54 975 (99) (36) (135) (127) (79) (206) ¹ Positive amounts represent losses, while negative amounts represent gains. 2 IFRS 9 provides for a once-off de-designation on adoption of IFRS 9 for all IAS 39 designated instruments. These instruments are no longer designated as FVTPL under IFRS 9. 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 risk-free 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 Limited bonds are applied. H5 Offsetting financial assets and financial liabilities Accounting policy 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. In accordance with the requirements of IFRS 7: Financial Instruments: Disclosures, the table below sets out the impact of: (cid:122) (cid:122) 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: (cid:122) (cid:122) 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. 130 Nedbank Limited Annual Report 2018 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. 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 off on the occurrence of a future event Net amounts reflecting the effect of master netting arrangements Total a mounts recognised in the statement of financial position Amounts not subject to IFRS 7 offsetting disclosure² Gross amounts 22 480 25 190 1 914 (1 123) (14 984) (1 553) 21 357 10 206 361 (15 828) 5 529 10 206 361 1 055 715 586 7 570 22 412 725 792 7 931 Rm 2018 Financial assets Derivative financial assets Loans and advances Cash and cash equivalents Total financial assets 49 584 (17 660) 31 924 (15 828) 16 096 724 211 756 135 Financial liabilities Derivative financial liabilities Amounts owed to depositors (23 010) 4 311 (18 699) 15 828 (2 871) (1 062) (19 761) (77 763) Total financial liabilities (100 773) 2017 Financial assets Derivative financial assets3 Loans and advances4 Cash and cash equivalents Total financial assets 30 594 63 026 4 772 98 392 13 349 17 660 (64 414) (64 414) (742 073) (806 487) (83 113) 15 828 (67 285) (743 135) (826 248) (978) (40 107) (3 286) 29 616 22 919 1 486 (17 062) 12 554 22 919 1 486 1 082 672 825 7 337 30 698 695 744 8 823 (44 371) 54 021 (17 062) 36 959 681 244 735 265 Financial liabilities Derivative financial liabilities3, 5 Amounts owed to depositors4, 6 (30 518) 7 507 (23 011) 17 043 (5 968) (550) (23 561) (115 705) 36 864 (78 841) (179 906) (664 018) (742 859) Total financial liabilities (146 223) 44 371 (101 852) 17 043 (185 874) (664 568) (766 420) ¹ 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. ² 3 In the previous year the ‘Amounts that may be netted off on the occurrence of a future event’ for derivative financial assets was incorrectly disclosed as negative R26 875m instead of negative R17 062m. Thus the ‘Net amounts reflecting the effect of master netting arrangements’ for derivatives financial assets should have been positive R12 554m rather than the previously reported positive R2 741m. 4 During 2018 a detailed review was performed on offsetting, which indicated that at 31 December 2017 an asset of R6 107m was incorrectly set off against a liability with the same counterparty. To correct this at 31 December 2017 loans and advances and amounts owed to depositors were restated by R6 107m. This restatement had no impact on information on previously reported for Nedbank Group. 5 In the previous year the ‘Amounts that may be netted off on the occurrence of a future event’ for derivative liabilities was incorrectly disclosed as negative R21 319m instead of positive R17 043m. Thus the ‘Net amounts reflecting the effect of master netting arrangements’ for derivatives liabilities should have been negative R5 968m rather than the previously reported negative R44 330m. 6 In the previous year R101 065m of call and term deposits not subject to IFRS 7 disclosure were incorrectly disclosed under gross amounts of balances that are subject to offsetting. Thus the ‘Gross amounts’ for amounts owed to depositors should have been negative R115 705m rather than the previously reported negative R216 770m and the ‘Amounts not subject to IFRS 7 offsetting disclosure’ should have been negative R664 018m rather than the previously reported negative R562 953m after the adjustment of R6 107m referred to in note A3. Nedbank Limited Annual Report 2018 131 Notes to the consolidated financial statements continued for the year ended 31 December H6 Collateral Accounting policy 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. H6.1 Collateral pledged The group has pledged government and other securities (note C3) and negotiable certificates of deposit (note C4) amounting to R22 295m (2017: R28 538m) as collateral for deposits received under repurchase agreements, of which R9 600m (2017: 10 134m) relates to sell-/buybacks. These amounts represent assets that have been transferred, but that do not qualify for derecognition under IFRS 9. The associated liabilities of R21 443m (2017: R24 615m), of which R9 241m (2017: R9 807m) relates to sell-/buybacks, are disclosed in note D1. These transactions are entered into under terms and conditions that are standard industry practice in securities borrowing and lending activities. H6.2 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 with 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. The group generally segregates collateral received into the following two classes: (cid:122) 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 under terms and conditions that are standard industry practice in securities borrowing and lending activities. (cid:122) 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: (cid:122) Retail portfolio ○ Mortgage lending that are secured by mortgage bonds over residential property. ○ Instalment credit transactions that are secured by the assets financed. ○ Overdrafts that are either unsecured or secured by guarantees, suretyships or pledged securities. 132 Nedbank Limited Annual Report 2018 (cid:122) Wholesale portfolio ○ Commercial properties that 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 that are 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). ○ 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, 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 2018 management considered R244 973m (2017: R192 015m) to be a reasonable estimate of the gross 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, which includes a review of the security structure and covenants to ensure that proper title is retained over the relevant collateral. At 31 December 2018 management considered R236 852m (2017: R254 261m) to be a reasonable estimate of the gross 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 in the absence of default. The fair value of these securities at the reporting date amount to R9 081m (2017: R17 828m), of which Rnil (2017: Rnil) have been sold or repledged. H6.3 Collateral taken possession of and recognised in the statement of financial position Included in properties in possession (note C1.1) is an amount of R88m (2017: R96m), which represents retail assets the group has acquired during the year by taking possession of collateral held as security. Nedbank Limited Annual Report 2018 133 Notes to the consolidated financial statements continued for the year ended 31 December SECTION I: SHARE-BASED PAYMENTS Accounting policy 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. 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 payments 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. Nedbank Group Limited shares, share options over Nedbank Group Limited shares and equity instruments in respect of Nedbank Group Limited shares are granted to employees as part of their remuneration package as services are rendered. 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 reliably estimate 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 its 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 using 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. 134 Nedbank Limited Annual Report 2018 I1 Description of arrangements Scheme Trust/Special- purpose vehicle (SPV) Description Traditional employee schemes Nedbank Group (2005) Share Option and Restricted-share Scheme Nedbank Group (2005) Share Scheme Trust 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. 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. n/a Nedbank UK Long-term Incentive Plan (LTIP) 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 they are granted at a predetermined exercise 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. Maximum term 3 years 3 years 3 years Vesting requirements Three years’ service and achievement of performance targets based on average return on equity, as well as the Nedbank Group Limited share price performance against the financial index (2016 and 2017 tranches). In addition, the 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 reached. The performance condition against the financial index was replaced with diluted headline earnings per share compound annual growth rate in 2018. Three years’ service and achievement of Nedbank Group Limited performance target. Where this performance target is not met, 50% will vest provided that the three years’ service has been reached. Completion of three years’ service, from grant date, subject to corporate performance targets being met. Nedbank UK Matched Scheme 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. Completion of three years’ service, from grant date, subject to corporate performance targets being met. 3 years Nedbank Limited Annual Report 2018 135 Notes to the consolidated financial statements continued for the year ended 31 December I1 Description of arrangements continued Trust/Special- purpose vehicle (SPV) n/a Scheme Nedbank Wealth Management International Long-term incentive plan (LTIP) n/a Nedbank Wealth Management International Matched Scheme Nedbank Africa Restricted-share Scheme n/a Nedbank Africa Matched-share Scheme n/a Description 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. 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. 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 lies 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 lies with the participants, including the voting and dividend rights. Maximum term 3 years Vesting requirements 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 Three years’ service and achievement of corporate performance targets. Where these performance targets are not met, 50% will vest provided that the three years’ service has been reached. 7 years 7 years Participants must remain in service for four, five and six years, after each of which one-third of the shares become unrestricted and one-third of the options vest. Participants must remain in service for four, five and six years, after each of which one-third of the shares become unrestricted and one-third of the options vest. 136 Nedbank Limited Annual Report 2018 I2 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 Wealth Management Incentive Scheme¹ Nedbank Africa Restricted-share Scheme and Matched-share Scheme¹ 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 2018 Rm 738 608 123 (3) 2 4 1 3 3 2 1 2017 Rm 589 477 122 (18) 1 (1) 1 1 6 2 2 2018 Rm 1 421 1 123 253 13 2 14 2 14 6 6 2017 Rm 1 184 909 239 10 3 9 2 1 11 21 18 3 741 591 1 427 1 205 2018 2017 Number of instruments Weighted- average exercise price R Number of instruments Weighted- average exercise price R I3 Movements in number of instruments Nedbank Group (2005) Share Option and Restricted-share Scheme Outstanding at the beginning of the year Granted Transfers Forfeited Exercised Outstanding at the end of the year 9 401 279 2 983 119 5 472 (415 109) (2 605 086) 9 369 675 9 630 296 3 252 604 (495 899) (2 985 722) 9 401 279 Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) – – 299,11 – – 251,80 Nedbank Group (2005) Matched-share Scheme Outstanding at the beginning of the year Granted Forfeited Exercised Outstanding at the end of the year 2 245 223 711 361 (148 130) (629 455) 2 178 999 Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) – – 285,00 Nedbank UK 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) Nedbank UK Matched-share Scheme Outstanding at the beginning of the year Granted Exercised Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) 94 132 18 179 (2 957) (27 634) 81 720 – 16 779 3 294 (7 240) 12 833 – – – – – 2 213 243 811 034 (175 301) (603 753) 2 245 223 – 102 536 43 932 (52 336) 94 132 – 14 249 5 341 (2 811) 16 779 – – 241,50 – – – – Nedbank Limited Annual Report 2018 137 Notes to the consolidated financial statements continued for the year ended 31 December 2018 2017 Number of instruments Weighted- average exercise price R Number of instruments Weighted- average exercise price R 76 267 50 826 (4 602) (21 160) 101 331 – 13 059 7 024 (4 122) 15 961 – 107 264 35 764 (5 472) (20 406) (16 416) 100 734 – 2 840 1 142 3 982 – 287 101 (171 249) 115 852 70 807 83 248 (2 125) (47 490) (27 689) 5 944 5 944 72 917 22 624 (19 274) 76 267 – 15 915 4 757 (7 613) 13 059 – 56 270 49 496 5 770 (4 272) 107 264 – 731 2 109 2 840 – 518 456 (52 104) (179 251) 287 101 79 087 277 806 (20 686) (168 581) (5 291) 83 248 63 599 – – – – – – – – 171,83 285,25 161,90 279,80 – – – – – – – – 170,79 237,03 137,08 242,05 I3 Movements in number of instruments continued 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) Nedbank Wealth Management International Matched-share Scheme Outstanding at the beginning of the year Granted 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 Africa Restricted-share Scheme Outstanding at the beginning of the year Granted Granted prior year Transfers 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) Nedbank Africa Matched-share Scheme Outstanding at the beginning of the year Granted Granted Prior year Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (GBP) 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 Expired Outstanding at the end of the year Exercisable at the end of the year Weighted-average share price for share instruments exercised (R) 138 Nedbank Limited Annual Report 2018 I4 Instruments outstanding at the end of the year by exercise price Nedbank Group (2005) Share Option and Restricted-share 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 0,00 161,88 182,98 189,90 Black Management Scheme 0,00 128,44 139,69 161,88 Nedbank Africa Restricted-share Scheme 0,00 Nedbank Africa Matched-share Scheme 0,00 2018 2017 Weighted- average remaining contractual life (years) Number of instruments Weighted- average remaining contractual life (years) Number of instruments 9 369 675 9 369 675 2 178 999 2 178 999 81 720 81 720 12 833 12 833 101 331 101 331 15 961 15 961 14 622 39 574 24 690 36 966 115 852 5 944 5 944 100 734 100 734 3 982 3 982 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,3 1,3 1,4 1,4 0,2 0,2 0,6 1,2 0,6 0,2 0,2 1,0 1,0 1,6 1,6 9 401 279 9 401 279 2 245 223 2 245 223 94 132 94 132 16 779 16 779 76 267 76 267 13 059 13 059 70 508 104 906 41 509 70 178 287 101 1 737 34 749 18 893 27 869 83 248 107 264 107 264 2 840 2 840 1,3 1,3 1,3 1,3 1,4 1,4 1,1 1,1 1,2 1,2 1,0 1,0 0,7 1,2 1,6 2,2 1,4 1,2 0,1 1,2 0,2 1,8 1,8 1,4 1,4 Nedbank Limited Annual Report 2018 139 Notes to the consolidated financial statements continued for the year ended 31 December Nedbank Group (2005) Share Option and Restricted- share Scheme¹ Nedbank Group (2005) Matched- share Scheme² Nedbank UK Long- term Incentive Plan¹ Nedbank Wealth Management International Long-term Incentive Plan¹ Nedbank Wealth Management International Matched Scheme¹ Nedbank UK Matched Scheme¹ Nedbank Africa Restricted- share Scheme¹ Nedbank Africa Matched- share Scheme¹ I5 Instruments granted during the year 2018 Number of instruments granted Weighted-average fair value per instrument granted (R) Weighted-average share price (R) Weighted-average life (years) Number of participants Weighted-average vesting period (years) 2017 Number of instruments granted Weighted-average fair value per instrument granted (R)³ Weighted-average share price (R) Weighted-average life (years) Number of participants Weighted-average vesting period (years) 2 983 119 711 361 18 179 3 294 50 826 7 024 35 764 1 142 293,21 198,87 295,80 285,00 292,56 285,00 295,79 285,00 293,21 285,54 295,80 285,00 292,56 285,00 295,79 285,00 3 1 464 3 2 047 3 3 3 10 3 3 4 3 3 17 3 3 20 3 3 55 3 3 2 3 3 252 604 811 034 43 932 5 341 22 624 4 757 49 496 731 261,40 193,47 255,74 193,47 263,31 193,47 261,26 193,47 261,87 241,50 260,26 241,50 263,31 241,50 261,26 241,50 3 1 437 3 1 730 3 3 3 7 3 3 6 3 3 12 3 3 17 3 3 65 3 3 1 3 1 The weighted-average fair value of instruments granted during the year has been calculated using the closing price of Nedbank Group Limited quoted on JSE Limited. 2 The weighted-average fair value of instruments granted during the year has been calculated using the closing price of Nedbank Group Limited quoted on JSE Limited of R285,54 (2017: R241,50) less the present value of dividends anticipated over the vesting period. 3 Fair value per instrument has been recalculated in line with a change in the valuation methodology for shares linked to the financial index. SECTION J: OTHER LIABILITIES J1 Provisions and other liabilities Accounting policy 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. 140 Nedbank Limited Annual Report 2018 Accounting policy 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. Client loyalty When a cardholder makes a purchase that is regarded as eligible spend, the person or entity is 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. Client loyalty programmes are accounted for in accordance with IFRS 15 and a contract liability is recognised. The revenue normally earned by the group when clients transact on their Nedbank cards is reduced by the expected amount payable arising from the issue of points. If the expectation regarding the amount to be paid changes, this is recognised in revenue. When the group settles the liability, there will be no additional revenue recognised and the costs will be offset against the liability. J1.1 Analysis of carrying amount Creditors and other accounts Client loyalty programmes liability Short-trading securities and spot positions Provision for the impairment of off-balance-sheet items Provision for bonuses (note J1.2) Leave pay accrual (note J1.3) J1.2 Provision for bonuses Balance at the beginning of the year Recognised in profit or loss Utilised during the year Foreign currency translation and other movements Balance at the end of the year J1.3 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 J1.4 Day 1 gains and losses 2018 Rm 6 060 462 466 201 2 389 836 2017 Rm 8 483 182 2 436 2 128 818 10 414 14 047 2 128 2 425 (2 166) 2 2 389 818 554 (536) 836 2 146 2 149 (2 167) 2 128 754 321 (257) 818 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 1 profit or loss. The difference between the transaction price and the valuation amount, commonly referred to as ‘day 1 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 1 gains are attributable to loans and advances. Gains recognised in the statement of comprehensive income 2018 Rm 427 2017 Rm Nedbank Limited Annual Report 2018 141 Notes to the consolidated financial statements continued for the year ended 31 December J2 Contingent liabilities and undrawn facilities Guarantees on behalf of clients Letters of credit and discounting transactions Irrevocable unutilised facilities and other 2018 Rm 31 973 8 936 133 800 2017 Rm 26 710 3 006 101 336 174 709 131 052 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 J1). 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 Limited and its subsidiary companies, the outcome of which cannot currently be foreseen. None of these matters are material in nature. The two claims by Absa Bank Limited relating to Pinnacle Point Group reported in previous financial statements were settled during 2018. J3 Commitments New standards and interpretations not yet adopted IFRS 16: Leases IFRS 16 was issued in January 2016 and replaces IAS 17: Leases and its related interpretations for reporting periods beginning on or after 1 January 2019. The group as lessee IFRS 16 introduces a ‘right of use’ model whereby the lessee recognises a right-of-use asset and an associated financial obligation to make lease payments for all leases with a term of more than 12 months. The asset will be amortised over the lease term and the financial liability measured at amortised cost, with interest recognised in profit or loss using the effective-interest-rate method. The group as lessor IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify and account for its leases as operating leases or finance leases. Transitional approach and initial impact The group has elected to apply IFRS 16 retrospectively using the modified approach. The modified approach posits that comparative figures under the preceding accounting regime (IAS 17, IFRIC 4 and SIC 27) will not be restated. Corresponding transitional adjustments will be made through opening retained earnings (including reversals of existing balances under the old lease accounting standards). The implementation of IFRS 16 results in the recognition of lease liabilities of R3,9bn and accompanying right-of-use assets of R2,9bn, with reserves decreasing by R0,7bn on an after-tax basis. The lease liability was recognised by present-valuing future lease payments using an incremental borrowing rate. The lease-specific discount rate is based on an interpolated interest yield curve that factors in the tenor and characteristics of the lease. An IAS 17 credit straight-lining balance of R126m and an accompanying deferred tax entry of R35m will be reversed against retained earnings. In applying IFRS 16, assumptions and judgements will be reviewed frequently to ensure practise that is congruent, non- contradictory, neutral, reasonable and rational when considered in conjunction with other assumptions, judgements and the prevailing facts and circumstances surrounding the group’s lease activities. J3.1 Capital expenditure approved by directors Contracted Not yet contracted 2018 Rm 435 2 320 2 755 2017 Rm 415 2 320 2 735 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. J3.2 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: 142 Nedbank Limited Annual Report 2018 2018 Land and buildings¹ 2017 Land and buildings¹ Furniture and equipment 2019 Rm 943 943 919 20 939 2020–2024 Rm Beyond 2024 Rm 2 194 2 194 1 863 1 863 562 562 367 367 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 6% and 8% per annum. For all major lease agreements entered into there is no requirement to pay contingent rent or purchase options. J3.3 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 C7). SECTION K: RISK AND BALANCE SHEET MANAGEMENT K1 Financial risk management The group’s risk management procedures include, but are not limited to, credit risk, liquidity risk, interest rate risk in the banking book and market risk. Additional information relating to the group’s risk management policies and procedures are disclosed in the unaudited Risk and Capital Management Report, available at nedbank.co.za. K2 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 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 Financial 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 ALCO and Executive Risk Committee, 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 D2. 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. K3 Liquidity gap Banks are inherently susceptible to liquidity mismatches and consequently funding and market liquidity risks. Through the robust Liquidity Risk Management Framework the group manages the funding and market liquidity risk to ensure that banking operations continue uninterrupted under normal and stressed conditions. The key objectives that underpin the Liquidity Risk Management Framework include maintaining financial-market confidence at all times, protecting key stakeholder interests and meeting regulatory liquidity requirements. In terms of measuring, managing and mitigating liquidity mismatches Nedbank focuses on two types of liquidity risk: funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that the group is unable to meet its payment obligations as they fall due. These payment obligations could emanate from depositor withdrawals, or the inability to roll over maturing debt or meet contractual commitments to lend. Liquidity risk management is a vital risk management function in all entities across all jurisdictions and currencies, and is a key focus for the group. The board of directors retains ultimate responsibility for the effective management of liquidity risk. Through the Group Risk and Capital Management Committee (GRCMC) (a board committee), the board has delegated its responsibility for the management of liquidity risk to Group ALCO. Nedbank Limited Annual Report 2018 143 Notes to the consolidated financial statements continued for the year ended 31 December K3 Liquidity gap continued The group’s Liquidity Risk Management Framework articulates the board-approved risk appetite in the form of limits and guidelines, and sets out the responsibilities, processes, reporting and assurance required to support the management of liquidity risk. The Liquidity Risk Management Framework is reviewed annually by Group ALCO and approved by the GRCMC. Rm 2018 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-deter- mined Total 27 720 17 913 15 265 20 224 4 338 104 3 284 2 015 1 570 5 252 10 291 792 112 971 578 40 071 1 305 58 395 42 387 296 680 51 061 194 269 27 720 57 844 22 412 96 123 725 792 41 732 23 406 41 732 162 680 57 929 81 494 348 657 255 725 65 138 971 623 76 407 76 407 2 821 1 530 1 512 5 627 8 271 19 761 545 394 71 658 83 167 67 899 11 012 27 357 806 487 272 13 286 13 558 1 474 5 080 2 300 27 429 19 127 55 410 549 689 78 268 87 251 100 955 38 410 117 050 971 623 Net liquidity gap (387 009) (20 339) (5 757) 247 702 217 315 (51 912) – 2017 Cash and cash equivalents (including mandatory reserve deposits with central banks) Other short-term securities Derivative financial instruments Government and other securities Loans and advances1 Other assets Total equity Derivative financial instruments Amounts owed to depositors1 Provisions and other liabilities Long-term debt instruments 26 968 26 843 21 442 20 763 4 424 6 037 2 842 3 787 7 256 10 776 170 164 193 3 502 36 985 3 309 49 157 23 108 253 941 18 660 191 468 26 968 73 472 30 698 48 749 695 744 34 437 34 437 224 211 64 771 77 016 288 729 220 904 34 437 910 068 5 102 2 335 3 269 5 490 7 365 542 596 72 715 62 732 56 988 7 828 74 154 74 154 23 561 742 859 18 012 18 012 477 1 437 3 720 27 804 18 044 51 482 548 175 76 487 69 721 90 282 33 237 92 166 910 068 Net liquidity gap (323 964) (11 716) 7 295 198 447 187 667 (57 729) – 1 2017 restated, refer to note A3: Correction of prior-period errors and reclassifications. This note has been prepared on a contractual maturity basis. The group has high-quality liquid assets and other sources of quick liquidity. Other sources of quick liquid assets include corporate bonds and listed equities, unencumbered trading securities, price-sensitive overnight loans, other banks’ paper and unutilised bank credit lines. 144 Nedbank Limited Annual Report 2018 K4 Interest rate risk in the banking book Net interest income sensitivity One percent instantaneous decline in interest rates1 Management of interest rate risk in the banking book 2018 Rm 2017 Rm (1 287) (1 210) The group employs various analytical techniques to measure interest rate sensitivity monthly in the banking book on both an earnings and economic-value basis (where appropriate) for balance sheets with material exposure to interest rate risk. Assets, liabilities and derivative financial instruments are modelled and reported based on their contractual repricing or maturity characteristics. Where advances are exposed to prepayments and deposits to ambiguous repricing, Group ALCO approves the use of prepayment models for the hedging of fixed-rate advances and behavioural repricing assumptions for the modelling and reporting of ambiguous repricing deposits, where appropriate. Sensitivity analysis At the reporting date, the net interest income sensitivity of the banking book for a 1% parallel reduction in interest rates measured over 12 months is a decrease in net interest income of approximately R1 287m before tax (2017: R1 210m), which is within the board’s approved risk limit. The group’s net interest income sensitivity exhibits very little convexity and will therefore also result in an increase in pretax net interest income of similar amounts should interest rates increase by one percent. Net interest income sensitivity is actively managed through on- and off-balance-sheet interest rate risk management strategies for the group’s expected interest rate view and impairment sensitivity. 1 Nedbank London: 0,5% instantaneous decline in interest rates. K5 Historical value at risk (99%, one-day) by risk type Value at risk (VaR) is the potential loss in pretax profit due to adverse market movements over a defined holding period with a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognising offsetting positions and correlations between products and markets. It facilitates the consistent measurement of risk across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The 99% one-day VaR number used by the group reflects, at a 99% confidence level, that the daily loss will not exceed the reported VaR and therefore that the daily losses exceeding the VaR figure are likely to occur, on average, once in every 100 business days. The group uses one year of historical data to estimate VaR. Some of the considerations that are taken into account when reviewing the VaR numbers are: (cid:122) (cid:122) (cid:122) (cid:122) The assumed one-day holding period will not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day. The historical VaR assumes that the past is a good representation of the future, which may not always be the case. The 99% confidence level does not indicate the potential loss beyond this interval. If a product or listing is new in the market, limited historical data would be available. In such cases, a proxy is chosen to act as an estimate for the historical rates of the relevant risk factor. Depending on the amount of (limited) historical rates available, regression analysis is used on the chosen proxy to refine the link between the proxy and the actual rates. Additional risk measures are used to monitor the individual trading desks, including performance triggers, approved trading products, concentration of exposures, maximum tenor limits and market liquidity constraints. All market risk models are subject to periodic independent validation in terms of the Group Market Risk Management Framework. A formal review of all existing valuation models is conducted at least annually. Should the review process indicate that models need to be updated, a formal independent review will take place. All new risk models developed are independently validated prior to implementation. The group’s current trading activities are focused on liquid markets, which are in line with the current regulatory liquidity horizon assumption of a 10-day holding period, as per Basel III. 2018 2017 Rm Average Minimum Maximum Year-end Average Minimum Maximum Year-end Foreign exchange Interest rate Equity Credit Commodity Diversification Total VAR exposure 3,2 30,6 0,2 9,2 0,1 (12,8) 30,5 0,6 15,8 6,9 11,5 46,0 2,4 12,3 2,1 16,8 50,8 3,5 31,4 8,2 0,2 (12,6) 30,7 4,5 21,2 9,2 0,1 (12,5) 22,5 0,9 11,3 6,2 <0.1 11,5 38,1 16,1 0,7 13,1 39,2 3,8 31,1 12,1 0,7 (20,5) 27,2 Nedbank Limited Annual Report 2018 145 Notes to the consolidated financial statements continued for the year ended 31 December SECTION L: CASHFLOW INFORMATION L1 Reconciliation of profit from operations to cash generated by operations Profit from operations Adjusted for: – Depreciation (note B6) – Amortisation: computer software and intangible assets (note B6) – Movement in impairments on financial instruments – Net income on investment banking assets – Non-trading and capital items (note B8) – Indirect taxation (note B7.1) Cash generated by operations L2 Cash received from clients Interest and similar income (note B5.1.1) Commission and fees income (note B5.2)¹ Net trading income (note B5.2) Private-equity income/(losses) Other non-interest income¹ 1 During 2018 management reclassified certain internal insurance commission allocations earned by Nedbank Retail and Business Banking previously reported as part of commission and fee income to insurance income to ensure that the amount is appropriately eliminated against the cost recognised in Nedbank Wealth. Comparative figures have been restated accordingly (R184m). L3 Cash paid to clients, employees and suppliers Interest expense and similar charges (note B5.1.2) Staff costs (note B6) Computer processing Communication and travel Occupation and accommodation Marketing and public relations (note B6) Fees and assurances (note B6) Furniture, office equipment and consumables Other operating expenses L4 Dividends received Dividends on equity instruments at FVOCI Dividends received on other investments L5 Increase in operating assets Other short-term securities Government and other securities Loans and advances and other operating assets L6 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 146 Nedbank Limited Annual Report 2018 2018 Rm 2017 Rm 14 718 14 817 1 394 938 4 776 (5) 164 804 1 319 777 4 238 (36) 210 858 22 789 22 183 72 739 15 525 3 930 344 738 93 276 71 311 14 706 3 426 (17) 1 046 90 472 (46 774) (15 288) (2 259) (721) (1 737) (1 452) (3 202) (282) (343) (46 111) (14 562) (2 069) (734) (1 695) (1 606) (2 917) (292) (221) (72 058) (70 207) 342 342 710 710 15 628 (47 374) (32 754) (5 909) 1 808 (20 043) (64 500) (24 144) 5 376 49 720 11 824 (3 172) (9 353) 827 (7 986) (11 896) 5 488 18 572 54 395 5 005 L7 Disposal of investments in subsidiary companies net of cash Other short-term securities Derivative financial instruments Government and other securities Loans and advances Other assets Current taxation assets Investments in associate companies Deferred taxation assets Property and equipment Intergroup assets Amounts owed to depositors Deferred taxation liabilities Derivative financial instruments Current taxation liabilities Other liabilities Intergroup liabilities Net assets disposed (excluding cash and cash equivalents) Non-controlling interest Dividends paid to ordinary shareholders Cash and cash equivalents disposed L8 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 B7.1) Taxation paid 2018 Rm 2017 Rm 492 20 130 4 756 68 15 3 31 116 1 586 (7 288) (3) (3) (20) (148) (110) (355) (244) (907) (1 506) 387 (3 627) 69 116 (3 055) (858) (3 913) – – (116) (3 746) 846 167 (2 849) (804) (3 653) Nedbank Limited Annual Report 2018 147 Notes to the consolidated financial statements continued for the year ended 31 December SECTION M: ADDITIONAL INFORMATION M1 Foreign currency conversion Accounting policy 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. The consolidated financial statements are presented in SA rand, which is the group’s presentation currency. 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 retranslated subsequently. Exchange differences on non-monetary items are recognised consistently, with the gains and losses that arise on such items, ie exchange differences relating to an item for which gains and losses are recognised directly in equity, 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. Exchange rates UK pound to rand US dollar to rand Average Closing 2018 17,64 13,24 2017 17,15 13,31 2018 18,32 14,38 2017 16,60 12,29 Geographic analyses The geographic analyses within various notes are based on the geographic location of the clients or transactions and not the domicile of the group entity. M2 Events after the reporting period There are no material events after the reporting period to report on. 148 Nedbank Limited Annual Report 2018 M3 Directors’ emoluments The following disclosures are those required by the Companies Act, in respect of remuneration of directors and prescribed officers: M3.1 Total remuneration of executive directors and prescribed officers Mike Brown Mfundo Nkuhlu Raisibe Morathi R’000 Cash portion of package Other benefits Defined-contribution retirement fund Guaranteed remuneration Cash performance incentive Cash performance incentive (delivered in shares)1 2018 7 352 173 1 050 8 575 8 500 2017 7 014 160 1 001 8 175 7 875 7 500 5 875 2018 4 869 159 702 5 730 5 125 4 125 Total short-term incentive (STI)2 16 000 13 750 9 250 2017 4 635 149 668 5 452 4 500 3 500 8 000 13 452 2018 4 536 122 567 5 225 5 050 4 050 9 100 14 325 2017 4 184 110 576 4 870 4 625 3 625 8 250 13 120 Total remuneration2 Value of share-based awards (face value at award)3 24 575 21 925 14 980 16 500 14 500 10 250 9 500 9 500 8 750 Total direct remuneration 41 075 36 425 25 230 22 952 23 825 21 870 R’000 Cash portion of package Other benefits Defined-contribution retirement fund Guaranteed remuneration Cash performance incentive Cash performance incentive (delivered in shares) Total short-term incentive (STI)1 Total remuneration2 Value of share-based awards (face value at award)3 Total direct remuneration Iolanda Ruggiero Ciko Thomas Brian Kennedy 2018 3 343 96 480 3 919 3 300 2 300 5 600 9 519 7 000 16 519 2017 3 160 91 454 3 705 3 125 2 125 5 250 8 955 2018 4 117 120 669 4 906 4 950 3 950 8 900 13 806 2017 3 746 113 610 4 469 4 625 3 625 8 250 12 719 2018 4 222 243 336 4 801 9 950 2017 4 015 236 320 4 571 8 875 8 950 7 875 18 900 16 750 23 701 21 321 6 000 10 000 8 500 9 000 8 500 14 955 23 806 21 219 32 701 29 821 1 In terms of the rules of the Matched-share Scheme this amount may increase by up to 27,5% (before share price movement), subject to fulfilment of the corporate performance targets (CPTs) and the amount remaining invested in the scheme for 36 months. 2 Total remuneration is the sum of guaranteed remuneration and total STI. 3 This is the value of the share-based awards made in the following financial year. Nedbank Limited Annual Report 2018 149 Notes to the consolidated financial statements continued for the year ended 31 December M3 Directors’ emoluments continued M3.2 Non-executive directors’ remuneration Name DKT Adomakoh TA Boardman HR Brody BA Dames NP Dongwana ID Gladman JB Hemphill EM Kruger RAG Leith PM Makwana L Makalima MA Matooane NP Mnxasana MP Moyo V Naidoo JK Netshitenzhe S Subramoney MI Wyman Total Note 12 1, 1a 2 3 4, 4a 5, 5a 6, 6a 7, 7a 8, 8a, 8b 9 10, 10a, 10b, 10c, 10d, 10e 11 Nedbank and Nedbank Group board fees (R000) Committee fees (R000) 2018 (R000) 2017 (R000) 176 490 490 490 382 212 1 043 382 490 490 490 171 277 5 528 490 490 685 889 488 595 330 109 1 349 330 997 488 412 368 265 370 1 187 465 176 1 379 978 1 085 712 321 2 392 712 1 487 978 902 539 542 5 528 860 1 677 1 150 222 1 341 562 782 526 854 694 1 277 854 1 443 469 826 1 428 5 178 791 1 374 1 396 12 776 8 642 21 418 20 017 Ian Gladman resigned as a member of the Group Credit Committee and Group Risk and Capital Management Committee on 15 October 2018. 1 Hubert Brody was appointed as Chairman of the Group Remuneration Committee on 10 May 2018. 1a Hubert Brody was appointed as a member of the Group Directors’ Affairs Committee on 10 May 2018. 2 Brian Dames was appointed as a member of the Group Risk and Capital Management Committee on 10 May 2018. 3 Neo Dongwana was appointed as a member of the Group Credit Committee on 10 May 2018. 4 4a Ian Gladman resigned as a director of Nedbank Limited and Nedbank Group Limited on 15 October 2018. 5 Bruce Hemphill resigned as a member of the Group Remuneration Committee and Group Directors’ Affairs Committee on 11 June 2018. 5a Bruce Hemphill resigned as a director of Nedbank Limited and Nedbank Group Limited on 11 June 2018. 6 Errol Kruger was appointed as a member of the Group Audit Committee on 10 May 2018. 6a Errol Kruger’s board fees are inclusive of the Nedbank Private Wealth (Isle of Man) fees of £31 385. He was appointed 22 March 2018. 7 Rob Leith resigned as a member of the Group Credit Committee and Group Risk and Capital Management Committee on 15 October 2018, but was subsequently reappointed on 1 January 2019. 7a Rob Leith resigned as a director of Nedbank Limited and Nedbank Group Limited on 15 October 2018, but was subsequently reappointed on 1 January 2019. 8 Mpho Makwana was appointed as a member of the Group Risk and Capital Management Committee on 10 May 2018. 8a Mpho Makwana resigned as Chairman of the Group Remuneration Committee, but remained a member on 10 May 2018. 8b Mpho Makwana resigned as a member of the Group Audit Committee on 10 May 2018. 9 Linda Makalima was appointed as a member of the Group Risk and Capital Management Committee on 10 May 2018. 10 Nomavuso Mnxasana retired as a member of the Group Risk and Capital Management Committee on 10 May 2018. 10a Nomavuso Mnxasana retired as Chairman of the Group Transformation, Social and Ethics Committee on 10 May 2018. 10b Nomavuso Mnxasana retired as a member of the Group Remuneration Committee on 10 May 2018. 10c Nomavuso Mnxasana retired as a member of the Group Audit Committee on 10 May 2018. 10d Nomavuso Mnxasana retired as a member of the Group Directors’ Affairs Committee on 10 May 2018. 10e Nomavuso Mnxasana retired as a director of Nedbank Limited and Nedbank Group Limited on 10 May 2018. 11 Peter Moyo was appointed as a director of Nedbank Limited and Nedbank Group Limited and as a member of the Group Risk and Capital Management Committee, Group Remuneration Committee and Group Directors’ Affairs Committee on 11 June 2018. 12 Tom Boardman’s fees represent Nedbank Private Wealth (Isle of Man) fees of £9 999. He resigned on 20 March 2018. Where applicable, board fees include travel reimbursements for business mileage. 150 Nedbank Limited Annual Report 2018 Number of shares Tom Boardman1 Hubert Brody Mike Brown Brian Dames Mantsika Matooane Nomavuso Mnxasana2 Raisibe Morathi Peter Moyo Vassi Naidoo Mfundo Nkuhlu Malcolm Wyman Stanley Subramoney Total ordinary shares Total preference shares 1 Resigned/Retired during 2017. 2 Retired 10 May 2018. Beneficial direct 2018 2 556 311 408 64 2 261 Beneficial direct 2017 4 012 Beneficial indirect 2018 Beneficial indirect 2017 10 988 281 766 259 775 262 255 2 261 172 384 136 794 61 085 62 028 7 420 100 462 75 556 49 254 144 484 321 2 300 7 420 134 315 47 135 160 863 2 300 549 758 486 861 639 572 625 276 No change in the above interests occurred between 31 December 2018 and 4 March 2019. Nedbank Limited Annual Report 2018 151 Notes to the consolidated financial statements continued for the year ended 31 December M3 Directors’ emoluments continued M3.3 Share-based payments to executive directors and prescribed officers Opening balance at 1 January 2018 Awards made during 2018 Number of restricted shares/ options Date of issue/ inception Issue price (R) Number of restricted shares/ options Vesting date Date of issue/ inception Issue price (R) Final vesting/ exercise date Executive directors MWT Brown Nedbank restricted shares 50 826 70 851 58 197 12 March 2015 255,77 13 March 2018 17 March 2016 190,54 18 March 2019 15 March 2017 249,15 16 March 2020 Compulsory Bonus Share Scheme1 16 435 31 March 2015 251,29 1 April 2018 48 376 14 March2018 299,73 15 March 2021 22 563 31 March 2016 189,58 31 March 2017 258,33 14 371 1 April 2019 1 April 2020 1 173 31 March 2015 251,29 1 556 31 March 2016 189,58 220,17 1 249 31 March 2017 1 April 2018 1 April 2019 1 April 2020 12 033 31 March 2018 291,36 1 April 2021 943 31 March 2018 291,36 1 April 2021 Voluntary Bonus Share Scheme4 Total value of dividends Total 237 221 61 352 MC Nkuhlu Nedbank restricted shares Compulsory Bonus Share Scheme1 Voluntary Bonus Share Scheme4 Total value of dividends 45 939 12 March 2015 255,77 13 March 2018 45 922 17 March 2016 190,54 18 March 2019 37 126 15 March 2017 249,15 16 March 2020 8 511 31 March 2015 251,29 11 670 31 March 2016 189,58 7 717 31 March 2017 258,33 1 April 2018 1 April 2019 1 April 2020 1 173 31 March 2015 251,29 1 556 31 March 2016 189,58 1 249 31 March 2017 232,59 1 April 2018 1 April 2019 1 April 2020 31 695 14 March 2018 299,73 15 March 2021 6 606 31 March 2018 291,36 1 October 2021 943 31 March 2018 291,36 1 October 2021 Total 160 863 39 244 152 Nedbank Limited Annual Report 2018 Awards vesting/lapsing during 2018 Closing balance at 31 December 2018 Number of restricted shares/ options released Number of restricted shares/ options lapsed Market price at vesting Value gained on vesting Notional value of loss on lapsing5 Dividends Total value of dividends paid in respect of all plans6 Number of restricted shares/ options (R) (R) (R) (R) End of performance period Final vesting/ exercise date 32 306 18 520 313,00 10 111 778 (5 796 760) 32 8703 283,78 9 327 849 2 3463 283,78 665 748 70 851 58 197 48 376 31 December 2018 31 December 2019 31 December 2020 18 March 2019 16 March 2020 15 March 2021 22 563 14 371 12 033 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 1 556 1 249 943 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 67 522 18 520 20 105 375 (5 796 760) 3 101 570 230 139 3 101 570 29 199 16 740 313,00 9 139 287 (5 239 620) 17 0223 283,78 4 830 503 2 3463 283,78 665 748 45 922 37 126 31 695 31 December 2018 31 December 2019 31 December 2020 18 March 2019 16 March 2020 15 March 2020 11 670 7 717 6 606 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 1 556 1 249 943 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 48 567 16 740 14 635 538 (5 239 620) 2 125 176 144 484 2 125 176 Nedbank Limited Annual Report 2018 153 Notes to the consolidated financial statements continued for the year ended 31 December Opening balance at 1 January 2018 Awards made during 2018 Number of restricted shares/ options Date of issue/ inception Issue price (R) Number of restricted shares/ options Vesting date Date of issue/ inception Issue price (R) Final vesting/ exercise date 27 368 39 361 32 109 12 March 2015 255,77 13 March 2018 17 March 2016 190,54 18 March 2019 15 March 2017 249,15 16 March 2020 7924 31 March 2015 251,29 10 896 31 March 2016 189,58 7 716 31 March 2017 258,33 1 April 2018 1 April 2019 1 April 2020 1173 31 March 2015 251,29 1 556 31 March 2016 189,58 1 249 31 March 2017 232,59 1 April 2018 1 April 2019 1 April 2020 29 192 14 March 2018 299,73 15 March 2021 6 840 31 March 2018 291,36 1 October 2019 943 31 March 2018 291,36 RK Morathi Nedbank restricted shares Compulsory Bonus Share Scheme1 Total value of dividends Total 129 352 36 975 Prescribed officers B Kennedy Nedbank restricted shares Compulsory Bonus Share Scheme1 Voluntary Bonus Share Scheme4 Total value of dividends 22 285 12 March 2015 255,77 13 March 2018 13 March 2015 255,77 14 March 2018 14 857 15 744 18 March 2016 190,54 19 March 2019 17 March 2016 190,54 18 March 2019 23 617 16 March 2017 249,15 17 March 2020 13 646 15 March 2017 249,15 16 March 2020 20 469 17 609 31 March 2015 251,29 23 730 31 March 2016 189,58 17 712 31 March 2017 258,33 1 April 2018 1 April 2019 1 April 2020 1 173 31 March 2015 251,29 1 556 31 March 2016 189,58 1 249 31 March 2017 232,59 1 April 2018 1 April 2019 1 April 2020 11 343 15 March 20182 299,73 16 March 2021 17 015 14 March 2018 299,73 15 March 2021 14 865 31 March 2018 291,36 1 April 2021 943 31 March 2018 291,36 1 April 2021 Total 173 647 44 166 154 Nedbank Limited Annual Report 2018 Awards vesting/lapsing during 2018 Closing balance at 31 December 2018 Number of restricted shares/ options released Number of restricted shares/ options lapsed Market price at vesting Value gained on vesting Notional value of loss on lapsing5 Dividends Total value of dividends paid in respect of all plans6 Number of restricted shares/ options (R) (R) (R) (R) End of performance period Final vesting/ exercise date 17 396 9 972 313,00 5 444 948 (3 121 236) 15 8483 283,78 4 497 345 2 3463 283,78 665 748 39 361 32 109 29 192 31 December 2018 31 December 2019 31 December 2020 18 March 2019 16 March 2020 15 March 2021 10 896 7 716 6 840 31 December 2018 1 April 2019 31 December 2019 1 October 2020 1 April 2021 31 December 2020 1 556 1 249 943 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 35 590 9 972 10 608 041 (3 121 236) 1 845 171 129 862 1 845 171 15 781 14 857 6 504 313,00 306,00 4 939 453 4 546 242 (2 035 752) 35 2183 283,78 9 994 164 2 3463 284 665 748 15 744 23 617 13 646 20 469 11 343 17 015 31 December 2018 31 December 2018 31 December 2019 31 December 2019 31 December 2020 31 December 2020 19 March 2019 18 March 2019 17 March 2020 16 March 2020 16 March 2021 15 March 2021 23 730 17 712 14 865 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 1 556 1 249 943 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 68 202 6 504 20 145 607 (2 035 752) 2 166 545 161 889 2 166 545 Nedbank Limited Annual Report 2018 155 Notes to the consolidated financial statements continued for the year ended 31 December Opening balance at 1 January 2018 Awards made during 2018 Number of restricted shares/ options Date of issue/ inception Issue price (R) Number of restricted shares/ options Vesting date Date of issue/ inception Issue price (R) Final vesting/ exercise date 10 204 12 March 2015 255,77 13 March 2018 6 803 13 March 2015 255,77 14 March 2018 9 447 12 August 2016 211,87 12 August 2019 9 971 18 March 2016 190,54 19 March 2019 14 169 11 August 2016 211,87 12 August 2019 17 March 2016 190,54 18 March 2019 14 957 16 March 2017 249,15 17 March 2020 12 040 15 March 2017 249,15 16 March 2020 18 061 11 343 15 March 20182 299,73 16 March 2021 17 015 14 March 2018 299,73 15 March 2021 2 307 31 March 2017 258,33 1 April 2020 4 562 31 March 2018 291,36 1 April 2021 97 959 32 920 12 March 2015 255,77 13 March 2018 4 457 2 971 13 March 2015 255,77 14 March 2018 7 959 12 August 2015 263,84 13 August 2018 5 306 13 August 2015 263,84 14 August 2018 19 March 2019 17 March 2016 190,54 18 March 2019 16 March 2017 249,15 17 March 2020 15 March 2017 249,15 16 March 2020 12 595 18 March 2016 190,54 18 893 10 435 15 653 3 110 31 March 2015 251,29 7 780 31 March 2016 189,58 5 429 31 March 2017 258,33 1 April 2018 1 April 2019 1 April 2020 1 173 31 March 2015 251,29 1 556 31 March 2016 189,58 249 31 March 2017 232,59 1 April 2018 1 April 2019 1 April 2020 8 007 15 March 20182 299,73 16 March 2021 12 011 14 March 2018 299,73 15 March 2021 4 011 31 March 2018 291,36 1 April 2021 943 31 March 2018 Prescribed officers C Thomas Nedbank restricted shares Compulsory Bonus Share Scheme1 Voluntary Bonus Share Scheme4 Total value of dividends Total I Ruggiero Nedbank restricted shares Compulsory Bonus Share Scheme1 Voluntary Bonus Share Scheme4 Total value of dividends Total 97 566 24 972 1 Matching on the Compulsory Bonus Share Scheme occurs only on shares in the scheme at the vesting date. If CPTs are met, 100% matching occurs, otherwise a 50% matching occurs. 2 Restricted-share awards with time-based vesting only. 3 Match occurred at one share for each share in the Compulsory Bonus Share Scheme and Voluntary Bonus Share Scheme at the vesting date. 4 For the Voluntary Bonus Share Scheme employees invest their own Nedbank shares in the scheme. After three years, if the CPTs are met, a 100% matching occurs, otherwise a 50% matching occurs. 5 Value determined based on the number of shares lapsing, multiplied by the market share price on the scheduled vesting date. 6 Plans exclude the Voluntary Bonus Share Scheme, which consists of own shares. 156 Nedbank Limited Annual Report 2018 Awards vesting/lapsing during 2018 Closing balance at 31 December 2018 Number of restricted shares/ options released Number of restricted shares/ options lapsed Market price at vesting Value gained on vesting Notional value of loss on lapsing5 Dividends Total value of dividends paid in respect of all plans6 Number of restricted shares/ options (R) (R) (R) (R) End of performance period Final vesting/ exercise date 7 226 6 803 2 978 313,00 306,00 2 261 738 2 081 718 (932 114) 9 447 9 971 14 169 14 957 12 040 18 061 11 343 17 015 13 August 2019 31 December 2018 31 December 2018 19 March 2019 31 December 2018 12 August 2019 18 March 2019 31 December 2018 17 March 2020 31 December 2019 16 March 2020 31 December 2019 16 March 2021 31 December 2020 15 March 2021 31 December 2020 2 307 4 562 31 December 2019 31 December 2020 1 April 2020 1 April 2021 14 029 2 978 4 343 456 (932 114) 1 748 834 113 872 1 748 834 3 157 2 971 5 636 5 306 1 300 2323 313,00 306,00 256,85 258,95 988 141 909 126 1 447 607 1 373 989 (406 900) (596 663) 6 2203 283,78 1 765 112 2 3463 283,78 665 748 12 595 18 893 10 435 15 653 8 007 12 011 31 December 2018 31 December 2019 31 December 2019 31 December 2019 31 December 2020 31 December 2020 19 March 2019 18 March 2019 17 March 2020 16 March 2020 16 March 2021 15 March 2021 7 780 5 429 4 011 31 December 2018 31 December 2019 31 December 2020 1 April 2019 1 April 2020 1 April 2021 1 556 1 249 31 December 2018 31 December 2019 1 April 2019 1 April 2020 943 31 December 2020 1 April 2021 25 636 3 623 7 149 723 (1 003 563) 1 505 901 98 562 1 505 901 Nedbank Limited Annual Report 2018 157 Notes to the consolidated financial statements continued for the year ended 31 December M4 Preference shareholder 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 Own holdings Retirement funds Total Public/Non-public shareholders Non-public shareholders Nedbank Group Limited and associates Public shareholders Total Beneficial shareholders holding 5% or more Nedbank Group Limited Prescient Total Major managers Prescient Investment Management (SA) Nedbank Group Limited (SA) Nedgroup Private Wealth Proprietary Limited (SA) Investec Securities Proprietary Limited Sanlam Investment Management Abax Investments (SA) Bridge Fund Managers Proprietary Limited (SA) OUTsurance Insurance Company Limited (SA) STANLIB Asset Management (SA) Regent Insurance Company Limited (SA) Various Retail Holders (SA) BJM Private Client Services Ltd (SA) Sasfin Asset Managers Proprietary Limited (SA) Graaff Baronetcy Fund (SA) Climor Trust (SA) 158 Nedbank Limited Annual Report 2018 31 December 2018 1 000 000 000 shares 358 277 491 shares Number of shareholdings % Number of shares 319 2 752 3 042 417 35 6 565 10 68 71 4 392 20 6 7 85 1 573 55 239 5 1 33 6 565 13 13 6 552 6 565 4,86 41,92 46,34 6,35 0,53 116 447 15 482 484 96 485 732 96 808 982 149 383 846 % 0,03 4,32 26,93 27,02 41,70 100,00 358 277 491 100,00 0,15 1,04 1,08 66,90 0,30 0,09 0,11 1,29 23,96 0,84 3,64 0,08 0,02 0,50 1 271 783 3 810 523 9 155 837 95 833 738 30 620 661 12 448 022 630 734 63 695 143 67 239 848 2 028 943 24 722 333 2 323 800 37 300 000 7 196 126 0,35 1,06 2,55 26,75 8,55 3,47 0,18 17,78 18,77 0,57 6,90 0,65 10,41 2,01 100,00 358 277 491 100,00 0,20 48 976 057 0,20 48 976 057 99,80 309 301 434 13,67 13,67 86,33 100,00 358 277 491 100,00 Number of shares 48 976 057 32 557 133 81 533 190 % 13,67 9,09 22,76 Number of shares Dec 2018 % holding Dec 2017 % holding 42 880 469 37 300 000 34 049 817 26 811 517 21 180 506 8 785 787 7 802 788 7 586 720 6 438 491 4 848 485 4 544 202 4 284 291 3 995 681 3 281 296 2 926 690 11,97 10,41 9,50 7,48 5,91 2,45 2,18 2,12 1,80 1,35 1,27 1,20 1,12 0,92 0,82 11,64 10,41 9,98 5,16 6,21 2,69 2,12 1,38 1,35 1,12 1,08 0,92 Compliance with IFRS – financial statement notes Note number Note description IFRS required A1 A2 A3 A4 A5 B1 B2 B3 B4 B5.1 B5.2 B6 B7.1 B7.2 B7.3 B8 C1 C2 C3 C4 C5 C6 C7 D1 D2 D3 E1 E2 E3 E4 E5 E6 F1 F2 G1 G2 G3 H1 H2 H3 H4 H5 H6 I J1 J2 J3 K1 K2 K3 K4 K5 L M1 M2 M4 Principal accounting policies Change in accounting policies: Financial instruments Correction of prior-period errors and reclassifications Key assumptions concerning the future and key sources of estimation New standards and interpretations not yet adopted Segmental reporting Dividends Share capital Additional tier 1 capital instruments Net interest income Non-interest revenue Total operating expenses Indirect taxation Direct taxation Deferred taxation Non-trading and capital items Loans and advances Impairments charge on financial instruments Government and other securities Other short-term securities Credit analysis of other short-term securities, and government and other securities Cash and cash equivalents Derivative financial instruments Amounts owed to depositors Long-term debt instruments Contractual maturity analysis for financial liabilities Investment securities Investments in associate companies Investments in subsidiary companies and related disclosure Interests in structured consolidated entities Securitisations Related parties Property and equipment Intangible assets Long-term employee benefits Non-current assets held for sale Other assets Consolidated statement of financial position – categories of financial instruments Fair-value measurement – financial instruments Assets and liabilities not measured at fair value for which fair value is disclosed Financial instruments designated as fair value through profit or loss Offsetting financial assets and financial liabilities Collateral Share-based payments Provisions and other liabilities Contingent liabilities and undrawn facilities Commitments Financial risk management Capital management Liquidity gap Interest rate risk in the banking book Historical value at risk (99%, one-day) by risk type Cashflow information Foreign currency conversion Events after the reporting period Preference shareholder analysis IAS 1 IAS 1, IAS 8, IFRS 9 IAS 1 and IAS 8 IAS 1 IAS 8 IFRS 8 IAS 1, IAS 10, and IAS 32 IAS 1 and IAS 32 IAS 32, IFRS 7, IFRS 9 and IFRS 13 IAS 32, IFRS 7, IFRS 9, IFRS 13 and IFRS 15 IAS 20, IAS 32, IFRS 4, IFRS 7, IFRS 8, IFRS 9, IFRS 13 and IFRS 15 IAS 1, IAS 19, IFRS 2 and IFRS 8 IAS 1 IAS 12 IAS 12 IAS 1, IAS 16 and IAS 36 IAS 17, IFRS 7, IFRS 8, IFRS 9 and IFRS 13 IFRS 7, IFRS 8 and IFRS 9 IAS 1, IAS 32, IFRS 7, IFRS 8, IFRS 9 and IFRS 13 IAS 1, IFRS 7, IFRS 8, IFRS 9 and IFRS 13 IFRS 7 IAS 1, IAS 7 and IFRS 7 IAS 32, IAS 39, IFRS 7, IFRS 9 and IFRS 13 IAS 1, IFRS 7, IFRS 8, IFRS 9 and IFRS 13 IAS 32, IFRS 7, IFRS 9 and IFRS 13 IFRS 7 IAS 32, IFRS 7, IFRS 9 and IFRS 13 IAS 28, IFRS 11, IFRS 12 and IFRS 13 IAS 27, IFRS 10 and IFRS 12 IFRS 12 IFRS 7, IFRS 9, IFRS 12 and IFRS 13 IAS 24 IAS 16, IAS 36 and IFRS 13 IAS 38 and IAS 36 IAS 19 and IFRIC 14 IFRS 5 and IFRS 13 IAS 1, IFRS 7, IFRS 9 and IFRS 13 IFRS 7 and IFRS 9 IFRS 7, IFRS 9 and IFRS 13 IFRS 7, IFRS 9 and IFRS 13 IAS 32, IFRS 7, IFRS 9 and IFRS 13 IFRS 7 and IAS 32 IFRS 7 IFRS 2 IAS 37, IAS 32, IFRS 7, IFRS 9 and IFRS 13 IAS 37 and IAS 10 IAS 37, IAS 10, IAS 17 and IFRS 7 IAS 1 IAS 1 IFRS 7 IFRS 7 IFRS 7 IAS 7 IAS 21 IAS 10 IAS 1 Nedbank Limited Annual Report 2018 159 Fintech partnership of the year Nedbank is proud to have won The Banker magazine’s 2018 fintech partnership award for our ‘Satellite and drone imagery analytics experimentation’. Together with Aerobotics (Pty) Ltd, a disruptive technology company that builds advanced analytics on top of aerial drone and satellite imagery, we deliver precision farming tools for our agricultural clients. 160 Nedbank Limited Annual Report 2018 11116011601600060 NedNededdNedNedddbanbanbanbananananananananananannbannnnnnbanbannnb k Lk Lk Lk Lk Lk Lk Lk Lk kk kk k k k k k Lk Lk Lkkk l Rl Rl Rl RRRRRRRRRRl RRRRRRRl RRRl RRRRl Rl RRl RRl Reeeeepoepepoepoepoepoepoepoepoee oeepoepoepoepoepopoepopepoepoeeepoepoepoepopopopoepoeppopopoooooepopooopoopppp rtrtrtrtrrrrrrrrrrrrtrtrrt trtrtrrt 2022201202000002020102022 88888 iim teteteedededededdddededeeeeeeeeeeeeeeeee AAnAnAnAnAAnnuanuanuanunuanunnnun iimimimimimimimi