Nedbank Group · JSE:NED
Nedbank — Investor Presentation (September 2007)
40 slides from Nedbank's investor presentation, Sep 25, 2007
Slide 1: Basel II, economic capital & performance measurement update – 25 September 2007
Basel II, economic capital & performance measurement update – 25 September 2007 “It It would be a mistake to conclude that the only way to succeed in banking is through ever-greater size & diversity. Indeed, better Risk Management may be the only truly necessary element of success in banking” Alan G
Slide 2: Contents
Contents BASEL II z Overview & status – Pillar 1 – Pillar 2 – Pillar 3 (disclosure) ( ) z Credit quality evaluation ECONOMIC CAPITAL z Overview & status z Compared to Basel II and IFRS (impairments) CAPITAL IMPACT OF BASEL II & ECONOMIC CAPITAL RISK, CAPITAL AND SHAREHOLDER VALUE MANAGEMENT z End of
Slide 3: Paradigm shift in risk & capital management driven by Basel II
Paradigm shift in risk & capital management driven by Basel II OLD THINKING NEW THINKING & EXECUTION Philosophical Attitude to risk Risk is bad Risk is a bank’s core business Evaluation of business Minimise risk Price for risk; client value management opportunities Definition of risk appetite Qualit
Slide 4: Risk & capital management – evolved to become core strategic business partners
Risk & capital management – evolved to become core strategic business partners 4
Slide 5: Nedbank's Basel II implementation blueprint
Nedbank’s Basel II implementation blueprint 2003 - 2005 2004 - 2006 2005 - 2007 RISK & CAPITAL RISK & CAPITAL VALUE BASED MANAGEMENT MEASUREMENT MANAGEMENT z Credit Models & Scorecards z Credit Process Redesign zCredit Process Implementation (AIRB approach) (AIRB approach for Basel II) (Æ AIRB appro
Slide 6: Three pillars of Basel II
Three pillars of Basel II Represent a fundamental shift in banking regulation Basel II Capital Accord Pillar 1 Pillar 2 Pillar 3 Min Capital Requirements Supervisory Review Process Market Discipline (rules based) (subjective) (disclosure) z Sophisticated risk z Significant increase in required z Ban
Slide 7: Nedbank's risk & capital approaches for Basel II
Nedbank’s risk & capital approaches for Basel II z Advanced Internal Ratings Based (AIRB) approach for Credit Risk ~ Pillar 1 (‘in-principle’ approval received from SARB on 29 June 2007) z Market-based Simple Risk Weight Approach for Investment Risk (equity exposures) ~ Pillar 1 z Standardised Appro
Slide 8: Nedbank's AIRB credit system
Nedbank’s AIRB credit system Quantum leap across Nedbank to world class practice in credit risk measurement & management Loan Approval F Framework k & Policy P li Monitoring Performance P f Reporting & Disclosure Nedbank’s Advanced Internal Measurement Ratings Based (AIRB) Credit System (RAPM) Risk-
Slide 9: Pillar 2 obligations under requirement for risk & capital assessment (ICAAP)
Pillar 2 obligations under requirement for risk & capital assessment (ICAAP) REQUIRED BY NEDBANK REQUIRED BY SARB ICAAP 1 ICAAP 7 REQUIREMENTS OF THE BANKS REQUIREMENTS OF THE REGULATOR Every bank should Forward looking Forward-looking have an ICAAP Principle 1 Principle 2 • Regulators to review and
Slide 10: Nedbank's ICAAP framework (Pillar 2)
Nedbank’s ICAAP framework (Pillar 2) QUANTITATIVE RISK AND CAPITAL MEASUREMENT AND ASSESSMENT INTEGRATION OF RISK AND CAPITAL MANAGEMENT INTO GOVERNANCE, QUALITATIVE ASPECTS AND STRATEGY BUSINESS PLANS STRATEGY, SUPPORTING INFRASTRUCTURE Pillar 1 risks Pillar 2 risks External factors AND REWARD Stre
Slide 11: Public disclosure from 2008 (Pillar 3)
Public disclosure from 2008 (Pillar 3) Regulation 43 of the new Basel II Regulations relating to Banks: - “…bank shall disclose in its annual financial statements and other disclosure (e.g. quarterlyy / semi-annually) q y) to the public, p , reliable,, relevant and timelyy qualitative q and quantita
Slide 12: New credit risk BA returns - Basel II AIRB approach
New credit risk BA returns - Basel II AIRB approach z Summary of selected credit risk related information z Total advances z Impaired advances z Assets bought-in z Total credit impairments – Specific credit impairments IFRS (accounting (accounting-based) based) – Portfolio credit impairments z Credi
Slide 13: New credit risk BA returns - Basel II AIRB approach (continued)
New credit risk BA returns - Basel II AIRB approach (continued) z Credit risk exposure & capital requirement – analysed by Basel II asset class z Corporate exposure – Corporate C t – Specialised lending - high volatility commercial real estate (prop development) – Specialised lending - income produc
Slide 14: New credit risk BA returns - Basel II AIRB approach (continued)
New credit risk BA returns - Basel II AIRB approach (continued) z Analysis of credit exposure, that is EAD analysed by PD band (NGR) per master rating scale; EAD weighted average LGD (%); expected loss (EL) – Performing book in total & by PD band (NGR), & by asset class – Non-performing book / book
Slide 15: Other AIRB credit disclosure
Other AIRB credit disclosure z Risk profile by NGR (PD) & NTR (EL) grades across credit portfolios / segments z Migration across grades z Portfolio migration (trends) z Regulatory & economic capital by credit portfolio, asset class, business, etc z Back testing of default rates (PDs), LGDs & EADs z
Slide 16: Nedbank's master rating scales are the new common language of credit risk
Nedbank’s master rating scales are the new common language of credit risk Credit risk profile – as at 30 June 2007 Exposure per PD – NGR rating scale Exposure per EL – NTR rating scale (excludes CRM / collateral) (includes CRM / collateral) % Exposure % Exposure 30% 25% Primarily Retail & Primarily
Slide 17: New basis for credit quality assessment arising from Basel II
New basis for credit quality assessment arising from Basel II z Definition of Default – for IRB banks – New fundamental basis for asset quality evaluation across banking industry (large banks) – Obligor overdue for more than 90 days & / or when bank is of opinion that obligor is unlikely to pay obli
Slide 18: Levels of capital
Levels of capital REGULATORY CAPITAL ECONOMIC CAPITAL AVAILABLE CAPITAL (BOOK EQUITY) zAmount of capital required to zAmount of capital required to zNet asset value, takes protect bank against protect group against economic account of the two regulatory insolvency insolvency, tailored to Nedbank mea
Slide 19: Economic capital vs. Basel II
Economic capital vs. Basel II Basel II Capital Accord Pillar 1 Pillar 2 Pillar 3 Mi i Minimum Capital C it l ICAAP and d Supervisory S i M k t Market Requirements Review Process Discipline (rules based) (subjective) (disclosure) zSophisticated p risk measurement for zSignificant increase in required
Slide 20: Economic capital vs. Basel II (continued)
Economic capital vs. Basel II (continued) BASEL II ECONOMIC CAPITAL PILLAR 1 PILLAR 2 (ECAP) Credit di Risk i k (stand ( d alone) l ) di Concentration Credit i Risk i k ? Credit di Economic i Capital i l AIRB credit approach 1 Nedbank’s Credit Portfolio Model =1&2 (using KMV software) 2 Market Tradi
Slide 21: Economic capital vs. Basel II (continued)
Economic capital vs. Basel II (continued) BASEL II ECONOMIC CAPITAL PILLAR 1 PILLAR 2 (ECAP) Equity Risks N/A Equity Risk ECap (investment and property risks) (using simple volatility measures in 2007; will align to Basel II for 2008) Simple risk weight approach (300 / 400% vs 100% Basel 1) 6* = 6*
Slide 22: Economic capital vs. Basel II (continued)
Economic capital vs. Basel II (continued) FACTOR BASEL II ECONOMIC CAPITAL Measurement period 1 year (forward looking) 1 year (forward looking) (time horizon) Confidence interval 99,9% (1 in 1 000 years) or A- 99,9% (1 in 1 000 years) or A- (solvency standard) (Nedbank’s current choice) Diversificat
Slide 23: Economic capital vs Basel II – available capital resources
Economic capital vs Basel II – available capital resources CAPITAL SOURCES BASEL I BASEL II ECONOMIC CAPITAL Tier 1 Tier 1 AFR Core - Share capital and reserves 3 3 3 - Minority interest 3 3 (to apply to SARB) 3 Non-core (limit 20% of tier 1) (limit 25% of tier 1) (no limit) - Preference share capit
Slide 24: Economic capital vs Basel II – available capital resources
Economic capital vs Basel II – available capital resources CAPITAL SOURCE BASEL I BASEL II ECONOMIC CAPITAL Ti 2 Tier Ti 2 Tier AFR Excess of tier 1 non-core capital 3 3 No limit, all included in core capital (i.e. AFR) (limited to tier 2 total being (limited to tier 2 total being 100% of tier 1) 10
Slide 25: Basel II (expected loss) vs. IFRS (incurred loss)
Basel II (expected loss) vs. IFRS (incurred loss) EXPECTED LOSS EXCEEDS INCURRED LOSS INCURRED LOSS EXCEEDS EXPECTED LOSS (IMPAIRMENTS) (IMPAIRMENTS) Basel II IAS 39 Basel II IAS 39 ed al nt Total capita Unexpecte requiremen loss ected loss Total capital requirement Unexpe 50% of Tier 1 deduction El
Slide 26: Basel II (expected loss) vs. IFRS (incurred loss) (continued)
Basel II (expected loss) vs. IFRS (incurred loss) (continued) BASEL II IAS 39 PDs Intention of z Conservative estimate of probability of z Best estimate of likelihood & timing of estimate default within next 12 months credit losses over life of loan Period of z Long run historical average over whole
Slide 27: Nedbank's economic capital model & position at 30 June 2007
Nedbank’s economic capital model & position at 30 June 2007 2% 15% Rm 15% Credit risk 15 070 Market risk 3 782 8% Trading risk 416 8% 16% ALM risk 554 67% 4% Property risk 906 2% Investment risk 1 873 2% Forex risk 33 Operational risk 464 Business risk 3 522 Minimum ECap 22 838 = Minimum Economic Ca
Slide 28: Basel II regulatory capital requirements
Basel II regulatory capital requirements REGULATORY MINIMUM CAPITAL REQUIREMENTS REGULATORY MINIMUM CAPITAL STRUCTURE Pillar 1 8,00% + Pillar 2a 1,50% (RSA systemic risk) Minimum Ordinary shares & defined 75% of reserve funds 9 50% 9,50% primary + Pillar 2b 0,25% (may vary - idiosyncratic risk) capi
Slide 29: Impact of Basel II & economic capital as at June 2007
Impact of Basel II & economic capital as at 30 June 2007 CAPITAL REQUIREMENT (in Rbn) OMIC CAPITAL BASEL II BASEL I ECONO CAPITAL RESOURCES (in Rbn) BASEL II C CAPITAL BASEL I ECONOMIC CAPITAL RATIOS Basel I Basel II Economic Capital Tier 1 8.3% 7.9% R4.9bn surplus 29 Total 12.4% 11.6% (i.e. after 1
Slide 30: Strategic capital management
Strategic capital management z Nedbank will be capitalised at greater of Basel II & Economic Capital: Confirmed using macro- macro Target range for Basel II Total ratio ratio:: 11% - 12% (min 9.75%) economic factor model to stress- Target range for Basel II Tier 1 ratio ratio:: 8% - 9% (min 7%) test
Slide 31: Journey to worldclass risk & capital management
Journey to worldclass risk & capital management BASEL II CAPITAL MANAGEMENT ECONOMIC CAPITAL RISK APPETITE RAPM INCENTIVES 2003 2003//2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 BUILD RISK AND (incl EDUCATE, Build capabilities Educate,USE, use, SHADOW FINEFine shadow reporting, refine and TUNE
Slide 32: Capital management framework – rolled out in 2005
Capital management framework – rolled out in 2005 CAPITAL MANAGEMENT FRAMEWORK STAKEHOLDERS STAKEHOLDERS RISK RISK Depositors vs. vs. Shareholders Debt-holders SENIOR RETURN Analysts CAPITAL Rating agencies ADEQUACY MANAGEMENT General public (Solvency) (Profitability) Regulators Clients RISK ADJUSTE
Slide 33: Line of sight – Shareholder value creation
Shareholder value creation A vital aspect of our focus on value based management is the clear line of sight between creating value for shareholders, portfolio risk management at the centre & day to day decisions in our businesses Shareholder value based management Delivering shareholder value based
Slide 34: Economic (& Basel II) capital a sophisticated quantitative enterprise-wide measurement of risk
Economic (& Basel II) capital a sophisticated quantitative enterprise-wide measurement of risk By major risk type R MM By business Unit Total Risk = Total Capital Requirement Investment Risk Is the inherent volatility or potential Property Risk fluctuation in a Nedbank Group's net Operational Risk a
Slide 35: New 2008 risk based capital allocation methodology
New 2008 risk based capital allocation methodology TO END 2007 2008 ONWARDS Capital allocated using 10% of Basel I RWAs Economic Capital allocated, aligned to Group’s ord d shareholders’ h h ld ’ equity it (i.e. (i core Tier Ti 1 capital) it l) z Non-core tier 1 (prefs) not allocated z Excess cost o
Slide 36: Risk appetite
Risk appetite Risk appetite is an articulation of risk capacity or quantum of risk Nedbank Group is willing to accept in pursuit of its strategy, duly set & monitored by the board, & integrated into strategy & business plans NEDBANK’S GROUP-LEVEL RISK APPETITE METRICS Group Definition Measurement me
Slide 37: Performance measurement from 2008
Performance measurement from 2008 Communicated since 2005 that RAPM will be applied (i.e. for remuneration ~ STI) from 2008 onwards, following the end of Nedbank’s 3 year recovery & Basel II going live in RSA z Primary P i ffocus off performance f measurementt att Group G & Business B i Unit U it le
Slide 38: Performance measurement from 2008 (continued)
Performance measurement from 2008 (continued) z Strongest correlation of Total Shareholder Return (TSR) is with Δ EP growth I di t ffor TSR: Indicator TSR C Compare ROE vs. TSR R2= 3% ∆ROE vs. TSR R2= 29% EP vs vs. TSR R2= 33% (TSR = value created for shareholders through ∆EP vs. TSR R2= 73% share p
Slide 39: Performance measurement from 2008 (continued)
Performance measurement from 2008 (continued) z Business clusters target RoE %s used in setting hurdle rates (i.e. differentiated by cluster) z Reforecasts / revisions to targets: - – Quarterly reforecasting process already in place – Capital p Management g Committee underpins p Group p Opcom p and
Slide 40: Thank you
Thank you
Nedbank Group — Investor Presentation (September 2007) on 6ix