Risk performance summary

Effective risk management and control are essential for sustainable and profitable growth

Overview of 2016

Notwithstanding the deteriorating trends in some indicators, the overall performance continued being sound, with all risk and capital measures remaining within the Board-approved risk appetite.

  • Challenging macroeconomic conditions continued putting pressure on consumers and businesses.
  • Credit risk remains within risk appetite.
  • Gross loans and advances to customers and clients increased by 2.7% through growth in our South Africa Wholesale portfolio, while our South Africa Retail portfolio was flat (mostly due to a small decline in home loans). Rest of Africa portfolios declined due to foreign currency movements (growth was 2.7% in constant currency).
  • Our credit loss ratio increased to 108 basis points (2015: 92 basis points). Impairment charges increased to R8.8bn (2015: R6.9bn) as most retail portfolios in South Africa and Rest of Africa somewhat deteriorated, and we incurred a single name default in the Wholesale portfolio. We also raised an additional R283m in macroeconomic provisions.
  • Non-performing loans as a percentage of loans and advances to banks and customers increased to 3.9% (2015: 3.5%), and our non-performing loan coverage improved to 44.2% (2015: 43.2%).
  • Overall coverage on our performing loans increased to 79 basis points (2015: 65 basis points).
  • Market risk exposures remained within our overall risk appetite.
  • In line with the nature of our business, total operational risk losses increased, mainly due to transaction processing issues (49%) as well as fraud (37%) however these are within risk appetite.
  • Our capital position remained above the minimum regulatory limit and the Board-approved Common Equity Tier 1 target range. Our liquidity position remained healthy, above the minimum regulatory requirements and maintained the buffers approved by the Board.
  • Our short and long-term insurance risk was managed within our approved risk appetite.
  • We continued to embed the management of conduct risk.

View our Pillar 3 risk report here.

1 Detailed disclosure for Retail and Wholesale credit portfolios are provided in our 2016 Pillar 3 risk report. 2014 numbers (excluding credit loss ratio) restated to include Rest of Africa and WIMI.
2 Includes trading book and banking book credit exposure.
3 Percentages include only portfolios subject to the internal-ratings based approaches.


Moderate loan growth and increasing impairments as a result of challenging macroeconomic conditions

  • Growth in gross loans and advances to customers declined to 2.7% (2015: 10.4%) or 4.5% in constant currency terms. In South Africa, we had solid growth in our Business Bank, Corporate and Investment Bank portfolios, while our Retail portfolio remained flat. Our Home Loans portfolio decreased by 2%. The growth in South African Wholesale banking was offset by a decline in the Rest of Africa portfolios.
  • Our credit loss ratio increased to 108 basis points (2015: 92 basis points). Our retail credit impairment charge increased to R6 590m (2015: R5 451m) due to the deterioration of most retail portfolios and additional macroeconomic provisions. South African retail credit performance deteriorated due to increased pressure on consumers as a result of the weakening macroeconomic environment. Our wholesale credit impairment charge increased to R2 197m (2015: R1 431m) mainly due to new single name impairments, and additional macroeconomic provisions.
  • Our non-performing loans as a percentage of gross loans and advances increased to 3.9% (2015: 3.5%). Retail non-performing loans increased by 9.8% (2015: 0.2%) due to an increase in overdue accounts, while Wholesale non-performing loans increased by 14.6% (2015: 7.6%) due to new defaults in the consumer sector and Rest of Africa. The extent to which non-performing loans are covered by provisions increased to 44.2% (2015: 43.2%).
  • The extent to which performing loans are covered by provisions, improved to 0.79% (2015: 0.65%).
  • New risk model implementations across the retail portfolios and continuing capital optimisation efforts resulted in lower capital intensity levels.
4 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.
5 Excludes Rest of Africa.


Managing exposures within appetite

  • Our trading exposures were managed within overall risk appetite, and the trading business remained resilient despite the macroeconomic conditions.
  • Hedging enabled us to remain positively exposed to increases in interest rates. Interest rate risk management in the Rest of Africa remains challenging due to the relative unavailability of appropriate derivative instruments with which to hedge.
  • Absa Financial Services submitted two interim Own Risk and Solvency Assessment reports to meet the parallel-run regulatory requirements. The third interim report under the Solvency Assessment Management requirements will be submitted to the Financial Services Board in the second quarter of 2017.
  • Pension plans and benefits are provided in all our presence countries. The overall funding level of the schemes improved. The South African Absa Pension Fund remained the largest fund.
6 The average cost of equity is based on the capital asset pricing model.
7 Board target range 9. 5 – 11. 5%.


Maintaining an optimal mix of capital

  • Our cost of equity increased to 14.75% (2015:13.75%) due to a higher risk-free rate which came into effect in the year.
  • Our risk-weighted assets increased by 0.2% to R703.8bn (2015: R702.7bn). This increase was in line with asset growth and higher counterparty credit risk from over-the-counter derivatives which was partially offset by a reduction due to rand appreciation against most currencies.
  • Capital levels remained above the minimum regulatory requirements and within, or above, our Board-approved capital target ranges.
8 Rest of Africa.
9 The Group liquidity coverage ratio represents the simple average of the three month-end data points prior to December 2016. Surplus high quality liquid asset holdings in excess of the minimum requirement of 70% have been excluded from the aggregated high quality liquid asset number in the case of all Rest of Africa banking entities.


Liquidity remains stable

  • Our liquidity risk position remained sound and within key limits, and we consistently maintained a liquidity coverage ratio in excess of the regulatory minimum requirement of 70%. The liquidity coverage ratio disclosure is calculated using a three-month average of the month-end values for October 2016, November 2016 and December 2016. The three-month average high quality liquid assets increased from R110.0bn in 2015 to R142.1bn in 2016. We have a committed liquidity facility from the South African Reserve Bank, which reflects in our high quality liquid assets from 1 January 2016, thus benefiting our liquidity coverage ratio.
  • Our long-term funding ratio increased to 21.4% (2015: 21.0%) to match the growth in longer-term assets. Our long-term funding is a combination of funding instruments, and issuances of financial instruments in capital markets and directly to private investors.
  • Our loan-to-deposits and debt securities ratio increased to 88.4% (2015: 86.1%) primarily due to growth in loans and advances to customers.


Losses decreasing while fraud loss stabilises

  • Our operational risk losses were higher than in 2015, though still within our risk appetite. In line with the nature of our business, the main contributors were transaction processing and payment-related issues, as well as fraud (49% and 37% respectively).
  • Operational Risk’s risk-weighted assets increased by 1.8%, in line with operating income and growth expectations.
  • Technology improvements continued stabilising our technology environment and payments systems. We migrated our mainframe to a best-in-class data centre, and we are on track to migrate most critical services by September 2017.
  • Card fraud losses remain the major driver of our overall net fraud losses, followed by lending fraud, and payment fraud which includes digital fraud. The overall fraud losses are within expectation.
  • Our customer on-boarding processes have been enhanced, and we continue remediating non-compliant customers and to build analytical capability to detect money laundering threats and activities.
  • Our information security transformation plan aims to continue to strengthen our cyber defences over the next five years.


We continue to monitor and implement conduct-related regulatory changes

We successfully embedded our conduct risk frameworks and tools in line with the Treating Customer Fairly requirements and principles.

We continue enhancing our regulatory controls, particularly those related to Know Your Client, anti-money laundering, and the National Credit Act.

  • Our various regulators conduct reviews of our business operations’ controls, and our progress in meeting requirements. We continuously focus on compliance and risk controls. Sometimes, however, remedial action is required, and administrative penalties and fines are levied on the Group.
  • The remediation plan in respect of non-authenticated electronic debit orders in Corporate and Investment Bank is on track.
  • The regulatory requirements relating to the deployment of in-country data centres in Uganda and Tanzania remains a concern for our Rest of Africa operations. However, both the National Bank of Commerce (Tanzania) and Barclays Bank Tanzania, are on track to ensure compliance.

Further information regarding our approach to conduct.

Looking ahead

We will:

  • continue monitoring
    • and managing the effect of the separation from Barclays PLC on our risk profile;
    • the global economy and the effects of socio-economic challenges in key African markets; and
    • material changes in developed markets arising from key events, including Brexit, and US policy changes;
  • focus further on technology risk, fraud risk (including cybercrime) and anti-money laundering;
  • expand our conduct risk management controls, tools and reporting;
  • increase our focus on data and model initiatives, arising from regulations including BCBS 239 and IFRS 9;
  • continue enhancing our scenario development and stress testing processes, in order to fine-tune our business planning and measurement processes;
  • embed insurance risk as a principal risk and implement appropriate controls in the Rest of Africa insurance entities;
  • meet the insurance regulatory Solvency Assessment Management requirements (Pillars 1, 2 and 3);
  • embed enhanced risk measurement tools and models to optimise extensive use of economic capital metrics in order to enhance the management of our risk portfolios; and
  • aim to meet the minimum requirement of 100% for the net stable funding ratio, which comes into effect 1 January 2018.