The year was marked by geopolitical tension and macroeconomic volatility, significant changes to regulation, and strong competitive pressures. The general condition and outlook of the global and African economies had an impact on our operating environment. Looking ahead, we anticipate that our business will continue to be influenced by these factors.
As a Board, we continue to monitor our external environment for trends, opportunities and risks that might impact our growth ambitions and the shape of our business.
During 2015, we considered several themes, including:
- the macroeconomic factors that impact our various businesses and the related lead and lag indicators, triggers and management actions;
- global compliance requirements, including anti-money laundering, sanctions and combating the financing of terrorism;
- trends in cybercrime, and applying proactive defensive strategies;
- our organisation’s commitment to our Values, including all aspects of diversity and inclusion;
- Basel III and the impact on capital and liquidity;
- IFRS 9, which addresses accounting for financial instruments;
- the evolving nature of the European Union’s Capital Requirements Directive IV and its impact on our remuneration policy;
- the direction of regulatory changes and national policy initiatives in all our presence countries; and
- infrastructure challenges in a number of our presence countries.
During the course of 2015, there were a number of events that had a significant impact on the operating environment and our targeted growth ambitions.
The depressed commodity cycle and the sustained drought in South Africa continue to negatively affect sectors both upstream and downstream of producers. Exchange rate and GDP assumptions made when our strategy was developed differ materially to our latest views, with an average decline of 1.85 percentage points in GDP across the portfolio and an average decline in currencies in our presence countries against the US dollar of 35.5%. The South African National Treasury has indicated that it is expecting growth of 0.9% for 2016, down from 1.3% in 2015.
Tightening of monetary policy has emerged as a key theme across the majority of our presence countries. This is reflective of a slowing Chinese economy as well as the initiation of policy tightening by the US Federal Reserve.
Due to significant currency weakness in some jurisdictions, we have also observed unconventional monetary policies which require a different approach to risk mitigation, particularly in the context of liquidity management. Our strategy has consciously evolved to ensure robust levels of liquidity to withstand any possible liquidity shocks as well as to support our long-term aspirations to grow customer and client advances.
South Africa, which remains our largest market, has seen lower than expected GDP growth, slowing credit extension, a decline in household consumption and a rising interest rate cycle after an extended period of low interest rates with an aggregate 50 basis points increase in 2015 and a further 50 basis points increase in January 2016.
Our own business has seen the impact of the political dynamic in South Africa in 2015.
The weakening exchange rate (most pointedly in December 2015), the volatility of listed share prices and the continued pressure on South Africa’s credit rating have been a particular challenge. Despite this, many sectors of the economy (including financial services) showed growth, and a number of large corporates in South Africa continued to demonstrate strength and resilience.
Concerns over infrastructure delivery have not abated, with power and water supply in the spotlight, and we have also seen social activism in the areas of local service delivery and student protests, parliamentary sit-ins, and challenges to the banking sector, culminating in disruptions at South African universities. The challenges we face, particularly in South Africa, require a stronger relationship between business, labour and government to find solutions and we welcome the current open dialogue with government. In the State of the Nation Address on 11 February 2016, President Zuma announced that the banks, through the Banking Association of South Africa, are launching a project in collaboration with the Finance Minister and National Treasury aimed at establishing a centre of excellence for financial services and leadership training. This initiative will contribute to the South African ambition to become a global financial centre and create opportunities to expand the pool of financial skills on the continent.
Our Values require us to take individual and collective responsibility for building a society that does not tolerate xenophobia, racism or any other form of discrimination. The tragic attacks in South Africa, Kenya and Nigeria were a gross violation of human rights and had the potential to divert Africa from the positive path it is following.
The regulatory transformation brought by Basel III continues to unfold on numerous fronts. We are sustaining progress on strengthening our capital ratios and, along with our peers, we will make use of a committed liquidity facility from the South African Reserve Bank to support our regulatory liquidity requirements from 2016.
Other key changes in the regulatory landscape include IFRS 9 and the impact on model development, impairment management and financial reporting, with a view to implementation in 2018; an increasing focus on consumer protection, Solvency Assessment Management, ‘Twin Peaks’, the Bank Recovery and Resolution Framework and clarity on total loss-absorbing capital requirements; clarity on capital requirements pertaining to interest rate risk in the banking book; a fundamental review of capital requirements relating to the trading businesses; and continued evolutionary changes in regulatory requirements in our presence countries outside South Africa. These changes will have nuanced implications for the nature of our business going forward. Through bilateral and industry engagement with our regulators, we remain committed to ensuring the sound development of the banking sector and its role in promoting financial stability in the countries in which we operate.
We welcome the National Credit Amendment Act’s promotion of responsibility in the credit market and provision of mechanisms for resolving over-indebtedness. Absa Bank has for several years specifically targeted lower than peer growth in line with sustainable and responsible lending. Amendments (effective September 2015) will further impact the way we do business in this area. Similarly, the Credit Life Insurance Regulations seek to address, among others, the cost of credit life insurance to the consumer and the limits in this regard.
The Solvency Assessment and Management Act sets out more robust capital requirements for insurers and guidelines on governance, risk management and disclosure with the aim of protecting policyholders and beneficiaries. The Retail Distribution Regulations propose a number of far-reaching reforms to the regulatory framework for distributing retail financial products to customers in South Africa. We are at the forefront of industry change in the way that we remunerate our insurance and investment advisers, to ensure the best and most appropriate advice to customers.
Over the last year, the Board devoted time to assessing the strategy and conducting business reviews against the backdrop of the macroeconomic and sociopolitical environments, innovation in technology, the continuous progression of cybercrime, shifts in the competitor landscape, and the effect of global and local regulatory changes. Additionally, the Board considered market benchmarks and the performance against them, assumptions of market share, and future trends.
We concluded that our strategy remains robust and targets the key areas for growth, while maintaining sound controls and a strong focus on risk management. It also takes into account the needs of our stakeholders over the short and long term.
Our strategy is underpinned by four clear themes. Firstly, as an African bank we are investing in growth opportunities and providing access to the African and global capital markets; secondly, as a customer-focused organisation we aim to ensure that customer experience remains our primary focus; thirdly, we are simplifying our business processes to improve efficiency; and lastly, we continue to make significant investments in technology and automation.
The continued turnaround in RBB, the maturing of the Corporate and Markets businesses, and the expansion of our insurance offerings across our geographies create the platform for future growth. Our ability to replicate our systems, to innovate, and to launch new products and services, further enhance our existing opportunities.
Infrastructure and the delivery thereof remains a focus across the continent. In terms of the impact on our business, management has developed business continuity management plans under the auspices of our Board committees in relation to both power and water supply. In terms of support for government infrastructure initiatives, we are involved in the provision of finance, including the support for key clients in the renewable energy sector.
In South Africa in particular, the concern for the high rate of unemployment and the low rate of GDP growth remains high on the national agenda. We have adopted a Shared Growth agenda, which for us means making a positive impact on society and delivering shareholder value. The South African Finance Minister mentioned in his Budget Speech on 24 February 2016 that one of the key pillars on which the budget is built is the achievement of inclusive growth. In particular he said that “the budget tabled today is guided by the NDP [National Development Plan]. It is a budget for inclusive growth, it emphasises partnerships amongst role players in our economy…”.
By pursuing mutually beneficial outcomes, we believe that we can contribute towards sustainable solutions to the biggest challenges (including unemployment) facing our continent. For example, we have launched ReadytoWork, a Pan-African employability programme that helps prepare young people for the world of work, and Rise Africa, which is about partnering with talented entrepreneurs and innovators to promote the development of pioneering technologies on the continent.
Small, medium and micro-enterprises remain important to economic growth and employment. In South Africa, we spent R2bn with over 1 400 enterprises with a turnover of less than R50m per annum.
Going forward, we will continue to look for opportunities to create scalable and innovative solutions that address challenges faced by our society. We are committed to partnerships with government to contribute to initiatives aimed at inclusive growth.
2015 governance objectives
The Board is committed to good governance practices that add value to the business. We oversee the risk, compliance and assurance practices and hold management accountable for the responsible delivery of the strategy.
We refined our Board objectives for 2015 to cover our strategic objectives; the importance of running the business in an ethical and transparent way; our IT strategy; our resilience in dealing with emerging global issues and management of our risk and capital frameworks; and our people and culture.
Our Board has overseen the ongoing roll-out of best-practice processes and further education and training. This year has seen further improvement in integrated and interactive strategic planning, holistic monitoring of investment programmes, and replication of this approach through the individual countries overseen by their country boards.
2016 governance objectives
We have a stable and diverse Board with appropriate and strong skill sets. Five of our 14 Board members are non-South African. Of the seven South African members, three are black and three are women.
In terms of gender diversity, we aim to improve female representation on our Group Board to 25% (2015: 21%) by the end of 2016 and to more than 30% in 2017. We have 23% women on our country bank boards and 22% women on our subsidiary boards.
While there were no changes in 2015, we appointed Paul O’Flaherty in February 2016 and we anticipate appointing two or three additional directors to further increase specific skills and to improve succession coverage. Over time, the Board will increase slightly in number to manage the technical demands of the various Board committees.
In particular, I want to share with our stakeholders that Trevor Munday, who will have served our Board for nine years in April, has indicated that he will be stepping off the Barclays Africa and Absa Bank Boards during the course of 2016. Trevor has agreed to remain on the Board beyond the annual general meeting in order to ensure time for a full handover of his duties as Chairman of several of our key committees. Trevor will be up for re-election at the annual general meeting as required in terms of our Board processes, but will be stepping down during the course of 2016. I would like to extend a sincere thank you to Trevor for his leadership, diligence and dedication.
On 1 March 2016, Barclays PLC announced their intention to sell down their interest in Barclays Africa to a level which would permit them to deconsolidate Barclays Africa from an accounting and regulatory perspective, subject to shareholder and regulatory approvals if and as required.
Our Board has noted that Barclays PLC will reduce its shareholding due to recently introduced additional regulatory burdens specific and particular to Barclays PLC as a UK headquartered and globally significant financial institution. The two most recent and most significant regulatory changes which impact Barclays PLC in terms of their holding in Barclays Africa are the minimum requirements of own funds and eligible liabilities (including total loss absorbing capacity), and the global systemically important banks buffer.
We will engage with Barclays PLC and our regulators to ensure that this process has an appropriate and satisfactory outcome for all our stakeholders.
Following this announcement, I stepped down from the Barclays PLC and Barclays Bank PLC boards to ensure that no conflicts of interest exist as a result of me being a member of these boards as well as being the Chairman of the Barclays Africa Board.
The year under review has been challenging and I am proud of Maria, David and their management team’s achievements.
Africa remains a continent of opportunity and we have a strong African franchise and robust strategy against which we continue to deliver. We also have strong subsidiary boards that monitor business performance and drive governance throughout the Group.
The turnaround of our South African RBB business, the expansion of our Corporate Bank and the Markets franchise and the expansion of our insurance businesses in new markets will remain important Board focus areas.
We will do this with the right people, efficient processes, the best platforms, and well-considered risk management.
None of what we achieved this year would have been possible without our customers and clients. We strive to help them achieve their ambitions in the right way and I wish to thank them for their ongoing support.
Finally, I would like to thank the chairmen and boards of our subsidiaries and express my gratitude to our Barclays Africa Board members, in particular the chairs of our Group Board committees, for their ongoing dedication, support and challenge.