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Pillar 3 Nedbank

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    NEDBANK GROUPRISK & BALANCE SHEET

    MANAGEMENT REPORT

    H A L F Y E A R 3 0 J U N E 2 0 1 0

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    NEDBANK GROUP S RISK UNIVERSE ............................................................................................................................. 30

    CREDIT RISK .............................................................................................................................................................. 31

    COUNTERPARTY CREDIT RISK ...................................................................................................................................... 75

    CREDIT CONCENTRATION RISK ..................................................................................................................................... 77

    SECURITISATION RISK ................................................................................................................................................. 79

    MARKET RISK ............................................................................................................................................................. 82

    EQUITY RISK (INVESTMENT RISK ) IN THE BANKING BOOK ................................................................................................ 90

    ASSET AND LIABILITY MANAGEMENT ............................................................................................................................. 90

    OPERATIONAL RISK .... ............................................................................................................................................... 102 BUSINESS RISK ... ...................................................................................................................................................... 104

    ACCOUNTING AND TAXATION RISKS ... ......................................................................................................................... 105

    TECHNOLOGY RISK ... ................................................................................................................................................ 105

    REPUTATIONAL , STRATEGIC , SOCIAL AND ENVIRONMENT , TRANSFORMATION AND COMPLIANCE RISKS ... ........................ 105

    HUMAN RESOURCES (OR PEOPLE ) RISK .... .................................................................................................................. 107

    MAJOR CONCENTRATION RISKS AND OFF -BALANCE-SHEET RISKS .... ............................................................................. 108

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    ,, ** &&// %%##11 !88 ** A A!>> ** // 22 .. -- .. $$ .. 33 ##** )) !BB!** CCDDEECCFFGGHH!

    ,EIJKEL!ELLMFEKJMC!KM!NOPJCGPPGP!! Increase in quantum of economic capital allocated to businesses for risk adjusted performance measurement

    and segmental analysis, due to methodology enhancements and alignment with the higher group regulatorycore Tier 1 capital level.

    ,QGHJK!LMPP!QEKJM!! Change in calculation from simple average to daily averages and exclusion of trading assets.

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    Nedbank Group is in a privileged position as its balance sheet in 2010 is significantly stronger than at the beginningof the global financial crisis two to three years ago, and as such the group is well-placed to navigate successfullyany further economic storms.

    Nedbank Group continues to remain solidly profitable in a challenging environment, which contributes to its ongoingbalance sheet strength.

    #CKGQCEL!,EIJKEL!%HGTOEFU!%PPGPPVGCK!"QMFGPP!W#,%%"X!! Annual group ICAAP completed and signed off by the board in July 2010. The group believes that its capital levels, liquidity and funding positions and provisioning for credit impairments

    are appropriate and conservative relative to its business activities, strategy, risk appetite, actual risk profile andthe current external environment in which it operates.

    *YKGQCEL!,QGHJK!&EKJCSP!! In July 2010, Moodys Investor Service reaffirmed Nedbank Limiteds financial strength rating at C- and its

    global local currency rating at A2. The outlook for all ratings was also maintained at stable. In July 2010, Fitch Ratings reaffirmed Nedbank Groups long-term foreign and local currency Issuer Default

    Rating (IDR) at BBB, and national long-term rating at AA-(zaf), respectively. The short-term foreign currencyIDR was maintained at F2. The outlook for all three ratings was also maintained at stable.

    In August 2010, Fitch Ratings placed Nedbank Group and Nedbank Limiteds long-term issuer default ratings(IDRs), short-term IDRs, support and national long-term ratings on Rating Watch Positive.

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    *FMCMVJF!FEIJKEL! Available Financial Resources: Economic Capital ratio 148% (December 2009: 154%). In 2010 the group implemented several refinements to the calculation and allocation of economic capital.

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    Established as a separate cluster in 2009, the Balance Sheet Management (BSM) cluster helps to optimise the financialperformance, strategy and sustainability of Nedbank Group through proactive management of all material components

    of the balance sheet.The creation of a specialist BSM cluster recognises the importance of managing risk on a portfolio basis and integratingthe management of risk with liquidity and funding, capital management, managing for value and risk-based financialperformance optimisation to help attain the ideal balance sheet shape via inter alia portfolio tilt, and to ensure thegroups long-term sustainability and optimisation of shareholder value-add, within an acceptable risk appetite and with astrong qualitative overlay of experience and common sense.

    Since the business of banking is fundamentally about managing and optimising risk, BSM, in addition to supporting thevision of making Nedbank Group a great place to invest, also champions the group's Deep Green aspiration to be worldclass at managing risk and its three core objectives for successful enterprisewide risk management, namely themanagement of:

    Risk as a THREAT(ie to minimise and protect against downside risk, protect against material unforeseen losses and maximise longrun sustainability).

    Risk as UNCERTAINTY(ie to eliminate excessive earnings volatility and minimise material negative surprises).

    Risk as OPPORTUNITY(ie to maximise financial and share price performance upside via application of superior business intelligence,management science and shareholder value-based economics, while optimising business opportunities, riskand capital to ultimately differentiate against competitors. The effort involved in creating superior businessintelligence, enabled by world class data, greatly complements and assists in providing superior client service).

    The BSM cluster is the central consolidation point for the portfolio management of risk, capital and liquidity across thegroup.

    (Shareholder value-add)

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    Below is a list of the key risk areas and targets which are managed by Balance Sheet Management.

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    &&** 33 ++ $$ %%// .. && A A!,, %%"" ##// %%$$ Group capital adequacy ratios (Basel II) - Core Tier 1 7,5%-9,0%

    Group capital adequacy ratios (Basel II) - Tier 1 8,5%-10,0%

    Group capital adequacy ratios (Basel II) - Total 11,5%-13,0%

    Total RWA: Total assets (%) 55%-57%

    Credit RWA: Loans and advances (%) 52%-58%

    ** ,, .. 11 .. >> ##,, !,, %%"" ##// %%$$ Target debt solvency standard 99,93% (or A) !

    $*5*&%3*! !Leverage ratio 20 times

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    Short-term (0-31 days) funding: % of total funding 58% (tolerable deviation +5%)

    Medium-term (32-180 days) funding: % of total funding 18% (tolerable deviation +5%)

    Long-term (180 days) funding: % of total funding 24% (tolerable deviation -7%)

    Contractual maturity mismatch (0 to 31 days): % of total funding 38% (tolerable deviation +5%)

    Business-as-usual maturity mismatch (0 to 31 days): % of total funding 5% (tolerable deviation +2%)

    Liquidity buffer (surplus liquid assets in excess of regulatory requirement) Approximately R6bn

    Liquidity stress event (minimum survival period): Days 14 days (target 30 days)

    Net interbank reliance: % of total funding 1,5% (tolerable deviation +1%)

    Maximum call Aggregate of the top 10 depositors 12% of total funding

    Maximum balance due to any single asset manager (o/n to 1 week)* R5bn

    Maximum balance due to any single depositor other than asset managers (o/n to 1week)*

    R3bn

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    NII interest sensitivity: Equity (%) 2,5%

    NII interest sensitivity: 12-months NII (%) 7,5%

    NII interest sensitivity: Interest-earning assets (bps) 25bps

    (ECd!

    Economic value of equity: Equity (%) 5% !

    Note: No change in IRRBB risk appetite planned for next 3 years.

    * Excess supported by marketable securities.

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    CCr r ee ddiitt r r iiss kk ggoovvee r r nnaa nnccee ss ttr r uuccttuur r ee ss aa nndd ss ttr r aa ttee ggyy

    Credit risk arises from lending and other financing activities that constitute the groups core business. It is by far themost significant risk type and accounts for over 60% of the groups economic capital requirement and 75% of regulatorycapital.

    One of Nedbank Groups major investments in risk in recent years has been to elevate its credit risk management tobest practice. This, together with our strong client service focus, not only positioned Nedbank Group to achieveappropriate growth and returns, but also to obtain approval from SARB for the Advanced Internal Ratings-basedApproach for credit risk, the most advanced approach offered by Basel II and the new South African bankingregulations.

    Nedbank Groups credit risk governance structures are reflected in the following diagram:

    Credit risk is managed across the group in terms of its board-approved Group Credit Risk Management Framework,which encompasses selective credit policy, mandate limits and governance structures. It is a key component of thegroups ERMF, Capital Management and Risk Appetite Frameworks discussed earlier.

    The Group Credit Risk Management Framework, which covers the macrostructures for credit risk management,monitoring and approval mandates, includes the Executive Credit Committee (ECC), its two AIRB technical forums anda Group Credit Ad Hoc Ratings Committee.

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    The ECC is the designated committee appointed by the Group Credit Committee (GCC) to monitor, challenge andultimately approve all material aspects of the banks AIRB credit rating and risk estimation processes. The SARBrequires that the ECC is chaired by a non-executive director however the ECC also serves as the executive creditoversight forum for the bank. Current membership includes two non-executive directors and three executive directors.

    The ECC reports into the GCC which has overall responsibility for the banks AIRB credit rating system. In this regardthe board and its GCC are required by the banking regulations to have a general understanding of the AIRB creditsystem and the related reports generated. They also need to ensure the independence of the banks credit riskmonitoring unit, Group Credit Risk Monitoring including the Credit Models Validation Unit (CMVU) and the effectivefunctioning of the ECC.

    The technical understanding required of senior management is greater than that required at board level. Managementmust have a detailed understanding of the AIRB credit system and the reports it generates.

    Management needs to ensure the effective operation of the AIRB credit system assisted by the independent credit riskcontrol units.

    Divisional credit committees (DCCs), with chairpersons independent of the business units, operate for all major

    business units across the group. The DCCs are responsible for approving and recommending credit and credit policy,as well as reviewing divisional-level credit portfolios, parameters, impairments, expected loss and credit capital levels.

    An independent Group Credit Risk Monitoring (GCRM) Unit is part of Group Risk. It champions the ongoingenhancement of credit risk management across the group, the Group Credit Risk Management Framework and AIRBcredit system, monitors credit portfolios and reports to executive management, DCCs, ECC and ultimately the boardsGCC on a regular basis. GCRM together with BSM has overall responsibility for the ongoing championing of the Basel IIAIRB methodology across the group. GCRM also ensures consistency in the rating processes, and has ultimateresponsibility for independent model validation.

    During 2009 the AIRB Framework for credit risk was enhanced by strengthening the governance process to ensureeffective challenge of credit model related issues. This included revising the minimum validation requirements. The

    staffing compliment of CMVU was substantially increased to ensure the efficient functioning of the unit based on thenew validation requirements. Progress in terms of the new validation requirements is actively monitored and reportedthrough the governance process to the ECC.

    In each of the five business clusters credit risk management functions operate independently of credit origination,reporting into the cluster head of risk, who in turn reports to the cluster managing director. In line with the Basel II AIRBmethodology each cluster has implemented economic capital quantification and economic profit performancemeasurement. Each cluster also has a cluster credit risk lab that is responsible for the ongoing expert design,implementation, validation and performance of their business clusters internal rating systems, with independentvalidation by CMVU.

    Nedbank Wealth has historically been a part of Nedbank Retail, but from August 2009 Nedbank Wealth commencedoperating as a separate business cluster. Nedbank Wealth currently has its own risk management framework, and thebusiness cluster has been reported separately in this document.

    Nedbank Groups credit policy regarding lending to related parties is properly documented and approved by the GCC, acommittee of the board. The policy is also subject to an annual review by the GCC. Definitions used for related partiesare aligned with the definitions specified by SAICA (IAS 24) and compliance with the policy requires appropriateprocesses and procedures for the approval monitoring and reporting by business units. In addition, the policy requiresthat all related party loans are concluded at arms length and hence subject to normal credit criteria applicable to allother lending. The re-pricing on all related party transactions requires sign-off by Group Taxation Department for adviceon tax consequences arising from funding or pricing issues.

    The policy also stipulates that no person benefiting from a particular loan or exposure can be responsible for thepreparation, assessment or approval of the application whilst credit signatories are encouraged to escalate, to a higher mandate for approval, any instances where they feel it is impossible to consider or agree the credit application on acommercial arms length basis.

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    NNee ddbbaa nnkk GGr r oouuppss ccr r ee ddiitt r r iiss kk mmee aa ss uur r ee mmee nntt aa nndd mmee tthhooddoollooggyy

    Nedbank Groups Basel II AIRB credit methodology is fully implemented across all its major credit portfolios.

    Under this methodology credit risk is essentially measured by two key components, namely:

    Expected loss (EL), which is a 12-month estimate based on the long-run annual average level of credit lossesthrough a full credit cycle based on time series data history.

    Unexpected loss (UL), which is the annualised volatility of expected losses for credit risk.

    Analytically, EL and UL are defined respectively as the average and one standard deviation from that average of thedistribution of potential losses inherent in the banks credit portfolio.

    These statistically estimated losses are determined by the key Basel II AIRB credit risk parameters, namely probabilityof default (PD), exposure at default (EAD), loss given default (LGD) and maturity (M). These, together with the Basel IIcapital formulae, culminate in the Pillar 1 minimum regulatory capital requirements for credit risk.

    The IFRS requirements for credit risk also form an integral part of Nedbank Groups credit risk measurement and

    management. Nedbank Group assesses the adequacy of impairments, in line with International Financial ReportingStandards (IFRS) on a continuing basis. Specific impairments are created in respect of defaulted advances where thereis objective evidence that all amounts due will not be collected. Portfolio impairments are created in respect of performing advances based on historical evidence and trends of losses in each component of the performing portfolio.

    The generic methodological differences between EL estimation and IFRS impairment are summarised in the tablebelow:

    8GU!"EQEVGKGQP! (EPGL!##! #%)'9!PDsIntention of estimate Conservative estimate of PD within next

    12 months Best estimate of likelihood and timing of credit

    losses over life of loanPeriod of measurement Long-run historical average over whole

    economic cycle TTC Should reflect current economic conditions

    PITLGDsIntention of estimate Conservative estimate of discounted

    value of post-default recoveries Conservative estimate of discounted value of

    post-default recoveriesTreatment of collectioncosts

    Recoveries net of direct and indirectcollection costs

    Recoveries net of direct cash collection costsonly

    Discount rate Recoveries discounted using entitys costof capital

    Cash flows discounted using instrumentsoriginal effective interest rate

    Period of measurement Reflects period of high credit losses Should reflect current economic conditions PIT Downturn LGDs required

    EL

    Basis of exposure Based on EAD, which includes unutilisedfacilities

    Based on actual exposure(on and off balance sheet)

    The IASB released an exposure draft on impairments in November 2009. The comment period on the draft closed on30 June 2010. The new requirements will be finalised in late 2010 with expected implementation for 2013 or later. TheIASB is proposing to move away from the incurred-loss methodology towards an expected-loss methodology of calculating impairments. The objective of the expected-loss methodology is to create funds gradually over the life of theasset, which can be used against future losses. The proposed changes would have a significant operational impact dueto additional data requirements and system changes needed.

    As shown in the table above, IFRS impairments are determined using PIT metrics, which are used to estimate thedefault expectations under the current economic cycle, whereas TTC metrics reflect a one-year forward estimate based

    on a long-term average through an economic cycle and are used for the groups regulatory and economic capitalcalculations.

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    Basel II also requires banks to base their LGD estimates for regulatory capital requirements on a downturn scenario(ie downturn LGD), rather than an average TTC loss estimate. Downturn LGD thus represents what could be expectedin downturn economic conditions in the trough of a business cycle.

    EL is a forward-looking measure, on a TTC basis (ie the long-run average) of the statistically estimated credit losses on

    the performing portfolios for the forthcoming 12 months. For Nedbank Groups active portfolio, portfolio impairmentsestimated using the PIT methodology are based on emergence periods that are 12 months or less. Specificimpairments are estimated for the defaulted portfolio and added to portfolio impairments, which then constitute the totalimpairments for the credit portfolio. The total EL and the total impairments are compared and should the total EL for theAIRB credit portfolio be higher than the total impairments, the difference is subtracted from qualifying capital. Should thetotal impairments be higher than the EL, the difference is added to qualifying capital up to a maximum of 0,6% of creditrisk-weighted assets.

    In the case of the defaulted portfolio a best estimate of expected loss (BEEL) is calculated, which is in line with thespecific impairment for that exposure. The BEEL/specific impairment takes the current economic and businessconditions into regard as well as the counterpartys current circumstances. It is typically a PIT estimate. The downturnLGD estimation for the defaulted exposure is updated and compared with the BEEL. Normally no capital is held for defaulted exposures due to the specific impairment that should provide for any possible losses. Where the downturnLGD exceeds BEEL it is considered a UL and the difference is then the required capital for the defaulted portfolio.

    NNee ddbbaa nnkk GGr r oouuppss mmaa ss ttee r r ccr r ee ddiitt r r aa ttiinngg ss ccaa llee

    Nedbank Group uses two master rating scales for measuring credit risk. The first measures borrower risk without theeffect of collateral and any credit risk mitigation (ie PD only), while the second measures transaction risk (ie EL), whichincorporates the effect of collateral, any other credit risk mitigation and recovery rates.

    All credit applications are required to carry the borrower PD rating [from the Nedbank Group Rating (NGR) master ratingscale], estimate of LGD and overall transaction rating [from the Nedbank Group Transaction Rating (NTR) master ratingscale].

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    "-!NECH!W]X >EIIJCS!KM!)KECHEQH!ECH!"MMQeP!SQEHGP!$MfGQ!NMOCH!W"-lX!

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    Performing NGR 01 0,010 0,000 0,012 AAANGR 02 0,014 0,012 0,017 AA+NGR 03 0,020 0,017 0,024 AANGR 04 0,028 0,024 0,034 AA-NGR 05 0,040 0,034 0,048 A+NGR 06 0,057 0,048 0,067 A+ to ANGR 07 0,080 0,067 0,095 A to A-NGR 08 0,113 0,095 0,135 A- to BBB+NGR 09 0,160 0,135 0,190 BBB+NGR 10 0,226 0,190 0,269 BBB+ to BBBNGR 11 0,320 0,269 0,381 BBB to BBB-NGR 12 0,453 0,381 0,538 BBB-NGR 13 0,640 0,538 0,761 BBB- to BB+NGR 14 0,905 0,761 1,076 BB+ to BBNGR 15 1,280 1,076 1,522 BBNGR 16 1,810 1,522 2,153 BB to BB-NGR 17 2,560 2,153 3,044 BB- to B+NGR 18 3,620 3,044 4,305 B+NGR 19 5,120 4,305 6,089 B+ to BNGR 20 7,241 6,089 8,611 B to B-NGR 21 10,240 8,611 12,177 B to B-NGR 22 14,482 12,177 17,222 B- to CCCNGR 23 20,480 17,222 24,355 CCCNGR 24 28,963 24,355 34,443 CCC to CNGR 25 40,960 34,443 100 CCC to C

    Non-performing NP 1 100 100 100 D(defaulted) NP 2 100 100 100 DNP 3 100 100 100 D

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    The comprehensive PD rating scale, which is mapped to default probabilities and external rating agency rating scales,enables the bank to rate all borrowers on a single scale, whether they are a low-risk corporate or high-risk individualborrower. The principal benefit thereof is that comparisons can be made between the riskiness of borrowers making upvarious portfolios. A brief explanation of the scale follows.

    NGR01 to NGR20 reflect a profile of credit risk starting with very-low-risk borrowers with a PD as low as 0,01%, to riskyborrowers with a default probability as high as approximately 8%.

    NGR21 to NGR25 represent very-high-risk borrowers with default probabilities of 10% or more. While many bankswould generally not knowingly expose themselves to this degree of risk, these rating grades exist for four reasons:

    Being an emerging market, there are times when local banks would be willing to take on this level of risk, whilepricing appropriately.

    There may be times when the consequences of not lending may be more severe than lending for example, amarginal going concern with existing loans but a strong business plan.

    They cater for borrowers that were healthy but have migrated down the rating scale to the point of being near

    default.From time to time the bank may grant facilities to very risky borrowers on the basis of significant collateraloffered. This particular rating scale measures only the likelihood of the borrower defaulting and does notrecognise that a very high level of default risk may well have been successfully mitigated with collateral.

    The final ratings on the scale represent those borrowers that have defaulted. NP1 applies to recent defaults, NP2represents those accounts in respect of which the bank is proceeding to legal recovery of moneys owing and NP3 is for long-term legal cases, exceeding a period of 12 months.

    Basel II specifically requires that AIRB banks maintain two ratings, one measuring the probability of the borrower defaulting and the second considering facility characteristics. The NTR table below reflects EL as a percentage of EADand contains 10 rating bands the first three bands representing facilities of low risk, the next three bands being for

    facilities of average risk and the final four bands indicating facilities of high or very high risk.1*-(%18!3&.+"e)!*$!/&%1)%,/#.1!&%/#13!),%$*!W1/&X!

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    NTR01 0,00 0,05

    NTR02 0,05 0,10

    NTR03 0,10 0,20

    NTR04 0,20 0,40

    NTR05 0,40 0,80

    NTR06 0,80 1,60

    NTR07 1,60 3,20

    NTR08 3,20 6,40

    NTR09 6,40 12,80

    NTR10 12,80 100,00

    The NTR scale measures the total or overall credit risk (ie EL) in individual exposures, thereby allowing credit officers toconsider the mitigating effect of collateral, other credit risk mitigation and recovery rates on borrower risk. This reflectsthe true or complete measurement of credit risk, incorporating not only PD but, importantly, also LGD.

    Credit risk reporting across the bank is, to a large extent, based on the twin rating scales discussed above. Business

    units report on the distribution of their credit exposures across the various rating scales and explain any changes insuch distribution, including the migration of exposures between rating grades and underlying reasons therefore.

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    TThhee ddee vvee llooppmmee nntt oof f ccr r ee ddiitt r r aa ttiinngg mmooddee llss

    The 3 measurements of risk that are used in an internal credit rating system are as follows:

    Probability of default (PD)

    Probability of default measures the likelihood of a client defaulting on credit obligations within the next twelvemonths.

    Exposure at default (EAD)

    Exposure at default quantifies the expected exposure on a particular facility at the time of default. EAD riskmeasures consider the likelihood that a client would draw down against available facilities in the period leading up todefault and are based on Nedbank Groups historical default experience in respect of similar clients and facilities.

    Loss given default (LGD)

    Loss given default is a measure of the economic loss the banks expects to incur on a particular facility should theclient default. LGD risk measures are based on Nedbank Groups historical recovery experience in respect of similar

    clients and facilities and consider the quality and level of collateral held.The Pillar 1 models that are used to develop the key measures of PD, EAD and LGD form the cornerstone of NedbankGroups internal rating and economic capital systems.

    The group decided at an early stage to develop its own expertise in this regard, rather than rely on the ongoing use of consultants and external rating agencies. Each business cluster has developed a team of specialist quantitativeanalysts who are responsible for creating and maintaining a range of rating models. A team of suitably qualifiedindividuals within GCRM, namely the CMVU, is responsible for the independent validation of all the models whileNedbank Groups Internal Audit Division performs a governance process audit.

    Nedbank Group makes use of a range of modelling approaches, as illustrated in the following diagram:

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    An overview of the rating approaches adopted across the various asset classes is as follows:

    Whenever possible, models are calibrated to long-term default and loss rates, thus ensuring that capital estimates areappropriate. Where suitably robust loss rates are not available, for example in the case of low default portfolios, thenexternal data sources such as external ratings are included to ensure appropriate calibration.

    LGD estimates are adjusted to those applicable during a downturn to meet regulatory requirements in this regard.

    Nedbank Group is currently utilising the scaling factor developed by the US Federal Reserve Board of Governors toconvert its cycle-neutral LGD estimates to those applicable to downturn conditions, but it is expected that the group willdevelop its own downturn estimates during 2010 and 2011, based on data collected during the economic downturn of 2009/10.

    The risk estimates generated from Nedbank Groups internal models are utilised across the credit process, as indictedin the following diagram:

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    Group credit policy not only incorporates the minimum requirements stipulated in the revised South African bankingregulations, but also documents Nedbank Groups aspiration to best-practice credit risk management. This policy isimplemented across the group with detailed and documented policies and procedures, suitably adapted for use by thevarious business units, and forms the cornerstone for sound credit risk management as it provides a firm framework for credit granting as well as the subsequent monitoring of credit risk exposures.

    CCr r ee ddiitt r r iiss kk aa ppppr r ooaa cchhee ss aa ccr r ooss ss tthhee ggr r oouupp

    While Nedbank Group has adopted the AIRB Approach for all exposures across Nedbank Limited, the StandardisedApproach has been adopted across the other subsidiaries.

    The use of internal rating models within these subsidiaries is encouraged as it is anticipated that a number of them willmigrate to the AIRB Approach once they have developed the data history required to adopt the approach for theestimation of regulatory capital.

    For the purpose of estimating internal economic capital, conservative AIRB credit benchmarks are applied for thesubsidiaries that are still utilising the Standardised Approach.

    The distribution of approaches across Nedbank Group is reflected in the following diagram. These regulatoryapproaches all carry formal approval from SARB:

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    Advanced Internal RatingsBased Approach

    87%

    Standardised App roach13%

    Nedbank Limited

    Imperial Bank Limited

    Nedbank Namibia Limited

    Nedbank (Swaziland) Limited

    Nedbank (Lesotho) Limited

    MBCA Bank Limited

    Nedbank (Malawi) Limited

    Fairbairn Private Bank (IOM) Limited

    Fairbairn Private Bank Limited

    (87%)

    (

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    RRooaa ddmmaa pp oof f NNee ddbbaa nnkk GGr r oouuppss ccr r ee ddiitt r r aa ttiinngg ss yyss ttee mmss

    The following diagrams provide an overview of the banks credit risk profile by business line and major Basel II asset class as at 30 June 2010.The distribution of exposures across the various subsidiaries that are utilising the Standardised Approach is reflected in the diagram below:

    )/%1-%&-#)*-!&%/#13!)A)/*>!%1-!1.1B&*3+$%/*-!*1/#/#*)!

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    The distribution of retail exposures that are measured by way of the AIRB Approach is reflected in the following diagram. Basel II AIRB credit exposure isreported on the basis of EAD: !

    R*/%#$!%#&(!&%/#13!)A)/*>!&V!W*%-!NEPJP!EK!'

    !

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    LLooaa nnss aa nndd aa ddvvaa nnccee ss aa nndd BBaa ss ee ll IIII ee xxppooss uur r ee

    Total banks loans and advances extended to the private sector picked up marginally during the first half of 2010, trailingthe improvement in nominal gross domestic expenditure. Great caution continued to characterise the collective psyche

    of both lenders and borrowers, with the recession having left a trail of impaired advances, increased vigilance regardingcredit quality and reduced confidence among borrowers, whose finances needed further consolidation.

    Conditions during the remainder of the year will be heavily influenced by developments in the global economy. SouthAfrica has benefited so far in the recovery from rising commodity prices and improved capital inflows, but internationalprospects remain uncertain. Domestic spending will continue to rise although some loss of momentum is probable after the boost provided by the inventory cycle and the World Cup fades. Interest rates will remain low well into 2011 givenlow inflation and below-trend economic growth.

    Retail banking should fare better as household credit demand improves, house prices edge higher and bad debtsmoderate. Wholesale banking areas will likely remain under pressure as fixed investment activity remains subdued, buttransactional volumes are expected to gradually improve and defaults should remain contained.

    Nedbank Groups net advances grew by 4,9% (annualised), increasing from R450 billion at December 2009 to R461billion at June 2010. Gross loans and advances increased by 5,3% (annualised) to R472 billion. The fragility of theglobal recovery, as highlighted by recent developments in Europe, has subdued wholesale demand, whilst retail clientscontinue to deleverage from historically high levels of indebtedness.

    In Nedbank Capital core banking advances, excluding foreign correspondents, overnight loans and trading advances,grew by 0,6% (annualised) from December 2009. Nedbank Corporate and Nedbank Business Banking grew by 7,1%and 7,7% respectively. In Nedbank Retail, personal loans performed well increasing by 37,1% (annualised). Retail cardsand vehicle asset finance grew moderately by 7,6% and 6,2% (annualised) respectively, and home loans decreased by0,8% (annualised) in line with the differentiated, value-based strategies. There was a pleasing reduction of 25% inproperties in possession.

    3&.))!$.%1)!%1-!%-5%1,*)!(A!(+)#1*))!,$+)/*& !

    58 21055 69944 325

    143 240138 285136 018

    53 30851 335

    53 800

    146 045144 149

    142 016

    17 53519 246

    17 350

    54 32851 640

    47 845

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    ==:!

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    (%$%1,*!)2**/!,&*-#/!*@".)+&*!"*&!(%)*$!##!%))*/!,$%))!%1-!(+)#1*))!,$+)/*&!

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    Specialised lending - income-producing real estate 41 039 2 252 43 291 40 154 42 209

    Specialised lending - object finance 437 437 906 439

    Specialised lending - commodities finance 73 73 60 55

    Specialised lending - project finance 4 679 4 679 5 230 4 811

    SME - corporate 262 4 923 24 144 29 329 23 937 23 672

    Public sector entities 4 423 10 018 4 875 15 320 15 365 15 405

    Local governments and municipalities 522 6 373 979 7 874 2 632 5 171

    Sovereign 6 412 24 179 30 591 27 022 26 566

    Banks 33 057 1 738 34 795 30 562 30 716

    Securities firms 11 1 12 697 871

    Retail mortgages 9 4 420 109 021 10 914 124 364 123 171 123 611

    Retail revolving credit 8 568 66 8 634 6 822 7 028

    Retail - other 7 1 1 879 20 417 950 23 254 21 567 23 241

    SME - retail 48 1 13 537 3 195 16 781 21 543 20 340

    Securitisation exposure 305 229 534 229 229

    )KECHEQHJPGH!%IIQMEFD!W)%X! ! :'!_9:! ! ! :

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    (%$%1,*!)2**/!,&*-#/!*@".)+&*!"*&!(%)*$!##!%))*/!,$%))!%1-!(+)#1*))!,$+)/*&!

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    !IImmppaa iir r mmee nnttss aa nndd ddee f f aa uullttee dd llooaa nnss aa nndd aa ddvvaa nnccee ss

    Total impairments increased by 25% (annualised) to R10 989 million, although the rate of increase has slowed

    dramatically compared to last year. 70% of the impairment growth came from Nedbank Retail and Imperial Bank, withNedbank Capital and Nedbank Corporate contributing 16% and 10% to the impairment growth respectively.

    In the retail sector impairments for unsecured lending reduced as a result of improving arrears, quality of advances andrecoveries. Improved asset quality and higher levels of restructured loans and repayments have started to reduceimpairments in the secured lending categories.

    Defaulted advances increased by 9,9% (annualised) to R28 367 million, from R27 045 million reported in December 2009.

    Improving conditions have resulted in the credit loss ratio decreasing to 1,46% for June 2010, compared with 1,60%(restated) for the same period in 2009. We remain cautious on the wholesale sector, although wholesale credit lossratios, with the exception of Nedbank Capital and commercial property finance within Nedbank Corporate, improved and

    remain below expectations for this stage of the cycle.The tables on the following pages summarise Nedbank Group's defaulted portfolio and the level of impairments. Thepolicies, principles and definitions relating to the defaulted portfolio and impairments are well articulated in the group'scredit policy.

    The key definitions relating to the following section are included below:

    Past due

    A loan or advance is considered past due when it exceeds its limit (fluctuating types of advances) or is inarrears (linear types of advances).

    Defaulted loans and advances

    Any advance or group of loans and advances that has triggered the Basel II definition of default criteria andwhich is in line with the revised SA banking regulations. For retail portfolios this is product-centric and thereforea default would be specific to a client or borrower account (a specific advance). For all other portfolios exceptproject-based financing, it is client or borrower-centric, meaning that should any transaction within a borrowinggroup default, then all transactions within the borrowing group would be treated as defaulted.

    At a minimum a default is deemed to have occurred where, for example, a specific impairment is raised againsta credit exposure due to a significant perceived decline in the credit quality, a material obligation is past due for more than 90 days or an obligor has exceeded an advised limit for more than 90 days.

    Impaired loans and advances

    Impaired loans and advances are defined as loans and advances in respect of which the bank has raised aspecific impairment [International Accounting Standard (IAS) 39 definition].

    Specific impairment If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investmentscarried at amortised cost has been incurred, the amount of the loss is measured as the difference between theassets carrying amount and the present value of estimated future cash flows (excluding credit losses that havenot been incurred) discounted at the financial assets original effective interest rate (ie the effective interest ratecomputed at initial recognition).

    Portfolio impairment

    The standard portfolio represents all the loans and advances that have not been impaired. These loans andadvances have not yet individually evidenced a loss event, but loans and advances exist within the standardportfolio that may have impairment without the bank yet being aware of it.

    A period of time will elapse between the occurrence of an impairment event and objective evidence of theimpairment becoming evident. This period is generally known as the emergence period. For each standardportfolio an emergence period is estimated as well as the probability of the loss trigger and the loss givenevents occurring. These estimates are applied to the total exposures of the standard portfolio to calculate theportfolio impairment.

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    )+>>%&A!.0!#>"%#&>*1/)^!-*0%+$/*-!$.%1)!%1-!%-5%1,*)!%1-!,&*-#/!$.))!&%/#.)!

    ]!

    NedbankCapital

    NedbankCorporate

    NedbankBusiness

    Banking

    NedbankRetail

    NedbankWealth

    ImperialBank

    aOC!;Jun2009

    Dec2009

    Impairments to gross loans andadvances

    0,98 0,85 2,38 4,23 0,90 2,92 ;^''! 2,07 2,13

    Specific impairments 0,84 0,45 1,69 3,75 0,74 2,51 !:^9:! 1,61 1,70

    Portfolio impairments 0,14 0,40 0,69 0,48 0,16 0,41

    Defaulted loans and advances to grossloans and advances

    1,78 2,44 5,88 12,33 2,20 4,23 _^

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    1,021,08

    1,22

    1,72

    1,601,52 1,52 1,51

    1,46

    0,0

    0,20

    0,40

    0,60

    0,80

    1,00

    1,20

    1,40

    1,60

    1,80

    2,00

    Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010 Jun 2010

    I G Q F G C K E S G

    Group (credit loss ratio) Lower bound (group credit loss ratio target)

    Upper bound (group credit loss ratio target) Basel II expected loss (EL)% through-the-cycle target range (0,6% - 0,7%)

    !"#$%&' ()*+, -)"#./ 0*11 )%/.* /%)2"/ )%&2" 3%1 -4%&2"#5)*6 7899: 78;9: /* 7877?

    012 344&5 67382 9%5734 :5&2;< 17==5$

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    Defaulted loans and advances increased by 9,9% to R28 367 million, while specific impairments increased to R9 013million in the first half of 2010.

    -*0%+$/*-!$.%1)!%1-!%-5%1,*)^!)"*,#0#,!#>"%#&>*1/)!%1-!,.5*&%3*!&%/#.!

    25 437

    27 045

    28 367

    7 1127 830

    9 013

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    ,, MMOOCCKKGGQ Q II EEQ Q KKUU!FFQ Q GGHHJJKK!Q Q JJPPdd !Counterparty credit limits are set at an individual counterparty level and approved within the Group Credit RiskManagement Framework. Counterparty credit risk exposures are reported and monitored at both a business unit andgroup level. To ensure that appropriate limits are allocated to large transactions, scenario analysis is performed withina specialised counterparty risk unit. Based on the outcome of such analysis, proposals regarding potential risk-mitigating structures are made prior to final limit approval. Limits for our Corporate and Business Banking businessesfavour a nominal limit to facilitate monitoring.

    There is continued emphasis on the use of credit risk mitigation strategies, such as netting and collateralisation of exposures. Nedbank Group and its large bank counterparties have International Swaps and Derivatives Association(ISDA) and International Securities Market Association (ISMA) master agreements as well as credit support(collateral) agreements in place to support bilateral margining of exposures. Limits and appropriate collateral aredetermined on a risk-centred basis.

    Netting is applied only to underlying exposures where supportive legal opinion is obtained as to the enforceability of the relevant netting agreement in the particular jurisdiction. Margining and collateral arrangements are entered into inorder to mitigate counterparty credit risk. Haircuts, appropriate for the specific collateral type, are applied to determinecollateral value. Margining agreements are pursued with interbank trading counterparties on a proactive basis.Margining thresholds constitute unsecured exposure to the counterparty and are assessed as such. To deal with apotential deterioration of counterparty credit risk over the life of transactions thresholds are typically linked to thecounterparty external credit rating.

    Nedbank Group applies the Basel II Current Exposure Method (CEM) for counterparty credit risk. Economic capitalcalculations also currently utilise the Basel II CEM results as input in the determination of credit economic capital.

    OOvvee r r --tthhee --ccoouunnttee r r ((OOTTCC)) ddee r r iivvaa ttiivvee ss f f oor r NNee ddbbaa nnkk LLiimmiittee dd aa nndd LLoonnddoonn bbr r aa nncchh ./,!HGQJ[EKJ[G!IQMHOFKP! 1MKJMCEL![ELOG 3QMPP!IMPJKJ[G!\EJQ!

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    [ELOG!

    &V!! aOCG!;Credit default swaps :!7`:! =_! 2 272 8

    Equities ! =?:! 1 155

    Forex and gold :77!9'=! _!;:'! 189 601 6 437

    Interest rates =99!`7'! _!`7=! 358 738 5 470

    Other commodities ! :./,!HGQJ[EKJ[G!IQMHOFKP!

    3QMPP!IMPJKJ[G!\EJQ!

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    ,MLLEKGQEL!EVMOCK!

    1GKKGH!FOQQGCK!FQGHJK!GYIMPOQG!

    WIMPKBVJKJSEKJMCX!

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    aOCG!;December 2009 13 428 7 028 6 963 779 6 443 9 566 3 018

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    ,+ " #$%&

    ./,!HGQJ[EKJ[GP!IGQ!13&!W"-X!NECH!

    1MKJMCEL![ELOG!

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    &V! aOCG!;NGR 13 =!'_?! ::`! :7

    NGR 24 :! ! ! 1

    NGR 25 ! ! ! 123 99NP ;_

    Total _7`!;_

    *Nedbank rating scale is from NGR01 to NGR25.Currently there are no NGR01 exposures.

    SS ee ccuur r iittiiee ss f f iinnaa nncciinngg ttr r aa nnss aa ccttiioonnss ((SS FFTTSS )) f f oor r NNee ddbbaa nnkk LLiimmiittee dd aa nndd LLoonnddoonn bbr r aa nncchh

    )0/P! 3QMPP!IMPJKJ[G!\EJQ!

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    WIMPKBVJKJSEKJMCX

    *%-![ELOG! &JPdBfGJSDKGH!GYIMPOQG

    aOCG!;&V! Repurchase agreements ?!=-GFGVNGQ!;

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    *Total group EAD includes all Nedbank Group subsidiaries. Although the subsidiaries have adopted the Standardised Approach, credit benchmarksare applied for the purpose of estimating internal credit economic capital.

    /."!;

    aOCG!;W"-X!QEKJCS*%-! ]!M\!KMKEL!SQMOI!

    FQGHJK!*FEI1M! !! &V! W]X1 NGR05 5 236 0,162 NGR05 3 247 0,103 NGR05 2 863 0,064 NGR05 1 360 0,085 NGR04 1 195 0,066 NGR07 1 013 0,107 NGR06 1 068 0,088 NGR07 827 0,119 NGR05 805 0,06

    10 NGR06 1 190 0,0911 NGR06 699 0,0612 NGR07 563 0,0713 NGR05 609 0,0514 NGR04 708 0,0415 NGR05 613 0,0516 NGR05 516 0,0317 NGR05 520 0,0418 NGR06 386 0,0419 NGR06 387 0,0420 NGR04 368 0,03

    /MKEL!M\!KMI!;

    *Total group EAD includes all Nedbank Group subsidiaries. Although the subsidiaries have adopted the Standardised Approach, credit benchmarksare applied for the purpose of estimating internal credit economic capital.

    GGee ooggr r aa pphhiicc ccoonnccee nnttr r aa ttiioonn r r iiss kk

    Geographic exposure risk is high as 95% of the group's loans and advances originate in South Africa, but practicallythis concentration has proven positive for Nedbank Group, given the global financial crisis, and reflects NedbankGroups focus on an area of core competence.

    The exposure of Nedbank Group to the Portuguese, Italian, Irish, Greek and Spanish banking sectors is monitored onan ongoing basis and is not material. The Nedbank Group holds no sovereign bonds issued by these countries. Directlines to banks in Italy and Spain are restricted to systemically important banks.

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    ,. " #$%&

    3*.3&%"2#,%$!)"$#/!.0!$.%1)!%1-!%-5%1,*) !

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    South Africa

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    Synthesis is a hybrid multi-seller ABCP Programme that invests in longer-term rated bonds and offers capital marketfunding to South African corporates at attractive rates. These assets are funded through the issuance of short-datedinvestment-grade commercial paper to institutional investors. All the commercial paper issued by Synthesis isassigned the highest short-term local currency credit rating Fitch and is listed on the Johannesburg Stock Exchange.

    Nedbank Group currently fulfils a number of roles in relation to Synthesis including acting as sponsor, liquidity facilityprovider, credit enhancement facility provider, swap provider and investor. The exposures to Synthesis that NedbankGroup assumes are measured, from both a regulatory and economic capital (ICAAP) point of view, using the ratings-based approach and the standardised formula approach, both under the IRB approach for securitisation exposures,thereby ensuring alignment with the methodology adopted across the wider Nedbank Group.

    Octane is a securitisation programme of auto loans advanced by Imperial Bank Limited. The inaugural transactionunder Octane entailed the securitisation of R2 billion of motor vehicle loans under Octane Series 1. Nedbank Groupcurrently fulfils a number of roles in relation to Octane Series 1 including acting as originator, service provider, creditenhancement (subordinated loan) facility provider, swap provider and investor.

    The commercial paper issued by Octane Series 1 has been assigned credit ratings by Fitch and is listed on BESA.

    The assets of Octane continue to be recognised on the balance sheet of Nedbank Group in terms of IFRS and Octaneis consolidated under Nedbank Group.

    GreenHouse is a R10 billion RMBS programme to securitise some of Nedbank Groups residential mortgages. Theinaugural transaction under GreenHouse entailed the securitisation of R2 billion of residential mortgages under GreenHouse Series 1. Nedbank Group currently fulfils a number of roles in relation to GreenHouse Series 1 includingacting as originator, service provider, credit enhancement (subordinated loan) facility provider, swap provider andinvestor. The commercial paper issued by GreenHouse Series 1 has been assigned credit ratings by both Fitch andMoodys and is listed on BESA. The assets of GreenHouse continue to be recognised on the balance sheet of Nedbank Group in terms of IFRS, and GreenHouse is consolidated under Nedbank Group.

    The contraction in the local and international securitisation markets experienced in 2008 continued in through 2010.As a result the group did not implement new securitisations as an alternative source of funding over this period.

    Amidst the difficult external environment the arrears levels in GreenHouse exceeded the arrears trigger (during thelast quarter of 2009) as a result of the deterioration in underlying asset performance. The effect of this is that nofurther home loans (other than servicing redraws ie access facilities on existing GreenHouse loans) can be acquiredfor as long as the arrears level remains above the arrears trigger level, and all capital repayments will be directed tothe noteholders. As at June 2010, arrears levels were still above the trigger level and notes are currently being repaid.

    With regard to Octane, the transaction has started to repay investors in the normal course, as envisaged in thetransaction documents.

    The group's securitisation initiatives are overseen by the Group ALCO. All securitisation transactions are also subjectto the stringent SA Regulatory Securitisation Framework.

    From an IFRS accounting perspective the assets transferred to GreenHouse and Octane vehicles continue to berecognised and consolidated in the balance sheet of the group.

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    OOnn--bbaa llaa nnccee --ss hhee ee tt ss ee ccuur r iittiiss aa ttiioonn ee xxppooss uur r ee :: /QECPEFKJMC! AGEQ!

    JCJKJEKGH!&EKJCS!ESGCFU!

    /QECPEFKJMC!KUIG!

    %PPGK!KUIG! %PPGKP!PGFOQJKJPGH!

    %PPGKP!MOKPKECHJCS!

    %VMOCK!QGKEJCGHg!

    IOQFDEPGH!

    %PPGKP!PGFOQJKJPGH!

    %PPGKP!MOKPKECHJCS!

    %VMOCK!QGKEJCGHg!

    IOQFDEPGH!

    %PPGKP!PGFOQJKJPGH!

    %PPGKP!MOKPKECHJCS!

    %VMOCK!QGKEJCGHg!

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    &V! !! !! !! !! aOC!;GreenHouse 2007Moody'sand Fitch

    Traditionalsecuritisation

    Retailmortgages

    :!?9?! :!?=?! ;;_!! 2 000 1 991 226 2 000 1 973 226

    Octane 2007 FitchTraditionalsecuritisation

    Auto loans :!`

    ! Third parties !

    Private Residential Mortgages (Pty) Limited Securitisation Liquidity facility :Private Mortgages 2 (Pty) Limited Securitisation Liquidity facility =

    Private Mortgages 2 (Pty) Limited Securitisation Redraw facility =;?! 428 428

    /MKEL! 7!9:;! 7 574 6 392

    TThhee ttaa bbllee bbee llooww ccoonnttaa iinnss aa ss uummmmaa r r yy oof f SS yynntthhee ss iiss :: /QECPEFKJMC! AGEQ!JCJKJEKGH &EKJCS!ESGCFU /QECPEFKJMC!

    KUIG!%PPGK!KUIG "QMSQEVVG!

    PJnG!,MCHOJK!PJnG

    !&V ! !! !! !! !! aOC!;

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    !5%&!+/#$#)%/#.1!0.&!/2*!:?!>.1/2)!*1-*-!a+1*!;-40

    -35

    -30

    -25

    -20

    -15

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    -5

    0

    Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10

    5 E & & V

    One-Day VaR Average VaR

    VaR is an important measurement tool and the performance of the model is regularly assessed. The approach toassessing whether the model is performing adequately is known as backtesting, which is simply a historical test of the accuracy of the VaR model. To conduct a backtest the bank reviews the actual daily VaR over a one year period(on average 250 trading days) and compares the actual daily trading revenue (including net interest but excludingcommissions and primary revenue) with the VaR estimate and counts the number of times the trading loss exceedsthe VaR estimate.

    Nedbank Group used a holding period of one day with a confidence level of 99%, and had no backtesting exceptionsfor the 18 months ended on 30 June 2010.

    5%&!"&.0#/!%1-!$.))!0.&!/2*!:?!>.1/2)!*1-*-!a+1*!;

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    The following histogram illustrates the distribution of daily revenue for the period 1 January 2009 to 30 June 2010 for Nedbank Group's trading businesses (including net interest, commissions and primary revenue credited to NedbankGroup's trading businesses). The distribution is skewed to the profit side and the graph shows that trading revenuewas realised on 308 days out of a total of 373 days in the period. The average daily trading revenue generated for the 18 month period was R5,94 million.

    %1%$A)#)!.0!/&%-#13!&*5*1+*!0.&!/2*!:?!>.1/2)!*1-*-!a+1*!;

    Interest rate stress 109 165 78 116Equity position stress 157 340 13 20Credit spread stress 49 58 32 45Commodity stress 1 7 0 1

    .[GQELL! ''_! 77'! :?`! :9;!

    )8!0%,/.&)!0.&!/2*!:;!>.1/2)!*1-*-!':!-*,*>(*&!;

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    TTr r aa ddiinngg mmaa r r kkee tt r r iiss kk uunnddee r r tthhee SS ttaa nnddaa r r ddiiss ee dd AAppppr r ooaa cchh f f oor r r r ee gguullaa ttoor r yy ccaa ppiittaa ll

    The tables below reflect the market risk capital requirement and statistics for Nedbank Capitals trading book under the Standardised Approach, which is used for regulatory capital purposes only.

    Note: The high (and low) figures reported for each risk factor did not necessarily occur on the same day as the high (and low) total capital requirement.

    The graph below shows the history of Nedbank Capitals domestic trading book on a daily basis by risk factor for 2009.

    -.>*)/#,!/&%-#13!,%"#/%$!&*Z+#&*>*1/!(A!)8!0%,/.&!0.&!/2*!:?!>.1/2)!*1-*-!'

    190

    240

    290

    340

    390

    440

    490

    &V

    :!aEC!;

    Interest rate risk 366 471 317 471

    Equity position risk 26 54 9 12

    Foreign exchange risk 17 33 7 25

    Commodities risk 26 45 15 15

    ,EIJKEL!QGTOJQGVGCK! ='7! 7;'! '`7! 7;'!

    /&%-#13!,%"#/%$!&*Z+#&*>*1/!(A!)8!0%,/.&!0.&!-*,*>(*&!;

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    ** TTOOJJKKUU!Q Q JJPPdd !WWJJCC[[ GGPPKKVV GGCCKK!Q Q JJPPdd XX!JJCC!KKDDGG!NNEECCdd JJCCSS !NNMMMMdd!The total equity portfolio for investment risk is R3 803 million (December 2009: R3 901 million). R2 895 million(December 2009: R2 947 million) is held for capital gain, while the rest is mainly strategic investments.

    Equity investments held for capital gain are generally classified as fair value through profit and loss, with fair-valuegains and losses reported in non-interest revenue. Strategic investments are generally classified as available for sale, with fair-value gains and losses recognised directly in equity.

    #C[GPKVGCKP! "ONLJFLU!LJPKGH! "QJ[EKGLU!DGLH! /MKEL!&V! aOC!

    ;;;;

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    Through robust analysis and ongoing assessment BSM seeks to maintain an appropriate liquidity buffer whilecontinually reviewing the appropriateness of the liquidity risk metrics, the liquidity policy, the funding strategy and thecontingency funding and liquidity plan. These individual components of the liquidity risk framework should at all timessupport the board approved risk appetite, which is to ensure that stress funding sources are sufficient to meet stressfunding requirements for a given time horizon. Based on the Basel Committees consultative document CInternationalframework for liquidity risk measurement, standards and monitoring (December 2009) C indications are that theminimum time horizon may be set at 30 days, but this will only be finalised during 2010.

    The liquidity risk framework is further supported by a number of management processes designed to manage andmitigate liquidity risk under normal and stressed market conditions. The key management processes and activitiesare summarised below:

    #CKQEHEU!LJTOJHJKU!QJPd!VECESGVGCKmThe need to manage and control intraday liquidity in real time is recognisedby the group as a critical process. The centralised funding desk is responsible for ensuring that the bank always hassufficient intraday liquidity to meet any obligations it may have in the clearing and settlement systems. In addition,net daily funding requirements are forecast by estimating daily rollovers and withdrawals and managing the fundingpipeline of new deals. The centralised funding desk is responsible for maintaining close interaction with the bankslarger depositors in order to manage their cash flow requirements and the consequential impact on the banksintraday liquidity position.

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    The BaU table below shows the expected liquidity mismatch under normal market conditions after taking intoaccount the behavioural attributes of Nedbank Limited's stable deposits, savings and investment products.

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    /MKEL 1GYK!HEU ;!KM! !HEUP! ?!HEUP!KM!

    :!VMCKD

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    :!VMCKD!KM!;!VMCKDP(E+!VEKOQJKU!M\!EPPGKP! 7'7!;:` '_!`_9 :!`='! :=!;?: ::!:==

    Loans and advances 410 820 8 986 1 586 10 505 7 997

    Trading, hedging and other investment instruments 81 207 27 783 157 1 659 2 822

    Other assets 43 190 - - 2 117 325

    (E+!VEKOQJKU!M\!LJENJLJKJGP! 7'7!;:` ;;!_9; ::!==

    *Nedbank Limited refers to the SA reporting entity in terms of Regulation 38 (BA700) of the SA banking regulations.

    As per the table above Nedbank Limited's BaU inflows exceed outflows overnight to one week, taking into accountbehavioural assumptions, including rollover assumptions associated with term deals but excluding BaU managementactions.

    As per the graph below the improved BaU maturity mismatch in 2010, when compared with 2009, can be attributedto the fact that previously Nedbank Limited adopted a very conservative approach when estimating the BaUmismatch ie Nedbank Limited previously assumed that no term deposits were refinanced and that they resulted in acash outflow on maturity of the deposit. As this does not reflect reality under normal market conditions, refinancingassumptions (having been statistically derived) have now been applied to term funding, thus yielding a more realisticBaU mismatch. In addition, the reduction in Nedbank Limiteds short-term funding ratio from 62,3% in June 2009 to58,1% in June 2010 has also contributed to an improved behavioural liquidity mismatch.

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    !// " #$%&

    1*-(%18!3&.+"!B!#1/*&*)/!&%/*!&*",#13!3%"!%/!a+1*!;&V! !6JKDJC!'!VMCKDP!

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    Net repricing profile before hedging 64 157 (24 867) (34 686) 27 526 (32 130)

    Net repricing profile after hedging 33 797 (2 547) (2 566) 3 446 (32 130)

    Cumulative repricing profile after hedging 33 797 31 250 28 684 32 130 -

    !#1/*&*)/!&%/*!&*",#13!"&.0#$*!%/!'

    (40,000)

    (20,000)

    -

    20,000

    40,000

    60,000

    80,000

    Within 3 months Between 3 and 6 months Between 6 and 12 months > 1 year Non-rate sensitive

    & V

    Net repricing profile before hedging Net repricing profile after hedging!

    As at June 2010 the groups earnings-at-risk (EaR) sensitivity of the banking book for a 1% parallel reduction ininterest rates was 1,44% of total group equity (December 2009: 1,30%), well within the approved risk limit of 2,5%.This exposes the group to a decrease in net interest income (NII) of approximately R647 million should interest ratesfall by 1%, measured over a 12-month period.

    The groups level of interest rate sensitivity is managed in conjunction with credit impairment sensitivity and isbenchmarked regularly against the peer group.

    Nedbank Limiteds economic value of equity, measured for a 1% parallel decrease in interest rates, is a loss of R308million at June 2010 (December 2009: loss of R225 million).

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    The table below highlights the groups and banks exposure to interest rate risk measured for normal and stressedinterest rate changes:

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    1% instantaneous decline in interest rates (512) (135) (647)

    2% instantaneous decline in interest rates (1 027) (271) (1 298)

    $JCGEQ!IEKD!PIEFG! 2

    Lognormal interest rate sensitivity (275) n/a n/a

    Absolute-return interest rate sensitivity* (1 396) n/a n/a

    (EPJP!JCKGQGPK!QEKG!QJPd!PGCPJKJ[JKU! 3

    0,25% narrowing of prime/call differential (204) (60) (264)*FMCMVJF![ELOG!M\!GTOJKU!PGCPJKJ[JKU!! 4

    1% instantaneous decline in interest rates (308) n/a n/a

    2% instantaneous decline in interest rates (629) n/a n/a

    1GK!JCKGQGPK!JCFMVG!PGCPJKJ[JKU!

    Instantaneous stress shock* 5 (2 556) n/a n/a

    Instantaneous stress shock modelled as a ramp* 6 (2 126) n/a n/a

    n/a: not modelled

    *Stressed interest rate changes !! !! !!

    1MKGP!

    1 1GK! JCKGQGPK! JCFMVG! PGCPJKJ[JKU, as currently modelled, exhibits very little convexity. In certain cases the comparativefigures have been estimated assuming a linear risk relationship to the interest rate moves.

    2 $JCGEQ!IEKD!PIEFGis a stochastic method used to generate random interest rate paths. These paths are then modelled anda probabilistic impact of interest rate changes on NII is derived. The Lognormal interest rate sensitivity uses two years of interest rate movements to derive interest rate volatility. The stress scenario Absolute-return interest rate sensitivity isbased on the volatility of interest rates over nine years.

    3 (EPJP!JCKGQGPK!QEKG!QJPd!PGCPJKJ[JKUis quantified using a narrowing in the prime / call interest rate differential of 0,25% andis an indication of the sensitivity of the margin to a squeeze in short-term interest rates.

    4 *FMCMVJF![ELOG!M\!GTOJKU!PGCPJKJ[JKU!is calculated as the net present value of asset cashflows less the net present valueof liability cashflows.

    5 The !JCPKECKECGMOP!PKQGPP!PDMFd!is derived from the principles espoused in the Basel Committee paper Principles for theManagement and Supervision of Interest Rate Risk. 1st and 99th percentile observed interest rate changes over 5 year period with a 1 year holding period have been used.

    6 The JCPKECKECGMOP!PKQGPP!PDMFd!VMHGLLGH! EP!E! QEVIuses the same interest rate shock as the instantaneous stressshock described above, but the rate shock is phased in over a nine-month period.

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    FFoor r ee iiggnn ccuur r r r ee nnccyy ttr r aa nnss llaa ttiioonn r r iiss kk iinn tthhee bbaa nnkkiinngg bbooookk

    Foreign currency translation risk arises as a result of Nedbank Group's investments in foreign companies that haveissued foreign equity. This foreign equity is translated into rand for domestic reporting purposes, recording a profitwhere the rand exchange rate has deteriorated and a loss where the rand exchange rate has strengthened betweenperiods.

    Foreign currency translation risk remains relatively low and currently aligns with an appropriate offshore capitalstructure. Risk limits are based on the expected level of currency-sensitive foreign capital and the exposure wasapproximately US$231 million at June 2010 (US$241 million at December 2009).

    .00)2.&*!,%"#/%$!)"$#/!(A!0+1,/#.1%$!,+&&*1,A !$m US dollar equivalent ($ millions) aOC!; Equity Forex-sensitive Non-forex

    sensitive/MKEL! Total

    US dollar 101 101 :

    The effective average capitalisation rate of the foreign-denominated business is 21% (December 2009: 26%). Thetotal foreign risk-weighted assets (RWA) as a percentage of the Nedbank Group total is low at 1,6% (R5,4 billion outof the total group RWA of R332 billion). Therefore, any foreign exchange rate movement will have a minimal effecton Nedbank Group's capital adequacy ratio.

    High rand volatility has a minimal effect on capital adequacy as a 10% depreciation in the rand, for example, will onlydecrease capital adequacy by 0,04%.

    .. II GGQ Q EEKKJJMMCCEELL!Q Q JJPPdd !Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people andsystems or from external events. This definition includes legal, but excludes strategic and reputational risk. Legal riskincludes, but is not limited to, exposure to fines, penalties or punitive damages resulting from supervisory actions, aswell as private settlements.

    OOppee r r aa ttiioonnaa ll r r iiss kk ss ttr r aa ttee ggyy,, ggoovvee r r nnaa nnccee aa nndd ppoolliiccyy

    To minimise the exposure to operational risk that arises as a consequence of the groups financial risk-taking (creditand market) and operating activities, Nedbank Group has implemented and embedded a Group Operational RiskManagement Framework (GORF), which includes methodologies, policies and guidelines to facilitate a consistentand worldclass approach to operational risk management.

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    Nedbank Group considers financial crime to be a major operational risk that leads to significant losses. For thisreason the group pursues a vigorous policy of mitigating this risk through the following measures:

    pursuance of a zero-tolerance policy in respect of staff dishonesty;proactive identification and prevention of criminal acts against the group;

    effective and comprehensive investigation and recovery of losses; andcooperation with government and industry roleplayers to ensure the successful apprehension and conviction of the perpetrators of financial crime.

    Group Internal Audit (the third line of defence) and Enterprise Governance and Compliance provide assurance to theboard that GORF is sound and that the policies and processes related to operational risk management are adheredto. The board annually reviews and approves the group-level risk policies.

    OOppee r r aa ttiioonnaa ll r r iiss kk mmee aa ss uur r ee mmee nntt,, ppr r ooccee ss ss ee ss aa nndd r r ee ppoor r ttiinngg ss yyss ttee mmss

    The primary operational risk management processes in the group are risk and control assessments, internal lossdata governance and collection, the tracking of key risk indicators (KRIs), external loss data, scenario analysis andcapital calculation, which are designed to function in a mutually reinforcing manner. The additional related processesinclude the consistent consideration of the business environment and consistent review of internal control factors, aswell as the analysis of operational risk causes. Management is responsible for developing and maintaining controlenvironments to mitigate operational risks inherent in the business. Specific mitigating action is reported at theERCOs.

    Risk and control self-assessments are designed to be forward looking. In other words, management is identifyingrisks that could threaten the achievability of business objectives, together with the required set of controls andactions to mitigate the risks. Loss data collection and KRI tracking are backward-looking and enable the monitoringof trends and the analysing of the root causes of loss events. KRIs are designed to be both forward- and backward-looking in the sense that they function not only as early-warning indicators but also as escalation triggers where setrisk tolerance levels have been exceeded.

    The AMA requires the use of relevant external data. The purpose of using external data is to incorporate infrequentyet relevant and potentially severe operational risk exposures into the measurement model. Nedbank Groupcurrently incorporates the effects of external data in the operational risk capital calculation model indirectly via thescenario analysis methodology.

    Scenario analysis is also a required element of the AMA. Scenario analysis is defined in the ORMF and is one of thedata sources for Operational risk modelling and is the main input for unexpected loss estimation. Scenario analysisis conducted in a disciplined and structured way using expert judgement to estimate the operational risk exposure of the bank. Scenario analysis focuses on solvency and aims to identify the major operational risks that can stronglyinfluence the solvency of the bank.

    These processes result in the enhancement of the internal control environment, with the ultimate aim of reducing

    losses incurred, improving process efficiency and reducing earnings volatility. Risk profiles, loss trends and riskmitigation actions are reported to and monitored by the risk governance structures of the group.

    As part of Nedbank Groups implementation of the AMA an operational risk incentive and capital allocationmechanism has been developed and is currently being implemented as part of AMA rollout. The capital allocationmechanism will satisfy regulatory expectations and support a continuous improvement of Nedbank Groupsoperational risk environment. AMA is used for economic capital calculations for 2010.

    (( OOPPJJCCGGPPPP!Q Q JJPPdd !Business risk is the risk of adverse outcomes resulting from a weak competitive position or from a poor choice of strategy, markets, products, activities or structures. Major potential sources of business risk include revenue volatilityowing to factors such as macroeconomic conditions, inflexible cost structures, uncompetitive products or pricing andstructural inefficiencies.

    Nedba


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