Overview of 2015Overall performance continued to be sound with all risk and capital measures remaining within the Board-approved risk appetite.
Key highlights included:
- Macroeconomic conditions deteriorated significantly towards the end of the year and we extended our framework of macroeconomic triggers and management actions in response.
- Loans and advances to customers increased 11%, driven by growth in Wholesale, Card and the portfolios outside South Africa. Excluding growth in repos and exchange rate movement, growth was 6.3%.
- Our credit loss ratio increased to 105 basis points (2014: 102 basis points) and impairment charges increased to R6.9bn (2014: R6.3bn). Increases in the Wholesale and Card portfolios, and additional macroeconomic provisions (R418m) were offset by lower charges in the mortgages and Edcon portfolios.
- Overall coverage on performing loans increased to 73 basis points (2014: 70 basis points).
- Market risk exposures remained within overall risk appetite, despite volatile market conditions.
- Total operational risk and fraud losses were lower than 2014, with fraud losses accounting for 71% of the total.
- We remained capitalised above the minimum regulatory limit and our Board-approved Common Equity Tier 1 target range. Our liquidity position remained healthy and supported the year-end dividend.
- We continued developing and embedding our approach to the management of conduct risk.
- Absa Financial Services submitted its first Own Risk and Solvency Assessment to the South African Financial Services Board.
|Priorities for 2015||Progress made in 2015|
|Ensure performance remains within risk appetite and continue to refine the risk appetite approach for insurance and country risk.||We remained well within the approved risk appetite, with a 90% utilisation. A new risk appetite framework is being implemented, with the first phase completed during 2015, including refinements to insurance and country risk. The second phase will be completed during 2016.|
|Continue with the embedding of the enterprise risk management framework and the three lines of defence operating model into businesses and countries.||The three lines of defence have been implemented in both the organisational structures and operating models across the Group. We have the right risk culture and tone from the top, and governance structures at a senior management level, with the 2016 priority to further embed this throughout the organisation.|
|Continue to improve risk measurement models and enhance risk-adjusted returns, while reducing volatility in performance.||Focus was placed on the redevelopment of the Retail Basel regulatory models, stress testing and economic capital models. The focus for 2016 will be on refining wholesale regulatory models and IFRS 9, which addresses accounting for financial instruments.|
|Continue to invest in systems in fraud prevention and detection (including digital and application fraud), commence migration to our new data centre and further streamline customer onboarding, not only for regulatory compliance purposes, but also to improve customer service.||Bespoke technology has been designed for digital fraud, and we have enhanced analytics for application fraud. Our data centre migration has started and our customer onboarding processes have been redesigned with better customer turnaround times and higher regulatory compliance rates.|
|Embed conduct risk frameworks and enhance conduct risk management controls, tools and reporting.||Good progress was made in the embedding of the conduct risk framework. Conduct risk is understood and used in the day-to-day decision-making, resulting in achieving the right customer and client outcomes. Conduct risk assessments continue to drive forward-looking risk management, with a focus in 2016 on further enhancements using predictive management information.|
|Continue to build upon the Recovery Plan and develop an approach to Resolution Planning.||We enhanced our Recovery Plan in line with the South African Reserve Bank’s requirements and continue to work with the regulators and industry bodies in the formulation of Resolution Planning.|
The risk of financial loss should our customers, clients or market counterparties fail to fulfil their contractual obligations.
Credit risk: Wholesale1
- Loans and advances: Growth was robust at 22.9%, with increases in banking, technology, media and telecommunications, agriculture and mining portfolios. Excluding growth in repos and exchange rate movement, growth was 12%. Geographic diversification across Africa continued.
- Risk-weighted assets as a percentage of gross credit extended: Decreased due to an increase in derivative instruments arising from an increase in gross credit extended.
- Non-performing loans5: Increased due to new defaults at higher coverage in Rest of Africa and Business Banking, although non-performing loans as a percentage of total loans decreased. The non-performing loans coverage ratio increased to 36.8% (2014: 35%).
- Impairments: The Wholesale credit impairment charge increased to R1 434m (2014: R843m) due to new impairments in Rest of Africa and macroeconomic provisions of R228m.
- Closely monitor risk trends arising from macroeconomic uncertainty.
- Undertake regular portfolio reviews.
- Ensure continuing alignment of business strategy with risk appetite.
- Implement agreed management actions in response to changing economic conditions.
- Implement enhanced models and data management.
Credit risk: Retail
- Loans and advances: The net decrease of 0.5% in Home Loans was offset by 2% growth in Card, 3% growth in Vehicle and Asset Finance and 19.5% growth in Rest of Africa.
- Risk-weighted assets as a percentage of gross credit extended: Increased to 33.4% (2014: 32.6%) due to implementation of new regulatory models.
- Non-performing loans: Continued to decrease due to a R1.6bn decline in the Home Loans legal book. The non-performing loans coverage ratio decreased to 45.6% (2014: 45.9%) due to write-offs in mortgages and Vehicle and Asset Finance. This was offset by an increase in the debt counselling legal book in Card.
- Impairments: The impairment charge remained flat despite additional macroeconomic provisions of R150m. The credit loss ratio reduced to 1.35% (2014: 1.41%) reflecting improvements in the quality of the Home Loans and Edcon portfolios. The loss ratio decreased in Home Loans, Vehicle and Asset Finance, Edcon and Consumer Banking but increased in Card, in line with the expected default profile of new growth bookings.
- Closely monitor risk trends arising a from macroeconomic uncertainty.
- Further enhance collection programmes to ensure appropriate management of customers in financial difficulty.
- Continue to focus on improvements to data sources and models/analytics to improve the Group’s risk profile, risk measurement, and risk-adjusted returns.
- Continue to improve internal risk measurement models and processes as part of the internal capital adequacy assessment process.
|1||Wholesale incorporates CIB, Business Banking and WIMI for South Africa and Rest of Africa.|
|2||Numbers (excluding credit loss ratio) restated to include Rest of Africa and WIMI.|
|3||Gross credit extended includes off balance sheet exposures as well as exposures to banks and sovereigns.|
|4||Only includes portfolios subject to the internal ratings-based approaches.|
|5||Refer to Note 63.2 of our Group annual financial statements for the IFRS 7 analysis for impairments. Refer to Note 4 of our 2015 financial results booklet for an analysis of our non-performing loans.|
|6||Numbers (excluding credit loss ratio) restated to include Rest of Africa.|
|7||Gross credit extended includes off balance sheet exposures as well as exposures to banks and sovereigns.|
|8||Only includes portfolios subject to the internal ratings-based approaches.|
The risk that our earnings, capital or business objectives will be adversely impacted by changes in the level or volatility of market rates or prices such as interest rates, foreign exchange rates, equity prices, commodity prices and credit spreads.
- Traded market risk: The risk that we would be impacted by changes in the level or volatility of positions in trading books, primarily in investment banking.
- Non-traded market risk: The risk of our earnings or capital being reduced due to the market risk exposure from banking book positions which may arise net of hedging activities.
- Insurance risk: The risk that future experiences relating to claims, expenses, policyholder behaviour and investment returns differ from the assumptions made when setting premiums or valuing policyholder liabilities.
- Pension risk: The risk that arises when an adverse movement between pension assets and liabilities results in a pension deficit.
- Traded market risk: We managed trading exposures within overall risk appetite and the trading business remained resilient despite macroeconomic conditions. The increase in average daily value at risk and regulatory capital was a result of increased volatility in the markets, especially in the second half of the year.
- Non-traded market risk: We remained positively exposed to increases in interest rates after the impact of hedging. Interest rate risk management in the Rest of Africa remains challenging due to the relative unavailability of appropriate derivative instruments to hedge.
- Insurance risk: Absa Financial Services submitted its first Own Risk and Solvency Assessment report to the South African Financial Services Board, highlighting risk management process improvements.
- Pension risk: Pension plans and benefits are provided in all our presence countries with the Absa Pension Fund remaining the largest fund. The overall funding level of the schemes improved in the current year. Following the Absa Pension Fund investment strategy review, a liability-driven investment strategy was implemented to mitigate inflation and interest rate risks and to ensure there are sufficient assets in the pension fund to meet current and future liabilities of the pension fund.
- Respond to regulatory and capital change, specifically preparing for the adoption of the Fundamental Review of the Trading Book.
- Continue to reduce margin volatility through the structural hedge programme in South Africa.
- Continue to focus on improvements in data quality.
- Develop a pension risk appetite for all the Group’s pension schemes.
|1||Daily value at risk for Rest of Africa is based on a historical simulation model that uses sensitivity-based inputs rather than full revaluation as is done for South Africa.|
The risk that the Group is unable to achieve its business plans as a result of capital and liquidity risk1.
- Capital risk: The risk that we are unable to maintain adequate levels of capital. This could lead to an inability to support business activity, a failure to meet regulatory requirements, and/or changes to credit ratings, which could also result in increased costs or reduced capacity to raise funds.
- Liquidity risk: The risk that we are unable to meet our obligations as they fall due.
Funding risk: Capital risk
- Cost of equity: Increased to 13.75% (2014: 13.50%) from January 2015 due to a higher risk-free rate.
- Risk-weighted assets: Increased 13.4% to R702.7bn (2014: R619.7bn) as a result of increased regulatory requirements and the negative impact of the economic environment on certain credit portfolios. This was partially offset by risk-weighted asset precision initiatives.
- Capital: Remained above the minimum regulatory limit and the Board-approved Common Equity Tier 1 ratio target range.
- Ensure all entities remain adequately capitalised relative to minimum regulatory requirements and Board-approved target capital ranges.
- Further improve the approach to capital management:− continue to focus on risk-weighted assets precision initiatives;
- enhance the economic capital framework;
- embed performance metrics such as positive net generation of equity and return on equity;
- maintain an optimal capital supply mix; and
- allocate capital appropriately.
- Continue engaging with the South African Reserve Bank to finalise the total loss-absorbing capacity requirements as part of the Resolution Framework for South African operations.
|1||Structural risk was previously a key risk under funding risk, but is now being included as a component of interest rate risk in the banking book within non-traded market risk.|
|2||The average cost of equity is based on the capital asset pricing model.|
|3||Board target range 9.5 – 11.5%|
Funding risk: Liquidity risk
- Liquidity risk position: This remained healthy and within key limits and metrics. Since 1 January 2015, we continuously maintained a liquidity coverage ratio in excess of the required 60%.
- Loan-to-deposit ratio: This decreased 1% to 86.1% (2014: 87.1%) primarily due to higher debt securities in issue.
- The net stable funding ratio: This comes into effect on 1 January 2018.
- Manage the funding and high quality liquid asset position within our Board-approved liquidity risk appetite framework and regulatory liquidity requirements.
- Continue to grow and diversify the funding base to support asset growth and other strategic initiatives.
- Continue to work with regulatory authorities and other stakeholders on the net stable funding ratio, recovery and resolution, and deposit guarantee scheme.
|1||Rest of Africa.|
|2||The Group liquidity coverage ratio represents the simple average of the relevant three month-end data points prior to year end. Surplus high quality liquid asset holdings in excess of the minimum requirement of 60% have been excluded from the aggregated high quality liquid asset number in the case of all Rest of Africa banking entities.|
Operational risk arises when there is potential for direct and/or indirect losses resulting from human factors, inadequate or failed internal processes, systems or external events.
- Total operational risk losses: These were within the Group’s appetite and were lower than 2014. Fraud losses are lower than 2014 and decreasing ahead of industry trends. Fraud losses continued to be the main contributor to operational risk losses, amounting to 71% of total losses.
- Operational risk risk-weighted assets: Increased due to a rise in the standardised approach capital, which was driven by increased operating income.
- Technology risk: Significant investments have been made in upgrading infrastructure and disaster recovery capabilities, resulting in improved system stability.
- Fraud risk: Card fraud losses remain the major contributor to overall fraud losses, but these have improved and stabilised across all Card portfolios. Lending fraud has increased and is being monitored closely.
- Information risk: Further progress has been made in enhancing protection of secret and confidential data by improving logical access controls.
- Financial crime: Satisfactory progress has been made on remediating customer identification and verification issues, customer on-boarding processes, improved customer document retrieval capability as well as improved suspicious transaction monitoring outside South Africa. Automated processes and controls are applied where possible.
- Continue to invest in technology to improve and maintain technology resilience.
- Continue to focus on managing cyber risk.
- Compliance with financial crime regulations will be strengthened through further investment in technology and transforming the customer on-boarding processes.
- Continue improving our fraud prevention, and early detection, capabilities with a focus on digital banking, branch network and operations in the Rest of Africa.
- Challenges to energy and water supply are being closely monitored and plans developed.
Conduct risk is the risk that detriment is caused to customers, clients, counterparties or the Group because of inappropriate judgement in the execution of business activities.The key themes for the year were the resilience of technology and continued levels of regulatory change. We managed a number of conduct and reputation risks:
- A number of accounts deemed non-compliant with Know Your Customer regulations were blocked, which negatively impacted customer experience.
- We closed several branches in line with a strategic drive to implement a multi-channel solution. Stakeholders’ responses were monitored and used to inform the engagement strategy.
- The reputation risk associated with both internal and external fraud.
- Increase focus on improving overall regulatory controls, particularly those related to Know Your Customer, anti-money laundering, and the National Credit Act.
- Embed risk assessments and forward-looking conduct risk reporting across the organisation.
- Enhance controls and key performance indicators to track and manage conduct risk.
- Maintain a robust awareness and understanding of drivers of political, regulatory and policy changes across the continent and manage changes to minimise customer impact.
- Assess the impact of ‘Twin Peaks’ regulations, specifically the Retail Distribution Review proposals.
- Review and alter risk appetite to take account of global and local macroeconomic deterioration.
- Increase the focus on model risk and governance across the Group.
- Continue to strengthen operational risk controls and infrastructure, specifically in the areas of information, technology, financial crime, and cybercrime, and hone our already established early warning triggers and mechanisms.
- Enhance conduct risk management controls, tools and reporting.
- Increase focus on data initiatives, including those arising from regulations such as BCBS 239 and IFRS 9.
- Continue to enhance our scenario development and stress testing processes in an increasingly uncertain and deteriorating macroeconomic environment.
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