PILLAR 3 RISK AND CAPITAL MANAGEMENT REPORT FOR THE YEAR ENDED 31 DECEMBER 2020 Executive Summary In a period of unprecedented health, economic and social challenges that have impacted our staff and our clients, Nedbank Group remained profitable and resilient, underpinned by a robust balance sheet with a solid capital, liquidity and funding position aided by an enabling but prudent risk appetite, and excellence in risk management. HIGHLIGHTS OF 2020 CREDIT LOSS TOTAL CAPITAL LONG-TERM RATIO ADEQUACY RATIO FUNDING RATIO1 161 bps 14,9% 25,4% (2019: 79 bps) (2019: 15,0%) (2019: 30,2%) 1 Three-month average. POSTWRITEOFF TOTAL TIER 1 NET STABLE RECOVERIES RATIO FUNDING RATIO R1 165m 12,1% 112,8% (2019: R1 247m) (2019: 12,8%) (2019: 113,0%) STAGE 3 ADVANCES AS COMMON-EQUITY LIQUIDITY A % OF GROSS ADVANCES TIER 1 RATIO COVERAGE RATIO 5,89% 10,9% 125,7% (2019: 3,46%) (2019: 11,5%) (2019: 125,0%) STAGE 3 AVAILABLE FINANCIAL TRADING BOOK COVERAGE RATIO RESOURCES: (10-DAY VAR) 31,50% ECONOMIC CAPITAL R292,3m (2019: 37,90%) 146% (2019: R140,5m) (2019: 129%) STAGE 2 IRRBB ECONOMIC IRRBB NII % ORDINARY COVERAGE RATIO VALUE OF EQUITY SHAREHOLDERS’ 6,61% -R165m EQUITY (2019: 5,30%) (2019: -R387m) 1,47% (2019: 1,54%) This report complies with regulation 43 of the regulations relating to banks issued in terms of the Banks Act (Act No 94 of 1990) and the Basel Committee on Banking Supervision’s (BCBS’s) revised Pillar 3 disclosure requirements. The Nedbank Group Chief Financial Officer (CFO) Mike Davis, on behalf of the board, is satisfied that information provided in this report has been prepared in accordance with board-approved internal control processes and in accordance with the Nedbank Group Public Disclosure Policy, which can be accessed at nedbank.co.za. LETTER FROM THE CHAIR OF THE GROUP RISK AND CAPITAL MANAGEMENT COMMITTEE (GRCMC) ‘Despite the radically heightened external risk environment, the outcomes and Errol Kruger state of risk and capital management continued to be excellent throughout (Chair) 2020, confirming Nedbank's agility and effectiveness, and the strong risk culture. Nedbank has been resilient throughout Covid-19 and has pivoted its strategic focus, business operations and risk strategy successfully, in light of the significant risks in this unprecedented environment. Nedbank has focused primarily on the health and safety of its employees, and on support to, and the service of, its clients. It has managed people, operational, market, credit, capital and liquidity risks proactively, and ultimately ensured business continuity. Significant risks that continue to be monitored very closely include credit and capital risks, together with the continuing external uncertainty.’ Organisational resilience in 2020 • Oversaw Nedbank’s Enterprisewide Risk Management Framework (ERMF), ensuring its agility during Market Crisis 2020 and the Covid-19 pandemic. • Monitored Nedbank’s risk universe heatmap, risk trends and groupwide key issues. • Reviewed revised capital and liquidity plans and targets in response to the volatile environment. • Focused on anti-money-laundering and combatting the financing of terrorism (AML/CFT), which was retained as a thematic. • Ensured an end-to-end review of risk appetite, considering the impact of Covid-19. • Oversaw cyberresilience, enabling Nedbank to respond effectively to cyberattacks. The effective management of cyberrisk ensured there were no breaches of Nedbank’s own defences. Key focus areas for 2021 • Ensure ongoing organisational resilience of Nedbank in the wake of the once in 100 years event (Covid-19 health and economic crisis). • Monitor progress of Nedbank’s strategic portfolio tilt (SPT 2.0) to ensure it translates into market share growth within risk parameters. • Monitor thematics, which will at a minimum include capital risk, cyberrisk, conduct risk, internal control environment (ICE), strategic execution risk, AML/CFT and market risk. NEDBANK GROUP LIMITED AND NEDBANK LIMITED – PILLAR 3 DECEMBER 2020 LETTER FROM THE CHAIR OF THE GROUP CREDIT COMMITTEE (GCC) ‘The Covid-19 pandemic is an unprecedented health, economic and social Errol Kruger challenge that has hurt the struggling South African economy and ability of (Chair) borrowers to meet debt obligations. The committee oversaw the successful implementation of a comprehensive Covid-19 credit programme by providing independent oversight of changes in the credit risk policies, procedures and credit models, and active credit risk management to ensure the credit portfolio remains resilient, optimally managed and adequately impaired.’ Ensuring resilience in 2020 • Tracked and monitored the implementation of SARB Directive 3/2020 pertaining to credit restructures and their classification and performance in light of Covid-19. • Approved the Covid-19 Credit Policy to govern the treatment of restructured credit exposures in response to Covid-19, which enabled payment relief or holidays on loans of R121bn. • Approved the implementation of the Covid-19 SME Credit Fund Policy to ensure consistent treatment of Covid-19 loans. • Monitored the changes in macroeconomic projections and post-model adjustments to ensure that the overall portfolio was adequately impaired. • Approved the review, adjustments and overrides of credit models to avoid undue short-term volatility and excessive procyclicality of impairments and capital requirements. • Applied effective credit-risk mitigation strategies, including early identification of distressed portfolios and proactive management of all watch-list clients. Focus for 2021 and beyond • Oversee the delivery of ongoing market-leading client experiences and innovative digital solutions backed by integrated credit processes. • Continue with early-identification strategies with regard to distressed portfolios, concentration risks and proactive management of key watch-list clients. • Manage credit risk and maintain resilient capital and credit loss ratios while remaining on high alert for subsequent waves of Covid-19. • Oversee the implementation of optimisation initiatives for credit risk-weighted assets. • Review the credit risk appetite, including CLR target ranges post-Covid-19 in 2021. NEDBANK GROUP LIMITED AND NEDBANK LIMITED – PILLAR 3 DECEMBER 2020 LETTER FROM GROUP CHIEF RISK OFFICER ‘Risk Management has demonstrated great agility and effectiveness –the Trevor Adams extra focus on credit risk remains, albeit with a much improved outlook.’ (Group Chief Risk Officer) There is nothing like a 1-in-100-year crisis event to stress test the agility and effectiveness of Nedbank’s risk management, and it has come out in excellent shape. Business (including geopolitical and sovereign) risks reside as number 1 on Nedbank’s Top 12 risks, and are very much driven by external factors such as Covid-19 or the ‘Great Lockdown Crisis’ (GLC), local macro-economic and political risks, and the unprecedented level of change underpinned by the Fourth Industrial Revolution. This has heightened inherent risk across the entire risk universe, as shown in the coloured bars in the middle in the table below. However, residual risk, or the net risk outcomes internally at Nedbank were very favourable, as summarised on the right of the table, and we ended 2020 with a much-improved outlook from what was the case at H1 2020. Resilience in 2020 The special focus remains on credit risk. In Q2 2020 we developed a comprehensive Covid-19 credit programme. This has been well executed and the outcome has been a great success. This also addressed the additional complexity of accounting for credit risk in light of the unprecedented economic crisis and uncertainty. • With the benefit of hindsight, I believe we struck the right balance at H1 between being forward-looking under IFRS9 and the regulatory guidance to avoid excessive procyclicality. • Our economic forecasts at H1 2020 have largely played out as we had expected. • We ended 2020 with impairments and coverage ratios at the top end of conservatism and prudence, appropriate in the climate and against our updated macroeconomic forecasts. That conservatism and prudence have been assured independently across the three lines of defence, including our joint external auditors. The credit loss ratio (CLR) ended the year at 161 bps, better than was forecasted at H1 and only marginally higher than the peak of the Global Financial Crisis (GFC), despite the GLC being a dramatically worse economic event, and with an improving outlook of the H2 CLR reducing to 134 bps from 187 bps in H1 2020. NEDBANK GROUP LIMITED AND NEDBANK LIMITED – PILLAR 3 DECEMBER 2020 Focus for 2021 The management of emerging major risks such as cyber, conduct, corruption, change (execution) and climate risk, which are referred to as the additional major ‘C-Suite’ risks, has progressively matured. Nedbank’s new board subcommittee dedicated to climate risk held its first meeting in 2021 and will oversee the further embedding of our climate risk management framework and strategic opportunities. While the nature of cyberrisk continues to evolve due to new challenges like working-from-home (WFH), data privacy regulation and the emergence of cryptocurrencies, Nedbank is well placed to face these with our robust Cyberresilience Programme. Nedbank’s risk management strategy and plan is designed across five major components, as summarized below: 2 C-suite risk (new major but less mature risks) 1 Traditional risks • Change (execution) risk • Credit risk • Cyber risk • Market risk • Conduct risk • Liquidity risk • Climate risk • Operational