Wrap Text
Summary provisional consolidated financial results for the reporting period ended 31 December 2018
Absa Bank Limited
Incorporated in the Republic of South Africa
Registration number: 1986/004794/06
Authorised financial services and registered credit provider (NCRCP7)
Bond Issuer Code: BIABS
Absa Bank Limited
Summary provisional consolidated financial results for the reporting
period ended 31 December 2018
The board of Directors overseas the Banks activities and holds
management accountable for adhering to the risk
governance framework. To do so, directors review reports prepared by
the businesses, Risk and others. They exercise
sound independent judgement, and probe and challenge recommendations,
as well as decisions made by management.
Finance is responsible for establishing a strong control environment
over Absa Group Limited financial reporting
processes and serves as an independent control function advising
business management, escalating identified risks
and establishing policies or processes to manage risk.
Finance is led by the Group's Financial Director who reports directly
to the Chief Executive Officer. The Financial
Director has regular and unrestricted access to the Board of Directors
as well as to the Group Audit and Compliance
Committee (GACC).
Together with the GACC, the board has reviewed and approved the
summary consolidated financial results including
the reporting changes contained in the announcement released on the
Stock Exchange News Services (SENS) on
11 March 2019. The GACC and the Board of Directors are satisfied that
the changes disclosed in the SENS result in
fair presentation of the consolidated financial position and comply,
in all material respects, with the relevant
provisions of the Companies Act, IFRS and interpretations of IFRS, and
SAICA's Reporting Guides.
These summary annual financial results were prepared by Absa Group
Financial Control under the direction and
Supervision of the Absa Group Limited Financial Director, J P Quinn
CA(SA).
Profit and dividend announcement
Overview of results
Absa Bank Limited (the Bank) is a subsidiary of Absa Group Limited
(the Group), which is listed on the exchange
operated by the JSE Limited. These audited summary provisional
financial results are published to provide information to
holders of the Bank's listed non-cumulative, non-redeemable preference
shares.
Commentary relating to the Bank's summary provisional consolidated
financial results is included in the Absa Group Limited
results, as presented to shareholders on 11 March 2019.
Normalised financial results as a consequence of Barclays PLC
separation
On 1 March 2016, Barclays PLC announced its intention to sell down its
62.3% interest in the Group. A comprehensive
separation programme was initiated by Barclays PLC and the Group to
determine possible interactions between the companies
to ensure that the Group can operate as an independent and sustainable
group without the involvement of Barclays PLC.
Barclays PLC currently holds 14.9% in the Group.
As part of its divestment Barclays PLC contributed ?765m to the Group,
primarily in recognition of the investments
required for the Group to separate from Barclays PLC. Investments will
be made primarily in rebranding, technology and
separation-related projects and it is expected that these will
neutralise the capital and cash flow impact of separation
investments on the Group over time.
The separation process will have an impact on the Group?s financial
results for the next few years, most notably by
increasing the capital base in the near term and generating endowment
revenue thereon, with increased costs over time
as the separation investments are concluded ahead of the associated
benefit realisation. International Financial
Reporting Standards (IFRS) require that the Barclays PLC contribution
be recognised directly in equity, while the
subsequent investment expenditure (including the depreciation or
amortisation of capitalised assets), will be
recognised in profit or loss. The aforementioned will result in a
disconnect between underlying business performance
and the IFRS financial results during the separation period.
Normalised financial results will therefore be disclosed
while the underlying business performance is materially different from
the IFRS financial results.
The following presents the items which have been excluded from the
normalised financial results:
* Barclays PLC contribution (including the endowment benefit)
* Hedging linked to separation activities
* Technology and brand separation projects
* Depreciation and amortisation on the aforementioned projects
* Transitional service payments to Barclays PLC
* Employee cost and benefits linked to separation activities
* Separation project execution and support cost
Basis of presentation
IFRS financial results
The Bank's summary provisional annual financial results have been
prepared in accordance with the recognition and
measurement requirements of IFRS, interpretations issued by the IFRS
Interpretations Committee (IFRS-IC), the South
African Institute of Chartered Accountants' Financial Reporting Guides
as issued by the Accounting Practices Committee,
Financial Reporting Pronouncements as issued by the Financial
Reporting Standards Council, the Johannesburg Stock
Exchange (JSE) Listings Requirements and the requirements of the
Companies Act of South Africa.
The information disclosed in the SENS is derived from the information
contained in the annual audited consolidated
and separate financial statements (except items not indicated as
audited) and does not contain full or complete
disclosure details. Any investment decisions by shareholders should be
based on consideration of the audited annual
consolidated financial statements, which are available on request. The
presentation and disclosure of these summary
provisional consolidated financial statements complies with IAS 34
Interim Financial Reporting (IAS 34).
The directors assess the Bank's future performance and financial
position on an ongoing basis and have no reason to
believe that the Bank will not be a going concern in the reporting
period ahead. For this reason, the information
in this report has been prepared on a going concern basis.
The preparation of financial information requires the use of estimates
and assumptions about future conditions.
Use of available information and application of judgement are inherent
in the formation of estimates. The
accounting policies that are deemed critical to the Bank's results and
financial position, in terms of the
materiality of the items to which the policies are applied, and which
involve a high degree of judgement including
the use of assumptions and estimation, are impairment of loans and
advances, goodwill impairment, fair value
measurements, impairment of fair value through other comprehensive
income financial assets (2018)/available-for-sale
financial assets (2017), consolidation of structured or sponsored
entities, post-retirement benefits, provisions,
income taxes, share-based payments, offsetting of financial assets and
liabilities.
Normalised financial results
The summary provisional consolidated normalised financial results
(normalised results) have been prepared to illustrate
the impact of the separation from Barclays PLC and adjust for the
interest income on Barclays PLC's separation
contribution, hedging linked to the separating activities, operating
expenses and other expenses, as well as the
tax impact of the aforementioned items (collectively the
"separation"). The Bank will present normalised results
for future periods where the financial impact of separation is
considered material. Normalisation does not affect
divisional disclosures.
Normalised results have been prepared for illustrative purposes only
and because of their nature may not fairly
present the Bank's financial position, changes in equity, cash flows
and results of operations.
The normalised results have not been prepared using the accounting
policies of the Bank and do not comply with IFRS.
These results are considered to be pro forma financial information and
have been prepared in terms of the Johannesburg
Stock Exchange listing requirements. The pro forma financial
information, is the responsibility of the Bank's Board of
the directors.
The pro forma financial information contained in this announcement has
been reviewed by the group's external auditors
and their unmodified limited assurance report prepared in terms of
ISAE 3420 is available for inspection at the
company's registered office on weekdays from 09:00 to 16:00
Accounting policies
The accounting policies applied in preparing the audited summary
provisional consolidated financial results are the same
for those in place for the Bank's annual consolidated financial
statements for the reporting period ended 31 December 2017,
except for the adoption of IFRS 9, IFRS 15, internal accounting policy
amendments and changes to the Bank's operating
segments and business portfolios changes between operating segments.
Refer to note 15.
Standards issued not yet effective
IFRS 16 Leases (IFRS 16) sets out the principles for the recognition,
measurement, presentation and disclosure of
leases. One of the key changes brought by IFRS 16 is the elimination
of the classification of leases as either operating
leases or finance leases for a lessee, and the introduction a single
lessee accounting model.
Applying the revised model, a lessee is required to recognise:
* a right of use asset together with a lease liability representing
the future lease payments for all leases (unless
the lease term is shorter than 12 months or the underlying asset is
of low value and the related exemptions are
elected); and
* depreciation of lease assets separately from interest on lease
liabilities in the statement of comprehensive income.
The standard provides revised guidance in defining what constitutes a
lease and how the lease term is determined as
well as enhanced disclosure requirements for both lessees and lessors
about its leasing activities and how exposures are
managed.
During 2018, the joint leases programme (incorporating corporate real
estate services and finance) has focused its
efforts on implementing the IT solution, which will ensure that leases
are recognised and disclosed in terms of the
requirements of IFRS 16, collating the required lease data, designing
and testing new processes, and ensuring
appropriate financial disclosures.
The effective date of IFRS 16 is 1 January 2019. The Bank intends to
apply the modified retrospective approach on
adoption, with right of use assets measured retrospectively using the
Bank's transition date incremental borrowing rate.
The implementation of IFRS 16 will require the recognition of right-
of-use assets (presented as part of property and
equipment) and lease liabilities, together with a debit against
retained earnings of between R190m and R240m (net of
deferred tax and the release of IAS 17 straight line reserves). Right-
of-use assets will be risk weighted in line with the
nature of the underlying assets, and the debit to retained income will
reduce CET1. The value of the right-of-use assets
recognised is expected to be less than R3bn and the value of the
increase in lease liabilities is expected to be less
than R3.7bn (before the release of the IAS 17 straight-lining
liability of approximately R390m).
Audit report
Ernst & Young Inc. (EY), the Bank's independent auditor, has audited
the annual consolidated and separate financial
statements of the Bank from which management prepared the summary
provisional consolidated financial results. The auditor has
expressed an unqualified audit opinion on the consolidated annual
financial statements. The summary provisional consolidated
financial results comprise: the summary provisional consolidated
statement of financial position at 31 December 2018, summary
provisional consolidated statement of comprehensive income, summary
provisional consolidated statement of changes in equity
and summary provisional consolidated statement of cash flows for the
reporting period then ended and selected explanatory
notes (on pages 1 -3 and 9-66), excluding items indicated as
unaudited. The audit report on the consolidated annual
financial statements as well as the independent reporting accountants'
reports on the normalised financial results is
available for inspection at the Bank's registered office.
These summary provisional consolidated financial statements (on pages
1- 3 and 9-66) for the year ended 31 December 2018 have been
audited by EY, who expressed an unmodified opinion thereon. A copy of
the auditor's report on the summary provisional consolidated
financial statements is available for inspection at the company's
registered office.
Events after the reporting period
Absa Bank Limited CEO, Maria Ramos announced her retirement on the 29
January 2019, effective 28 February 2019. The
Board has appointed Ren? van Wyk as Absa's Chief Executive with effect
from 1 March 2019.
Apart from the above mentioned, the directors are not aware of any
other events (as defined per IAS10 Events after the
Reporting Period) after the reporting date of 31 December 2018 and the
date of authorisation of these annual
consolidated and separate financial statements.
On behalf of the Board
W E Lucas-Bull J P Quinn
Chairman Financial Director
Johannesburg
8 March 2019
Declaration of preference share dividend number 26
Absa Bank non-cumulative, non-redeemable preference shares (Absa Bank
preference shares)
The Absa Bank preference shares have an effective coupon rate of 70%
of Absa Bank's average prime overdraft lending
rate for 1 September 2018 to 28 February 2019.Absa Bank's prevailing
prime overdraft lending rate as at 28 February 2019 was 10.25%.
Notice is hereby given that preference dividend number 26, equal to
70% of the average prime rate for 1 September 2018
to 28 February 2019, per Absa Bank preference share has been declared
for the period 1 September 2018 to
28 February 2019. The dividend is payable on Monday, 15 April 2019, to
shareholders of the Absa Bank preference shares
recorded in the Register of Members of the Company at the close of
business on Friday, 12 April 2019.
The directors of Absa Bank confirm that the Bank will satisfy the
solvency and liquidity test immediately after
completion of the dividend distribution.
Based on the average prime rate, the preference dividend payable for
the period 1 September 2018 to 28 February 2019
is 3 518.6986 cents per Absa Bank preference share.
The dividend will be subject to dividends withholding tax at a rate of
20%. In accordance with paragraphs 11.17(a)(i)
to (ix) and 11.17(c) of the JSE Listings Requirements, the following
additional information is disclosed:
* The dividend has been declared out of income reserves.
* The local dividend tax rate is twenty per cent (20%).
* The gross local dividend amount is 3 518.6986 cents per preference
share for shareholders exempt from the dividend
tax.
* The net local dividend for shareholders subject to withholding tax
at a rate of 20% amounts to 2 814.95888 cents per
preference share.
* Absa Bank currently has 4 944 839 preference shares in issue.
* Absa Bank's income tax reference number is 9575117719.
In compliance with the requirements of Strate, the electronic
settlement and custody system used by JSE Limited, the
following salient dates for the payment of the dividend are
applicable:
Last day to trade cum dividend Tuesday, 9 April 2019
Shares commence trading ex dividend Wednesday, 10 April
2019
Record date Friday, 12 April 2019
Payment date Monday, 15 April 2019
Share certificates may not be dematerialised or rematerialised between
Wednesday, 10 April 2019 and Friday,
12 April 2019, both dates inclusive.
On Monday, 15 April 2019, the dividend will be electronically
transferred to the bank accounts of shareholders.
On behalf of the Board
N R Drutman
Company Secretary
Johannesburg
8 March 2019
Absa Bank Limited is a company domiciled in South Africa. Its
registered office is 7th Floor, Absa Towers West,
15 Troye Street, Johannesburg, 2001.
Summary provisional consolidated IFRS salient features for the
reporting period ended
31 December
2018 2017
Statement of comprehensive income (Rm)
Income
51 843 50 094
Operating expenses
34 341 31 609
Profit attributable to ordinary equity holders
7 480 8 068
Headline earnings(1)
7 853 8 549
Statement of financial position
Loans and advances to customers (Rm)
735 200 660 492
Total assets (Rm)
1 079 679 988 358
Deposits due to customers (Rm)
605 647 583 825
Loans to deposits and debt securities ratio (%)
96. 0 91. 5
Financial performance (%)
Return on equity (RoE)
10.4 11.8
Return on average assets (RoA)
0.77 0.91
Return on risk-weighted assets (RoRWA)
1.44 1.64
Stage 3 loans ratio on gross loans and advances
4.81 n/a
Non-performance loans (NPL) ratio on gross loans and advances
n/a 3.75
Operating performance(%)
Net interest margin on average interest - bearing assets(2)
3.65 3.80
Credit loss ratio on gross loans and advances to customers and banks
0.68 0.73
Non-interest as a percentage of total income
42.2 41.3
Cost-to-income ratio
66.2 63.1
Jaws
(5) (12)
Effective tax rate
27.2 27.9
Share statistics (million)
Number of ordinary shares in issue
448.3 448.3
Weighted average number of ordinary shares in issue
448.3 440.7
Diluted weighted average number of ordinary shares in issue
448.3 440.7
Share statistics (cents)
Headline earnings per ordinary share (HEPS)
1 751.7 1 939.4
Diluted headline earnings per ordinary share (DHEPS)
1 751.7 1 939.4
Basic earnings per ordinary share (EPS)
1 668.7 1 830.3
Diluted basic earnings per ordinary share (DEPS)
1 668.7 1 830.3
Dividend per ordinary share relating to income for the reporting
period 713.8 2 373
Dividend cover times (times)
2.5 0.8
NAV per ordinary share
17 022 17 998
Tangible NAV per ordinary share
15 406 17 136
Capital adequacy (%)
Absa Bank Limited
16.5 16.9
Common Equity Tier 1 (%)
Absa Bank Limited
12.3 13.4
(1) After allowing for R351m (2017: R362m) profit attributable to
preference equity holders and R190m (2017: R48m)
profit attributable to Additional Tier 1 Capital holders.
(2) Net interest margin has been restated to reflect an update of the
Bank's policy for classifying assets as
interest bearing or non-interest bearing. The updated policy
classifies reverse repurchase transactions entered into
for regulatory purposes as interest bearing; under the previous
policy these transactions were classified as
non-interest bearing. Under the previous policy the Bank's net
interest margin would have been 3.79% (2017: 3.91%).
Summary provisional consolidated normalised salient features for the
reporting period ended
31 December
2018 2017
Statement of comprehensive income (Rm)
Income
50 987 49 689
Operating expenses
31 499 29 708
Profit attributable to ordinary equity holders
9 252 9 550
Headline earnings(1)
9 623 9 793
Statement of financial position
Total assets (Rm)
1 076 520 987 446
Financial performance (%)
Return on equity (RoE)
14.7 14.8
Return on average assets (RoA)
0.95 1.05
Return on risk-weighted assets (RoRWA)
1.77 1.88
Operating performance(%)
Net interest margin on average interest - bearing assets(2)
3.63 3.79
Non-interest as a percentage of total income
41.9 41.5
Cost-to-income ratio
61.8 59.8
Jaws
(3) (6)
Effective tax rate
25.7 27.0
Share statistics (million)
Weighted average number of ordinary shares in issue
448.3 440.8
Diluted weighted average number of ordinary shares in issue
448.3 440.8
Share statistics (cents)
Headline earnings per ordinary share (HEPS)
2 146.6 2 221.9
Diluted headline earnings per ordinary share (DHEPS)
2 146.6 2 221.9
Basic earnings per ordinary share (EPS)
2 063.6 2 166.5
Diluted basic earnings per ordinary share (DEPS)
2 063.6 2 166.5
Dividend per ordinary share relating to income for the reporting
period 713.8 2 372.7
Dividend cover times (times)
3.0 0.9
NAV per ordinary share
15 013 15 599
Tangible NAV per ordinary share
13 997 14 913
Capital adequacy (%)
Absa Bank Limited
15.4 15.0
Common Equity Tier 1 (%)
Absa Bank Limited
11.2 11.6
(1) After allowing for R351m (2017: R362m) profit attributable to
preference equity holders and R190m (2017: R48m)
profit attributable to Additional Tier 1 Capital.
(2) Net interest margin has been restated to reflect an update of the
Bank's policy for classifying assets as
interest bearing or non-interest bearing. The updated policy
classifies reverse repurchase transactions entered into
for regulatory purposes as interest bearing; under the previous
policy these transactions were classified as
non-interest bearing. Under the previous policy the Bank's net
interest margin would have been 3.77% (2017: 3.90%).
Summary provisional consolidated normalised reconciliation for the
reporting period ended
31 December
IFRS Barclays Normalised
Bank separation Bank
performance(1) effects(2) performance(3)
2018 2018 2018
Statement of comprehensive income (Rm)
Net interest income
29 952 331 29 621
Non-interest income
21 891 525 21 366
Total income
51 843 856 50 987
Impairment losses
(5 078) - (5 078)
Operating expenses
(34 341) (2 841) (31 500)
Other expenses
(1 579) (173) (1 406)
Share of post-tax results of associates and joint ventures
179 - 179
Operating profit before income tax
11 024 (2 158) 13 182
Tax expenses
(3 002) 388 (3 390)
Profit for the reporting period
8 022 (1 770) 9 792
Profit attributable to:
Ordinary equity holders
7 481 (1 770) 9 251
Preference shares
351 - 351
Additional Tier 1
190 - 190
8 022 (1 770) 9 792
Headline earnings
7 853 (1 770) 9 623
Operating performance (%)
Net interest margin on average interest - bearing assets
3.65 n/a 3.63
Credit loss ratio on gross loans and advances to customers and banks
0.68 n/a 0.68
Non - interest income as % of total income
42.2 n/a 41.9
Income growth
3 n/a 3
Operating expenses growth
9 n/a 6
Cost-to-income ratio
66.2 n/a 61.8
Effective tax rate
27.2 n/a 25.7
Statement of financial position (Rm)
Loans and advances to customers
735 200 - 735 200
Loans and advances to banks
40 533 - 40 533
Investment securities
93 576 - 93 576
Other assets
210 370 3 159 207 211
Total assets
1 079 679 3 159 1 076 520
Deposits due to customers
605 647 - 605 647
Debt securities in issue
160 042 - 160 042
Other liabilities
230 304 (5 845) 236 149
Total liabilities
995 993 (5 845) (4) 1 001 838
Equity
83 686 9 004 74 682
Total equity and liabilities
1 079 679 3 159 1 076 520
Key performance ratios (%)
RoA
0.77 n/a 0.95
RoE
10.4 n/a 14.7
Capital adequacy
16.5 n/a 15.4
Common Equity Tier 1
12.3 n/a 11.2
Share statistics (cents)
Diluted headline earnings per ordinary share
1 751.7 n/a 2 146.6
(1) IFRS performance, presents the IFRS information as extracted from
the Bank's summary provisional consolidated
financial results for the reporting period ended 31 December
2018.
(2) Barclays separation effects, presents the financial effects of the
separation on the summary provisional
consolidated financial results of the Group.
(3) Normalised performance presents the summary provisional
consolidated financial resutls of the Bank, after
adjusting for the consequences of the seperation.
(4) This represents the contribution of R12.1bn that was received from
Barclays PLC, net of amounts already spent on
separation activities. The cash received is held centrally by
Treasury and is presented as an intersegmental asset
in 'Other liabilities'.
Summary provisional consolidated normalised reconciliation for the
reporting period ended
31 December
IFRS Barclays Normalised
Bank separation Bank
performance effects performance
2017 2017 2017
Statement of comprehensive income (Rm)
Net interest income
29 413 325 29 088
Non-interest income
20 681 80 20 601
Total income
50 094 405 49 689
Impairment losses
(5 113) - (5 113)
Operating expenses
(31 608) (1 901) (29 707)
Other expenses
(1 788) (394) (1 394)
Share of post-tax results of associates and joint ventures
170 - 170
Operating profit before income tax
11 755 (1 890) 13 645
Tax expenses
(3 278) 408 (3 687)
Profit for the reporting period
8 477 (1 482) 9 959
Profit attributable to:
Ordinary equity holders
8 067 (1 482) 9 549
Preference shares
362 - 362
Additional Tier 1
48 - 48
8 477 (1 482) 9 959
Headline earnings
8 548 (1 245) 9 793
Operating performance (%)
Net interest margin on average interest - bearing assets(1)
3.80 n/a 3.79
Credit loss ratio on gross loans and advances to customers and banks
0.87 n/a 0.87
Non - interest income as % of total income
41.3 n/a 41.5
Income growth
3 n/a 2
Operating expenses growth
15 n/a 8
Cost-to-income ratio
63.1 n/a 59.8
Effective tax rate
27.9 n/a 27.0
Statement of financial position (Rm)
Loans and advances to customers
660 492 - 660 492
Loans and advances to banks
43 217 - 43 217
Investment securities
76 524 - 76 524
Other assets
208 125 912 207 213
Total assets
988 358 912 987 446
Deposits due to customers
583 825 - 583 825
Debt securities in issue
137 942 - 137 942
Other liabilities
181 262 (9 840) (2) 191 102
Total liabilities
903 029 (9 840) 912 869
Equity
85 329 10 752 74 577
Total equity and liabilities
988 358 912 987 446
Key performance ratios (%)
RoA
0.91 n/a 1.05
RoE
14.3 n/a 14.8
Capital adequacy
16.9 n/a 15.0
Common Equity Tier 1
13.4 n/a 11.6
Share statistics (cents)
Diluted headline earnings per ordinary share
1 939.4 n/a 2 221.9
(1) Net interest margin has been restated to reflect an update of the
Bank's policy for classifying assets as
interest bearing or non-interest bearing. The updated policy
classifies reverse repurchase transactions entered into
for regulatory purposes as interest bearing; under the previous
policy these transactions were classified as
non-interest bearing. Under the previous policy the Bank's net
interest margin would have been 3.79% (2017:3.91%) on
IFRS and 3.77% (2017: 3.90%) on normalised basis.
(2) This represents the contribution of R12.1bn that was received from
Barclays PLC, net of amounts already spent on
separation activities. The cash received is held centrally by
Treasury and is presented as an intersegmental asset
in 'Other liabilities'.
Summary provisional consolidated statement of financial position as at
31 December
2018 2017
Note
Rm Rm
Assets
Cash, cash balances and balances with central banks 22
679 28 792
Investment securities 93
576 76 524
Loans and advances to banks 2 40
533 43 217
Trading portfolio assets 101
271 104 781
Hedging portfolio assets 2
407 2 667
Other assets 22
294 15 513
Current tax assets
366 57
Non-current assets held for sale
50 1 119
Loans and advances to customers 2 735
200 660 492
Loans to Group Companies 37
363 36 530
Investments in associates and joint ventures 1
310 1 235
Investment property
180 -
Property and equipment 13
609 13 519
Goodwill and intangible assets 7
246 3 861
Deferred tax assets 1
595 51
Total assets 1 079
679 988 358
Liabilities
Deposits from banks 127
959 74 110
Trading portfolio liabilities 46
280 59 834
Hedging portfolio liabilities 1
343 1 117
Other liabilities 31
907 27 824
Provisions 2
682 2 073
Current tax liabilities
66 55
Deposits due to customers 605
647 583 825
Debt securities in issue 160
042 137 942
Borrowed funds 3 20
052 15 866
Deferred tax liabilities
15 383
Total liabilities 995
993 903 029
Equity
Capital and reserves
Attributable to ordinary equity holders:
Ordinary share capital
304 304
Ordinary share premium 36
879 36 879
Preference share capital
1 1
Preference share premium 4
643 4 643
Additional Tier 1 Capital 2
741 1 500
Retained earnings 35
209 37 855
Other reserves 3
918 4 145
83
695 85 327
Non-controlling interest - ordinary shares
(9) 2
Total equity 83
686 85 329
Total liabilities and equity 1 079
679 988 358
Summary provisional consolidated statement of comprehensive income for
the reporting period ended
31 December
Restated
2018 2017
Note
Rm Rm
Net interest income
29 952 29 413
Interest and similar income
74 155 71 438
Effective interest income (1)
72 565 70 161
Other interest income (1)
1 590 1 277
Interest expense and similar charges
(44 203) (42 025)
Effective interest expense
(44 203) (42 025)
Non-interest income 4
21 891 20 681
Net fee and commission income
18 491 17 279
Fee and commission income
19 781 18 608
Fee and commission expense
(1 290) (1 329)
Gains and losses from banking and trading activities
3 177 2 860
Gains and losses from investment activities
1 3
Other operating income
222 539
Total Income
51 843 50 094
Impairment losses on loans and advances
(5 078) (5 113)
Operating income before operating expenditure
46 765 44 981
Operating expenditure
(34 341) (31 608)
Other expenses
(1 579) (1 788)
Other impairments 5
(433) (512)
Indirect taxation
(1 146) (1276)
Share of post-tax results of associates and joint ventures
179 170
Operating profit before income tax
11 024 11 755
Taxation expense
(3 002) (3 278)
Profit for the reporting period
8 022 8 477
Profit attributable to:
Ordinary equity holders
7 481 8 067
Preference equity holders
351 362
Additional Tier 1 Capital
190 48
8 022 8 477
Earnings per share:
Basic earnings per share (cents per share)
1 668.7 1 830.3
Diluted earnings per share (cents per share)
1 668.7 1 830.3
(1) An amendment was made to IAS 1 Presentation of Financial
Statements, which is effective from 1 January 2018.
The amendment requires 'interest and similar income' which is
calculated using the effective interest method, to be
presented separately on the face of the statement of comprehensive
income. The Bank has elected to apply the same
approach in presenting 'interest expense and similar charges' to
achieve consistency.
Summary provisional consolidated statement of comprehensive income for
the reporting period ended
31 December
2018 2017
Rm Rm
Profit for the reporting period
8 022 8 477
Other comprehensive income
Items that will not be reclassified to profit or loss
(11) (154)
Fair value gain on equity instruments measured at FVOCI
19 -
Fair value gains
27 -
Deferred tax
(8) -
Movement of liabilities designated at FVTPL due to changes in own
credit risk (13) (147)
Fair value losses
(71) (147)
Deferred tax
58 -
Movement in retirement benefit fund assets and liabilities
(17) (7)
Increase in retirement benefit surplus
(24) (10)
Deferred tax
7 3
Items that are or may be subsequently reclassified to profit or loss
(236) 677
Movement in foreign currency translation reserve
- 55
Differences in translation of foreign operations
- 3
Release to profit or loss
- 52
Movement in cash flow hedging reserve
(247) 794
Fair value gains
207 1465
Amount removed from other comprehensive income and recognised in
profit or loss (550) (365)
Deferred tax
96 (306)
Movement in fair value of debt instruments measured at FVOCI
11 -
Fair value gains
26 -
Release to profit or loss
(9) -
Deferred tax
(6) -
Movement in available-for-sale reserve
- (172)
Fair value losses
- (307)
Release to profit or loss
- 67
Deferred tax
- 68
Total comprehensive income for the reporting period
7 775 9 000
Total comprehensive income attributable to:
Ordinary equity holders
7 234 8 590
Preference equity holders
351 362
Additional Tier 1 Capital
190 48
7 775 9 000
Summary provisional consolidated statement of changes in equity for
the period ended
2018
Number
of Preference
ordinary Share Share share
shares
(1) capital premium capital
'000 Rm Rm Rm
Balance at the end of the previous reporting period 448
301 304 36 879 1
IFRS 9
- - - -
IFRS 15
- - - -
Adjusted balance at the beginning of the reporting period 448
301 304 36 879 1
Total comprehensive income
- - - -
Profit for the period
- - - -
Other comprehensive income
- - - -
Dividends paid during the reporting period
- - -
Distributions paid during the reporting period
- - - -
Issuance of Additional Tier 1 Capital
- - - -
Purchase of Group shares in respect of equity-settled
share-based payment arrangements
- - - -
Movement in share-based payment reserve
- - - -
Transfer from share-based payment reserve
- - - -
Value of employee services
- - - -
Deferred tax
- - - -
Share of post-tax results of associates and joint ventures
- - - -
Balance at the end of the reporting period 448
301 304 36 879 1
Note
All movements are reflected net of taxation.
(1) This includes ordinary shares and 'A' ordinary shares.
2018
Preference Additional Retained Total
share Tier 1 earnings other
premium Capital equity reserves
Rm Rm Rm Rm
Balance at the end of the previous reporting period 4
643 1 500 37 855 4 145
IFRS 9
- - (4 000) (236)
IFRS 15
- - (44) -
Adjusted balance at the beginning of the reporting period 4
643 1 500 33 811 3 909
Total comprehensive income
351 190 7 449 (215)
Profit for the period
351 190 7 481 -
Other comprehensive income
- - (32) (215)
Dividends paid during the reporting period
(351) - (5 700) -
Distributions paid during the reporting period
- (190) - -
Issuance of Additional Tier 1 Capital
- 1 241 - -
Purchase of Group shares in respect of equity-settled
share-based payment arrangements
- - (172) -
Movement in share-based payment reserve
- - - 45
Transfer from share-based payment reserve
- - - (429)
Value of employee services
- - - 497
Deferred tax
- - - (23)
Share of post-tax results of associates and joint ventures
- - (179) 179
Balance at the end of the reporting period 4
643 2 741 35 209 3 918
2018
Fair value Foreign
through other Cash flow currency
comprehensive hedging translation Capital
income
reserve reserve reserve Reserve
Rm Rm Rm Rm
Balance at the end of the previous reporting period
87 649 1 1 422
IFRS 9
(132) - - -
IFRS 15
- - - -
Adjusted balance at the beginning of the reporting period
(45) 649 1 1 422
Total comprehensive income
32 (247) - -
Profit for the period
- - - -
Other comprehensive income
32 (247) - -
Dividends paid during the reporting period
- - - -
Distributions paid during the reporting period
- - - -
Issuance of Additional Tier 1 Capital
- - - -
Purchase of Group shares in respect of equity-settled
share-based payment arrangements
- - - -
Movement in share-based payment reserve
- - - -
Transfer from share-based payment reserve
- - - -
Value of employee services
- - - -
Deferred tax
- - - -
Share of post-tax results of associates and joint ventures
- - - -
Balance at the end of the reporting period
(13) 402 1 1 422
2018
Share- Associates Total equity
based and joint attributable
payment ventures to equity
reserve reserve holders
Rm Rm Rm
Balance at the end of the previous reporting period
749 1 237 85 327
IFRS 9
- (104) (4 236)
IFRS 15
- - (44)
Adjusted balance at the beginning of the reporting period
749 1 133 81 047
Total comprehensive income
- - 7 775
Profit for the period
- - 8 022
Other comprehensive income
- - (247)
Dividends paid during the reporting period
- - (6 051)
Distributions paid during the reporting period
- - (190)
Issuance of Additional Tier 1 Capital
- - 1 241
Purchase of Group shares in respect of equity-settled
share-based payment arrangements
- - (172)
Movement in share-based payment reserve
45 - 45
Transfer from share-based payment reserve
(429) - (429)
Value of employee services
497 - 497
Deferred tax
(23) - (23)
Share of post-tax results of associates and joint ventures
- 179 -
Balance at the end of the reporting period
794 1 312 83 695
2018
Non-
controlling
interest -
ordinary shares Total
Rm Rm
Balance at the end of the previous reporting period
2 85 329
IFRS 9
- (4 236)
IFRS 15
- (44)
Adjusted balance at the beginning of the reporting period
2 81 049
Total comprehensive income
- 7 775
Profit for the period
- 8 022
Other comprehensive income
- (247)
Dividends paid during the reporting period
(11) (6 062)
Distributions paid during the reporting period
- (190)
Issuance of Additional Tier 1 Capital
- 1 241
Purchase of Group shares in respect of equity-settled
share-based payment arrangements
- (172)
Movement in share-based payment reserve
- 45
Transfer from share-based payment reserve
- (429)
Value of employee services
- 497
Deferred tax
- (23)
Share of post-tax results of associates and joint ventures
- -
Balance at the end of the reporting period
(9) 83 686
2017
Number of Preference
ordinary Share Share share
shares (1) capital premium capital
'000 Rm Rm Rm
Balance at the beginning of the reporting period
431 318 304 24 964 1
Total comprehensive income for the reporting period
- - - -
Profit for the reporting period
- - - -
Other comprehensive income
- - - -
Dividends paid during the reporting period
- - - -
Distributions paid during the reporting period
- - - -
Shares issued
16 983 - 3 500 -
Issuance of Additional Tier 1 Capital
- - - -
Purchase of Barclays Africa Group Limited shares in respect of
equity-settled share-based payment arrangements
- - - -
Movement in share-based payment reserve
- - - -
Transfer from share-based payment reserve
- - - -
Value of employee services
- - - -
Conversion from cash-settled schemes
- - - -
Deferred tax
- - - -
Share of post-tax results of associates and joint ventures
- - - -
Disposal of non-controlling interest and related transaction costs (2)
- - - -
Barclays separation (3)
- - 8 415 -
Shareholder contribution - fair value of investment (4)
- - - -
Balance at the end of the reporting period
448 301 304 36 879 1
2017
Preference Additional Retained Total
share Tier 1 earnings other
premium Capital(5) equity reserves
Rm Rm Rm Rm
Balance at the beginning of the reporting period
4 643 - 36 099 3 262
Total comprehensive income for the reporting period
- - 8 323 677
Profit for the reporting period
- - 8 477 -
Other comprehensive income
- - (154) 677
Dividends paid during the reporting period
- - (9 962) -
Distributions paid during the reporting period
- - (48) -
Shares issued
- - - -
Issuance of Additional Tier 1 Capital
- 1 500 - -
Purchase of Barclays Africa Group Limited shares in respect of
equity-settled share-based payment arrangements
- - (125) -
Movement in share-based payment reserve
- - - 36
Transfer from share-based payment reserve
- - - (586)
Value of employee services
- - - 590
Conversion from cash-settled schemes
- - - -
Deferred tax
- - - 32
Share of post-tax results of associates and joint ventures
- - (170) 170
Disposal of non-controlling interest and related transaction costs (2)
- - - -
Barclays separation (3)
- - 3 690 -
Shareholder contribution - fair value of investment (4)
- - 48 -
Balance at the end of the reporting period
4 643 1 500 37 855 4 145
2017
Available- Cash Foreign
for- flow currency
sale hedging translation Capital
reserve reserve reserve reserve
Rm Rm Rm Rm
Balance at the beginning of the reporting period
259 (145) (54) 22
Total comprehensive income for the reporting period
(172) 794 55 -
Profit for the reporting period
- - - -
Other comprehensive income
(172) 794 55 -
Dividends paid during the reporting period
- - - -
Distributions paid during the reporting period
- - - -
Shares issued
- - - -
Issuance of Additional Tier 1 Capital
- - - -
Purchase of Barclays Africa Group Limited shares in respect of
equity-settled share-based payment arrangements
- - - -
Movement in share-based payment reserve
- - - -
Transfer from share-based payment reserve
- - - -
Value of employee services
- - - -
Conversion from cash-settled schemes
- - - -
Deferred tax
- - - -
Share of post-tax results of associates and joint ventures
- - - -
Disposal of non-controlling interest and related transaction costs (2)
- - - -
Barclays separation (3)
- - - -
Shareholder contribution - fair value of investment (4)
- - - -
Balance at the end of the reporting period
87 649 1 22
2017
Share- Associates Total equity
based and joint attributable
payment ventures to equity
reserve reserve holders
Rm Rm Rm
Balance at the beginning of the reporting period
713 1 067 69 273
Total comprehensive income for the reporting period
- - 9 000
Profit for the reporting period
- - 8 477
Other comprehensive income
- - 523
Dividends paid during the reporting period
- - (9 962)
Distributions paid during the reporting period
- - (48)
Shares issued
- - 3 500
Issuance of Additional Tier 1 Capital
- - 1 500
Purchase of Barclays Africa Group Limited shares in respect of
equity-settled share-based payment arrangements
- - (125)
Movement in share-based payment reserve
36 - 36
Transfer from share-based payment reserve
(586) - (586)
Value of employee services
590 - 590
Conversion from cash-settled schemes
- -
Deferred tax
32 - 32
Share of post-tax results of associates and joint ventures
- 170 -
Disposal of non-controlling interest and related transaction costs (2)
- - -
Barclays separation (3)
- - 12 105
Shareholder contribution - fair value of investment (4)
- - 48
Balance at the end of the reporting period
749 1 237 85 327
2017
Non-controlling
interest -
ordinary shares Total
Rm Rm
Balance at the beginning of the reporting period
26 69 299
Total comprehensive income for the reporting period
- 9 000
Profit for the reporting period
- 8 477
Other comprehensive income
- 523
Dividends paid during the reporting period
- (9 962)
Distributions paid during the reporting period
- (48)
Shares issued
- 3 500
Issuance of Additional Tier 1 Capital
- 1 500
Purchase of Barclays Africa Group Limited shares in respect of
equity-settled share-based payment arrangements
- (125)
Movement in share-based payment reserve
- 36
Transfer from share-based payment reserve
- (586)
Value of employee services
- 590
Conversion from cash-settled schemes
- -
Deferred tax
- 32
Share of post-tax results of associates and joint ventures
- -
Disposal of non-controlling interest and related transaction costs (2)
(24) (24)
Barclays separation (3)
- 12 105
Shareholder contribution - fair value of investment (4)
- 48
Balance at the end of the reporting period
2 85 329
All movements are reflected net of taxation.
(1) This includes ordinary shares and 'A' ordinary shares.
(2) The Bank disposed of its controlling stake in a non-core
subsidiary which was classified as held for sale.
(3) As part of the Barclays PLC disinvestment, the Bank issued 10
Ordinary Shares to Barclays Bank PLC for R8,4bn
and received an additional R3,7bn as a cash contribution. The
resultant cash received meets the definition of a
transaction with a shareholder.
(4) CLS Group Holding AG shares were transferred to Barclays PLC for
no consideration in 2005. During the prior
reporting period these shares were transferred back to the Bank
for a nominal consideration of one British Pound
Sterling (GBP). The shares have been recognised at a fair value of
R48m. The related credit has been recognised in
equity as a shareholder contribution.
(5) The additional Tier 1 capital notes represent perpetual,
subordinated instruments redeemable in full at the
option of Absa Group Limited (the issuer) on 12 September 2022
subject to regulatory approval. Interest is paid at
the discretion of the issuer and is non-cumulative. In addition,
if certain conditions are reached, the regulator
may prohibit the issuer from making interest payments.
Accordingly, the instruments are classified as equity
instruments.
Summary provisional consolidated statement of cash flows for the
period ended
Restated
2018(1) 2017(1)
Note Rm Rm
Net cash generated from/(utilised in) operating activies
6 346 (4 478)
Income taxes paid
(3 614) (3 513)
Net cash generated from/(utilised in) other operating activies
9 960 (965)
Net cash utilised in investing activities
(5 482) (3 906)
Purchase of property and equipment
(2 641) (2 622)
Proceeds from sale of non-current assets held for sale
1 079 672
Net cash utilised in other investing activities
(3 920) (1 956)
Net cash utilised/generated from financing activities
(1 946) 7 008
Net cash generated from Barclays separation
- 12 106
Issue of ordinary shares
- 3 500
Issue of Additional Tier 1 Capital
1 241 1 500
Proceeds from borrowed funds
6 432 2 841
Repayment of borrowed funds
(3 195) (2 805)
Dividends paid
(6 062) (9 962)
Net cash utilised in other financing activities
(362) (172)
Net (decrease)/increase in cash and cash equivalents
(1 082) (1 376)
Cash and cash equivalents at the beginning of the reporting period
1 11 040 12 416
Cash and cash equivalents at the end of the reporting period
2 9 958 11 040
Notes to the summary provisional consolidated statement of cash flows
2018(1) 2017(1)
Rm Rm
1. Cash and cash equivalents at the beginning of the reporting period
Cash, cash balances and balances with central banks(2)
9 684 9 662
Loans and advances to banks(3)
1 356 2 754
11 040 12 416
2. Cash and cash equivalents at the end of the reporting period
Cash, cash balances and balances with central banks(2)
9 570 9 684
Loans and advances to banks(3)
388 1 356
9 958 11 040
(1) In order to provide more transparent disclosures, the condensed
summary provisional statement of cash flows
has been expanded to include line items specifying significant
cash flow movements. The effect of this is to
provide specific disclosure of the following line items, rather
than include them in the total cash generated
by/used in operating, investing or financing activities: Income
taxes paid, purchase of property and equipment,
proceeds from sale of non-current assets, cash generated from
Barclays separation, Issue of shares, Issue of
additional tier 1 capital, proceeds/repayments of borrowed funds,
dividends paid. Comparative statements of
cash flows have been restated to take account of this additional
disclosure.
(2) Includes coins and bank notes.
(3) Includes call advances, which are used as working capital for the
Bank.
Summary provisional notes to the consolidated financial results for
the period ended
1. Non-current assets and non-current liabilities held for sale
The following movements in non-current assets and non-current
liabilities held for sale were effected during the
current financial reporting period:
* Retail Banking South Africa disposed of a loan book with a carrying
amount of R1 118m and property and equipment
with a carrying amount of R1m.
* Head office transferred property and equipment with a carrying
amount of R50m to non-current assets held for sale.
The following movements in non-current assets and non-current
liabilities held for sale were effected during the
previous reporting period:
* Retail Banking South Africa transferred loans and advances to
customers of R1 118m and property and equipment of
R1m to non-current assets held for sale. The CPF Equity division in
Business Banking South Africa disposed of a
subsidiary with assets of R373m and liabilities of R26m out of non-
current assets and non-current liabilities held
for sale respectively.
* Corporate and Investment Banking South Africa (CIB SA) transferred
investment securities with a carrying value of
R547m to non-current assets held for sale. Prior to its disposal at a
carrying value of R467m, a negative fair value
adjustment of R80m was applied to the investment securities.
2. Loans and advances
Carrying Stage 1
amount
of
financial
assets
at fair
value Gross ECL ECL
through
profit carrying allowance coverage
or
loss value
Rm Rm Rm %
RBB South Africa
- 406 248 2 658 0.65
Retail Banking South Africa
- 344 824 2 116 0.61
Credit cards
- 24 568 650 2.65
Instalment credit agreements
- 73 805 582 0.79
Loans to associates and joint ventures
- 25 490 1 -
Mortgages
- 197 342 287 0.15
Other loans and advances
- 3 045 21 0.69
Overdrafts
- 4 847 61 1.26
Personal and term loans
- 15 727 514 3.27
Business Banking South Africa
- 61 424 542 0.88
CIB South Africa 45
263 195 618 415 0.21
Wealth
- 5 342 24 0.45
Head Office, Treasury and other operations in South Africa
- 300 (195)
Loans and advances to customers
- 300 6 2.00
Reclassification to provisions(1)
- - (201) -
Loans and advances to customers 45
263 607 508 2 902 0.48
Loans and advances to banks 19
800 18 307 7 0.04
Loans and advances to customers and banks 65
063 625 815 2 909 0.46
Stage 2
ECL ECL
Gross
carrying value allowance coverage
Rm Rm %
RBB South Africa
35 352 3 234 9.15
Retail Banking South Africa
27 900 2 779 9.96
Credit cards
2 906 1 101 37.89
Instalment credit agreements
6 698 774 11.56
Loans to associates and joint ventures
- - -
Mortgages
13 973 235 1.68
Other loans and advances
447 21 4.70
Overdrafts
1 254 194 15.47
Personal and term loans
2 622 454 17.32
Business Banking South Africa
7 452 455 6.11
CIB South Africa
30 749 305 0.99
Wealth
332 20 6.02
Head Office, Treasury and other operations in South Africa
9 (191) -
Loans and advances to customers
9 - -
Reclassification to provisions(1)
- (191) -
Loans and advances to customers
66 442 3 368 5.07
Loans and advances to banks
2 446 13 0.53
Loans and advances to customers and banks
68 888 3 381 4.91
Stage 3
Gross
Net
carrying
ECL ECL total
value
allowance coverage exposure
Rm
Rm % Rm
RBB South Africa 35 284
14 031 39.77 456 961
Retail Banking South Africa 30 728
11 744 38.22 386 813
Credit cards 4 103
2 876 70.10 26 950
Instalment credit agreements 5 147
2 017 39.19 82 277
Loans to associates and joint ventures -
- - 25 489
Mortgages 18 241
4 774 26.17 224 260
Other loans and advances 20
20 100.00 3 450
Overdrafts 567
376 66.31 6 037
Personal and term loans 2 650
1 681 63.43 18 350
Business Banking South Africa 4 556
2 287 50.20 70 148
CIB South Africa 2 860
1 978 69.16 271 792
Wealth 310
206 66.45 5 734
Head Office, Treasury and other operations in South Africa -
(18) - 713
Loans and advances to customers -
- - 303
Reclassification to provisions(1) -
(18) - 410
Loans and advances to customers 38 454
16 197 42.12 735 200
Loans and advances to banks -
- - 40 533
Loans and advances to customers and banks 38 454
16 197 42.12 775 733
(1) This represents the ECL allowance on undrawn facilities which has
resulted in the ECL allowance on loans and
advances exceeding the carrying value of the drawn exposure. This
excess is recognised as a provision in the
Bank's statement of financial position.
31
December 2017(1)
Performing loans
Exposure Impairment Coverage ratio
Rm Rm %
RBB South Africa 425
859 3 356 0.79
Retail Banking South Africa 363
074 2 583 0.71
Credit cards 26
849 578 2.15
Instalment credit agreements 74
430 687 0.92
Loans to associates and joint ventures 23
037 - -
Mortgages 213
508 1 124 0.53
Other loans and advances 2
795 16 0.37
Overdrafts 5
349 51 0.95
Personal and term loans 17
107 127 0.74
Business Banking South Africa 62
785 773 1.23
Mortgages (including CPF) 27
010 140 0.52
Overdrafts 19
865 393 1.98
Term loans 15
910 240 1.51
CIB South Africa 218
383 559 0.26
Wealth 4
930 14 0.28
Head office, Treasury and other operations in South Africa
987 10 1.01
Loans and advances to customers 650
159 3 939 0.61
Loans and advances to banks 43
217 - -
Loans and advances to customers and banks 693
376 3 939 0.57
31 December 2017(1)
Non-performing loans
Exposure Impairment
Coverage ratio Net total exposure
Rm Rm
% Rm
RBB South Africa 21 675 8 678
40.04 435 500
Retail Banking South Africa 18 340 7 582
41.34 371 249
Credit cards 3 622 2 626
72.50 27 267
Instalment credit agreements 2 360 1 112
47.12 74 990
Loans to associates and joint ventures - -
- 23 037
Mortgages 10 241 2 056
20.08 220 569
Other loans and advances - -
- 2 779
Overdrafts 384 236
61.46 5 446
Personal and term loans 1 733 1 552
89.56 17 161
Business Banking South Africa 3 335 1 096
32.86 64 251
Mortgages (including CPF) 1 477 519
35.14 27 828
Overdrafts 1 082 375
34.66 20 179
Term loans 776 202
26.03 16 244
CIB South Africa 2 019 832
41.21 219 011
Wealth 262 174
66.41 5 004
Head office, Treasury and other operations
in South Africa - -
- 977
Loans and advances to customers 23 956 9 684
40.42 660 492
Loans and advances to banks - -
- 43 217
Loans and advances to customers and banks 23 956 9 684
40.42 703 709
(1) These numbers have been restated, refer to the reporting changes
overview in note 15.
3. Borrowed funds
During the reporting period the significant movements in borrowed
funds were as follows: R6 432m (31 December 2017:
R1 142m) of subordinated notes were issued and R3 195m (31 December
2017: R2 805m) were redeemed.
4. Disaggregation of non-interest income
The following table disaggregates non-interest income splitting it
into income received from contracts with
customers by major service lines and per reportable segment, and other
items making up non-interest income:
Head Office,
Treasury
and other Barclays
operations separation
RBB SA CIB SA
Wealth in SA effects Total
Rm Rm
Rm Rm Rm Rm
Fee and commission income from contracts
with customers 17 490 2 143
202 (54) - 19 781
Consulting and administration fees 232 21
8 - - 261
Transactional fees and commissions 14 914 1 572
106 (2) - 16 590
Cheque accounts 5 216 115
54 - - 5 385
Credit cards 2 204 -
- - - 2 204
Electronic banking 4 144 1 082
17 1 - 5 244
Other (1) 1 287 374
34 (3) - 1 692
Savings accounts 2 063 1
1 - - 2 065
Merchant income 1 721 -
- - - 1 721
Asset management 22 2
37 1 - 62
Other fees and commissions 47 113
8 (53) - 115
Insurance commissions received 554 -
2 - - 556
Investment banking fees - 435
41 - - 476
Other income from contracts with customers 33 -
- 19 - 52
Other non-interest income, net of expenses (323) 1 764
(25) 117 525 2 058
Total non-interest income 17 200 3 907
177 82 525 21 891
(1) Includes fees on mortgage loans and foreign currency transactions.
5. Other impairments
2018 2017
Rm Rm
Impairment raised on financial instruments(1) - (30)
Other 433 542
Goodwill 34 -
Intangible assets(2) 1 326
Property and equipment(3) 398 216
433 512
(1) With the adoption of IFRS 9 the impairment on other financial
instruments has been included as part of
impairment losses.
(2) The impairment incurred during the prior reporting period mainly
related to computer software, Barclays.Net
which was fully impaired.
(3) Management have decided to dispose of certain property and
equipment resulting in an impairment of R398m
(31 December 2017: R216m). As the property will be disposed of,
the impairment was calculated based on fair value
less costs to sell.
6. Headline earnings
2018 2017
Gross Net Gross Net
Rm Rm Rm Rm
Headline earnings is determined as follows:
Profit attributable to ordinary equity holders of the Bank
7 481 8 067
Total headline earnings adjustment:
372 481
IFRS 3 - Goodwill impairment
34 34 - -
IFRS 5 - Loss/(profit) on disposal of non-current assets held for sale
40 40 33 34
IAS 16 -Loss/(profit) on disposal of property and equipment
17 12 (18) (13)
IAS 21 - Recycled foreign currency translation reserve
- - 52 52
IAS 36 - Impairment of property and equipment
398 297 216 155
IAS 36 - Impairment of intangible assets
1 1 326 238
IAS 39 - Release of available-for-sale reserves
- - 67 49
IAS 40 - Change in fair value of investment properties
(15) (12) (37) (29)
IAS 40 - Profit on disposal of investment property
- - (5) (5)
Headline earnings/diluted headline earnings
7 853 8 548
Headline earnings per share/diluted headline earnings per share
(cents) 1 751.7 1 939.4
7. Dividends per share
2018 2017
Rm Rm
Dividends declared to ordinary equity holders
Interim dividend (6 August 2018: 602.27349 cents) (28 July 2017:
892.25702 cents) 2 700 4 000
Special dividend (30 June 2017: 811.4669592 cents)
- 3 500
Final dividend (11 March 2019: 111.532 cents) (1 March 2018: 669.1928
cents) 500 3 000
3 200 10 500
Dividends declared to preference equity holders
Interim dividend (6 August 2018: 3 542.67 cents) (28 July 2017: 3
685.06849 cents) 175 182
Final dividend (11 March 2019: 3 518.6986 cents) (1 March 2018: 3
558.01 cents) 174 176
349 358
Distributions declared to Additional Tier 1 Capital note holders
Distributions (12 December 2018: 31 620.63 Rands) (12 September 2018:
31 675.726 Rands)
(12 June 2018: 32 200 Rands) (12 March 2018: 31 500 Rands)(12 December
2017: 31 990.79 Rands) 190 48
190 48
Dividends paid to ordinary equity holders
Final dividend (16 April 2018: 669.1927668 cents) (10 April 2017:
486.88017 cents) 3 000 2 100
Interim dividend(17 September 2018: 602.27349 cents) (11 September
2017: 892.25702 cents) 2 700 4 000
Special dividend (30 June 2017: 811.4669592 cents)
- 3 500
5 700 9 600
Dividends paid to preference equity holders
Final dividend (16 April 2018: 3 558.01 cents) (10 April 2017: 3
644.79452 cents) 176 180
Interim dividend (17 September 2018: 3 542.669998 cents)(11 September
2017: 3 685.06849 cents) 175 182
351 362
Distributions paid to Additional Tier 1 Capital note holders
Distributions (12 December 2018: 31 620.63 Rands) (12 September 2018:
31 675.726 Rands)
(12 June 2018: 32 200 Rands) (12 March 2018: 31 500 Rands)(12 December
2017: 31 990.79 Rands) 190 48
190 48
8. Acquisitions and disposals of businesses and other similar
transactions
8.1 Acquisitions of businesses during the current reporting period
During the current period, the Bank acquired the remaining 50% in a
non-core investment, which was previously held
as an investment in associate at fair value. The acquisition of the
investment had an effective acquisition date of
16 March 2018 and is a business combination within the scope of IFRS
3. The acquisition date fair value of the
consideration transferred amounted to R198m.
The Bank also acquired a 100% holding in Home Obligors Mortgage
Enhanced Securities (RF) Limited (Homes) a
structured entity (SE) established in 2006 as a securitisation funding
vehicle. Since its establishment in 2006,
Homes has been accounted for as a subsidiary of Absa Group Limited.
The transaction meets the definition of a
business combination under common control, and in accordance with the
Bank's policy, predecessor accounting is
applied. The assets, liabilities and equity of Homes were transferred
to the consolidated Bank financial statements
at their carrying value on the date of transfer. The acquisition of
Homes at R100 had an effective date of
01 December 2018.
Home Obligors
Pacific Heights
Mortgage Enhanced Bank
2018
Fair value
Carrying value
recognised on
recognised on
acquisition
acquisition
Rm
Rm Rm
Consideration at date of acquisition:
Cash 30
- 30
Acquisition - date fair value of initial interest 168
- 168
Total consideration 198
- 198
Recognised amounts of identifiable assets acquired
and liabilities assumed
Cash and balances at central banks 15
- 15
Loans and advances to customers -
1 754 1 754
Loans and advances to banks -
48 48
Other assets 4
- 4
Investment properties 165
- 165
Current tax assets 1
4 5
Other liabilities (14)
(1) (15)
Deferred tax assets/(liabilities) (7)
2 (5)
Subordinated liabilities -
(1 807) (1 807)
Total identifiable net assets 164
- 164
Goodwill 34
- 34
Total 198
- 198
A summary of the total net cash outflow and cash and cash equivalents
related to acquisitions and disposals of
businesses and other similar transactions is included below:
Bank
2018 2017
Rm Rm
Summary of net cash outflow due to acquisitions 30 -
8.1.1 Acquisitions of businesses during the current reporting period
The profit recognised in the consolidated statement of comprehensive
income as a result of the acquisition of Home
Obligors Mortgage
Enhanced Securities (RF) Limited is R1.2m and for Pacific Heights
Investments 196 (Pty) Ltd is R30.6m.
8.1.2 Disposals of businesses during the current reporting period
Apart from the businesses classified as non-current assets/liabilities
held for sale and disposed of (refer to
note 1) there were no other disposals of businesses that were
finalised during the current reporting period. The
cash consideration received on disposals included in non-current
assets/liabilities held for sale was R1 079m.
8.2.1 Acquisitions of businesses during the previous reporting period
There were no acquisitions of businesses during the previous reporting
period.
8.2.2 Disposals of businesses during the previous reporting period
Apart from the businesses classified as non-current assets/liabilities
held for sale and disposed of (refer to
note 1) there were no other disposals of businesses that were
finalised during the previous reporting period. The
cash consideration received on disposals included in non-current
assets/liabilities held for sale was R205m.
9. Related parties
There were no one-off significant transactions with related parties of
the Absa Bank Limited during the current
reporting period.
In the prior reporting period, as part of the separation, Barclays PLC
sold ordinary Absa Group Limited shares
representing 12.2% and 33.7% of issued ordinary share capital in May
2016 and June 2017, respectively. Barclays PLC
currently holds 126.2m ordinary Absa Group Limited shares representing
14.9% of issued ordinary shares. The
remaining 85.1 % of the shares are widely held on the JSE.
Barclays PLC contributed ?765 million to the Group, primarily in
recognition of the investments required for the
Group to separate from Barclays PLC. This contribution will be
invested primarily in rebranding, technology and
separation-related projects and it is expected that it will neutralise
the capital and cash flow impact of
separation investments on the Group over time.
Barclays PLC contributed cash of R1 891m to be used in the furtherance
of the Group's objective of establishing
Broad-Based Black Economic Empowerment structure. The cash was
contributed to the independent Absa Empowerment
Trust, whose subsidiary purchased 12 716 260 Absa Group shares. In
terms of the requirements of IFRS, these shares
have been accounted for as treasury shares and eliminated against the
Group's share capital.
CLS Group Holding AG shares were transferred to Barclays PLC for no
consideration in 2005. During the previous
reporting period these shares were transferred back to the Group for a
nominal consideration of one British Pound
(GBP). The shares have been recognised at a fair value of R48m. The
related credit has been recognised in equity
as a shareholder contribution.
10. Commitments
2018 2017
Rm Rm
Authorised capital expenditure
Contracted but not provided for
589 257
The Bank has capital commitments in respect of
computer equipment, software and property development.
Management is confident that future net revenues and
funding will be sufficient to cover these commitments.
Operating lease payments due
No later than one year
981 1 026
Later than one year and no later than five years
2 561 2 654
Later than five years
667 902
4 209 4 582
The operating lease commitments comprise a number of separate
operating leases in relation to property and
equipment, none of which is individually significant to the Bank.
Leases are negotiated for an average term of three to five years and
rentals are renegotiated annually.
11. Contingencies
2018
2017
Rm
Rm
Guarantees 34 479
28 970
Irrevocable debt facilities/other lending facilities 166 198
145 087
Letters of credit 6 828
3 834
Other 63
151
207 568
178 042
Guarantees include performance guarantee contracts and financial
guarantee contracts.
Financial guarantee contracts represent contracts where the Bank
undertakes to make specified payments to a
counterparty, should the counterparty suffer a loss as a result of a
specified debtor failing to make payment when
due in accordance with the terms of a debt instrument. This amount
represents the maximum off-statement of
financial position exposure.
Irrevocable debt facilities are commitments to extend credit where the
Bank does not have the right to terminate the
facilities by written notice. Following the implementation of IFRS 9
other lending facilities in respect of which
expected credit losses are recognised have been included above, as the
Bank does not enforce the ability to revoke
these facilities in the normal day-to-day management thereof.
Commitments generally have fixed expiry dates. Since commitments may
expire without being drawn upon, the total
contract amounts do not necessarily represent future cash
requirements.
An impairment provision of R30m has been raised on financial
guarantees, R43m has been raised for letters of credit
and R409m on irrevocable debt facilities/other lending facilities.
Irrevocable equity facilities and other contingencies fall outside the
scope of the expected credit losses model of
IFRS 9.
Legal proceedings
The Bank has been party to proceedings against it during the reporting
period. The following material cases were
ongoing at the reporting date:
* Pinnacle Point Holdings Proprietary Limited: It is alleged that a
local bank conducted itself unlawfully in
relation to a financial product offered by it, and that Absa Bank
Limited was privy to such conduct. Subsequent to
the withdrawal of the first plaintiff's (Pinnacle Point Holdings)
claim, the total claim amount has been
substantially reduced, however, the second to fifth plaintiffs persist
with their claims for damages for an amount
of R470m.
* Ayanda Collective Investment Scheme (the Scheme): Absa Capital
Investor Services was the trustee of Ayanda
Collective Investment Scheme, in which Corporate Money Managers (CMM)
managed a portfolio of assets within the
Scheme. The joint curators of the CMM group of companies and the
Altron Pension Fund (an investor in the fund)
allege that the defendants caused damages to them arising from their
alleged failure to meet their obligations in
the trust deed together with their statutory obligations set out in
the Collective Investment Scheme Act, in
respect of which they seek payment of R934m.
The Bank is engaged in various other legal, competition and regulatory
matters both in South Africa and a number of
other jurisdictions. It is involved in legal proceedings which arise
in the ordinary course of business from time
to time, including (but not limited to) disputes in relation to
contracts, securities, debt collection, consumer
credit, fraud, trusts, client assets, competition, data protection,
money laundering, employment, environmental
and other statutory and common law issues.
The Bank is also subject to enquiries and examinations, requests for
information, audits, investigations and legal
and other proceedings by regulators, governmental and other public
bodies in connection with (but not limited to)
consumer protection measures, compliance with legislation and
regulation, wholesale trading activity and other
areas of banking and business activities in which the Bank is or has
been engaged.
At the present time, the Bank does not expect the ultimate resolution
of any of these other matters to have a
material adverse effect on its financial position. However, in light
of the uncertainties involved in such matters
and the matters specifically described in this note, there can be no
assurance that the outcome of a particular
matter or matters will not be material to the Banks's results of
operations or cash flow for a particular period,
depending on, amongst other things, the amount of the loss resulting
from the matter(s) and the amount of income
otherwise reported for the reporting period.
The Bank has not disclosed the contingent liabilities associated with
these matters either because they cannot
reasonably be estimated or because such disclosure could be
prejudicial to the outcome of the matter. Provision is
made for all liabilities which are expected to materialise.
Regulatory matters
The scale of regulatory change remains challenging and the global
financial crisis has resulted in a significant
tightening of regulation and changes to regulatory structures globally
and locally, especially for companies that
are deemed to be of systemic importance. Concurrently, there is
continuing political and regulatory scrutiny of the
operation of the banking and consumer credit industries globally
which, in some cases, is leading to increased
regulation. The nature and impact of future changes in the legal
framework, policies and regulatory action
especially in the areas of financial crime, banking and insurance
regulation, cannot currently be fully predicted
and are beyond the Bank's control. Some of these are likely to have an
impact on the Bank's businesses, systems
and earnings.
The Bank is continuously evaluating its programmes and controls in
general relating to compliance with regulation.
The Bank undertakes monitoring, review and assurance activities, and
the Bank has also adopted appropriate remedial
and/or mitigating steps, where necessary or advisable, and has made
disclosures on material findings as and when
appropriate.
Absa Bank Limited, a subsidiary of Absa Group Limited, identified
potentially fraudulent activity by certain of its
customers using advance payments for imports in 2014 and 2015 to
effect foreign exchange transfers from South Africa
to beneficiary accounts located in East Asia, UK, Europe and the US.
As a result, the Bank conducted a review of
relevant activity, processes, systems and controls, and provided
information to relevant authorities, in a process
which has now largely concluded. No financial impact is anticipated.
In February 2017 the South African Competition Commission (SACC)
referred Barclays PLC, BCI and Absa Bank Limited,
a subsidiary of Absa Group Limited, among other banks, to the
Competition Tribunal to be prosecuted for breaches of
South African antitrust law related to Foreign Exchange trading of
South African Rand. The SACC found from its
investigation that between 2007 and 2013 the banks had engaged in
various forms of collusive behaviour. Barclays
was the first to bring the conduct to the attention of the SACC under
its leniency programme and has cooperated
with, and will continue to cooperate with, the SACC in relation to
this matter. The SACC is therefore not seeking
an order from the Tribunal to impose any fine on Barclays Bank PLC,
BCI or Absa Bank Limited.
Income Taxes
The Bank is subject to income taxes in numerous jurisdictions and the
calculation of the Bank's tax charge and
provisions for income taxes necessarily involves a degree of
estimation and judgement. There are many transactions
and calculations for which the ultimate tax treatment is uncertain or
in respect of which the relevant tax
authorities may have indicated disagreement with the Bank's treatment
and accordingly the final tax charge cannot
be determined until resolution has been reached with the relevant tax
authority.
The Bank recognises provisions for anticipated tax audit issues based
on estimates of whether additional taxes will
be due after taking into account external advice where appropriate.
The carrying amount of any resulting provisions
will be sensitive to the manner in which tax matters are expected to
be resolved, and the stage of negotiations or
discussion with the relevant tax authorities. There may be significant
uncertainty around the final outcome of tax
proceedings, which in many instances, will only be concluded after a
number of years. Management estimates are
informed by a number of factors including, inter alia, the progress
made in discussions or negotiations with the
tax authorities, the advice of expert legal counsel, precedent set by
the outcome of any previous claims, as well
as the nature of the relevant tax environment.
Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such
differences will impact the current and deferred income tax assets and
liabilities in the reporting period in which
such determination is made. These risks are managed in accordance with
the Bank's Tax Risk Framework.
Summary provisional notes to the consolidated financial results for
the period ended
12. Segment reporting
2018 2017 (1)
Rm Rm
12.1 Headline earnings contribution by segment
RBB South Africa
8 646 8 507
CIB South Africa
2 819 3 355
Wealth
(388) (418)
Head Office, Treasury and other operations in South Africa(2)
(1 454) (1 651)
Barclays separation effects(2)
(1 770) (1 245)
Total headline earnings
7 853 8 548
12.2 Total income by segment
RBB South Africa
41 247 40 153
CIB South Africa
10 842 10 592
Wealth
430 430
Head Office, Treasury and other operations in South Africa (2)
(1 532) (1 486)
Barclays separation effects(2)
856 405
Total income
51 843 50 094
12.3 Total internal income by segment
RBB South Africa
(7 868) (8 471)
CIB South Africa
(8 230) (2 885)
Wealth
34 6
Head Office, Treasury and other operations in South Africa(2)
14 210 15 982
Barclays separation effects(2)
330 325
Total internal income
1 524 4 957
12.4 Total assets by segment
RBB South Africa
791 709 740 856
CIB South Africa
521 468 486 168
Wealth
7 370 6 097
Head Office, Treasury and other operations in South Africa(2)
(244 027) (245 675)
Barclays separation effects(2)
3 159 912
Total assets 1
079 679 988 358
12.5 Total liabilities by segment
RBB South Africa
784 795 730 734
CIB South Africa
517 415 481 646
Wealth
7 791 6 508
Head Office, Treasury and other operations in South Africa
(308 163) (306 019)
Barclays separation effects
(5 845) (9 840)
Total liabilities
995 993 903 029
(1) Operational changes, management changes and associated changes to
the way in which the CODM views the
performance of each business segment, have resulted in the
reallocation of earnings, assets and liabilities
between operating segments. For details on the business portfolio
changes refer to note 16.
(2) These represent reconciling strips and are not reporting segments.
13. Assets and liabilities not held at fair value
The following table summarises the carrying amounts and fair value of
those assets and liabilities not held at fair
value.
31 December
2018
2017
Carrying Fair Carrying Fair
value value value value
Rm Rm Rm Rm
Financial assets
Balances with the South African Reserve Bank 13
108 13 108 19 108 19 108
Coins and bank notes 9
571 9 571 9 684 9 684
Cash, cash balances and balances with central banks 22
679 22 679 28 792 28 792
Investment securities 6
219 6 270 - -
Loans and advances to banks 20
733 23 191 26 020 26 020
Other assets 20
065 20 073 13 327 13 420
RBB South Africa 456
960 458 131 435 500 435 731
Retail Banking South Africa 386
815 387 912 371 248 371 479
Credit cards 26
950 27 484 27 267 27 267
Instalment credit agreements 82
282 82 616 77 044 77 275
Loans to associates and joint ventures 25
489 25 489 23 037 23 037
Mortgages 224
260 224 260 220 569 220 569
Other loans and advances 3
447 3 447 726 726
Overdrafts 6
037 6 104 5 443 5 443
Personal and term loans 18
350 18 512 17 162 17 162
Business Banking South Africa 70
145 70 219 64 252 64 252
Mortgages (including CPF) 29
917 29 917 27 828 27 828
Overdrafts 20
027 20 098 19 199 19 199
Term loans 20
201 20 204 17 225 17 225
CIB South Africa 226
530 226 530 192 203 192 203
Wealth 5
734 5 985 5 004 5 004
Head Office, Treasury and other operations in South Africa
713 713 974 974
Loans and advances to customers - net of impairment losses 689
937 691 358 633 681 633 912
Loans to Group companies 37
363 37 363 36 530 36 530
Non-current assets held for sale
- - 1 118 1 118
Total assets (not held at fair value) 796
996 800 935 739 468 739 792
Financial liabilities
Deposits from banks 73
069 77 174 52 079 52 079
Other liabilities 29
641 29 654 25 709 25 724
Call deposits 57
981 57 981 62 725 62 725
Cheque account deposits 156
435 156 435 153 539 153 539
Credit card deposits 1
904 1 904 1 896 1 896
Fixed deposits 133
031 133 031 131 521 131 521
Foreign currency deposits 17
541 17 541 18 444 18 444
Notice deposits 58
367 58 367 58 460 58 460
Other deposits 1
473 1 473 1 414 1 414
Saving and transmission deposits 141
066 141 066 135 375 135 375
Deposits due to customers 567
798 567 798 563 374 563 374
Debt securities in issue 144
154 146 438 132 701 132 701
Borrowed funds 20
052 20 052 15 866 15 866
Total liabilities (not held at fair value) 834
714 841 116 789 729 789 744
14. Assets and liabilities held at fair value
14.1 Fair value measurement and valuation processes
Financial assets and financial liabilities
The Bank has an established control framework with respect to the
measurement of fair values. The framework
includes a Traded Risk and Valuations Committee and an Independent
Valuation Control team (IVC), which is
independent from the front office.
The Traded Risk and Valuations Committee, which comprises
representatives from senior management, will formally
approve valuation policies and any changes to valuation methodologies.
Significant valuation issues are reported
to the Absa Group Audit and Compliance Committee.
The Traded Risk and Valuations Committee is responsible for overseeing
the valuation control process and will
therefore consider the appropriateness of valuation techniques and
inputs for fair value measurement.
The IVC team independently verifies the results of trading and
investment operations and all significant fair value
measurements. They source independent data from external independent
parties, as well as internal risk areas when
performing independent price verification for all financial
instruments held at fair value. They also assess and
document the inputs obtained from external independent sources to
measure the fair value which supports conclusions
that valuations are performed in accordance with IFRS and internal
valuation policies.
Investment properties
The fair value of investment properties is determined based on the
most appropriate methodology applicable to the
specific property. Methodologies include the market comparable
approach that reflects recent transaction prices for
similar properties, discounted cash flows and income capitalisation
methodologies. In estimating the fair value of
the properties, the highest and best use of the properties is taken
into account.
Where possible the fair value of the Bank's investment properties is
determined through valuations performed by
external independent valuators.
When the Bank's internal valuations are different to that of the
external independent valuers, detailed procedures
are performed to substantiate the differences, whereby the IVC team
verifies the procedures performed by the front
office and considers the appropriateness of any differences to
external independent valuations.
14.2 Fair value measurements
Valuation inputs
IFRS 13 requires an entity to classify fair values measured and
disclosed according to a hierarchy that reflects
the significance of observable market inputs. The three levels of the
fair value hierarchy are defined as follows:
Quoted market prices - Level 1
Fair values are classified as Level 1 if they have been determined
using observable prices in an active market. Such
fair values are determined with reference to unadjusted quoted prices
for identical assets or liabilities in active
markets where the quoted price is readily available, and the price
represents actual and regularly occurring market
transactions on an arm's length basis. An active market is one in
which transactions occur with sufficient volume
and frequency to provide pricing information on an ongoing basis.
Valuation technique using observable inputs - Level 2
Fair values are classified as Level 2 if they have been determined
using models for which inputs are observable in
an active market.
A valuation input is considered observable if it can be directly
observed from transactions in an active market, or
if there is compelling external evidence demonstrating an executable
exit price.
Valuation technique using significant unobservable inputs - Level 3
Fair values are classified as Level 3 if their determination
incorporates significant inputs that are not based on
observable market data (unobservable inputs). An input is deemed
significant if it is shown to contribute more than
10% to the fair value of an item. Unobservable input levels are
generally determined based on observable inputs of
a similar nature, historical observations or other analytical
techniques.
Judgemental inputs on valuation of principal instruments
The following summary sets out the principal instruments whose
valuation may involve judgemental inputs:
Debt securities and treasury and other eligible bills
These instruments are valued, based on quoted market prices from an
exchange, dealer, broker, industry group or
pricing service, where available. Where unavailable, fair value is
determined by reference to quoted market prices
for similar instruments or, in the case of certain mortgage-backed
securities, valuation techniques using inputs
derived from observable market data, and, where relevant, assumptions
in respect of unobservable inputs.
Equity instruments
Equity instruments are valued, based on quoted market prices from an
exchange, dealer, broker, industry group or
pricing service, where available. Where unavailable, fair value is
determined by reference to quoted market prices
for similar instruments or by using valuation techniques using inputs
derived from observable market data, and,
where relevant, assumptions in respect of unobservable inputs.
Also included in equity instruments are non-public investments, which
include investments in venture capital
organisations. The fair value of these investments is determined using
appropriate valuation methodologies which,
dependent on the nature of the investment, may include discounted cash
flow analysis, enterprise value comparisons
with similar companies and price: earnings comparisons. For each
investment, the relevant methodology is applied
consistently over time.
Derivatives
Derivative contracts can be exchange-traded or traded over-the-counter
(OTC). OTC derivative contracts include
forward, swap and option contracts related to interest rates, bonds,
foreign currencies, credit spreads, equity
prices and commodity prices or indices on these instruments. Fair
values of derivatives are obtained from quoted
market prices, dealer price quotations, discounted cash flow and
option pricing models.
Loans and advances
The disclosed fair value of loans and advances to banks and customers
is determined by discounting contractual cash
flows. Discount factors are determined using the relevant forward base
rates (as at valuation date) plus the
originally priced spread. Where a significant change in credit risk
has occurred, an updated spread is used to
reflect valuation date pricing. Behavioural cash flow profiles,
instead of contractual cash flow profiles, are used
to determine expected cash flows where contractual cash flow profiles
would provide an inaccurate fair value.
Deposits, debt securities in issue and borrowed funds
Deposits, debt securities in issue and borrowed funds are valued using
discounted cash flow models, applying rates
currently offered for issuances with similar characteristics. Where
these instruments include embedded derivatives,
the embedded derivative component is valued using the methodology for
derivatives as detailed above.
The fair value of amortised cost deposits repayable on demand is
considered to be equal to their carrying value.
For other financial liabilities at amortised cost the disclosed fair
value approximates the carrying value because
the instruments are short term in nature or have interest rates that
reprice frequently.
14.3 Fair value adjustments
The main valuation adjustments required to arrive at a fair value are
described below:
Bid-offer valuation adjustments
For assets and liabilities where the Bank is not a market maker, mid
prices are adjusted to bid and offer prices
respectively. Bid-offer adjustments reflect expected close out
strategy and, for derivatives, the fact that they
are managed on a portfolio basis. The methodology for determining the
bid-offer adjustment for a derivative
portfolio will generally involve netting between long and short
positions and the bucketing of risk by strike and
term in accordance with hedging strategy. Bid-offer levels are derived
from market sources, such as broker data.
For those assets and liabilities where the firm is a market maker and
has the ability to transact at, or better
than, mid-price (which is the case for certain equity, bond and
vanilla derivative markets), the mid-price is used,
since the bid-offer spread does not represent a transaction cost.
Uncollateralised derivative adjustments
A fair value adjustment is incorporated into uncollateralised
derivative valuations to reflect the impact on fair
value of counterparty credit risk, the Bank's own credit quality, as
well as the cost of funding across all asset
classes.
Model valuation adjustments
Valuation models are reviewed under the Bank's model governance
framework. This process identifies the assumptions
used and any model limitations (for example, if the model does not
incorporate volatility skew). Where necessary,
fair value adjustments will be applied to take these factors into
account. Model valuation adjustments are
dependent on the size of portfolio, complexity of the model, whether
the model is market standard and to what
extent it incorporates all known risk factors. All models and model
valuation adjustments are subject to review on
at least an annual basis.
14.4 Fair value hierarchy
The following table shows the Bank's assets and liabilities that are
recognised and subsequently measured at fair
value and are analysed by valuation techniques. The classification of
assets and liabilities is based on the lowest
level input that is significant to the fair value measurement in its
entirety.
31
December
2018
Level 1 Level 2
Level 3 Total
Recurring fair value measurements Rm Rm
Rm Rm
Financial Assets
Investment securities 42 352 35 468
9 537 87 357
Loans and advances to banks - 19 800
- 19 800
Trading and hedging portfolio assets 45 107 53 819
3 449 102 375
Debt instruments 43 005 789
445 44 239
Derivative assets - 43 680
2 450 46 130
Commodity derivatives - 1 263
224 1 487
Credit derivatives - -
173 173
Equity derivatives - 3 433
1 947 5 380
Foreign exchange derivatives - 7 980
26 8 006
Interest rate derivatives - 31 004
80 31 084
Equity instruments 533 -
- 533
Money market assets 1 569 9 350
554 11 473
Loans and advances to customers - 34 602
10 661 45 263
Total financial assets 87 459 143 689
23 647 254 795
Financial liabilities
Deposits from banks - 54 871
19 54 890
Trading and hedging portfolio liabilities 11 072 35 097
1 454 47 623
Derivative liabilities - 35 097
1 454 36 551
Commodity derivatives - 1 267
222 1 489
Credit derivatives - -
174 174
Equity derivatives - 2 313
778 3 091
Foreign exchange derivatives - 8 391
19 8 410
Interest rate derivatives - 23 126
261 23 387
Short positions 11 072 -
- 11 072
Deposits due to customers 238 34 789
2 822 37 849
Debt securities in issue 3 15 885
- 15 888
Total financial liabilities 11 313 140 642
4 295 156 250
Non-financial assets
Commodities 1 304 -
- 1 304
Investment properties - -
180 180
Non-recurring fair value measurements
Non-current assets held for sale(1) - -
50 50
(1) Includes certain items classified in terms of the requirements of
IFRS 5 which are measured in terms of their
respective standards.
31
December
2017
Level 1 Level 2
Level 3 Total
Recurring fair value measurements Rm Rm
Rm Rm
Financial Assets
Investment securities 37 737 32 841
5 946 76 524
Loans and advances to banks - 16 713
484 17 197
Trading and hedging portfolio assets 31 379 72 194
1 824 105 397
Debt instruments 29 185 2 410
177 31 772
Derivative assets - 58 594
546 59 140
Commodity derivatives - 973
124 1 097
Credit derivatives - -
165 165
Equity derivatives - 2 356
173 2 529
Foreign exchange derivatives - 15 548
8 15 556
Interest rate derivatives - 39 717
76 39 793
Equity instruments 567 -
- 567
Money market assets 1 627 11 190
1 101 13 918
Loans and advances to customers - 22 070
4 741 26 811
Total financial assets 69 116 143 818
12 995 225 929
Financial liabilities
Deposits from banks - 22 031
- 22 031
Trading and hedging portfolio liabilities 8 141 51 866
944 60 951
Derivative liabilities - 51 866
944 52 810
Commodity derivatives - 1 164
121 1 285
Credit derivatives - -
148 148
Equity derivatives - 1 965
423 2 388
Foreign exchange derivatives - 14 500
4 14 504
Interest rate derivatives - 34 237
248 34 485
Short positions 8 141 -
- 8 141
Deposits due to customers 203 18 676
1 572 20 451
Debt securities in issue 399 4 354
488 5 241
Total financial liabilities 8 743 96 927
3 004 108 674
Non-financial assets
Commodities 2 051 -
- 2 051
Investment properties - -
- -
Non-recurring fair value measurements
Non-current assets held for sale(1) - -
- -
(1) Includes certain items classified in terms of the requirements of
IFRS 5 which are measured in terms of their
respective standards.
14.5 Measurement of assets and liabilities categorised at Level 2
The following table presents information about the valuation
techniques and significant observable inputs used in
measuring assets and liabilities categorised as Level 2 in the fair
value hierarchy:
Category of asset/liability Valuation techniques
applied Significant observable inputs
Loans and advances to banks Future cash flows
are Interest rate and/or money
discounted using
market-related market curves, as credit spreads
interest rates,
adjusted for
credit inputs, over
the
contractual period
of
instruments (that
is, discounted
cash flow)
Trading and hedging portfolio assets and
liabilities
Debt instruments Discounted cash flow
models Underlying price of market
instruments and/or
interest rates
Derivatives
Commodity derivatives Discounted cash flow
techniques, Spot price of physical or
option pricing
models futures, interest rates
such as the Black
Scholes and/or volatiles
model, futures
pricing
models and/or
Exchange
Traded Fund (ETF)
models
Credit derivatives Discounted cash flow
and/or Interest rate, recovery rate,
credit default swap
models credit spread and/or quanto
ratio
Equity derivatives Discounted cash
flow, option Spot price, interest rate,
pricing and/or
futures pricing volatility and/or dividend
models
stream
Foreign exchange derivatives Discounted cash flow
and/or Spot price, interest rate
option pricing
models and/or volatility
Interest rate derivatives Discounted cash flow
and/or Interest rate curves,
option pricing
models repurchase agreement curves,
money market curves and/or
volatility
Money market assets Discounted cash flow
models Money market curves and/or
interest rates
Loans and advances to customers Discounted cash flow
models Interest rate curves and/or
money market curves
Investment securities Listed equity:
market bid price. Underlying price of the market
Other items:
discounted cash traded instruments and/or
flow models
interest rate curves
Deposits from banks Discounted cash flow
models Interest rate curves and/or
money market curves
Deposits due to customers Discounted cash flow
models Interest rate curves and/or
money market curves
Debt securities in issue and other liabilities Discounted cash flow
models Underlying price of the market
traded instrument and/or
interest rate curves
14.6 Reconciliation of Level 3 assets and liabilities
A reconciliation of the opening balances to closing balances for all
movements on Level 3 assets and liabilities is
set out below:
31 December
2018
Trading and hedging
Loans and advances Loans and advances
portfolio assets
to customers to banks
Rm
Rm Rm
Opening balance at the beginning of the
reporting period 1 824
4 741 484
Net interest income -
153 -
Other income -
- -
Gains and losses from banking and
trading activities 1 240
427 -
Gains and losses from investment activities -
- -
Purchases 1 174
6 617 -
Sales (257)
(156) (18)
Movement in other comprehensive income -
- -
Transfer to Level 3 357
- -
Transfer (out) of Level 3 (889)
(1 121) (466)
Step acquistion of sub -
- -
Closing balance at the end of the
reporting period 3 449
10 661 -
31
December
2018
Investment
Investment Total assets
securities
properties at fair value
Rm
Rm Rm
Opening balance at the beginning of the
reporting period 5 946
- 12 995
Net interest income 89
- 242
Other income -
15 15
Gains and losses from banking and
trading activities 26
- 1 693
Gains and losses from investment activities 23
- 23
Purchases 3 181
165 11 137
Sales (507)
- (938)
Movement in other comprehensive income (37)
- (37)
Transfer to Level 3 2 928
- 3 285
Transfer (out) of Level 3 (1 914)
- (4 390)
Step acquistion of sub (198)
- (198)
Closing balance at the end of the
reporting period 9 537
180 23 827
31 December
2017
Trading and hedging
Loans and advances Loans and advances
portfolio assets
to customers to banks
Rm
Rm Rm
Opening balance at the beginning of the
reporting period 1 505
4 890 571
Net interest income -
12 -
Other income -
- -
Gains and losses from banking and
trading activities (635)
29 -
Gains and losses from investment activities -
- -
Purchases 1 101
1 020 88
Sales (147)
(1 112) (175)
Movement in other comprehensive income -
- -
Transfer (out) of Level 3 -
(98) -
Closing balance at the end of the
reporting period 1 824
4 741 484
31
December
2017
Investment
Investment Total assets
securities
properties at fair value
Rm
Rm Rm
Opening balance at the beginning of the
reporting period 1 062
222 8 250
Net interest income 62
- 74
Other income -
37 37
Gains and losses from banking and
trading activities -
- (606)
Gains and losses from investment activities 2
- 2
Purchases 4 789
- 6 998
Sales -
(259) (1 693)
Movement in other comprehensive income 31
- 31
Transfer (out) of Level 3 -
- (98)
Closing balance at the end of the
reporting period 5 946
- 12 995
31
December 2018
Trading
Deposits and hedging
Deposits Debt Total
from portfolio due
to securities liabilities
banks liabilities
customers in issue at fair value
Rm Rm
Rm Rm Rm
Opening balance at the beginning
of the reporting period - 944 1
572 488 3 004
Gains and losses from banking
and trading activities - (52)
5 - (47)
Issues 19 1 043 2
500 - 3 562
Settlements - (344)
(766) - (1 110)
Transfer (out) of Level 3 - (137)
(489) (488) (1 114)
Closing balance at the end of
the reporting period 19 1 454 2
822 - 4 295
31 December
2017
Trading and
hedging Deposits
Debt Total
portfolio due to
securities liabilities
liabilities customers in
issue at fair value
Rm Rm
Rm Rm
Opening balance at the beginning of
the reporting period 307 1 139
604 2 050
Net interest income - 7
- 7
Gains and losses from banking and
trading activities 585 -
- 585
Issues 52 1 685
30 1 767
Settlements - (1 144)
(68) (1 212)
Transfer (out) of Level 3 - (115)
(78) (193)
Closing balance at the end of the
reporting period 944 1 572
488 3 004
14.6.1 Significant transfers between levels
During the 2018 and 2017 reporting periods, transfers between levels
occurred because of changes in the
observability of valuation inputs, in some instances owing to changes
in the level of market activity. Transfers
have been reflected as if they had taken place at the beginning of the
year.
14.7 Unrealised gains and losses on Level 3 assets and liabilities
The total unrealised gains and losses for the reporting period on
Level 3 positions held at the reporting date are
set out below:
31 December
2018
Trading and
hedging Loans and
portfolio advances to
Investment Total assets
assets customers
securities at fair value
Rm Rm
Rm Rm
Gains and (losses) from banking
and trading activities 2 589 1 027
233 3 849
31 December 2018
Trading and
hedging Deposits
Total
portfolio due to
liabilities
liabilities customers at
fair value
Rm Rm
Rm
Gains and (losses) from banking
and trading activities (174) 134
(40)
31
December 2017
Trading and
hedging Loans and
portfolio advances to
Investment Total assets
assets customers
securities (1) at fair value
Rm Rm
Rm Rm
Gains and (losses) from banking
and trading activities 142 761
76 979
31 December 2017
Trading and
hedging Deposits
Total
portfolio due to
liabilities
liabilities customers at
fair value
Rm Rm
Rm
Gains and (losses) from banking
and trading activities (284) -
(284)
(1) The gains and losses from banking and trading activities on
investment securities have been restated to include
unrealised gains on unlisted Private Equity investments, resulting
in an increase of R27.61m. Previously only
unrealised gains relating to unobservable corporate bonds were
taken into account in the disclosure, and has
therefore been corrected accordingly.
14.8 Sensitivity analysis of valuations using unobservable inputs
As part of the Bank's risk management processes, we perform a
sensitivity analysis on the significant unobservable
parameters, in order to determine the impact of reasonably possible
alternative assumptions on the valuation of
level 3 financial assets and liabilities. The assets and liabilities
that most impact this sensitivity analysis
are those with more illiquid and/or structured portfolios. The
alternative assumptions are applied independently
and do not take account of any cross correlation between assumptions
that would reduce the overall effect on the
valuations.
The following table reflects the reasonable possible variances applied
to significant parameters utilised in our
valuations.
Significant unobservable parameter Positive/(negative)
variance applied to parameters
Credit spreads 100/(100) bps
Volatilities 10/(10)%
Basis curves 100/(100) bps
Yield curves and repo curves 100/(100) bps
Future earnings and marketability discounts 15/(15)%
Funding spreads 100/(100) bps
A significant parameter has been deemed to be one which may result in
a charge to profit or loss, or a change in
the fair value asset or liability by more than 10% of the underlying
value of the affected item. This is
demonstrated by the following sensitivity analysis which includes a
reasonable range of possible outcomes:
31 December 2018
Potential effect Potential effect
recorded in profit recorded directly
or loss in equity
Significant unobservable parameters
Favourable/ Favourable/
(Unfavourable) (Unfavourable)
Rm Rm
Loans and advances to banks Absa Group Limited/Absa funding
-/- -/-
Deposits due to customers Absa Group Limited/Absa funding
178/(178) -/-
Investment securities Risk adjustment yield curves, future
earnings and marketability discount
-/- (20)/20
Loans and advances to
customers Credit spreads
(323)/323 -/-
Trading and hedging
portfolio assets Volatility, credit spreads, basis
curves,
yield curves, repo curves, funding
spreads 162/(162) -/-
Trading and hedging
portfolio liabilities Volatility, credit spreads, basis
curves,
yield curves, repo curves, funding
spreads (224)/224 -/-
31 December 2017
Potential effect Potential effect
recorded in profit recorded directly
or loss in equity
Significant unobservable parameters
Favourable/ Favourable/
(Unfavourable) (Unfavourable)
Rm Rm
Loans and advances to banks Absa Group Limited/Absa funding
17/(17) -/-
Deposits due to customers Absa Group Limited/Absa funding
13/(12) -/-
Investment securities Risk adjustment yield curves, future
earnings and marketability discount
59/(59) 253/(240)
Loans and advances to
customers Credit spreads
60/(69) -/-
Trading and hedging
portfolio assets Volatility, credit spreads, basis
curves,
yield curves, repo curves, funding
spreads 33/(33) -/-
Trading and hedging
portfolio liabilities Volatility, credit spreads, basis
curves,
yield curves, repo curves, funding
spreads 17/(17) -/-
14.9 Measurement of assets and liabilities at Level 3
The following table presents information about the valuation
techniques and significant unobservable inputs used in
measuring assets and liabilities categorised as Level 3 in the fair
value hierarchy:
31 December
Category of asset/liability Valuation techniques applied
Significant unobservable inputs
Loans and advances to Discounted cash flow
Credit spreads
banks and customers and/or dividend
yield models
Investment securities Discounted cash flow
Marketability
models, third-party
discounts and/or
valuations, earnings
comparator multiples
multiples and/or
income
capitalisation
valuations
Trading and hedging
portfolio assets and
liabilities
Debt instruments Discounted cash flow
Credit spreads
models
Derivative assets
Credit derivatives (1) Discounted cash flow
Credit spreads,
and/or credit
Recovery rates and/or,
default swap (hazard
Quanto ratio
rate) models
Equity derivatives Discounted cash flow,
Volatility and/or
option pricing and/
dividend streams
or futures pricing
(greater than 3 years)
models
Foreign exchange Discounted cash flow
African basis curves
derivatives and/or option
(greater than 1 year)
pricing models
Interest rate Discounted cash flow Real
yield curves
derivatives and/or option (less
than 1 year),
pricing models
repurchase agreement
curves (less than 1
year), funding spreads
Deposits due to Discounted cash flow The
group's funding
customers models
spreads (greater than
5
years)
Debt securities in Discounted cash flow
Funding curves
issue models
(greater than 5 years)
Investment Properties Discounted cash flow
Estimates of periods
models in
which rental units
will
be disposed of
Annual selling price
escalations
Annual rental
escalations
Expense ratios
Vacancy rates
Income capitalisation
rates
Risk
adjusted discount
rates
2018 2017
Category of asset/liability Range of estimates utilised for the
unobservable inputs
Loans and advances to .513% to 3.235% 0.3% to 2.3%
banks and customers
Investment securities Discount rate of Discount rate of
7.75% to 8% 7% and 9%,
comparator
multiples between
5 and 10.5
Trading and hedging
portfolio assets and
liabilities
Debt instruments 0.15% to 8.2% 3% to 15%
Derivative assets
Credit derivatives (1) 0.03%-14%, 0.04% to 10%,
15%-76%, 15% to 76%,
60%-90% 54% to 90%
Equity derivatives 14.91% to 53.2% 15.09% to 64.67%
Foreign exchange (4.48)% to 24.7% (28%) to 29.5%
derivatives
Interest rate 0.20% to 9.34% 0.25% to 10.69%
derivatives
Deposits due to 1.3% to 1.8% 0.2% to 1.9%
customers
Debt securities in 1.3% to 1.8% 0.2% to 1.9%
issue
Investment Properties 1 to 6 years 1 to 6 years
6% 6%
6% 6%
n/a n/a
n/a n/a
n/a
7.5% to 8% 7.75% to 8%
10% to 15% 11% to 15%
For assets or liabilities held at amortised cost and disclosed in
levels 2 or 3 of the fair value hierarchy,
the discounted cash flow valuation technique is used. Interest rates
and money market curves are considered
unobservable inputs for items which mature after 5 years. However, if
the items mature in less than 5 years,
these inputs are considered to be observable, depending on other facts
and circumstances.
For debt securities in issue held at amortised cost, a further
significant input would be the underlying price of
the market traded instrument.
The sensitivity of the fair value measure is dependent on the
unobservable inputs. Significant changes to the
unobservable inputs in isolation will have either a positive or
negative impact on fair values.
(1) The range of estimates has been disaggregated to better reflect
the individual assumptions used.
14.10 Unrecognised losses/(gains) as a result of the use of valuation
models using unobservable inputs
The amount that is yet to be recognised in the statement of
comprehensive income that relates to the difference
between the transaction price and the amount that would have arisen
had valuation models using unobservable inputs
been used on initial recognition, less amounts subsequently
recognised, is as follows:
31 December
2018 2017
Rm Rm
Opening balance at the beginning of the reporting period
(134) (139)
New transactions
(367) (27)
Amounts recognised in profit or loss during the reporting period
73 32
Closing balance at the end of the reporting period
(428) (134)
14.11 Third-party credit enhancements
There were no significant liabilities measured at fair value and
issued with inseparable third-party credit
enhancements during the current and previous reporting periods.
15. Reporting changes overview
A number of key financial reporting changes were effected during the
current reporting period, including the
adoption of IFRS 15 and IFRS 9, and a consequential amendment to IAS
1. The Bank elected to amend its accounting
policy with regards to the presentation of interest expense, so as to
align to the amendment for the presentation
of effective interest under the IAS 1 amendment.
Implementation of new International Financial Reporting Standards
(IFRS):
* IFRS 9 Financial Instruments (IFRS 9) - The Bank has applied IFRS 9
on a retrospective basis, with an adjustment
to retained earnings and other reserves as at 1 January 2018. As
permitted under IFRS 9, the Bank has elected not
to restate comparative periods (Audited).
Amendments to IFRS:
* A change to the presentation of interest income, as required by an
amendment to IAS 1. This amendment has
resulted in the presentation of effective interest income as a
separate line item within profit or loss on the
face of the statement of comprehensive income.
Amendments to internal accounting policies:
* In addition to the amendment required to the presentation of
effective interest income under IAS 1, the Bank has
voluntarily elected to bifurcate both interest income and interest
expense, as presented on the face of the
statement of comprehensive income. Further, the Bank has voluntarily
elected to restate the prior reporting period.
The most significant reporting change effected during the current
period was the adoption of IFRS 9. The project
has been one of strategic importance to the Bank over the past 5
years, with extensive work being performed in
building new models, and developing the necessary infrastructure and
data management systems to deliver a high
quality implementation on 1 January 2018. A natural concomitant of
adopting any new IFRS, particularly one of this
level of complexity, is the evolution of technical interpretation,
particularly in areas where diversity has been
identified and challenged. There are two areas of technical
interpretation which have evolved since the publication
of the Bank's IFRS 9 transitional disclosures within this report, as
at 30 June 2018. These are as follows:
* Exclusion of post write-off recoveries (PWOR) from loss given
default (LGD) modeling: IFRS 9 provides that
financial assets should be written off, and accordingly derecognised,
when the Bank believes there to be no
reasonable expectation of recovery. The Bank has well-governed
internal policies, which define how an individual
account should be assessed for write-off, and ensure that post write-
off recoveries remain insignificant over the
long run. Further, the policies are recalibrated over time, as and
when actual recovery experience changes. Whilst
the Bank's write-off policy determines the point of derecognition at
an individual account level, it also impacts
the level of recoveries modelled on a collective basis for the
purposes of determining the LGDs to be applied at
a portfolio level. The Bank's LGD models have historically included
the present value of all forecast recoveries
on a pool of loans, over the full life of such loans, thereby
including cash flows which would otherwise be
classified as post-write off recoveries, from an accounting
perspective.
The IFRS 9 requirements for write-off have been one of the most
robustly debated topics following the global
banking industry's adoption of IFRS 9. Whilst the guidance regarding
derecognition under IFRS 9 remains largely
unchanged from IAS 39, IFRS 9 does explicitly provide that write-off
constitutes a derecognition event. The IASB's
intention in drafting IFRS 9, and specifically with regards to the
treatment of post write-off recoveries in the
calculation of LGD, has been the subject of extensive technical debate
across the industry. This matter has not
however been formally tested through international accounting forums,
such as the IFRS-IC and the IFRS 9 Transition
Resource Group. In line, however, with evolving IFRS 9 technical
interpretation, the Bank has reconsidered the
approach previously applied to LGD modelling for accounting purposes.
The Bank believes that under IFRS 9, the
write-off assumptions should be consistently applied at both an
individual account level and on a collective
modelling basis. Accordingly, the Bank will adjust the original
treatment it applied as at 1 January 2018. The
exclusion of post write-off recoveries from LGD, under IFRS 9, has
resulted in a significant increase in the
allowance for ECL recognised in the statement of financial position,
as at 1 January 2018. The restated allowance
for ECL is R21 462m (including interest in suspense and ECL provision
on financial guarantee contracts, letters
of credit and undrawn facilities), relative to the amount of R20 216m
as previously published. This has further
resulted in a reduction in the Bank's retained income as at 1 January
2018 of R897m (after taxation adjustment of
R349m). The 1 January 2018 IFRS 9 transition disclosures previously
published in the 30 June 2018 report have been
restated. The change in valuation methodology did not have a
significant impact on the credit losses recognised
during the current reporting period, since the impact on both the 1
January 2018 and 31 December 2018 ECL
allowances, were of a similar magnitude. Please refer to section
https://protect-
za.mimecast.com/s/wVmXC0gpVQcX7mRiWpu4A?domain=15.1.2.6 for further
information.
* Interest recoveries on cured stage 3 financial assets: IFRS 9
requires interest income on stage 3 assets to be
calculated based on the net carrying value of the exposure, that is,
the gross carrying value less the ECL
allowance. In order to practically give effect to this requirement,
the Bank first suspends the recognition of
contractual interest, and second, multiplies the net carrying value by
the effective interest rate (EIR). Interest
income recognised on stage 3 assets will therefore be less than the
contractual interest charged. In some
instances, the Bank may recover contractual interest which is in
excess of that previously recognised under IFRS 9.
This prompted extensive industry debate regarding whether such excess
should be presented as a credit impairment
gain, reflecting a credit recovery event, or as interest income,
reflecting recovery of interest in the ordinary
course of business. A request for clarification regarding this IFRS 9
requirement was submitted by the banking
industry through the South African Institute of Chartered Accountants
(SAICA) to the IFRS-IC in August 2018. At the
IFRS-IC meeting held in November 2018, the committee observed that any
unrecognised interest, which is subsequently
recovered, should be presented as a credit impairment gain. Since
such clarification was only provided post the
Bank's 30 June 2018 reporting date, the Bank had elected to present an
amount of R292m as interest income over the
reporting period ending 30 June 2018. It was the Bank's view that
presentation of the recovered interest previously
unrecognised as a credit impairment gain would understate, and
accordingly distort, the Bank's ECL. The Bank has
however amended its accounting treatment following the decision made
by the IFRS-IC. The accounting treatment does
not impact profit or loss, but it does reduce both the Bank's ECL and
interest income. As at 31 December 2018, the
interest recoveries on cured stage 3 assets amounted to R608m and was
presented within ECL as a credit impairment
gain. This is discussed further in section https://protect-
za.mimecast.com/s/5TdMCg5KLzC1oGLiEvc1g?domain=15.1.2.8.
Other less significant amendments to IFRS became effective during the
current reporting period, although these had
no impact on the financial results of the Bank. These amendments
relate to IAS 40 Investment Property, IAS 28
Investment in Associates and Joint Ventures, as well as IFRS 2 Share-
based Payment Transactions (IFRS 2). The
changes to IFRS 2 were however early adopted by the Bank in 2015.
IFRS-IC 22 Foreign Currency Transactions and
Advance Consideration is effective in the current reporting period.
The table below summarises the total impact on the Bank's statement of
changes in equity:
Share Preference
capital share
and capital
Additional
share and share
Tier 1 Retained
premium premium
Capital earnings
Rm Rm
Rm Rm
Balance reported as at 31 December 2017 37 183 4 644
1 500 37 855
Reported impact of adopting IFRS 9 - -
- (3 103)
IFRS 9 LGD restatement(1)
(897)
Restated impact of adopting IFRS 9 - -
- (4 000)
Impact of adopting IFRS 15 - -
- (44)
Adjusted balance as at 1 January 2018 37 183 4 644
1 500 33 811
Capital
and reserves Non-controlling
Other attributable
to ordinary interest-ordinary Total
reserves
equity holders shares equity
Rm
Rm Rm Rm
Balance reported as at 31 December 2017 4 145
85 327 2 85 329
Reported impact of adopting IFRS 9 (204)
(3 307) - (3 307)
IFRS 9 LGD restatement(1) (31)
(928) - (928)
Restated impact of adopting IFRS 9 (235)
(4 235) - (4 235)
Impact of adopting IFRS 15 -
(44) - (44)
Adjusted balance as at 1 January 2018 3 910
81 048 2 81 050
(1) The Bank has restated the 1 January 2018 ECL allowance, and the
related effects on retained income, which it
previously presented in this report, as at 30 June 2018. Under
this amendment, which follows from the adoption of
IFRS 9, post write-off recoveries have been excluded from LGD,
thereby resulting in a reduction of R897m in
retained income as at 1 January 2018.
15.1 Initial adoption of IFRS 9 Financial Instruments
15.1.1 Overview and highlights
https://protect-
za.mimecast.com/s/8q0qCj2MqDs4BR7FnDf9c?domain=15.1.1.1 The impact of
IFRS 9 on the Bank
IFRS 9 is effective from 1 January 2018 and introduces significant
changes to three fundamental areas of the
accounting for financial instruments, namely;
* The classification and measurement of financial instruments;
* The scope and calculation of credit losses, which has moved from an
incurred loss, to an expected credit loss
(ECL) approach; and
* The hedge accounting model.
Whilst the adoption of a revised classification and measurement
framework has had a less material impact on the
Bank, application of the IFRS 9 ECL methodology has affected both the
financial and regulatory capital position,
and can be reasonably expected to impact the net profit or loss of the
Bank going forward.
In accordance with the transition options allowable under IFRS 9, the
Bank will continue to apply the hedge
accounting requirements set out in IAS 39. The Bank employs a governed
hedging programme to reduce margin
volatility associated with structural balances (that is, rate
insensitive liabilities as well as the endowment
associated with equity). Operational complexity would be introduced by
adopting the revised IFRS 9 hedge accounting
requirements ahead of the finalisation of the IASB's Dynamic Risk
Management project in respect of macro hedging.
The Bank has accordingly elected not to adopt the revised IFRS 9 hedge
requirements.
https://protect-
za.mimecast.com/s/HplMCk5KZECyK5MUkJrCd?domain=15.1.1.2 The impact of
adopting a revised classification and measurement framework for
financial instruments
A portfolio of South African consumer price index (CPI) linked
investment securities have been reclassified from
available-for-sale under IAS 39, to amortised cost, under IFRS 9. This
aligns the portfolio's classification with
the Bank's business model of holding the instruments to collect
contractual cash flows. Other less significant
reclassifications of financial assets were also recorded, although
these did not have any impact on equity (refer
to section 10). The accounting for financial liabilities remains
largely unchanged, except for financial
liabilities designated at fair value through profit or loss (FVTPL).
Gains and losses on such financial liabilities
are required to be presented in other comprehensive income (OCI), to
the extent that they relate to changes in own
credit risk. The Bank early adopted this requirement in 2017, and
recognised a debit of R147m in OCI.
https://protect-
za.mimecast.com/s/O8jhClOL5GtwVXBtgQNxF?domain=15.1.1.3 The impact of
adopting a revised ECL methodology
The adoption of IFRS 9 will impact the timing of credit loss
recognition, by accelerating the recognition of losses
relative to IAS 39, and potentially creating increased volatility
through the incorporation of forward looking
assumptions. From an economic perspective, total long-run credit
losses incurred by the Bank will not be impacted
by the change in accounting framework. The Bank dedicates considerable
resources to gaining a clear and accurate
understanding of credit risk across the business and to correctly
reflecting the value of the assets in accordance
with applicable accounting principles. The core processes remain the
measurement of exposures and concentrations,
performance monitoring and tracking of asset quality, and the write-
off of assets in accordance with the Bank's
credit risk policies.
https://protect-
za.mimecast.com/s/IlOUCmw6QJHogWmi4Dj3h?domain=15.1.1.4 Summary of
the impact of IFRS 9 as at 1 January 2018
The disclosures set out within this section of the report serve to
bridge the statement of financial position of
the Bank as at 1 January 2018 between IAS 39 and IFRS 9. Information
has been provided to facilitate an
understanding of the key areas of difference, as well as the core
drivers of ECL going forward. The Bank highlights
the role that unexpected changes in forward looking assumptions may
play in driving earnings volatility, and that
changes in stage distribution could have an impact on net interest
income. Exposures within certain industry
sectors or products are expected to be more sensitive to changes in
macroeconomic conditions than others, which
could mean that the overall response to changes in forward looking
assumptions is driven by the relative
composition of the loans and advances portfolios.
The adoption of IFRS 9 has impacted the financial and regulatory
capital position of the Bank, as follows:
* The Bank's ECL allowance has increased from R15 902m as at 31
December 2017 to an amount of R21 462m as at
1 January 2018. This includes the provision recognised in respect of
off-statement of financial position items.
The ECL allowance post the adoption of IFRS 9, as previously reported,
was R20 216m. The exclusion of post
write-off recoveries has therefore increased the ECL allowance post
adoption by R1 236m.
* Retained income decreased by R4 000m (net after a taxation
adjustment of R1 560m). The impact of IFRS 9 on
retained income, as at 1 January 2018, was previously reported to be
R3 103m, with a tax adjustment of R1 211m.
The net impact on retained income of excluding post write-off
recoveries is therefore R897m.
* Other reserves decreased by R235m (previously reported R204m), owing
principally to the reclassification of
investment securities from available-for-sale to amortised cost.
* The Bank remains strongly capitalised notwithstanding a R2 096m
decrease in common equity tier 1 supply (CET1)
(previously reported to be R1 558m) and a 8 bps decrease in the CET1
ratio (previously reported 16 bps). The decrease
of 8 bps is the amount determined before the application of the
transitional arrangement elected by the Bank, which
will spread the CET 1 impact over three years. This deferral reduces
the impact on the CET 1 ratio on the date of
initial adoption to 2 bps (previously reported 4 bps).
https://protect-
za.mimecast.com/s/014OCnZXrKhZPmJiPXY0Z?domain=15.1.1.5 Summary
provisional consolidated statement of financial position for Absa Bank
Limited
The following table summarises the total impact of IFRS 9 on the
statement of financial position as at
1 January 2018:
Impact of IFRS9
Classification
31 December 2017
and Measurement(1) Reported ECL(2)
Rm
Rm Rm
Assets
Investment securities 76 524
(195) -
Loans and advances to banks 43 217
- (26)
Loans and advances to customers 660 492
(20) (3 827)
Investments in associates and joint ventures(4) 1 235
- (73)
Other assets(5) 206 890
55 792
Total assets 988 358
(160) (3 134)
Liabilities
Trading portfolio liabilities 59 834
(20) -
Provisions(6) 2 073
- 452
Other liabilities(5) 841 122
- (419)
Total liabilities 903 029
(20) 33
Equity
Capital and reserves
Attributable to equity holders:
Ordinary share capital 304
- -
Ordinary share premium 36 879
- -
Preference share capital 1
- -
Preference share premium 4 643
- -
Additional Tier 1 capital 1 500
- -
Retained earnings 37 855
- (3 103)
Other reserves 4 145
(140) (64)
85 327
(140) (3 167)
Non-controlling interest - ordinary shares 2
- -
Total equity 85 329
(140) (3 167)
Total liabilities and equity 988 358
(160) (3 134)
Exclusion of
PWOR
from
LGD (3) Total IFRS 9
(IFRS 9 ECL
Restatement) ECL impact 1 January 2018
Rm Rm Rm
Assets
Investment securities
- - 76 329
Loans and advances to banks
- (26) 43 191
Loans and advances to customers (1
246) (5 073) 655 399
Investments in associates and joint ventures(4)
(31) (104) 1 131
Other assets(5)
349 1 141 208 086
Total assets
(928) (4 062) 984 136
Liabilities
Trading portfolio liabilities
- - 59 814
Provisions(6)
- 452 2 525
Other liabilities(5)
- (419) 840 703
Total liabilities
- 33 903 042
Equity
Capital and reserves
Attributable to equity holders:
Ordinary share capital
- - 304
Ordinary share premium
- - 36 879
Preference share capital
- - 1
Preference share premium
- - 4 643
Additional Tier 1 capital
- - 1 500
Retained earnings
(897) (4 000) 33 855
Other reserves
(31) (95) 3 910
(928) (4 095) 81 092
Non-controlling interest - ordinary shares
- - 2
Total equity
(928) (4 095) 81 094
Total liabilities and equity
(928) (4 062) 984 136
(1) Classification and measurement reclassifications relate to two
portfolios:
* Short-term commodity-linked instruments that had embedded
derivatives which were previously bifurcated under
IAS 39, have been mandatorily classified at FVTPL under IFRS 9; and
* A portfolio of CPI linked investment securities that have been
reclassified from available-for-sale to amortised
cost.
(2) Reflects the IFRS 9 ECL impact as previously presented in this
report as at 30 June 2018, (not extracted from
the consolidated annual financial statements).
(3) Reflects the financial impact of amending the Bank's methodology
for calculating LGD of loans and advances to
customers (not extracted from the consolidated annual financial
statements).
(4) Reflects the change in the Bank's share of net assets from
associates and joint ventures due to their adoption
of IFRS 9.
(5) Relates to the adjustments to deferred tax and current tax assets.
(6) The increase in the carrying value of provisions relates to the
expected credit losses recognised on financial
guarantee contracts, letters of credit and undrawn facilities (to
the extent that it exceeds the gross carrying
amount of loans and advances to customers at an account level).
15.1.2 Key elements of the revised impairment model under IFRS 9
https://protect-
za.mimecast.com/s/A3QuCoYKQLiVgv7hE_ueD?domain=15.1.2.1 Introduction
IFRS 9 introduces an ECL impairment model that requires entities to
recognise ECL based on a stage allocation
methodology, with such categorisation informing the level of
provisioning required. The ECL allowance calculated on
stage 1 assets reflects the lifetime losses associated with events of
default that are expected to occur within 12
months of the reporting date (12 month ECL). Assets classified within
stage 2 and stage 3 carry an ECL allowance
calculated based on the lifetime losses associated with defaults that
are expected to occur over the lifetime of
the exposure (lifetime ECL). The assessment of whether an exposure
should be transferred from stage 1 to stage 2,
is a relative measure, where the credit risk at the reporting date is
compared to the risk that existed at initial
recognition.
The stage allocation is required to be performed as follows:
* Stage 1: Stage 1 assets comprise exposures which are performing in
line with expectations at origination.
Financial assets that are not purchased or originated with a credit
impaired status are required to be classified
on initial recognition within stage 1.
* Stage 2: Exposures are required to be classified within stage 2 when
a significant increase in credit risk has
been observed. The factors which trigger a reclassification from stage
1 to stage 2 have been defined so as to
meet the specific requirements of IFRS 9, and in order to align with
the Bank's credit risk management practices.
These are discussed further in section https://protect-
za.mimecast.com/s/8R7hCpgKQMc0VAji3Q6Ge?domain=15.1.2.3.
* Stage 3: Credit exposures are classified within stage 3, when they
are regarded as being credit impaired, which
aligns to the Bank's regulatory definition of default. Purchased or
originated credit impaired lending facilities
are classified on the date of origination within stage 3. This
definition is discussed further in section https://protect-
za.mimecast.com/s/8R7hCpgKQMc0VAji3Q6Ge?domain=15.1.2.3.
https://protect-
za.mimecast.com/s/hNyoCqj5YNsyEXpUWYjJ6?domain=15.1.2.2 Definition of
a significant increase in credit risk
The Bank uses various quantitative, qualitative and back stop measures
as indicators of a significant increase in
credit risk. The thresholds applied for each portfolio will be
reviewed on a regular basis to ensure they remain
appropriate. Where evidence of a significant increase in credit risk
is not yet available at an individual
instrument level, instruments that share similar risk characteristics
are assessed on a collective basis.
Key drivers of a significant increase in credit risk include:
* Where the weighted average lifetime probability of default (PD) for
an individual exposure or group of exposures
as at the reporting date evidences a material deterioration in credit
quality, relative to that determined on
initial recognition;
* Adverse changes in payment status, and where accounts are more than
30 days in arrears at reporting date. In
certain portfolios a more conservative arrears rule is applied where
this is found to be indicative of increased
credit risk (e.g. 1 day in arrears);
* Accounts in the Retail portfolio which meet the portfolio's
impairment high risk criteria; and
* The Bank's watch list framework applied to the Wholesale portfolio,
which is used to identify customers facing
financial difficulties or where there are grounds for concern
regarding their financial health.
https://protect-
za.mimecast.com/s/8R7hCpgKQMc0VAji3Q6Ge?domain=15.1.2.3 Definition of
credit impaired assets
Assets classified within stage 3 are considered to be credit impaired,
which, as discussed in section 2.1 applies
when an exposure is in default. Whilst IAS 39 does not prescribe any
alignment between the accounting and
regulatory definition default, this has been implemented by the Bank
as an amendment under IFRS 9. This departure
from IAS 39 has resulted in a large increase in the number of
exposures which are classified within stage 3, and
accordingly within accounting default.
The default definition applied within Wholesale and Retail is now
aligned with the regulatory definition, and
therefore assets are classified as defaulted when either:
* The Bank considers that the obligor is unlikely to pay its credit
obligations without recourse by the Bank to
actions such as realising security. Elements to be taken as
indications of unlikeliness to pay include the
following: * The Bank consents to a distressed
restructuring/forbearance of the credit obligation where this is
likely to result in a diminished financial obligation caused by the
material forgiveness of principal, interest
or fees;
* The customer is under debt review, business rescue or similar
protection; or,
* Advice is received of customer insolvency or death.
* The obligor is past due 90 days or more on any credit obligation to
the Bank.
Further, within the Retail portfolios, two additional requirements for
the classification of default are applied.
These have historically been included as criteria for determining
whether default exists from a regulatory
perspective, but not from an accounting perspective under IAS 39:
* Assets within forbearance/debt counselling are treated as in
default, regardless of whether the restructure has
led to a diminished financial obligation or not; and
* The Bank requires an exposure to reflect 12 consecutive months of
performance, in order to be considered to
have been cured from default.
Defaulted assets are considered to be cured once the original event
triggering default no longer applies, and the
defined probation period (that is, the required consecutive months of
performance) have been met. In the Retail
portfolio, the cure definition applied, per the credit risk management
policy is stringent, and assets will
typically only cure from stage 3 to stage 2, and therefore won't move
directly from stage 3 to stage 1. In the
Wholesale portfolio assets can move from stage 3 directly to stage 1.
https://protect-
za.mimecast.com/s/BaGqCr05ROIRk25u07avi?domain=15.1.2.4 Determination
of the lifetime of a credit exposure
The point of initial recognition and asset duration (lifetime) are
critical judgements to be applied in determining
the quantum of lifetime losses to be recognised. The date of initial
recognition reflects the date that a
transaction (or account) was first recognised on the statement of
financial position. The PD recorded at this time
provides the baseline used for subsequent determination of a
significant increase in credit risk.
In defining the period over which the entity is typically exposed to
credit risk, but for which the ECL would not
be mitigated by the entity's normal credit risk management actions,
the Bank considers the results of collective
data modelling and the evidence accordingly provided of:
* The period over which the entity is exposed to credit risk on
similar financial instruments;
* The length of time for related defaults to occur on similar
financial instruments following a significant
increase in credit risk; and
* The credit risk management actions that an entity expects to take
once the credit risk on the financial
instrument has increased, such as the reduction or removal of undrawn
limits.
For asset duration, the approaches which are applied (in line with
IFRS 9 requirements) are:
* Term lending: the contractual maturity date, reduced for behavioural
trends where appropriate (such as, expected
settlement and amortisation); and
* Revolving facilities: for Retail portfolios, asset duration is based
on behavioural life and this is normally
greater than contractual life. For Wholesale portfolios, a
sufficiently long period to cover expected life modelled
and an attrition rate is applied to cater for early settlement.
https://protect-
za.mimecast.com/s/6DmuCvg5oVcnYADUrFhzz?domain=15.1.2.5 Write-off
policy
The gross carrying amount of a financial asset shall be directly
reduced (that is, written off) when the entity
has no reasonable expectations of recovering it in its entirety, or a
portion thereof. A write-off constitutes a
derecognition event for accounting purposes. Depending on the nature
of the account, balances are written off when:
* There has been less than one qualifying payment received within the
last 12 months; or
* It is no longer economically viable to keep the debt on the
statement of financial position
A qualifying payment, for use in the write-off assessment, is defined
as the minimum monthly contractual payment due.
Indicators which suggest that an account is not economically viable to
retain on the statement of financial
position are as follows (but do not represent an exhaustive list):
* The exposure is unsecured i.e. there is no tangible security the
Bank can claim against (excluding suretyships);
* The debt has prescribed;
* The exposure would attract reputational risk should the Bank pursue
further legal action due to the
valuation/exposure ratio, for example where the exposure is low and
the valuation is very high in relation to the
low exposure;
* Where the cost to recover is high in relation to the valuation of
the asset, for example legal, realisation and
safe-guarding cost and rates and taxes.
Under IFRS 9, the Bank applies the write-off assumptions consistently
at both an individual account level and on a
collective modelling basis. This means that the Bank's LGD model
includes only the present value of forecast
recoveries on a pool of loans up until the designated point of write-
off. Recoveries of amounts previously written
off are recognised as an ECL gain in the statement of comprehensive
income as and when the cash is received.
https://protect-
za.mimecast.com/s/wVmXC0gpVQcX7mRiWpu4A?domain=15.1.2.6 General IFRS 9
ECL parameters and modelling approach
15.1.2.6.1 Introduction
The estimate of ECL is required to reflect an unbiased and
probability-weighted estimate of future losses, which
should be determined by evaluating a range of possible outcomes. In
some cases, relatively simple modelling is
considered to be sufficient, without the need to consider the outcome
under different scenarios. For example, the
average credit losses of a large group of financial instruments with
shared risk characteristics may be a
reasonable estimate of the probability-weighted amount. In other
situations, the identification of scenarios that
specify the amount and timing of the cash flows for particular
outcomes and the estimated probability of those
outcomes will be needed. The IFRS 9 models make use of three
parameters namely PD, LGD and EAD in the calculation
of the ECL allowance.
Expert credit judgement may, in certain instances be applied to
account for situations where known or expected risk
factors have not been considered in the ECL assessment or modelling
process, or where uncertain future events have
not been incorporated into the modelled approach. Adjustments are
intended to be short term measures and will not
be used to incorporate any continuous risk factors. The Bank has a
robust policy framework which is applied in the
estimation and approval of management adjustments.
Models are validated with the same rigor applied to regulatory models.
Testing procedures assess the quality of
data, conceptual soundness and performance of models, model
implementation and compliance with accounting
requirements.
15.1.2.6.2 Probability of default (PD)
The PD is the likelihood of default assessed based on the prevailing
economic conditions at the reporting date
(that is, at a point in time), adjusted to take into account estimates
of future economic conditions that are
likely to impact the risk of default; it will not therefore equate to
a long run average. For IFRS 9 purposes,
two distinct PD estimates are required:
* 12 month PD: the likelihood of accounts entering default within 12
months of the reporting date.
* Lifetime PD: the likelihood of accounts entering default during the
remaining life of the asset.
15.1.2.6.3 Loss given default (LGD)
LGD is defined as the percentage loss rate suffered by a lender on a
credit exposure if the obligor defaults.
In other words, even if the counterparty fails to repay the amount
owed, the lender will usually succeed in
recovering some percentage of the current amount owed in the process
of workout or sale of the obligor's assets.
This percentage is termed the recovery rate (RR), that is, the
following relation holds: RR = 1 - LGD. LGD can be
estimated on the basis of historical data on realised losses.
The modelling of loan behavior and cash recoveries on a collective
basis has, theoretically, a risk diversification
effect which would cause the inclusion of some recoveries that would
technically be defined as post write-off
recoveries at an individual account level. Due to this fact,
collective data modelling has historically been
considered to more appropriately represent the forecast performance of
a portfolio of loans, which is influenced
by prepayments, late payments, PD, LGD and modifications. To
illustrate this point, consider the assessment of
whether an individual home loan will be prepaid. The entity may
observe prepayment behaviour across its home loans
portfolio, but might find it difficult to ascribe a probability of
prepayment to an individual account.
From a regulatory perspective LGD parameters are modelled by
forecasting full lifetime economic losses over the
duration of the portfolio. Accordingly, the points of write-off
applied at an individual account level (for example,
12 months of no payments), would not necessarily be aligned with those
incorporated into the regulatory LGD models
(which would include recoveries on derecognised accounts received
beyond the 12 month write-off period). In line
with the regulatory treatment of LGD, and in the absence of clear
accounting guidance regarding the treatment under
IAS 39, this approach has historically been accepted as a more
appropriate manner in which to present the
accounting performance on a portfolio of loans with similar
characteristics, predominantly in the retail portfolios.
Whilst the guidance regarding derecognition under IFRS 9 remains
largely unchanged from IAS 39, IFRS 9 does
specifically provide that write-off constitutes a derecognition event.
This has prompted the Bank to reconsider the
treatment of post write-off recoveries in the calculation of
accounting LGD. In line with evolving IFRS 9
technical interpretation, the Bank has resolved to amend the approach
historically applied to LGD modelling for
accounting purposes. The Bank believes that under IFRS 9, the write-
off assumptions should be consistently applied
at both an individual account level and on a collective modelling
basis. The decision to exclude post write-off
recoveries from the LGD models applied across the Bank's portfolios
has resulted in a significant increase in the
allowance for ECL recognised in the statement of financial position,
as at 1 January 2018. The ECL allowance as
previously published has increased from R20 216m to a restated amount
of R21 462m (including the ECL provision
on financial guarantee contracts, letters of credit and undrawn
facilities). This means that the total increase in
the allowance for ECL under IFRS 9 is 35% (27% previously published)
greater than the impairment allowance under
IAS 39. This has resulted in a reduction in the Bank's retained income
as at 1 January 2018 of R897m (from the
previously published reduction in retained earnings of R3 103m, to a
restated reduction amount of R4 000m).
This change does not reflect a worsening of the Bank's view of credit
quality, and full lifetime losses are not
expected to change with this adoption. The regulatory treatment of LGD
remains unchanged.
In calculating LGD, losses are discounted to the reporting date using
the EIR determined at initial recognition or
an approximation thereof. For debt instruments, such as loans and
advances, the discount rate applied is the EIR
calculated on origination or acquisition date. For financial guarantee
contracts or loan commitments for which the
EIR cannot be determined, losses are discounted using a rate that
reflects the current market assessment of the
time value of money and the risks that are specific to the cash flows
(to the extent that such risks have not
already been taken into account by adjusting the cash shortfalls).
15.1.2.6.4 Exposure at default (EAD)
The EAD model estimates the exposure that an account is likely to have
at any point of default in future. This
incorporates both the amortising profile of a term loan, as well as
behavioural patterns such as the propensity of
the client to draw down on unutilised facilities in the lead up to a
default event.
https://protect-
za.mimecast.com/s/hqzDCwj5mWsEqyDiLtYkb?domain=15.1.2.7 Interaction of
the IFRS 9 ECL model with the Basel Framework
The Bank applies both the standardised approach (TSA) and advanced
internal ratings-based (AIRB) approaches to
calculate its regulatory capital requirements relating to credit risk.
While, the Bank's operations across ARO as
well as the Edcon portfolio are subject to the TSA approach, the
remaining portfolios are subject to the AIRB
approach, which applies the Bank's own measures of PD, EAD and LGD. In
designing IFRS 9 compliant ECL models, the
Bank recognised that it could leverage, specifically within Wholesale
South Africa, on the data used by the
regulatory models to model IFRS 9 ECL and encourage easier
reconciliation of inputs for capital requirement and
impairment calculations.
Existing Basel models were used as a starting point to develop IFRS 9
ECL parameters. The following are key
differences to the regulatory capital parameters:
Key risk parameter Basel III
IFRS 9
Probability of default (PD) Average of default within the next
For stage 1 assets, the PD is measured
12 months, but calculated based on
for the next 12 months, whilst in the
the long-run historical average over
case of stage 2 and stage 3 assets,
the whole economic cycle (that is,
PD is measured over the remaining
through the cycle).
life of the financial instrument.
The PD should reflect the current and
future economic cycles to the extent
relevant to the remaining life of the
loan calculated at a point in time,
as at the reporting date.
Loss Given Default (LGD) LGD is a downturn based metric,
A current or forward-looking LGD is
representing a prudent view of
recovery used to reflect the impact of economic
in adverse economic conditions.
scenarios, with no bias to adverse
The LGD calculation incorporates both
economic conditions.
direct and indirect costs associated
Collection costs incorporated into the
with the collection of the exposure.
LGD calculation include only those that
Cash flows are discounted at the risk
are directly attributable to the
free rate plus an appropriate premium.
collection of recoveries.
The LGD model excludes post write-off
recoveries.
The discount rate applied is the EIR
on the exposure.
Exposure at default (EAD) A downturn EAD is calculated to
reflect The calculation of EAD considers all
what would be expected during a period
the contractual terms over the
of economic downturn.
lifetime of the instrument.
15.1.2.8.1 Impact on the statement of comprehensive income
IFRS 9 requires interest income to be calculated on stage 1 or stage 2
financial assets by multiplying the
effective interest rate (EIR) by the gross carrying amount of such
assets. Hypothetically, should the EIR per
IFRS 9 equal the contractual interest rate charged, any interest
income recognised will be aligned with the amount
charged to the client as per the Bank's product system. In contrast to
the treatment of stage 1 and stage 2 assets,
IFRS 9 requires interest income on stage 3 financial assets to be
calculated based on the net carrying value of the
exposure, that is, the gross carrying value less the ECL allowance. In
order to practically give effect to this
requirement, the Bank first suspends the recognition of contractual
interest, and second, multiplies the net
carrying value by the EIR. Interest income recognised on stage 3
assets will therefore be less than the amount of
contractual interest charged. In principle, this means that an
exposure classified within stage 3 will realise
lower interest income than that which would be recognised had it been
classified within stage 1 or stage 2 over
the same period.
Cured stage 3 assets
In some instances, an entity may recover cash flows which are in
excess of the cumulative interest previously
suspended over the life of the instrument. The accounting treatment to
be applied when interest is recovered on a
credit-impaired financial asset which subsequently cures (that is,
when it is paid in full or is no longer
credit-impaired), prompted a significant amount of technical debate
during the current reporting period. The Bank
elected to present such excess interest received, amounting to R292m,
within interest income, and not as a gain
within ECL in its 30 June 2018 financial results.
The existence of diverging interpretations across the local industry
prompted a formal request for clarification to
be made by SAICA to the IFRS-IC. In a meeting held on 27 November
2018, the IFRS-IC observed that the curing of the
asset is a credit recovery event and that interest previously
unrecognised, should be presented as a credit
impairment gain, and not as interest income.
Application of the revised accounting treatment observed by the IFRS-
IC to be correct resulted in an amount of
R608m being presented as a gain within credit impairment losses, and
accordingly, as a reduction in interest income.
There is no related corresponding amount presented for 2017 as this
relates to the new presentation requirements
of IFRS 9 which is being applied from 1 January 2018.
15.1.2.8.2 Impact on the statement of financial position
Under IFRS 9, Interesr in Suspense (IIS) is required to be presented
as part of both the gross carrying value of the
financial instrument and the related ECL allowance. Under IAS 39,
cumulative suspended interest was not reflected
on the statement of financial position at all. Accordingly, under IFRS
9, both the gross carrying value and the ECL
allowance will be larger than it was under IAS 39, however, this
amendment does not impact the net carrying value of
the exposure.
Had the revised presentation requirement been applied as at 31
December 2017, the Bank would have recognised a
larger gross carrying value, and a larger impairment allowance of R2
279m.
15.1.3 Reconciliation of the allowance for impairment under IAS 39 to
the total ECL allowance under IFRS 9
https://protect-za.mimecast.com/s/RxcQCxG5vXF57x2iBb-
xn?domain=15.1.3.1 Summary of ECL by segment and class of credit
exposure
The following table sets out the transition of the impairment
allowances applied to all credit exposures from
IAS 39 to IFRS 9, by asset class, and by segment:
IAS 39 - 31
December 2017
Performing
Non-performing Total IAS 39
provision
Portfolio (excl. IIS)
Rm
Rm Rm
Retail and Business Banking South Africa 3 356
8 678 12 034
Retail Banking 2 583
7 582 10 165
Credit cards 578
2 626 3 204
Instalment credit agreements 703
1 112 1 815
Loans to associates and joint ventures -
- -
Mortgages 1 124
2 056 3 180
Other loans and advances -
- -
Overdrafts 51
236 287
Personal and term loans 127
1 552 1 679
Business Banking South Africa 773
1 096 1 869
CIB South Africa 559
832 1 391
Wealth 14
174 188
Head Office, Treasury and other operations in
South Africa 10
- 10
Loans and advances 10
- 10
Reclassification to provisions -
- -
Loans and advances to customers 3 939
9 684 13 623
Loans and advances to banks -
- -
Investment securities -
- -
Total ECL allowance: On-statement of financial
position exposures 3 939
9 684 13 623
Off - statement of financial position exposures
Undrawn committed facilities(1) -
- -
Financial guarantees -
- -
Letters of credit -
- -
Total ECL allowance: Off - statement of
financial position exposures -
- -
Total ECL allowance 3 939
9 684 13 623
Interest
Total IFRS 9
in Total
IAS 39 Reported PWOR provision
Suspense
(including IIS) IFRS 9 Impacts (including IIS)
Rm
Rm Rm Rm Rm
Retail and Business Banking South Africa 2 131
14 165 18 049 1 246 19 295
Retail Banking 1 082
11 247 14 479 1 176 15 655
Credit cards -
3 204 4 236 533 4 769
Instalment credit agreements 93
1 908 2 580 334 2 914
Loans to associates and joint ventures -
- 2 - 2
Mortgages 822
4 002 4 966 61 5 027
Other loans and advances -
- 34 - 34
Overdrafts 69
356 411 86 497
Personal and term loans 98
1 777 2 250 162 2 412
Business Banking South Africa 1 049
2 918 3 570 70 3 640
CIB South Africa 123
1 514 1 821 - 1 821
Wealth 25
213 266 - 266
Head Office, Treasury and other operations in
South Africa -
10 (407) - (407)
Loans and advances -
10 19 - 19
Reclassification to provisions -
- (426) - (426)
Loans and advances to customers 2 279
15 902 19 729 1 246 20 975
Loans and advances to banks -
- 26 - 26
Investment securities -
- 9 - 9
Total ECL allowance: On-statement of financial
position exposures 2 279
15 902 19 764 1 246 21 010
Off - statement of financial position exposures
Undrawn committed facilities(1) -
- 426 - 426
Financial guarantees -
- 23 - 23
Letters of credit -
- 3 - 3
Total ECL allowance: Off - statement of
financial position exposures -
- 452 - 452
Total ECL allowance 2 279
15 902 20 216 1 246 21 462
IFRS 9 - 1 January
2018
IFRS 9 transaction
Stage 1 Stage 2
Stage 3 adjustment(2)
Rm Rm
Rm Rm
Retail and Business Banking South Africa 2 797 2 821
13 677 5 130
Retail Banking 2 147 2 478
11 030 4 408
Credit cards 603 1 072
3 094 1 565
Instalment credit agreements 686 629
1 599 1 006
Loans to associates and joint ventures 2 -
- 2
Mortgages 306 255
4 466 1 025
Other loans and advances 8 18
8 34
Overdrafts 57 160
280 141
Personal and term loans 485 344
1 583 635
Business Banking South Africa 650 343
2 647 722
CIB South Africa 482 384
955 307
Wealth 27 6
233 53
Head Office, Treasury and other operations in
South Africa (188) (172)
(47) (417)
Loans and advances 8 11
- 9
Reclassification to provisions (196) (183)
(47) (426)
Loans and advances to customers 3 118 3 039
14 818 5 073
Loans and advances to banks 4 22
- 26
Investment securities 9 -
- 9
Total ECL allowance: On-statement of financial
position exposures 3 131 3 061
14 818 5 108
Off - statement of financial position exposures
Undrawn committed facilities(1) 196 183
47 426
Financial guarantees 15 8
- 23
Letters of credit 1 2
- 3
Total ECL allowance: Off - statement of
financial position exposures 212 193
47 452
Total ECL allowance 3 343 3 254
14 865 5 560
(1) Relates to ECL on undrawn committee facilities to the extent that
it exceeds the gross carrying amount on loans
and advances at an account level.
(2) 'IFRS 9 transaction adjustment' is calculated as 'Total IFRS 9
provision (including IIS)' less 'Total IAS 39
(including IIS)'.
The measurement of the ECL allowance is required to reflect an
unbiased probability-weighted range of possible
future outcomes, which are factored into the PD and LGD models, as
well as applied in determining whether a
significant increase in credit risk has occurred.
Key drivers of the ECL allowance are as follows:
* Interest in suspense: The cumulative interest which was suspended,
and therefore not presented as part of the
impairment allowance as at 31 December 2017, amounted to R2 279m. As
at the date of initial adoption this has been
included in the opening impairment allowance, with an equivalent
increase in the gross carrying value of the
financial assets.
* Removal of post write-off recoveries from LGD: The Bank has adopted
a revised approach to the collective data
modelling of LGD, and has specifically excluded post write-off
recoveries from the forecast recoverable cash flows.
This is an amendment under IFRS 9, and has resulted in an increase in
the ECL allowance as at 1 January 2018.
* Change in emergence period of stage 1 assets: The emergence period
under IAS 39 was calculated as the average
time between when a loss event occurred and the impairment event was
actually identified, and was typically 12
months or less. An increase in the ECL allowance has been observed and
is attributable to the period under IFRS 9
being defined as 12 months (or less if the contractual period is less
than 12 months) on stage 1 assets.
* Significant increase in credit loss for stage 2 classification:
Under IAS 39, stage 2 assets were classified as
performing exposures with an impairment allowance being recognised to
reflect latent risks, and calculated based on
an appropriate emergence period. Under IFRS 9, lending exposures that
have experienced a significant increase in
credit risk since origination are required to carry a lifetime ECL
allowance.
* Change in default definition: The definition of credit impaired is
aligned with the regulatory definition of
default, which has resulted in a larger population of credit exposures
being classified within stage 3 compared to
the NPL population under IAS 39. The differences have been discussed
further in section 5 include the application
of a 90 day backstop, as well as a widening of the watch list
categories included within stage 3, relative to those
that were specifically impaired under IAS 39. Further, all debt
counselling and performing forbearance accounts are
included in stage 3, but were not previously classified as NPL.
* Off-balance sheet exposures: The credit risk inherent in the undrawn
component of lending facilities are managed
and monitored by the Bank together with the drawn component as a
single exposure. The exposure at default (EAD) on
the entire facility is therefore used to calculate the ECL on loans
and advances. For this reason, it is not
possible to identify the ECL on the loan commitment component
separately from the financial asset component. As a
result, the total ECL is recognised in the ECL allowance for the
financial asset unless the total ECL exceeds the
gross carrying amount of the financial asset, in which case the ECL is
recognised as a provision on the face of
the statement of financial position. A provision of R426m was
recognised on 1 January 2018.
The Bank presents the ECL on financial guarantees and letters of
credit as a provision on the statement of financial
position. This provision has been presented as part of the IFRS 9 ECL
allowance for the purposes of illustrating
the full effects of applying a revised methodology. As at 1 January
2018, the provision calculated in respect of
these exposures was R26m.
* The calculation of ECL on other assets: Cash reserves with central
banks and investment securities are included
within the scope of IFRS 9 ECL and have contributed R9m to the Bank's
total ECL allowance.
https://protect-
za.mimecast.com/s/gMjmCy85rYhP8Lli6MWKL?domain=15.1.4.1 Summary of ECL
coverage for loans and advances to banks and customers
The following table provides an analysis of the total ECL allowance by
market segment, and per stage distribution.
For credit exposures disclosed on the statement of financial position,
the gross carrying value of on - statement
of financial position exposures includes only the amounts that were
drawn, as at 1 January 2018, whilst the
allowance for ECL includes expected losses (EL) on committed, undrawn
lending facilities. To the extent that the
ECL allowance exceeds the carrying value of the drawn exposure, a
liability (provision) has been recognised in the
statement of financial position.
1
January 2018
Stage 1
Financial assets
measurement at
FVTPL Carrying
Carrying ECL ECL
value
value allowance coverage
Rm
Rm Rm %
RBB South Africa 26 899
381 576 2 797 0.73
Retail Banking South Africa -
326 985 2 147 0.66
Credit cards -
23 116 603 2.61
Installment credit agreements -
67 498 686 1.02
Loans to associates and joint ventures -
23 037 2 0.01
Mortgages -
192 272 306 0.16
Other loans and advances -
2 439 8 0.33
Overdrafts -
4 362 57 1.31
Personal and term loans -
14 261 485 3.40
Business Banking South Africa -
54 591 650 1.19
CIB South Africa 26 899
156 231 482 0.31
Wealth -
4 658 27 0.58
Head Office, Treasury and other operations in
South Africa -
218 (188) -
Loans and advances -
218 8 3.68
Reclassification to provisions(1) -
- (196) -
Loans and advances to customers 26 899
542 683 3 118 0.57
Loans and advances to banks 17 197
24 092 4 0.02
Total Loans and advances 44 096
566 775 3 122 0.55
1 January 2018
Stage 2
Carrying value
ECL allowance ECL coverage
Rm
Rm %
RBB South Africa 33 192
2 821 8.82
Retail Banking South Africa 26 284
2 478 9.97
Credit cards 3 122
1 072 32.70
Installment credit agreements 5 217
629 11.69
Loans to associates and joint ventures -
- -
Mortgages 14 290
255 2.55
Other loans and advances 345
18 5.22
Overdrafts 1 024
160 12.40
Personal and term loans 2 286
344 21.04
Business Banking South Africa 6 908
343 4.46
CIB South Africa 35 232
384 1.09
Wealth 229
6 2.62
Head Office, Treasury and other operations in
South Africa 769
(172) -
Loans and advances 769
11 1.43
Reclassification to provisions -
(183) -
Loans and advances to customers 69 422
3 039 4.53
Loans and advances to banks 1 928
22 1.14
Total Loans and advances 71 350
3 061 4.44
1 January 2018
Stage 3
Net total
Carrying value
ECL allowance ECL coverage exposure
Rm
Rm % Rm
RBB South Africa 34 897
13 677 39.19 430 370
Retail Banking South Africa 29 227
11 030 37.74 366 841
Credit cards 4 233
3 094 73.09 25 702
Installment credit agreements 4 167
1 599 38.37 73 968
Loans to associates and joint ventures -
- - 23 035
Mortgages 18 009
4 466 24.80 219 544
Other loans and advances 11
8 72.73 2 761
Overdrafts 416
280 67.31 5 305
Personal and term loans 2 391
1 583 66.21 16 526
Business Banking South Africa 5 670
2 647 46.68 63 529
CIB South Africa 2 143
955 44.56 218 684
Wealth 330
233 70.61 4 951
Head Office, Treasury and other operations in
South Africa -
(47) - 1 394
Loans and advances -
- - 968
Reclassification to provisions -
(47) - 426
Loans and advances to customers 37 370
14 818 39.65 655 399
Loans and advances to banks -
- - 43 191
Total Loans and advances 37 370
14 818 39.65 698 590
(1) This represents the ECL allowance on undrawn facilities which has
resulted in the ECL allowance on loans and
advances exceeding the carrying value of the drawn exposure. This
excess is recognised on the statement of
financial position.
15.1.5 The impact of IFRS 9 on regulatory capital (unaudited)
https://protect-
za.mimecast.com/s/kqGQCzm5KZTYk40irwL8t?domain=15.1.5.1 Adoption of
IFRS 9 and its impact on the Bank's regulatory capital
The Bank has elected to utilise the transition period of three years
for phasing in the regulatory capital impact of
IFRS 9, as afforded by paragraph 2.2 of Directive 5 of 2017 issued by
the SARB. The key drivers of such impact are
explained in the next table:
Initial
IFRS (Including 31 December 2017 recognition
Release of Deferred Impact on
Unappropriated profits) (IAS 39) of ECL EL
shortfall tax (RWA) other reserves
Note 15.1.5.1.1.
15.1.5.1.2. 15.1.5.1.3. 15.1.5.1.4.
Capital Supply (Rm)
Common equity tier 1 72 648 (4 000)
2 139 (235)
Tier 1 capital 76 460 (4 000)
2 139 (235)
Total capital 91 484 (4 000)
2 139 (235)
Risk weighted assets 542 199
2 690
Capital Ratios (%)(1)
Common equity tier 1 13.4 (0.7)
0.4 (0.1) -
Tier 1 14.1 (0.7)
0.4 (0.1) -
Total capital 16.9 (0.7)
0.4 (0.1) -
Leverage
Leverage exposure 1 149 575 (5 560)
2 139 1 409 (290)
Leverage ratio (%) 6.7 (0.3)
0.2 - -
1
January 2018
IFRS (Including Release of RWA Eligible
General Fully loaded Transitional
Unappropriated profits) on non-performing loans Provisions (Tier
2) capital position capital position
Note 15.1.5.1.5.
15.1.5.1.6.
Capital Supply (Rm)
Common equity tier 1
70 552 72 124
Tier 1 capital
74 364 75 936
Total capital
113 89 501 90 989
Risk weighted assets (15 103)
529 785 539 094
Capital Ratios (%)1
Common equity tier 1 0.4
13.3 13.4
Tier 1 0.4
14.0 14.1
Total capital 0.4
- 16.9 16.9
Leverage
Leverage exposure
1 147 273 1 148 999
Leverage ratio (%)
6.5 6.6
(1) The Bank's capital ratios decreased as follows as a result of the
adoption of IFRS 9:
* CET1 ratio decreased by 8 bps on a fully loaded basis and 2 bps
after phase-in.
* Tier 1 ratio decreased by 6 bps on a fully loaded basis and 2 bps
after phase-in.
* Total Capital ratio decreased by 2 bps on a fully loaded basis and 1
bps after phase-in.
https://protect-
za.mimecast.com/s/kqGQCzm5KZTYk40irwL8t?domain=15.1.5.1. Adoption of
IFRS 9 and its impact on the Bank's regulatory capital (unaudited)
15.1.5.1.1. Increase in ECL provision under IFRS 9
The adoption of the revised IFRS 9 ECL model has reduced shareholders
equity by R5 560m (Reported: R4 314m) which is
partially offset by the recognition of a net tax credit of R1 560m
(Reported: R1 211m). The tax credit includes
current and deferred tax.
15.1.5.1.2. Release of ECL shortfall to credit provisions
For reporting periods up to 31 December 2017, the calculation of
capital took into account the regulatory expected
loss for performing assets, which was greater than the IAS 39
provision, thereby resulting in an additional
deduction against CET 1 to the extent of the shortfall in the
accounting provision. Under IFRS 9, the accounting
ECL allowance has increased resulting in the elimination of the
shortfall. This is reflected in the above
reconciliation as a reversal of the previous deduction and has the
effect of partially reducing the negative
impact of IFRS 9 ECL on regulatory capital.
15.1.5.1.3. Recognition of a higher deferred tax asset balance
As discussed in point 15.1.5.1.1., the carrying value of the Bank's
deferred tax asset balance has increased,
driven by an increase in the ECL provision. The reclassification of
investment securities, as discussed below in
15.1.5.1.4. resulted in a reversal of a deferred tax liability. The
net effect has been an increase in risk
weighted assets (RWA) of R2 690m (Reported: R2 331m), and accordingly,
a decrease in the CET1 ratio.
15.1.5.1.4. Impact on other reserves under IFRS 9
Other reserves decreased by R235m (Reported: R204m) (net of deferred
tax) primarily as a result of a
reclassification from available-for-sale to amortised cost of a small
portfolio of South African CPI linked
investments so as to reflect the Bank's business model of holding the
instruments to collect contractual cash flows.
15.1.5.1.5. Release of RWA on non-performing loans
The alignment of the definition of default for both accounting and
regulatory purposes resulted in a reduction of
RWA of R15 103m (Reported: R7 421m) due to specific provisions (stage
3) being raised for an increased population
of exposures. The methodology applied in calculating default RWA's
permits a bank to reduce the LGD of the
defaulted exposure by the Bank's estimate of expected loss,
represented by the Bank's specific accounting provision.
15.1.5.1.6. Tier 2 eligible provisions
Under IFRS 9, the total stage 1 and stage 2 ECL provision calculated
in respect of the Bank's AIRB portfolio
exceeds the regulatory ECL. The excess is added back as Tier 2
capital, but the quantum is capped at 0.6% of the
AIRB credit RWA. In respect of the Bank's standardised portfolio, the
IFRS 9 general provision (stage 1 and stage
2) is added back to Tier 2 capital, subject to a limit of 1.25% of the
standardised credit RWA. This has resulted
in an increase in total capital of R113m (Reported: R53m).
15.1.5.1.7. Impact of IFRS 9 ECL on leverage ratio
Key drivers of change in the leverage ratio as a result of the
adoption of IFRS 9 were a decrease in leverage
exposure and Tier 1 capital, mainly attributable to increased ECL
provisions. This was however partly offset by
the release of the EL shortfall.
15.1.6. Drivers of the impairment charge under IFRS 9
IFRS 9 impacts the timing of loss recognition, but over time, the long
run expected cash losses are driven by
economic and commercial factors, independent from the accounting
framework applied.
Differences in the timing of recognition of an impairment charge under
IFRS 9 versus IAS 39 are attributed to,
inter alia:
* significant increases in credit risk causing a transfer of assets to
stage 2 assets;
* significant changes in forward looking macroeconomic conditions
leading to assets moving between stages; and
* the size of new business growth.
Significant increase in credit risk: Transfers of exposures to stage 2
are driven by significant deterioration in
credit quality, although a large stage 2 balance does not necessarily
mean that the exposures have a poor default
grade. An important principle under IFRS 9 is that a significant
increase in credit risk constitutes a measure of
relative credit risk, requiring the absolute credit quality of an
exposure on origination to be compared against
the absolute credit quality at reporting date. Exposures classified
within stage 2 may actually have a better
credit quality than other assets which remain in Stage 1. Further,
owing to the Bank's definition of credit
impaired, and the inclusion of performing forbearance accounts within
stage 3, a credit impaired exposure may have
a better credit quality than an exposure in stage 2. Notwithstanding
this principle, should the Bank's stage 2
population start growing, this could indicate that the credit quality
across the portfolio on reporting date may
be worse than management had initially anticipated.
Changes in forward looking assumptions: IFRS 9 requires forward-
looking and historical information to be used in
order to determine whether a significant increase in credit risk has
occurred, as well as to determine the
appropriate PDs and LGDs to be applied. Transfers between stages could
be driven by a deteriorating or improving
macro-economic environment, which could make the impairment charge
more susceptible to volatility.
New business growth: One of the key changes under IFRS 9 is the
recognition of ECL losses in respect of all
exposures on initial recognition, or on the date that the Bank becomes
irrevocably committed to providing a
lending facility. This means that growth in new business will strain
profitability in the short to medium term,
although over time the realised economic returns should, all else
being equal, remain unchanged from IAS 39.
15.1.7. Impact of IFRS 9 on the Bank's tax position
The adoption of IFRS 9 has resulted in a change in the timing of the
recognition of credit losses, but does not
impact the value of credit losses ultimately incurred. Accordingly,
the long run tax effect of credit losses and
recoveries are unchanged by the implementation of a new accounting
framework. The change in the timing of loss
recognition is accounted for through the recognition of a deferred tax
adjustment, calculated based on the
statutory tax rate applicable.
In South Africa, the value of the deferred tax asset (and
corresponding impact on retained earnings and other
reserves) which was recognised on adoption of IFRS 9 was impacted by
both a change in the accounting recognition of
losses, as well as a change in the tax legislation. In accordance with
amended tax legislation issued by the
South African Revenue Service in 2017, the deduction permitted in
respect of doubtful debt balances has changed to
25% for stage 1 ECL, 40% for stage 2 ECL and 85% for stage 3 ECL. This
is a change from the previous deductions
under IAS 39, which were 25% of incurred but not reported losses, 80%
for portfolio specific impairments and 100%
for specific impairments. A higher deferred tax asset has therefore
been driven by an increase in the ECL provision
under IFRS 9, partially offset by a change in the South African tax
treatment of pre-existing allowances.
15.1.8. Incorporation of forward-looking information in their IFRS 9
modelling
The Bank's IFRS 9 impairment models consume macroeconomic information
to enable the models to provide an output
that is based on forward looking information. The macro-economic
variables and forecast scenarios are sourced from
one of the world's largest research companies, and are reviewed and
approved in accordance with the Bank's
macroeconomic governance framework. This review includes the testing
of forecast estimates, the appropriateness of
variables and probability weightings, as well as the incorporation of
these forecasts into the ECL allowance.
The Bank has adopted the use of three economic scenarios: a base
scenario, a mild upside scenario, and a mild
downside scenario. IFRS 9 requires the inclusion of point-in-time
forward looking assumptions, and in respect of
which the application of hindsight is prohibited. The scenarios
presented below are therefore reflective of the
Bank's view of forecast economic conditions as at the date of initial
adoption.
https://protect-
za.mimecast.com/s/T7YVCAnoP4TKwEvU56Q0T?domain=15.1.8.1. Base scenario
Global
Global expansion is expected to remain broad-based across sectors and
synchronised in developed economies. The
outlook on emerging market growth remains solid on the back of better
growth in developed economies and rising
commodity prices. Developed market central banks continue tightening
their monetary policies at a gradual pace in
2018-20 but this is not expected to be disruptive to emerging markets.
South Africa
The economy recovered from a weak growth at the start of 2017, on the
back of growing agricultural output, but
the near-term outlook still remains moderate. GDP growth is forecast
to marginally increase in 2018. Positive
political developments are observed, although the consumer remains in
a defensive mindset, and household spending
remains relatively muted given tax increases. Beyond 2019, growth is
supported by a stronger global and domestic
environment. South Africa's fiscal fortunes and potential ratings
downgrade remain a concern over the forecast
period. Disappointing growth could result in low fiscal revenue that
is expected to undershoot budget targets. No
further interest rate cuts over the forecast horizon are assumed.
Africa Regions
Sub-Saharan Africa's economic recovery continues although the
trajectory is not smooth across all jurisdictions.
Headwinds that could still derail growth in some markets include low
fiscal buffers and political risks ahead of
elections in key markets this year. Countries with weak fiscal
positions continue to necessitate close monitoring.
Economic growth is supported largely by a recovery in the agriculture
sector, improved commodity output and prices,
as well as more accommodative monetary policy stances.
https://protect-
za.mimecast.com/s/LNTnCBgpL4cXw8gi032Ub?domain=15.1.8.2. Mild upside
scenario: Stronger near term growth
Global
The US economy slows relative to baseline due to delays in
implementing the stimulus package promised before the
elections. Business and consumer confidence falls in the US, followed
by stock market indices. It is assumed
Brexit negotiations take longer than expected, increasing uncertainty
on financial markets, weighing on business
and consumer confidence. As a result, euro zone growth slows compared
to baseline, contributing to economic and
financial stress faced by some of the heavily indebted countries in
the region. Furthermore, slower growth in key
markets affects China's exports and result in its GDP.
South Africa
It is assumed there are no further rating downgrades. Policy and
political stability boosts business confidence
and private sector fixed investment. We assumed a strong Rand compared
to the base scenario that is driven by the
sovereign rating being unchanged and the positive global sentiment
toward emerging markets. Inflation moves lower
on the back of the stronger Rand and continued moderation in food
price inflation. Falling inflation and
diminished risk at a domestic level gives the South African Reserve
Bank (SARB) room to provide stimulus to the
economy by cutting interest rates to support the economy. The
cumulative interest rate cuts, higher commodity
prices and stronger global growth boost South Africa's GDP growth.
Africa Regions
A stronger global economy and higher commodity prices help support
growth in African commodity exports and fixed
investments. The level of output remains above the baseline scenario.
Inflation moves lower as currencies
appreciate on the back of capital flows and higher commodity prices
supporting exports. Easing inflation allows
central banks to lower interest rates, supporting the African economic
growth further.
15.1.8. Incorporation of forward-looking information in their IFRS 9
modelling
https://protect-
za.mimecast.com/s/LNTnCBgpL4cXw8gi032Ub?domain=15.1.8.2. Mild upside
scenario: Stronger near term growth
https://protect-
za.mimecast.com/s/9NCZCDRr94TLE3RIpwGiG?domain=15.1.8.3. Mild downside
scenario: Moderate recession
Global
The US economy slows relative to baseline due to delays in
implementing the stimulus package promised before the
elections. Business and consumer confidence falls in the US, followed
by stock market indices. It is assumed Brexit
negotiations take longer than expected, increasing uncertainty on
financial markets, weighing on business and
consumer confidence. As a result, euro zone growth slows compared to
baseline, contributing to economic and
financial stress faced by some of the heavily indebted countries in
the region. Furthermore, slower growth in key
markets affects China's exports and result in its GDP growth slowing.
Commodity prices fall on the back of weaker
global growth.
South Africa
South Africa goes into recession on the back of weaker global growth
environment and falling commodity prices. As a
result, government revenue comes under pressure and the finances of
state owned enterprises deteriorate. Rating
agencies downgrade South Africa's sovereign rating further, resulting
in capital outflow and Rand weakness. The
weakening of the Rand drives inflation above the SARB's 3-6% target
range in 2018-2019, resulting in the SARB
hiking the repurchase rate. The yield curve moves higher in line with
the selling of South African bonds and
higher short-term rates. Economic performance recovers slowly from
2020 as the weaker exchange rate builds some
export competitiveness aiding in arresting some of the Rand's decline,
and spending power returns slowly to
consumers as inflation abates in the middle of 2020.
Africa Regions
In Sub-Saharan Africa some economies go into recession on the back of
lower global growth and commodity prices.
Fiscal positions deteriorate further and political risks increase in
some markets. Capital outflows and falling
exports drive currencies weaker, pushing inflation higher. Central
banks intervene by hiking interest rates to
help stem the flight of capital and protect currencies.
15.1.9 The key elements of classification and measurement requirements
under IFRS 9
IFRS 9 will require financial assets to be classified on the basis of
two criteria:
* The business model within which financial assets are managed, and
* Their contractual cash flow characteristics, and specifically
whether the cash flows represent Solely Payment of
Principal and Interest ('SPPI').
Financial assets will be measured at amortised cost if they are held
within a business model whose objective is to
hold financial assets to collect contractual cash flows, and their
contractual cash flows meet the SPPI
requirements.
Financial assets will be measured at FVOCI if they are held within a
business model whose objective is achieved by
both collecting contractual cash flows as well as selling financial
assets and their contractual cash flows meet
the SPPI requirements.
Other financial assets are required to be measured at FVPL if they are
held for the purposes of trading, if their
contractual cash flows do not meet the SPPI criterion, or if they are
managed on a fair value basis and the Bank
maximises cash flows through sale. IFRS 9 allows an entity to
irrevocably designate a financial asset as at FVTPL
if doing so eliminates or significantly reduces a measurement or
recognition inconsistency (that is, an accounting
mismatch).
An entity is permitted to make an irrevocable election for non-traded
equity investments to be measured at FVOCI,
in which case dividends are recognised in profit or loss, but other
gains or losses remain in equity and are not
reclassified to profit or loss upon derecognition.
15.1.10 Classification and Measurement Impact
The following table presents the changes in the classification of
financial assets as at 1 January 2018, by showing
the changes in the carrying amounts on the basis of their measurement
categories in accordance with IAS 39 and the
changes in the net carrying amounts, which includes the effects of
ECL:
IAS 39
Measurement Category
Carrying amount Reclassification
Assets
Rm Rm
Cash, cash balances and
balances with central banks
Amortised cost - designated
28 792 -
28 792 -
Investment securities
Designated at FVTPL
20 866 (9 503)
9 503
Available-for-sale (AFS) -
designated
35 241 (5 902)
287
AFS - hedged items
20 417 -
- 5 420
76 524 (195)
Loans and advances to banks
Designated at FVTPL
17 197 (15 745)
15 745
Amortised cost - designated
26 020 -
43 217 -
Trading portfolio assets FVTPL - held for Trading
102 730 -
Hedging portfolio assets FVTPL - hedging Instrument
2 667 -
Other assets Amortised cost - designated
13 327 -
Loans and advances to customers
Designated at FVTPL
26 811 (19 378)
19 466
Amortised cost - designated
633 635 (108)
Amortised cost - hedged items
46 -
660 492 (20)
Loans to Group companies Amortised cost - designated
36 530 -
Non-current asset held for sale Amortised cost - designated
1 118 -
Assets outside the scope of IFRS 9
22 961 55
Total assets
988 358 (160)
IFRS 9
Remeasurement Measurement
Category Carrying amount
Assets Rm
Rm
Cash, cash balances and
balances with central banks
- Held at
amortised cost 28 792
-
28 792
Investment securities
- Designated at
FVTPL 11 363
- Mandatorily at
FVTPL 9 503
- FVOCI - debt
instruments 29 339
- FVOCI - equity
instruments 287
- FVOCI - hedged
items 20 417
Amortised cost
-debt instruments 5 420
-
76 329
Loans and advances to banks
- Designated at
FVTPL 1 452
- Mandatorily at
FVTPL 15 745
(26) Amortised cost
- debt instruments 25 994
(26)
43 191
Trading portfolio assets - Mandatorily at
FVTPL 102 730
Hedging portfolio assets - FVTPL - hedging
Instrument 2 667
Other assets - Held at
amortised cost 13 327
Loans and advances to customers
- Designated at
FVTPL 7 433
- Mandatory at
FVTPL 19 466
(5 073) Amortised cost
- designated 628 454
- Amortised cost
- hedged items 46
(5 073)
655 399
Loans to Group companies - Held at
amortised cost 36 530
Non-current asset held for sale - Held at
amortised cost 1 118
Assets outside the scope of IFRS 9 1 037 Assets outside
the scope of IFRS 9 24 053
Total assets (4 062)
984 136
Adoption of the new classification and measurement rules will require
a limited number of reclassifications to be
effected as at 1 January 2018, but will not require a significant
adjustment to the gross carrying values of the
Bank's financial assets and financial liabilities. Initial application
of the new requirements resulted in a
decrease in reserves of R140m (after tax) as at 1 January 2018.
Explanations of the reclassifications that will be
required are provided below:
* A portfolio of consumer price index (CPI) linked investment
securities within Treasury, have been reclassified
from available-for-sale under IAS 39, to amortised cost in terms of
the Banks business model of holding the
instruments to collect contractual cash flows. Had these assets not
been reclassified to amortised, the fair value
of the instruments would have been R5 630m, and a fair value loss of
R151m would have been recognised in OCI during
the reporting period.
* Certain financial assets, including loans and advances in CIB and
investments in Wealth were designated at FVTPL
under IAS 39 as they were managed on a fair value basis. In terms of
IFRS 9, these assets are now required to be
measured at FVTPL, and noted as mandatory designations.
* Debt securities are held by Treasury in a separate portfolio to meet
everyday liquidity needs. These were
classified as available-for-sale under IAS 39. Treasury seeks to
minimise the cost of managing liquidity needs and
therefore actively manages the return on the portfolio. The return
consists of collecting contractual cash flows
as well as gains and losses from the sale of financial assets. The
business model may result in sales activity and
these instruments have therefore been classified at FVOCI under IFRS
9.
* Commodity-linked debt instruments within CIB that were previously
bifurcated and separately recognised as a loan
at amortised cost and a derivative. These are now classified as FVTPL
as their cash flows do not consist of SPPI.
* In October 2017, the IASB issued an amendment to IFRS 9 Prepayment
Features with Negative Compensation. Under
the current IFRS 9 requirements, the SPPI condition is not met if the
lender has to make a settlement payment in
the event of termination by the borrower (also referred to as early
repayment gain). The amendment clarifies how a
company would classify and measure a debt instrument if the borrower
is permitted to prepay the instrument at an
amount less than the unpaid principal and interest owed. Under the
amendments, the sign of the prepayment amount is
not relevant. The calculation of this compensation payment must be the
same for both the case of an early repayment
penalty and the case of an early repayment gain. This amendment is
effective on 1 January 2019 and is not expected
to have a significant impact on the Bank.
15.1.11. Governance
https://protect-
za.mimecast.com/s/FmqZCElv94s8vpQFRB855?domain=15.1.11.1.
Implementation of IFRS 9
The implementation of IFRS 9 has been completed through a jointly
accountable risk and finance governance programme,
with representation from all impacted departments. A parallel run of
IFRS 9 and IAS 39 was initiated in
February 2017, providing oversight for both IAS 39 and IFRS 9
impairment results. This included model, process and
output validation, testing, calibration and analysis. During the
course of the programme there have been regular
updates provided to the Group Audit Compliance Committee (GACC), who
have approved key judgments and decisions.
https://protect-
za.mimecast.com/s/bZhgCGZx54hNDAVH6hsIZ?domain=15.1.11.2. Ongoing
governance of IFRS 9
The Bank's basic risk management framework has not been altered due to
the introduction of IFRS 9. The Group Credit
Impairment Committee (GCIC) remains the key management committee
responsible for the governance of impairments as
well as the oversight of the Bank's impairment position. The overall
credit risk appetite also remains unchanged
with all the controls in place in the business for the extension and
subsequent monitoring of credit exposure. It
has however, been necessary to develop new processes and related
controls to support the calculation of the Bank's
ECL. In particular, new governance processes have been established to
review and approve the forward looking
macroeconomic assumptions.
15.2. Adoption of IFRS 15 Revenue from contracts with customers (IFRS
15)
IFRS 15, is effective from 1 January 2018, and replaces the previous
revenue recognition standards and
interpretations, including IAS 18 Revenue and IFRS-IC 13 Customer
Loyalty Programmes. IFRS 15 establishes a single
approach for the recognition and measurement of revenue, and requires
an entity to recognise revenue as performance
obligations are satisfied. It applies to all contracts with customers
except for transactions specifically scoped
out, which includes interest, dividends, leases, and insurance
contracts. The adoption of IFRS 15 has resulted in
a change in the accounting treatment of a loyalty programme which
resulted in a reduction in retained earnings of
R44m, net of tax.
15.3. Internal accounting policy amendments
The presentation of net interest income
As a consequence of IFRS 9, an amendment was made to IAS 1
Presentation of Financial Statements, which is effective
from 1 January 2018. The amendment requires interest revenue, which is
calculated using the effective interest
method, to be presented separately on the face of the statement of
comprehensive income. This only includes
interest earned on financial assets measured at amortised cost or at
FVOCI, subject to the effects of applying
hedge accounting to derivatives in designated hedge relationships. In
compliance with this amendment the Bank has
separately presented its effective interest income within profit or
loss, but elect to present all interest which
fall outside the afore-mentioned scope as a sub-component of 'Interest
and similar income'. The Bank has elected
to apply the same approach in presenting 'Interest expense and similar
charges' to achieve consistency in the
presentation of 'Net interest income'. The revised presentation has
been applied on a retrospective basis, to
ensure comparability between reporting periods.
15.4. Changes to reportable segments and business portfolios
The South Africa Banking segment (which consisted of RBB (SA) and CIB
(SA) in aggregate) has been removed in the
Bank's segmental disclosures to align with how the banking operations
are now managed.
The following business portfolio changes resulted in the restatement
of financial results for the comparative period.
None of the restatements have impacted the overall financial position
or net earnings of the Bank:
* The Bank refined its treasury allocation methodology, resulting in
the following restatements:
* Net interest income from RBB South Africa of R122m and CIB South
Africa R2m to and Head Office, Treasury and other
operations R124m;
* Non-interest income from Head Office, Treasury and other operations
to CIB South Africa R92m; and
* The Bank continued refining its cost allocation methodology,
resulting in restatement of operating expenses from
RBB South Africa R42m to, CIB South Africa R24m, Wealth R16m and Head
Office, Treasury and other operations R2m.
Administration and contact details
Absa Bank Limited
Formerly known as Barclays Africa Group Limited
Incorporated in the Republic of South Africa
Registration number: 1986/004794/06
Authorised financial services and registered credit provider (NCRCP7)
JSE share code: ABSP
ISIN: ZAE000079810
Head Investor Relations
Alan Hartdegen
Telephone: +27 11 350 2598
Company Secretary
Nadine Drutman
Telephone: +27 11 350 5347
Head of Financial Control
John Annandale
Telephone: +27 11 350 3496
Transfer secretary
Computershare Investor Services (Pty) Ltd Telephone: +27 11 370 5000
https://protect-
za.mimecast.com/s/CwUDCJZAq5hW6K7CAEtMI?domain=computershare.com
Auditors
Ernst & Young Inc.
Telephone: +27 11 772 3000 https://protect-
za.mimecast.com/s/Bt7oCKOBZ4tyX4jUY8Q64?domain=ey.com
Registered office
7th Floor, Absa Towers West
15 Troye Street, Johannesburg, 2001
PO Box 7735, Johannesburg, 2000
Switchboard: +27 11 350 4000
absa.africa
Queries
Please direct investors relations queries to IR@absa.co.za
Please direct media queries to groupmedia@absa.africa
Please direct other queries regarding the Bank to groupsec@absa.co.za
Debt Sponsor
Absa Bank Limited (Corporate and Investment Bank)
Telephone: +27 11 772 7701
DebtSponsor@absa.africa
Date: 11/03/2019 11:08:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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