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ABSA GROUP LIMITED - Basel III Pillar 3 disclosure as at 31 March 2020

Release Date: 26/05/2020 13:05
Code(s): ABG ABSP     PDF:  
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Basel III Pillar 3 disclosure as at 31 March 2020

ABSA GROUP LIMITED                                                        ABSA BANK LIMITED
(Incorporated in the Republic of South Africa)                           (Incorporated in the Republic of South Africa)
(Registration number: 1986/003934/06)                                    (Registration number: 1986/004794/06)
ISIN: ZAE000255915                                                       ISIN: ZAE000079810
JSE share code: ABG                                                      JSE share code: ABSP
(Absa Group Limited)                                                     (Absa Bank)

ABSA GROUP LIMITED – BASEL III PILLAR 3 DISCLOSURE AS AT 31 MARCH 2020

This quarterly Pillar 3 disclosure contains the quantitative Pillar 3 disclosure requirements in respect of Absa Group Limited (Absa Group or the Group)
and Absa Bank Limited (Absa Bank or the Bank). The quarterly report provides a view of the Group’s regulatory capital and risk exposures, and it complies
with:

-       The Basel Committee on Banking Supervision (BCBS) revised Pillar 3 disclosure requirements (Pillar 3 standard).
-       Regulation 43 of the Regulations relating to Banks (Regulations), issued in terms of the Banks Act, 1990 (Act No. 94 of 1990), where not
        superseded by the revised Pillar 3 disclosure requirements.



1.      Key prudential metrics and RWA
In line with regulatory and accounting requirements, the capital and leverage position of the Group and the Bank in this document are reflected on a
regulatory basis (which requires unappropriated profits to be excluded), and in accordance with IFRS accounting rules (which requires the impact of the
contribution amounts received from Barclays PLC as part of the separation to be included). However, the capital and leverage position of the Group is
also managed on a statutory, normalised basis (which includes unappropriated profits, and excludes the impact of the contribution amounts received
from Barclays PLC). The summary table below provides key capital adequacy and liquidity information on both normalised and statutory, IFRS basis as
at 31 March 2020.

1.1     Capital adequacy and liquidity

                                                                                    Normalised        Normalised             IFRS             IFRS
                                                   Board target     Minimum RC           Group             Group           Group             Group
                                                        ranges      requirements   performance       performance     performance       performance
                                                             %                %     31 Mar 2020      31 Dec 2019      31 Mar 2020      31 Dec 2019
    Statutory capital ratios (includes unappropriated
    profits) (%)
    Common equity tier 1 (CET1)                  11.00 – 12.00                               11.1            11.8             11.3             12.1
    Tier 1                                       12.00 – 13.00                               12.0            12.7             12.2             13.0
    Total capital adequacy requirement (CAR)     14.50 – 15.50                               14.8            15.5             15.0             15.8
    Leverage                                        5.00 – 7.00                               6.6             7.0              6.7              7.2
    RC ratios (excludes unappropriated profits) (%)
    CET1                                                                     7.5                                              11.0             11.6
    Tier 1                                                                   9.3                                              11.9             12.5
    Total CAR                                                               11.5                                              14.7             15.3
    Leverage                                                                 4.0                                               6.6              6.9
    Liquidity coverage ratio (LCR) (%)                                                                                       120.8            134.4
    Net stable funding ratio (%)                                                                                             112.1            112.7




                                                                                                                                             Page 1 of 8
Capital
The capital adequacy ratios remain strong, above the minimum regulatory requirements and within Board target range. Absa Group’s statutory CET1
ratio (calculated on a normalised basis) declined by 70bps over Q1 2020, driven by payment of the final 2019 dividend of R5.2bn or 55bps of the
decrease. Higher capital deductions due to higher valuation reserves and a higher available for sale reserve, together with the IFRS 9 transitional
adjustment contributed to the remaining reduction.
-   Capital demand increased by R69.4bn, of which R40bn related to Rand weakness. The increased capital demand due to currency movements was
    offset by R6bn additional supply from Absa Regional Operations (ARO) entities due to the weaker exchange rate.
-   Constant currency RWA growth of R29bn was primarily in Corporate and Investment Banking (CIB) due to asset growth, probability of default (PD)
    migration and FX volatility. Counterparty credit risk and market risk were also a drag on consumption, given the market dislocation in March. An
    offset of R9bn came from the sale of the Edcon storecard book which concluded in February 2020.
-   Capital deductions reduced the capital ratio, as the stressed market environment in March resulted in a quarter-on-quarter (QoQ) increase in
    valuation reserves and available for sale reserve which increased from R0.6bn to R2.5bn combined.
-   The IFRS 9 phasing adjustment reduced capital supply by R0.9bn and will be fully phased in by 2021.
-   The Group redeemed R2.5bn and issued R2.7bn of Tier 2 capital during February 2020. The capital markets for further issuances are currently
    uncertain, although the Group has minimal redemptions for the remainder of 2020.
The leverage ratio (calculated on a normalised basis) has reduced from 7.0% to 6.6%. This is due to an increase in leverage exposures as the balance
sheet grew due to customer and interbank lending in combination with the weaker currency, which was only partially offset by a growth in Tier 1 capital.
In response to the COVID-19 stress, the Prudential Authority issued Directive 2 of 2020, which temporarily reduces the current Pillar 2A minimum capital
from 50bps at a CET1 level, 75bps at a Tier 1 level and 100bps at a total capital level to zero. The capital conservation buffer of 2.5% has also been
made available for banks to utilize during the COVID-19 stress. The Prudential Authority Directive 2 of 2020 is effective from 6 April 2020.


Liquidity
-   The liquidity coverage ratio and net stable funding ratio remain strong, above the minimum regulatory requirements and within risk appetite.
-   The QoQ decrease in the liquidity coverage ratio from 134.4% to 120.8% was mainly attributable to an increase in net cash outflows as a result of
    wholesale funding clients reducing the duration of their deposits, given the stressed financial market conditions in March 2020. The Prudential
    Authority released Directive 1 of 2020, reducing the LCR minimum from 100% to 80% due to the COVID-19 market stress. The Prudential Authority
    Directive 1 of 2020 is effective from 1 April 2020.
-   The net stable funding ratio decreased slightly QoQ, from 112.7% to 112.1%, due to the above-mentioned shortening in duration of wholesale
    funding.




                                                                                                                                             Page 2 of 8
1.2   KM1: Key metrics (at consolidated group level)
In line with the requirements of IFRS 9, which became effective on 1 January 2018, the Group moved from the recognition of credit losses on an
incurred loss basis to an expected credit loss (ECL) basis. The Group elected to utilise the transition period of three years for phasing in the regulatory
capital impact of IFRS 9, as afforded by Directive 5. The table below reflects the capital and leverage position of the Group on a fully loaded basis, as
well as on a transitional basis.
The Prudential Authority have issued Directive 2 of 2020 which temporarily reduces Pillar 2A minimum capital requirement to zero. This relief is effective
from 6 April 2020; therefore, the disclosures below do not include the Pillar 2A reduction.


                                                                                     31 Mar          31 Dec         30 Sep           30 Jun         31 Mar
                                                                                       2020            2019           2019            2019            2019
 Group                                                                                  Rm              Rm             Rm               Rm             Rm
 Available capital (Rm)
  1     CET1 transitional basis                                                     103 450         100 637        100 115          95 034          95 984
  1a    Fully loaded ECL accounting model                                           102 586          98 909         98 387          93 306          94 256
  2     Tier 1 transitional basis                                                   111 636         109 062        107 216         102 101         101 341
  2a    Fully loaded ECL accounting model Tier 1                                    110 772         107 334        105 488         100 373          99 613
  3     Total capital transitional basis                                            137 789         133 411        130 726         124 669         122 187
  3a    Fully loaded ECL accounting model total capital                             136 924         131 683        128 998         122 941         120 459
 RWA (Rm)
  4     Total RWA transitional basis                                                939 800         870 406        884 742         844 332         832 028
  4a    Fully loaded RWA                                                            936 226         863 260        877 595         837 186         824 882
 Risk-based capital ratios as a percentage of RWA (%)
  5     CET1 ratio transitional basis (1)                                               11.0            11.6           11.3            11.3            11.5
  5a    Fully loaded ECL accounting model CET1 (1)                                      11.0            11.5           11.2            11.2            11.4
  6     Tier 1 ratio transitional basis                                                 11.9            12.5           12.1            12.1            12.2
  6a    Fully loaded ECL accounting model Tier 1 ratio                                  11.8            12.4           12.0            12.0            12.1
  7     Total capital ratio transitional basis                                          14.7            15.3           14.8            14.8            14.7
  7a    Fully loaded ECL accounting model total capital ratio                           14.6            15.2           14.7            14.7            14.6
 Additional CET1 buffer requirements as a percentage of RWA (%)
  8     Capital conservation buffer requirement                                          2.5             2.5             2.5             2.5            2.5
  9     Countercyclical buffer requirement (2)                                             -               -               -               -              -
  10    Bank G-SIB and/or D-SIB additional requirements (3)                                -               -               -               -              -
  11    Total of bank CET1 specific buffer requirements (Row 8 + row 9                   2.5             2.5             2.5             2.5            2.5
        + row 10)
  12    CET1 available after meeting the bank’s minimum capital                          3.5             4.1             3.8             3.8            4.0
        requirements
 Basel III leverage ratio
  13    Total Basel III leverage ratio exposure measure (Rm)                      1 703 322       1 572 845      1 638 103       1 597 486       1 586 022
  14    Basel III leverage ratio (%) (row 2 / row 13) transitional basis                6.6             6.9            6.5             6.4             6.4
 14a Fully loaded ECL accounting model Basel III leverage ratio (%)                     6.5             6.8            6.4             6.3             6.3
        (row 2a / row 13)
 Liquidity coverage ratio (4)
  15    Total high-quality liquid assets (HQLA) (Rm)                                176 982         182 093        183 757         179 203         187 500
  16    Total net cash outflow (Rm)                                                 146 514         135 510        149 051         141 104         160 559
  17    LCR (%)                                                                       120.8           134.4          123.3           127.0           116.8
 Net stable funding ratio
  18    Total available stable funding (ASF) (Rm)                                   928 531         866 368        868 808         834 432         827 614
  19    Total required stable funding (RSF) (Rm)                                    828 278         768 850        769 183         749 331         750 073
  20    Net stable funding ratio (NSFR) (%)                                           112.1           112.7          113.0           111.4           110.3




                                                                                                                                                Page 3 of 8
1.3    OV1: Overview of RWA
                                                                                   Group                         Bank (5)
                                                                          31 Mar    31 Dec   31 Mar     31 Mar    31 Dec    31 Mar
                                                                            2020      2019      2020      2020      2019       2020
                                                                           RWA        RWA    MCR(6)      RWA        RWA     MCR(6)
                                                                             Rm        Rm        Rm        Rm        Rm         Rm
  1     Credit risk (excluding counterparty credit risk (CCR))           692 173   632 682    79 600   463 177   444 506     53 266
  2        Of which: standardised approach (SA)                          216 319   183 801    24 877       266     9 083         31
  3        Of which: foundation internal rating based (FIRB) approach          -         -         -         -          -         -
  4        Of which: supervisory slotting approach                             -         -         -         -          -         -
  5        Of which: advanced internal ratings based (AIRB) approach     475 854   448 881    54 723   462 911   435 423     53 235
  6     CCR                                                               18 926    15 703     2 176    16 838    14 546      1 936
  7        Of which: SA-CCR (7)                                           18 926    15 703     2 176    16 838    14 546      1 936
  8        Of which: internal model method (IMM)                               -         -         -         -          -         -
  9        Of which: other CCR                                                 -         -         -         -          -         -
 10     Credit valuation adjustment (CVA)                                  9 291    12 092     1 068     9 291    12 092      1 068
 11     Equity positions under the simple risk weigh approach              4 822     4 252       555     1 798     1 865        207
 12     Equity investments in funds – look-through approach                7 761     7 761       893       496       367         57
 13     Equity investments in funds – mandate-based approach                   -         -         -         -          -         -
 14     Equity investments in funds – fall-back approach                       -         -         -         -          -         -
 15     Settlement risk                                                    1 359       817       156     1 309       765        150
 16     Securitisation exposures in banking book                             232       232        27       232       232         27
 17        Of which: IRB ratings-based approach (SEC-IRBA)                   232       232        27       232       232         27
 18        Of which: securitisation external RBA (SEC-ERBA), including         -         -         -         -          -         -
           internal assessment approach (IAA)
  19       Of which: securitisation SA (SEC-SA)                                -         -         -         -         -         -
  20    Traded market risk                                                48 184    39 231     5 541    32 631    25 874     3 752
  21       Of which: SA                                                   23 322    18 540     2 682     7 769     5 183       893
  22       Of which: internal model approach (IMA)                        24 862    20 691     2 859    24 862    20 691     2 859
  23    Capital charge for switch between trading book and banking             -         -         -         -         -         -
        book
  24    Operational risk                                                 102 915   102 915    11 835    63 105    63 105     7 257
        Non-customer assets                                               28 444    27 331     3 271    19 897    20 381     2 288
  25    Amounts below the thresholds for deduction (subject to 250%       16 260    17 957     1 870     3 581     5 077       412
        risk weight)
  26    Floor adjustment (8)                                               9 433     9 433     1 085    13 090    13 090     1 505
  27    Total (1+6+10+11+12+13+14+15+16+20+23+24+25+26+non-              939 800   870 406   108 077   625 445   601 900    71 926
        customer assets)




                                                                                                                                Page 4 of 8
1.4   CR8: RWA flow statements of credit risk exposures under IRB
                                                                                                                          31 Mar 2020
                                                                                                                                RWA
                                                                                                                               Rm (9)
 1      RWA as at end of previous reporting period                                                                            441 374
 2      Asset size                                                                                                             30 906
 3      Asset quality                                                                                                               -
 4      Model updates                                                                                                               -
 5      Methodology and policy                                                                                                      -
 6      Acquisitions and disposals                                                                                                  -
 7      Foreign exchange movements                                                                                                  -
 8      Other                                                                                                                       -
 9      RWA as at end of reporting period                                                                                     472 280




1.5   MR2: RWA flow statements of market risk exposures under IMA
                                                                                           31 Mar 2020
                                                                                                                                Total
                                                                                                                              capital
                                                                                                                  Total      require-
                                                                VaR     sVaR    IRC (10)       CRM       Other    RWA       ment (11)
                                                                 Rm       Rm        Rm          Rm         Rm      Rm            Rm
 1      RWA at previous quarter end                            6 370   14 321          -           -         -   20 691         2 379
 2      Movements in risk levels                               2 298    1 873          -           -         -    4 171           480
 3      Model updates/changes                                      -        -          -           -         -        -             -
 4      Methodology and policy                                     -        -          -           -         -        -             -
 5      Acquisitions and disposals                                 -        -          -           -         -        -             -
 6      Other                                                      -        -          -           -         -        -             -
 7      RWA at end of reporting period                         8 668   16 194          -           -         -   24 862         2 859




                                                                                                                               Page 5 of 8
2. Leverage
Consistent with the treatment in table KM1, the leverage position below is shown on a regulatory, IFRS basis.

2.1 LR1: Summary comparison of accounting assets versus leverage ratio exposure measure
                                                                                                   Group                            Bank
                                                                                         31 Mar 2020 31 Dec 2019          31 Mar 2020 31 Dec 2019
                                                                                                  Rm            Rm                Rm           Rm
 1     Total consolidated assets                                                           1 587 583     1 399 175          1 310 417    1 159 827
 2     Adjustment for investments in banking, financial, insurance or commercial             (35 779)      (37 820)                 -            -
       entities that are consolidated for accounting purposes but outside the scope
       of regulatory consolidation
 3     Adjustment for fiduciary assets recognised on the balance sheet pursuant to                  -                 -              -            -
       the operative accounting framework but excluded from the leverage ratio
       exposure measure
 4     Adjustments for derivative financial instruments                                      (54 450)           (3 887)      (52 966)       (3 381)
 5     Adjustments for securities financing transactions (i.e. repos and similar                    -                 -             -             -
       secured lending)
 6     Adjustments for off-balance sheet items (i.e. conversion to credit equivalent         217 874        227 361          170 842       179 450
       amounts of off-balance sheet exposures)
 7     Other adjustments                                                                     (11 906)       (11 984)          (10 364)     (10 442)
 8     Leverage ratio exposure measure                                                     1 703 332      1 572 845         1 417 929    1 325 454

2.2   LR2: Leverage ratio common disclosure template
                                                                                                  Group                             Bank
                                                                                         31 Mar 2020 31 Dec 2019          31 Mar 2020 31 Dec 2019
                                                                                                 Rm          Rm                   Rm          Rm
 On-balance sheet exposures
 1    On-balance sheet exposures (excluding derivatives and securities financing            1 354 128     1 229 978         1 114 431     1 028 847
      transactions (SFTs), but including collateral)
 2    (Asset amounts deducted in determining Basel III Tier 1 capital)                        (11 236)      (11 752)           (9 899)       (9 911)
 3    Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of             1 342 892     1 218 226         1 104 532     1 018 936
      rows 1 and 2)
 Derivative exposures
 4    Replacement cost associated with all derivative transactions (where                      33 974           21 909         33 974        21 909
      applicable net of eligible cash variation margin and/ or with bilateral netting)
 5    Add-on amounts for PFE associated with all derivative transactions                       30 156           26 228         30 156        26 228
 6    Gross-up for derivatives collateral provided where deducted from the                          -                -              -             -
      balance sheet assets pursuant to the operative accounting framework
 7    (Deductions of receivable assets for cash variation margin provided in                         -                -              -             -
      derivatives transactions)
 8    (Exempted CCP leg of client-cleared trade exposures)                                          -                 -             -             -
 9    Adjusted effective notional amount of written credit derivative                           9 458             8 925         9 458         8 925
 10   (Adjusted effective notional offsets and add-on deductions for written credit                 -                 -             -             -
      derivatives)
 11   Total derivative exposures (sum of rows 4 to 10)                                         73 588           57 062         73 588        57 062
 Security financing transaction exposures
 12   Gross SFT assets (with no recognition of netting), after adjusting for sale              68 968           70 196         68 967        70 004
      accounting transactions
 13   (Netted amounts of cash payables and cash receivables of gross SFT                             -                -              -             -
      assets)
 14   CCR exposure for SFT assets                                                                   -                -              -             -
 15   Agent transaction exposures                                                                   -                -              -             -
 16   Total securities financing transaction exposures (sum of rows 12 to 15)                  68 968           70 196         68 967        70 004
 Other off-balance sheet exposures
 17   Off-balance sheet exposures at gross notional amount                                    398 127        391 354           335 936      332 915
 18   (Adjustments for conversion to credit equivalent amounts)                             (180 253)      (163 993)         (165 094)    (153 465)
 19   Off-balance sheet items (sum of rows 17 and 18)                                         217 874        227 361           170 842      179 450
 Capital and total exposures
 20   Tier 1 capital (excluding unappropriated profits)                                       111 636       109 062            73 275        76 306
 21   Total exposures (sum of lines 3, 11, 16 and 19) excluding IFRS 9 adjustment           1 703 322     1 572 845         1 417 929     1 325 454
 Leverage ratio
 22   Basel III leverage ratio (12)                                                               6.6               6.9            5.2          5.8

                                                                                                                                          Page 6 of 8
3. Liquidity

3.1 LIQ1: Liquidity coverage ratio (LCR)
                                                                                        Group (13)                     Bank (14)
                                                                                       31 Mar 2020                   31 Mar 2020
                                                                                       Total           Total          Total          Total
                                                                                 unweighted        weighted     unweighted       weighted
                                                                                       value          value           value          value
                                                                                   (average)      (average)       (average)      (average)
                                                                                         Rm             Rm              Rm             Rm
 High-quality liquid assets (HQLA)
 1    Total HQLA                                                                                   176 982                        159 547
 Cash outflows
 2    Retail deposits and deposits from small business customers, of which:         372 168         28 033         282 317         20 380
 3      Stable deposits                                                                   -              -               -              -
 4      Less stable deposits                                                        372 168         28 033         282 317         20 380
 5    Unsecured wholesale funding, of which:                                        366 102        194 684         299 835        164 491
        Operational deposits (all counterparties) and deposits in networks of
 6      cooperative banks                                                           109 109         27 277         109 109         27 277
 7      Non-operational deposits (all counterparties)                               249 672        160 086         185 635        132 123
 8      Unsecured debt                                                                7 321          7 321           5 091          5 091
 9    Secured wholesale funding                                                                      1 855                          1 855
 10   Additional requirements, of which:                                            318 501         35 528         288 511         32 116
        Outflows related to derivative exposures and other collateral
 11     requirements                                                                 13 158         13 158          12 440         12 440
 12     Outflows related to loss of funding on debt products                              -              -               -              -
 13     Credit and liquidity facilities                                             305 343         22 370         276 071         19 676
 14   Other contractual funding obligations                                             467            467             467            467
 15   Other contingent funding obligations                                          194 508          9 423         155 320          7 591
 16   Total cash outflows                                                                          269 990                        226 900
 Cash inflows
 17   Secured lending (e.g. reverse repos)                                           29 364          7 821          29 364             7 821
 18   Inflows from fully performing exposures                                       131 331        106 262         100 118            84 260
 19   Other cash inflows                                                              9 912          9 393           6 259             5 740
 20   Total cash inflows                                                            170 607        123 476         135 741            97 821


                                                                                Total weighted value           Total weighted value

 High-quality liquid assets (HQLA)
 21   Total HQLA (Rm)                                                                              176 982                        159 547
 22   Total net cash outflows (Rm)                                                                 146 514                        129 079
 23   LCR (%)                                                                                        120.8                          123.6




                                                                                                                                         Page 7 of 8
Notes:

 (1)    The difference between the CET1 ratio on a transitional basis and the fully loaded ECL accounting model total capital ratio is less than 5bps, hence
        no difference is shown.
 (2)    The countercyclical buffer is not required for banks in South Africa.
 (3)    The D-SIB add on is not required to be disclosed.
 (4)    The Group LCR reflects an aggregation of the Absa Bank LCR and the LCR of ARO. For this purpose, a simple average of the relevant 3 month-
        end data points is used in respect of ARO. In respect of Absa Bank, the LCR was calculated as a simple average of 90 calendar-day LCR
        observations.
 (5)    Absa Bank Limited includes subsidiary undertakings, special-purpose entities, joint ventures, associates and offshore holdings.
 (6)    The 2020 minimum regulatory capital requirement of 11.5% includes the capital conservation buffer but excludes the bank-specific individual capital
        requirement (Pillar 2b add-on) and the domestically systemically important bank (D-SIB) add-on. The Pillar 2A reduction of 100bps per the guidance
        in the SARB directives has not been taken into account in determining the minimum regulatory capital requirement above as this is only effective
        from 1 April 2020.
 (7)    SA-CCR amount is calculated using the current exposure method (CEM).
 (8)    Includes the operational risk floor.
 (9)    Excludes R3.57bn relating to IFRS9 RWA impact phase in.
 (10)   IRC: incremental risk charge
 (11)   Calculated at 11.5% of RWA
 (12)   Numbers reported are on a regulatory basis and include the contribution amounts from Barclays PLC as part of the separation.
 (13)   The Group LCR reflects an aggregation of the Absa Bank LCR and the LCR of Absa Regional Operations (ARO). For this purpose, a simple average
        of the relevant 3 month-end data points is used in respect of ARO. In respect of Bank, the LCR was calculated as a simple average of 90 calendar-
        day LCR observations.
 (14)   The Bank LCR is calculated on a simple average of 90 calendar-day LCR observations.


Johannesburg
26 May 2020

Enquiries:
Alan Hartdegen
E-mail: Alan.Hartdegen@absa.africa

Lead Independent Sponsor:
J.P. Morgan Equities South Africa Proprietary Limited

Joint Sponsor:
Corporate and Investment Bank – a division of Absa Bank Limited




                                                                                                                                               Page 8 of 8

Date: 26-05-2020 01:05:00
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