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Risk and capital management report for the six months ended 30 June 2015 Standard Bank Group Contents Overview 1 Risk and capital reporting frameworks 6 Capital management 10 Risk appetite and stress testing 19 Credit risk 23 Compliance risk 49 Country risk 51 Funding and liquidity risk Risk types 54 Market risk 61 Operational risk 70 Business risk 1 2 2 2 3 5 5 6 8 9 10 10 10 11 12 18 19 19 21 23 23 23 24 28 42 49 49 50 51 51 51 52 52 54 54 56 56 60 60 61 61 61 62 65 66 67 68 69 70 70 71 71 71 Risk and capital management report scope Board responsibility Risk types Governance framework Governance committees Governance documents Three lines of defence model IFRS and Basel reporting frameworks Reporting framework consolidation differences Basel approaches adopted for regulatory capital purposes Objectives Governance Capital transferability Basel III capital requirements Regulatory capital Economic capital Governance Risk appetite Stress testing Definition Approach to managing credit risk Governance Approved regulatory capital approaches Credit portfolio characteristics and metrics in terms of Basel Credit portfolio characteristics and metrics in terms of IFRS Definition Approach to managing compliance risk Governance Definition Approach to managing country risk Governance Approved regulatory capital approaches Country risk portfolio characteristics and metrics Definition Approach to managing liquidity risk Governance Liquidity characteristics and metrics SBG’s credit ratings Conduits Definition Governance Approved regulatory capital approaches Trading book market risk Interest rate risk in the banking book Equity risk in the banking book Foreign currency risk Own equity-linked transactions Post-employment obligation risk Definition Approach to managing operational risk Governance Approved regulatory capital approach Operational risk subtypes 77 78 82 85 86 92 93 Terms and conditions of capital instruments issued Composition of capital – SBG Composition of capital – SBSA Leverage ratio – SBSA Capital instruments: main features disclosure template Liquidity coverage ratio (average) – SBSA Acronyms and abbreviations 74 Reputational risk 75 Restatements 76 Additional information 77 Contact details 95 Overview 1 Risk and capital management report scope 2 Board responsibility 2 Risk types 2 Governance framework 3 4 4 Governance committees • Board committees • Management committees 5 Governance documents 5 Three lines of defence model Risk and capital management report scope This risk and capital management report covers the Standard Bank Group’s (SBG) banking activities (group). Refer to the SBG 2014 risk and capital management report and annual financial statements for information regarding the SBG insurance operations. The comparative period disclosures presented within this report include the exposures from our global markets outside Africa operations, which for financial reporting purposes have been separately classified as non-current assets and liabilities held for sale in the comparative period. The group’s controlling interest in Standard Bank Plc, which included the group’s global markets outside Africa operations, was disposed of to the Industrial and Commercial Bank of China on 1 February 2015. Subsequent to the transaction Standard Bank Plc has been renamed ICBC Standard Bank Plc and the group’s remaining 40% interest has been included as an associate, with equity accounted earnings included in the group’s continuing operation’s results from the disposal date. 1 Risk and capital management report Overview | continued Board responsibility The group’s board of directors (board) has the ultimate responsibility for the oversight of risk. For the period ended 30 June 2015, the board is satisfied that the group’s risk, compliance, treasury, capital management and group internal audit (GIA) processes generally operated effectively, that the group’s business activities have been managed within the boardapproved risk appetite, and that the group is adequately funded and capitalised to support the execution of the group’s strategy. In the instances where the group incurred losses, breached risk appetite or was fined by its regulators, the board is satisfied that management have taken appropriate remedial action. Risk types The group’s business activities give rise to various risks. These are: credit risk compliance risk country risk funding and liquidity risk market risk operational risk business risk reputational risk. Each risk is defined within the relevant section, together with: an explanation of the application of the group’s risk, compliance and capital management (RCCM) governance framework to the specific risk the approved regulatory treatment for capital requirements to be held against the specific risk in terms of Basel a description of the relevant portfolio characteristics both in terms of prescribed disclosure and the group’s business model. 2 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Governance framework The group’s approach to managing risk and capital is set out in the RCCM governance framework, which is approved by the group risk and capital management committee (GRCMC). The framework has two components: governance committees governance documents such as standards, frameworks and policies. Governance committees Governance committees that operate within the RCCM governance framework are in place at both a board and management level. They have mandates and delegated authorities that are reviewed regularly. Standard Bank Group board Management committees Board committees Group executive committee Group risk and capital management committee Group management committee Group IT committee Group audit committee Group model approval committee Group risk oversight committee Direct reporting line. Indirect reporting line. 3 Risk and capital management report Overview | Governance committees continued Board committees The group model approval committee The board committees that are responsible for the oversight of the group’s RCCM comprise the group audit committee (GAC), the GRCMC, the group information technology (IT) committee, and the group model approval committee. The key roles and responsibilities of these committees, as they relate to the RCCM, are summarised in the sections that follow. The group model approval committee is designated by the board to discharge the board’s regulatory responsibility of reviewing and approving the group’s material risk models, as well as models used in the calculation of regulatory capital. This committee is supported by the Personal & Business Banking (PBB) and Corporate & Investment Banking (CIB) model approval subcommittees, with the models being assigned to these three committees for approval based on an assessment of the materiality of each model. Detailed information relating to these committees can be found in the governance section of the SBG 2014 annual integrated report. The group risk and capital management committee The GRCMC provides independent oversight of RCCM across the group by: ensuring adequate and effective implementation of risk governance processes, standards, policies and frameworks ensuring that the risk strategy is executed by management in accordance with the board-approved risk appetite and risk, compliance and capital management governance framework considering the quarterly risk management report which includes detailed updates on risk types, as well as the separate updates from legal, compliance, capital and liquidity risk reporting material risk and capital management matters to the board. The group IT committee The group IT committee’s purpose is to assist the board in fulfilling its corporate governance responsibilities with respect to IT and reports to the board through its chairman. The committee has the authority to review and provide guidance on matters related to the group’s IT strategy, budget, operations, policies and controls, as well as oversight of significant IT investments and expenditure. The group audit committee The GAC has oversight of the group’s financial position and makes recommendations to the board on all financial matters, financial risks, internal financial controls, fraud, compliance, IT risks and the impact of IT on financial controls. In relation to the RCCM, the GAC plays a role in assessing the adequacy and operating effectiveness of the group’s internal financial controls. A risk management report is tabled at the GAC meetings and the group chief risk officer (CRO) provides the committee with an overview of key issues raised at GRCMC. In order to ensure the independence of the second line of defence functions, the chairman of the GAC, who is also a member of the GRCMC, meets with the group chief compliance officer (GCCO), the group CRO, the group financial director, the group chief audit officer and the head of operational risk management, who is responsible for financial crime control, without management being present. 4 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Management committees The group risk oversight committee Executive management responsibility for all material risk types has been delegated by the group management committee to the group risk oversight committee (GROC) which, in turn, assists the GRCMC in fulfilling its mandate. As is the case with the GRCMC, GROC calls for and evaluates in-depth investigations and reports based on its assessment of the group’s risk profile and external factors. GROC delegates authority to various subcommittees which deal with specific risk types or oversight activities. Material matters are escalated to GROC through reports or feedback from each subcommittee chairman. The GROC subcommittees are as follows: CIB credit governance committee, chaired by the CIB CRO PBB credit governance committee, chaired by the PBB CRO group asset and liability committee (ALCO), chaired by the group financial director group compliance committee, chaired by the GCCO group country risk management committee, chaired by the group CRO group equity risk committee (ERC), chaired by the CIB CRO group internal financial control governance committee, chaired by the group financial director group operational risk committee, chaired by the group head of operational risk management group regulatory and legislative oversight committee, chaired by the group chief executive group sanctions review committee, chaired by the group chief executive group stress testing and risk appetite committee, chaired by the group CRO intragroup exposure committee, chaired by the group financial director. Governance documents Governance documents within the RCCM governance framework comprise standards, frameworks and policies which set out the requirements for the identification, assessment, measurement, monitoring, managing and reporting of risks and effective management of capital. Governance standards and frameworks are approved by the relevant board committee. Group policies are approved by the group management committee or subcommittee, relevant GROC subcommittee, GROC itself or, where regulations require board approval, by the board or relevant board committee. Business line and legal entity policies are aligned to these group policies and are applied within their governance structures. The second line of defence functions provide independent oversight and assurance. They have resources at the centre and embedded within the business lines. Central resources provide groupwide oversight of risks, while resources embedded within the business lines support management in ensuring that their specific risks are effectively managed as close to the source as possible. Central and embedded resources jointly oversee risks at a legal entity level. The second line of defence functions develop and implement governance standards, frameworks and policies for each material risk type to which the group is exposed. This ensures consistency in approach across the group’s business lines and legal entities. Compliance with the standards and frameworks is ensured through annual selfassessments by the second line of defence and reviews by GIA. The third line of defence is the provision of independent oversight and assurance by GIA to the board and senior management of the effectiveness of the first and second line of defence. All three levels report through to the board, either directly or through the GRCMC and GAC. Three lines of defence model The group uses the three lines of defence governance model which promotes transparency, accountability and consistency through the clear identification and segregation of roles. The first line of defence is the responsibility of management to identify and manage risks. This involves, at an operational level, the day-to-day effective management of risk in accordance with agreed risk policies, appetite and controls. Effective first line management includes: the pro-active self-identification of issues and risks, including emerging risks the design, implementation and ownership of appropriate controls the associated operational control remediation a strong control culture of effective and transparent risk partnership. 5 Risk and capital reporting frameworks 6 IFRS and Basel reporting frameworks 8 Reporting framework consolidation differences 9 Basel approaches adopted for regulatory capital purposes IFRS and Basel reporting frameworks Tables in this report have been labelled to identify content disclosed in terms of International Financial Reporting Standards (IFRS) or Basel reporting frameworks. The method of measurement in terms of Basel differs from the method of measurement in accordance with IFRS. The table below highlights the principal differences between the IFRS and Basel reporting frameworks. Principle Basel IFRS Categorisation of exposures By Basel asset class which, under the internal ratings-based (IRB) approach, is based on homogeneous risk characteristics. By class of financial instrument, taking into account the nature of the information to be disclosed and the characteristics of the underlying financial instruments. Exposure Credit exposure, for both IRB and standardised portfolios, consists of on-balance sheet exposure, off-balance sheet exposure, securities financing exposure and derivatives exposure. These exposure values are all gross exposures before the impact of netting, collateral or expected recoveries have been taken into account. Balances reported per the statement of financial position (SOFP) are determined according to applicable IFRS requirements. Refer to annexure D in the SBG 2014 annual financial statements for further detail regarding SBG’s accounting policies. Certain revolving facilities are reported using month average balances, per regulatory requirements. Valuation 6 Fair value gains and losses attributable to own credit risk are excluded when calculating regulatory capital. Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Assets on the group’s IFRS SOFP are reported net of portfolio and specific impairment provisions. Balances, per the SOFP, are reported based on month end balances. All changes in fair value (including fair value gains and losses attributable to own credit risk) on financial liabilities that, on meeting specific criteria, have been designated to be measured at fair value as well as held-for-trading liabilities, are recognised in profit or loss. Principle Basel IFRS Impairment of assets Impairment is based on the concepts of expected and unexpected losses. Expected losses are accounted for through the level of impairments held against the underlying exposure. Statistical modelling of expected losses is required. Unexpected losses are accounted for through holding regulatory capital in relation to the size and nature of the exposure held. Assets measured at amortised cost and debt instruments classified as available-for-sale are specifically impaired and the resulting losses recognised in the profit or loss only if: there is objective evidence of impairment resulting from one or more events that have occurred after the initial recognition of the asset, and that event has an impact on the estimated future cash flows of assets that can be reliably measured. The difference between the Basel and IFRS impairment values produces a shortfall if the expected loss amount under Basel exceeds total impairments under IFRS, or an excess if total impairments exceed the expected loss amount. The shortfall, if any, is to be deducted from common equity tier I (CET I) capital. To provide for latent losses in a portfolio of loans where the loans have not yet been individually identified as impaired, impairment for incurred but not reported losses is recognised based on historic loss patterns and estimated emergence periods. Defines default as the obligor being 90 days past due on the obligation (extended to 180 days for some products). Defines objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that objective evidence of impairment has an impact on the asset’s estimated future cash flows. Default The use of statistical models is permitted, but an event of default must occur before an impairment loss can be recognised. Examples of objective evidence of impairment include: actual breach of contract observable data indicating that there is a measurable decrease in the estimated cash flows from a group of assets since their initial recognition due to: adverse changes in the payment status of the borrowers in the group, or a deterioration in national or local economic conditions that correlate with defaults on the assets in the group. 7 Risk and capital management report Risk and capital reporting frameworks | continued Reporting framework consolidation differences In accordance with IFRS, all entities, regardless of the nature of their underlying activities, are either consolidated or equity accounted based on the extent of control or influence that the group exerts over those entities. Basel differentiates entities based on the underlying activity of the entity combined with the extent of control or influence that the group exerts over those entities. The different treatments for entities for regulatory and accounting consolidation are explained in the table below. Shareholding Regulatory treatment Banking, financial entity or securities firm1 <10% Commercial entity Insurance entity Aggregate of investments are compared to a threshold of 10% of the group’s CET I capital. Amounts above the threshold are deducted against the corresponding component of capital and amounts below the threshold are risk-weighted. > 10% but ≤ 20% Apply the deduction method2. Aggregate of investments in tier I and tier II instruments are deducted against the corresponding component of capital. > 20% but ≤ 50% Other significant shareholder: Proportionately consolidate. No other significant shareholder: Apply the deduction method2. Aggregate of investments in tier I and tier II instruments are deducted against the corresponding component of capital. >50% IFRS treatment Apply the deduction method2. Aggregate of investments in tier I and tier II instruments are deducted against the corresponding component of capital. Consolidated Standardised approach Risk weight at no less than 100%. Individual investments up to 15% of the group’s CET I, additional tier I and tier II: risk weight at no less than 100%. Individual investments in excess of 15% of the group’s CET I, additional tier I and tier II: risk weight at 1 250%. Aggregate of investments >60% of the group’s CET I, additional tier I and tier II: risk weight excess above 60% at 1 250%. IRB approach Risk weight up to a Typically treated as an maximum of 1 250%. investment and is measured at fair value (cost in certain circumstances). Where the group has significant influence over that investment, equity accounting is applied unless designated to be measured at fair value through profit or loss in terms of IFRS. Individual investments up to 15% of the group’s CET I, additional tier I and tier II: risk weight at no less than 100%. Individual investments in excess of 15% of the group’s CET I, additional tier I and tier II: risk weight at 1 250%. Equity accounting (unless designated to be measured at fair value through profit or loss in terms of IFRS) applied unless there is evidence of control in which case the group consolidates the investment into its results. Consolidate unless there is evidence to indicate that the group does not have control over that investment in which case equity accounting will typically be applied unless designated to be measured at fair value through profit or loss in terms of IFRS. 1For Basel purposes, financial entities other than financial entities acquired through realisation of security in respect of previously contracted debt (held temporarily) are subject to other materially different rules and regulations or non-consolidation as required by law. 2Aggregate of investments compared to 10% of the group’s CET I capital and amounts above the 10% threshold are deducted against CET I capital. Amounts not deducted are combined with mortgage servicing rights and deferred tax assets and compared to 15% of the group’s CET I capital. Amounts above the 15% threshold are deducted against CET I capital and amounts below are risk-weighted at 250%. 8 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Basel approaches adopted for regulatory capital purposes Basel provides various approaches for the calculation of regulatory capital to be held against credit, market and operational risk. In general, there are three approaches: a basic approach an intermediate approach an advanced approach. The regulators approve the approach adopted on a case-by-case basis, both at a solo regulated entity and consolidated regulated entity level. The group does not adopt advanced approaches for certain portfolios, either because these methods are not yet recognised in a particular jurisdiction or because the group has chosen, on a materiality basis, to adopt the intermediate or basic approaches. In these cases, the group nevertheless adopts practices similar to the advanced approach for its internal economic capital, risk measurement and management purposes where it is felt that these offer better information for managing risks. The approaches per risk type approved by regulators are specified in the relevant credit, market and operational risk sections of this report. 9 Risk and capital management report Capital management 10 Objectives 10 Governance 10 Capital transferability 11 Basel III capital requirements 12 Regulatory capital 18 18 18 Economic capital • Risk-adjusted performance measurement • Cost of equity Objectives The group’s capital management function is designed to ensure that regulatory requirements are met at all times and that the group and its principal subsidiaries are capitalised in line with the group’s risk appetite and target ratios, both of which are approved by the board. The capital management division within treasury and capital management comprises: Strategic capital management function: Key responsibilities include raising capital to enable growth opportunities and to provide an optimal capital structure, advising on the dividend policy, facilitating capital allocation and risk-adjusted performance measurement (RAPM), and managing the internal capital adequacy assessment process (ICAAP) and capital planning process, including stress testing of capital supply and demand. Portfolio analysis and reporting function: Key responsibilities include the measurement and analysis of regulatory and economic capital, internal and external reporting and implementation of new regulatory requirements. CIB and PBB capital management functions: Key responsibilities include providing support on deal pricing, balance sheet utilisation and management of capital consumption against budgets. Regional capital management function: Key responsibilities include supporting the group’s operations in the rest of Africa. Governance The primary management level subcommittees that oversee the risks associated with capital management are the group ALCO and its subcommittee, the group capital management committee. The principal governance documents are the capital management governance framework and the model risk governance framework. Capital transferability Subject to compliance with the corporate laws of relevant jurisdictions and appropriate motivation to and approval by exchange control authorities, no significant restrictions exist on the transfer of funds and regulatory capital within the group. 10 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Basel III capital requirements The South African Reserve Bank (SARB) adopted the Basel III framework introduced by the Basel Committee on Banking Supervision (BCBS) from 1 January 2013. The group has been compliant with the minimum requirements from that date. The group is well positioned to comply with the requirements that are subject to phase-in rules when they become effective. Basel III aims to improve the quality of capital, increase capital levels and remove inconsistencies in the definition of capital across jurisdictions as explained in the table below. Objectives of Basel III Increased quality, quantity and consistency of capital increased focus on CET I increased capital levels. Increased risk coverage credit valuation adjustment for over-the-counter derivatives, being the capital charge for potential mark-to-market losses associated with the deterioration in counterparty creditworthiness asset value correlation, being the increased capital charge on exposures to financial institutions strengthened standards for collateral management, margin period of risk, management of general wrong-way risk and stress testing. Capital conservation buffer 2.5% CET I capital buffer by 2019 to decrease pro-cyclicality build up capital during favourable economic conditions that can be drawn on during times of stress. Pillar 2a and domestic systemically important banks (D-SIB) buffer up to 2% of pillar 2a buffer prescribed by the SARB to be held against systemic risk requirements 0 – 2.5% D-SIB buffer required for banks deemed by the SARB to be systemically important the sum of the two requirements is limited to 3.5% and is split over all three tiers of capital. Countercyclical buffer 0 – 2.5% CET I capital buffer deployed by national jurisdictions when system-wide risk builds up ensures capital adequacy takes the macro-financial environment into account. Leverage ratio constrain build-up of leverage in the banking sector the ratio is calculated as tier I qualifying capital/on- and off-balance sheet exposures, as defined by the BCBS, and is measured against the SARB prescribed minimum ratio of 4%. 11 Risk and capital management report Capital management | Basel III capital requirement continued The graph below reflects the capital requirements and phase-in periods applicable to South Africa. SARB ratios (capital as a % of riskweighted assets)1 effective 1 January each year (%) 14.00 14 13.01 12.00 12 2.75 10.00 10 2.00 8 3.25 3.00 11.01 2.50 1.50 1.38 0.63 6.50 2015 1.63 1.50 1.75 1.25 1.88 2.50 6.50 6.50 6.50 6.50 2016 2017 2018 2019 6 4 2 ● CET I ● Conservation buffer ● Additional tier I ● Tier II 1Graph excludes countercyclical buffer and confidential bank-specific pillar 2b capital requirement, but includes maximum potential D-SIB requirement which is also bank specific and therefore confidential. The South African D-SIB framework assesses the systemic importance of banks, controlling companies and branches of foreign banks licensed to operate in South Africa. While the D-SIB loss-absorbency requirement imposed on banks will only become effective on 1 January 2016, the SARB has advised banks of their bank-specific loss-absorbency requirements in advance of the implementation date to allow banks sufficient time to account for this requirement in their capital planning and management processes. Regulatory capital The group manages its capital levels to support business growth, maintain depositor and creditor confidence, create value for shareholders, and ensure regulatory compliance. The main regulatory requirements to be complied with are those specified in the South African Banks Act 94 of 1990 (Banks Act) and related regulations which are aligned with Basel III. Regulatory capital adequacy is measured through the following three risk‑based ratios: CET I: Ordinary share capital, share premium, retained earnings and qualifying non-controlling interest less impairments divided by total risk-weighted assets. Tier I: CET I and other qualifying non-controlling interest plus perpetual, non-cumulative instruments with principal loss absorption features issued under the Basel III rules divided by total risk-weighted assets. Perpetual non-cumulative preference shares issued under Basel I and Basel II are included in tier I capital but are subject to regulatory phase-out requirements over a 10-year period, which commenced on 1 January 2013. Total capital adequacy: Tier I plus other items such as the general allowance for credit impairments and subordinated debt with principal loss-absorption features issued under Basel III divided by total risk-weighted assets. Subordinated debt issued under Basel I and Basel II is included in total capital but is subject to regulatory phase-out requirements, over a 10-year period which commenced on 1 January 2013. The ratios are measured against internal targets and regulatory minimum requirements. 12 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Capital adequacy1 (%) SBG tier II instrument maturity profile (Rm) 18 6 000 16 5 000 14 12 4 000 10 3 000 8 6 2 000 4 1 000 2 FY10 ● Tier I FY11 ● Tier II FY12 Tier III FY13 FY14 1H15 Required capital 2H15 2016 2017 2018 2019 2020 2022 ● Callable date 12010 and 2011 are on a Basel II basis. Basel III was implemented 1 January 2013. Risk-weighted assets and capital adequacy for 2012 are on a pro forma Basel III basis. Risk-weighted assets are calculated in terms of the Banks Act and related regulations, which are aligned with Basel III. The group complied with all regulatory capital requirements during the current period and prior year. The group’s CET I capital, including unappropriated profit, is R112,9 billion as at 30 June 2015 (31 December 2014: R113,5 billion). The group’s tier I capital, including unappropriated profit, is R116,9 billion as at 30 June 2015 (31 December 2014: R118,0 billion) and total capital, including unappropriated profit was R138,0 billion as at 30 June 2015 (31 December 2014: R142,0 billion). The group has a balanced tier II subordinated debt maturity profile. During the period ended 30 June 2015, the group issued R2,8 billion Basel III compliant tier II instruments (31 December 2014: R2,3 billion). The SARB adopted the leverage framework that was issued by the BCBS in January 2014, with final calibrations expected by 2017. Formal disclosure requirements commenced from 1 January 2015 and the ratio is expected to transition to a pillar 1 requirement by 2018. The non-risk-based leverage measure is designed to complement the Basel III risk-based capital framework. The group’s leverage ratio inclusive of unappropriated profit was 6.7% as at 30 June 2015 (31 December 2014: 6.9%), in excess of the SARB minimum requirement of 4%. Basel: Leverage ratio Tier I capital (excluding unappropriated profit) Tier I capital (including unappropriated profit) Total exposures Leverage ratio (excluding unappropriated profits, %) Leverage ratio (including unappropriated profits, %) June 2015 Rm December 2014 Rm 103 062 104 921 116 922 117 970 1 750 073 1 713 616 5.9 6.1 6.7 6.9 13 Risk and capital management report Capital management | Regulatory capital continued Basel III qualifying capital, excluding unappropriated profits June 2015 Rm December 2014 Rm Normalised ordinary shareholders’ equity Net IFRS adjustments 142 512 (1 042) 139 588 (2 603) IFRS ordinary shareholders' equity Qualifying non-controlling interest Less: regulatory adjustments 141 470 4 968 (33 527) 136 985 4 159 (27 689) Goodwill Other intangible assets Shortfall of credit provisions to expected future credit losses Investments in financial, banking and insurance entities Other adjustments (3 573) (16 579) (2 156) (9 919) (1 300) (3 711) (15 850) (2 054) (4 074) (2 000) Less: unappropriated profit and regulatory exclusions (13 860) (13 049) 99 051 3 846 165 100 406 4 396 119 CET I capital Qualifying perpetual preference shares Qualifying non-controlling interest profit Tier I capital 103 062 104 921 Tier II subordinated debt General allowance for credit impairments 19 405 1 653 22 727 1 266 Tier II capital 21 058 23 993 Total regulatory capital 124 120 128 914 Total capital requirement 85 638 91 521 Total risk-weighted assets 856 380 915 213 14 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Basel III risk-weighted assets and associated capital requirements December 20142 June 2015 Risk-weighted assets Rm Capital requirement1 Rm Risk-weighted assets Rm Capital requirement1 Rm Credit risk 627 153 62 714 623 931 62 392 Portfolios subject to the standardised approach3 232 784 23 278 231 670 23 167 99 880 69 170 12 523 9 787 41 132 292 9 988 6 917 1 252 979 4 113 29 99 468 66 184 8 791 12 601 44 361 265 9 947 6 618 879 1 260 4 436 27 Corporate Sovereign Banks Retail mortgages Retail other4 Securitisation exposure Portfolios subject to the foundation internal ratings-based (FIRB) approach 5 958 595 Corporate Sovereign Banks 2 834 1 491 1 633 283 149 163 Portfolios subject to the advanced internal ratings-based (AIRB) approach 365 355 36 535 357 222 35 722 Corporate Sovereign Banks Retail mortgages Qualifying retail revolving exposure (QRRE) Retail other4 Securitisation exposure 149 859 22 100 21 313 83 324 48 124 40 183 452 14 986 2 210 2 131 8 333 4 812 4 018 45 145 781 19 449 19 352 83 946 46 918 41 305 471 14 578 1 945 1 935 8 394 4 692 4 131 47 Other assets 29 014 2 901 29 081 2 908 Counterparty credit risk 20 819 2 082 47 026 4 703 Portfolios subject to the standardised approach3 3 944 394 4 434 444 Corporate Sovereign Banks 3 123 312 821 82 2 648 403 1 383 265 40 139 Portfolios subject to the FIRB approach 32 355 3 235 Corporate Sovereign Banks 21 129 243 10 983 2 113 24 1 098 Portfolios subject to the AIRB approach 16 875 1 688 10 237 1 024 Corporate Sovereign Banks 6 295 469 10 111 630 47 1 011 6 317 971 2 949 632 97 295 Footnotes on the following page. 15 Risk and capital management report Capital management | Regulatory capital continued Basel III risk-weighted assets and associated capital requirements continued December 20142 June 2015 Risk-weighted assets Rm Equity risk in the banking book Capital requirement1 Rm Risk-weighted assets Rm Capital requirement1 Rm 12 596 1 261 14 469 1 447 Portfolios subject to the market-based approach 4 421 442 7 649 765 Listed Unlisted 6 4 415 1 441 698 6 951 70 695 Portfolios subject to the probability of default (PD)/loss given default (LGD) approach 8 175 819 6 820 682 Market risk 42 190 4 219 71 153 7 115 Portfolios subject to the standardised approach3 25 919 2 592 29 259 2 926 Interest rate risk Equity position risk Foreign exchange risk Commodities risk 24 156 148 1 544 71 2 416 15 154 7 25 935 98 2 483 743 2 594 10 248 74 Portfolios subject to the internal models approach 16 271 1 627 41 894 4 189 Value-at-risk (VaR) based 16 271 1 627 29 978 2 997 Interest rate risk Equity position risk Foreign exchange risk Commodities risk Diversification benefit 6 030 6 630 12 668 20 (9 077) 603 663 1 267 2 (908) 21 823 8 891 7 570 8 922 (17 228) 2 182 889 757 892 (1 723) 11 916 1 192 Non-VaR-based Operational risk 3 Portfolios subject to the standardised approach Portfolios subject to the advanced measurement approach (AMA) Risk-weighted assets for investments in financial entities Total risk-weighted assets/capital requirement 126 380 12 638 131 459 13 146 80 884 45 496 8 088 4 550 82 931 48 528 8 293 4 853 27 242 2 724 27 175 2 718 856 380 85 638 915 213 91 521 1Capital requirement at 10.0% (December 2014: 10.0%) excludes confidential bank specific add-ons. 2 Restated. Refer to page 76. 3Portfolios on the standardised approach relate to the rest of Africa operations and, in addition, portfolios for which the application to adopt the internal models approach has not yet been submitted, or for which an application has been submitted but approval has not yet been granted. 4 Retail other includes retail small and medium enterprises, vehicle and asset finance, and term lending exposures. 16 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Capital adequacy ratios 2015 SARB minimum regulatory requirement % Total capital adequacy ratio Tier I capital adequacy ratio CET I capital adequacy ratio 10.0 8.0 6.5 Internal1 target ratios % 14.0 – 15.0 11.0 – 12.0 10.0 – 11.0 Including unappropriated profits Excluding unappropriated profits June 2015 % December 2014 % June 2015 % December 2014 % 16.1 13.7 13.2 15.5 12.9 12.4 14.5 12.0 11.6 14.1 11.5 11.0 1Following an internal review and taking into account global trends, the group’s CET internal target range (including unappropriated profits) has been revised from 9.5% – 10.5% to 10.0% – 11.0%. Capital adequacy ratios of banking subsidiaries Host tier I regulatory requirements % Standard Bank Group The Standard Bank of South Africa Group3 Rest of Africa CfC Stanbic Bank (Kenya) Stanbic Bank Botswana Stanbic Bank Ghana Stanbic Bank Tanzania Stanbic Bank Uganda Stanbic Bank Zambia Stanbic Bank Zimbabwe Stanbic IBTC Bank (Nigeria) Standard Bank de Angola Standard Bank Malawi Standard Bank Mauritius Standard Bank Mozambique Standard Bank Namibia Standard Bank RDC (Democratic Republic of Congo) Standard Bank Swaziland Standard Lesotho Bank Outside Africa Standard Bank Isle of Man Standard Bank Jersey Host total regulatory requirements % December 20142 June 2015 Tier I capital % Total capital % Tier I capital % Total capital % 8.01 10.01 13.7 16.1 12.9 15.5 8.01 10.01 12.4 15.8 12.3 15.8 10.5 7.5 6.7 12.5 8.0 5.0 8.0 5.0 5.0 10.0 7.5 4.0 7.0 14.5 15.0 10.0 14.5 12.0 10.0 12.0 10.0 10.0 15.0 10.0 8.0 10.0 15.7 13.9 12.5 15.8 15.2 16.5 20.1 10.6 16.3 17.8 21.1 12.3 10.3 18.9 22.9 12.7 17.7 17.0 19.8 23.2 13.9 22.4 20.5 29.0 12.6 13.9 16.9 11.7 13.1 17.4 18.1 20.0 20.6 10.9 12.8 17.5 12.9 9.3 10.9 20.5 20.0 14.0 19.4 19.8 23.5 23.7 14.4 18.1 20.3 18.5 9.7 13.0 5.0 4.0 4.0 10.0 8.0 8.0 17.3 11.5 15.2 26.4 15.6 16.1 16.9 11.9 10.1 24.8 16.5 10.9 10.0 11.0 11.9 9.2 13.7 13.2 10.6 9.7 12.5 14.0 1Represents 2015 SARB Basel III minimum capital requirements. 2 Restated. Refer to page 76. 3Incorporating: – The Standard Bank of South Africa Limited (SBSA). 17 Risk and capital management report Capital management | continued Economic capital Economic capital adequacy is the internal basis for measuring and reporting all quantifiable risks on a consistent risk-adjusted basis. The group assesses its economic capital adequacy by measuring its risk profile under both normal and stress conditions. ICAAP considers the qualitative capital management processes within the organisation and includes the organisation’s governance, risk management, capital management and financial planning standards and frameworks. Furthermore, the quantitative internal assessments of the organisation’s business models are used to assess capital requirements to be held against all risks the group is or may become exposed to, in order to meet current and future needs as well as to assess the group’s resilience under stressed conditions. Economic capital by risk type at end of the period June 2015 Rm December 2014 Rm Credit risk Equity risk Market risk Operational risk Business risk Interest rate risk in the banking book 58 972 8 403 1 089 8 815 3 910 62 780 5 286 1 373 9 520 5 844 3 375 3 324 Economic capital requirement 84 564 88 127 135 128 131 257 1,6 1,5 Available financial resources Economic capital coverage ratio (times) 18 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Economic capital of R84,6 billion (31 December 2014: R88,1 billion) is the amount of capital that is required to support the group’s banking operations’ economic risk profile. For potential losses arising from risk types that are statistically quantifiable, economic capital reflects the worst-case loss commensurate with a confidence level of 99.92%. Available financial resources refer to capital supply as defined by the group for economic capital purposes and includes capital and reserve funds after adjusting for certain non-qualifying items. The available financial resources exceed the minimum economic capital requirement by 160% (31 December 2014: 149%). Risk-adjusted performance measurement RAPM supports the maximisation of shareholder value by optimally managing financial resources within the board-approved risk appetite. Capital is centrally monitored and allocated, based on usage and performance, in a manner that enhances overall group economic profit and return on equity. Business units are held accountable for achieving their RAPM targets. RAPM is calculated on both regulatory and economic capital measures. Cost of equity The group’s rand-based cost of equity (CoE) is estimated using the capital asset pricing model. CoE is recalibrated twice a year using the latest estimates of risk-free rate, beta and equity risk premium. The group applied a CoE of 13.0% as at 30 June 2015 (31 December 2014: 13.2%). Risk appetite and stress testing Risk appetite is set, and stress testing activities are undertaken, at a group level, in business lines and at a legal entity level within the risk appetite and stress testing governance frameworks. Governance 19 Governance 19 19 21 Risk appetite • Risk appetite governance framework • Risk appetite statement 21 21 21 Stress testing • Stress testing governance framework • Stress testing programme The primary management level governance committee overseeing risk appetite and stress testing is the group risk appetite and stress testing committee. It is chaired by the group CRO and is a subcommittee of GROC. The principal governance documents are the risk appetite governance framework and the stress testing governance framework. Risk appetite Risk appetite governance framework The risk appetite governance framework provides guidance on the following: setting and cascading of risk appetite by group, business line and legal entity measurement and methodology governance monitoring and reporting of the risk profile. The group has adopted the following definitions, where entity refers to a business line or legal entity within the group, or the group itself: Risk appetite: An expression of the amount or type of risk an entity is generally willing to take in pursuit of its financial and strategic objectives, reflecting its capacity to sustain losses and continue to meet its obligations as they fall due, under both normal and a range of stress conditions. The metric is referred to as a risk appetite trigger. Risk tolerance: The maximum amount of risk an entity is prepared to tolerate above risk appetite. The metric is referred to as a risk tolerance limit. Risk capacity: The maximum amount of risk the entity is able to support within its available financial resources. Risk appetite statement (RAS): The documented expression of risk appetite and risk tolerance which have been approved by the entity’s relevant governance committee. The RAS is reviewed and revised, if necessary, on an annual basis. Risk profile: The risk profile is defined in terms of three dimensions, namely current risk profile or forward risk profile unstressed or stressed risk profile pre- or post-management actions. 19 Risk and capital management report Risk appetite and stress testing | Risk appetite continued The current risk profile is the amount or type of risk to which the entity is currently exposed. The unstressed forward risk profile is the forwardlooking view of how the entity’s risk profile is expected to evolve under expected conditions. The effectiveness of available management actions can be assessed through an analysis of pre- and post-management action risk profiles against risk appetite triggers and tolerance limits. The diagram below provides a schematic view of the three levels of risk appetite and the integral role that risk types play in the process of cascading risk appetite from dimensions such as regulatory capital, economic capital, stressed earnings and liquidity to more granular portfolio limits. Risk appetite Level 1 Risk appetite dimensions (quantitative) Regulatory capital Economic capital Stressed earnings Liquidity Credit and equity risk Operational risk Market risk Interest rate risk Business risk Liquidity risk Business risk e.g. Liquidity risk e.g. Capital demand/earnings at risk utilisation per risk type Level 3 Portfolio limits by risk type Credit and equity risk e.g. Credit loss ratio Non-performing loan % Concentrations 20 Operational risk e.g. Operational losses % to total income Market risk e.g. Normal and stressed value-at-risk (SVaR) limits Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Interest rate risk e.g. Interest rate sensitivity Cost-to-income ratio Net stable funding ratio (NSFR) RAS Level 2 Risk appetite dimensions by risk type Risk appetite statement Executive management is responsible for recommending the group’s RAS, which is then approved by the GRCMC on behalf of the board. In developing the RAS, executive management considers the group’s strategy and the desired balance between risk and return. The GRCMC reviews the group’s current risk profile on a quarterly basis and forward risk profile (both stressed and unstressed) at least annually. Level 1 risk appetite dimensions can be either qualitative or quantitative. Quantitative level 1 risk appetite dimensions relate to available financial resources and earnings volatility. The standardised quantitative dimensions used by the group, as well as legal entities and business lines, are: stressed earnings economic capital regulatory capital liquidity (short-term liquidity and term liquidity). Level 2 risk appetite represents the allocation of level 1 risk appetite to risk types. Specifically, the contribution of individual risk types to earnings volatility and overall capital demand (both economic and regulatory) is controlled through triggers and limits. Level 3 consists of key metrics used to monitor the portfolio. Portfolio triggers and limits are required to be broadly congruent with level 1 and level 2 triggers and limits. These metrics are regularly monitored at a risk type level and ensure proactive risk management. Stress testing Stress testing governance framework Stress testing is a key management tool within the group and is used to evaluate the sensitivity of the current and forward risk profile relative to risk appetite. Stress testing supports a number of business processes, including: strategic planning and financial budgeting the ICAAP, including capital planning and management, and the setting of capital buffers liquidity planning and management informing the setting of risk appetite triggers and risk tolerance limits identifying and proactively mitigating risks through actions such as reviewing and changing limits, limiting future and reducing current exposures, and hedging thereof facilitating the development of risk mitigation or contingency plans, including recovery plans, across a range of stressed conditions supporting communication with internal and external stakeholders. Stress testing within the group is broadly aligned and subject to the group’s stress testing governance framework which sets out the responsibilities for and approaches to stress testing activities. Stress tests are conducted at group, business line, material legal entity and risk type level. Fit-for-purpose stress testing programmes are implemented for the group to ensure appropriate coverage of the different risks. Stress testing programme The group’s stress testing programme uses one or a combination of stress testing techniques, including scenario analysis, sensitivity analysis and reverse stress testing to perform stress testing for different purposes. Routine groupwide macroeconomic stress testing Routine macroeconomic stress testing is conducted across all major risk types on an integrated basis for a range of economic scenarios varying in severity from mild to very severe but plausible macroeconomic shocks. The impact, after consideration of mitigating actions, on the group’s income statement, SOFP and capital demand and supply of the group is measured against risk appetite. Groupwide macroeconomic stress testing for the group and SBSA is performed, as a minimum, once a year for selected scenarios that are specifically designed by a scenario working group targeting the group’s risk profile, geographical presence and strategy. The results of the groupwide macroeconomic stress testing are presented at a board level for the group and SBSA in order to consider whether the group’s risk profile is consistent with the group’s risk appetite and to set the capital buffer. Groupwide macroeconomic stress testing results are submitted as part of the annual ICAAP. Additional stress testing Groupwide macroeconomic stress testing results are supplemented with additional ad hoc stress testing at the group, legal entity, business line, or risk type level that may be required from time-totime for risk management or planning purposes. The purpose of this stress testing is to inform management of risks that may not yet form part of routine stress testing or where the focus is on a specific portfolio or business unit. Additional stress testing can take the form of either scenario analysis or sensitivity analysis. This type of stress testing will be performed and governed at the appropriate group, legal entity, business line, or risk type level. The focus of additional stress tests for 2015 include various commodity-related stress tests, the impact of infrastructure challenges and interest rate scenarios. Supervisory stress tests Regulators may call for the group or a legal entity to run a supervisory stress test using a common scenario with prescribed assumptions and methodologies. 21 Risk and capital management report Risk appetite and stress testing | Stress testing continued Business model stress testing Business model stress testing utilises the reverse stress testing technique to explore vulnerabilities in a particular strategy or business model. The outcome does not necessarily target business or bank failure, but rather seeks to inform what could have a severe impact, given a plausible but in most cases highly improbable event within a given set of circumstances and assumptions. The purpose of business model stress testing is to identify potential vulnerabilities by: assuming the business model is severely impacted identifying potential circumstances/scenarios that could have led to this impact identifying vulnerabilities in the business model, human capital, infrastructure and control framework, as and when highlighted by underlying failures reviewing the existing risk mitigants supplementing risk mitigants if considered necessary. Stress testing for the recovery plan As part of the annual review of the group’s recovery plan, the group’s procedures require the execution of stress tests in order to test the effectiveness of the recovery options proposed in the recovery plan, and to provide guidance on the selection of early warning indicators. The range of scenarios that are considered include both systemic, group-specific and combination events as well as fast- and slow-moving scenarios. Risk type stress testing Risk type stress tests apply to individual risk types. Risk type stress testing could take the form of scenario or sensitivity analysis. 22 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Credit risk Definition Credit risk is the risk of loss arising out of the failure of counterparties to meet their financial or contractual obligations when due. Credit risk comprises counterparty (i.e. obligor)1 risk and concentration risk. 23 Definition 23 Approach to managing credit risk 23 Governance 24 24 24 27 27 Approved regulatory capital approaches • Standardised approach • Internal ratings-based approach • Equity portfolio • Use of internal estimates 28 Credit portfolio characteristics and metrics in terms of Basel • Credit portfolio analysis • Credit risk mitigation • Counterparty credit risk • Securitisation 28 36 38 40 42 42 42 Credit portfolio characteristics and metrics in terms of IFRS • Analysis of loans and advances • Maximum exposure to credit risk Approach to managing credit risk The group’s credit risk comprises mainly wholesale and retail loans and advances, underwriting and guarantee commitments together with the counterparty credit risk arising from derivative and securities financing contracts entered into with our customers, clients and market counterparties. The group manages credit risk through: maintaining a culture of responsible lending and a robust risk policy and control framework identifying, assessing and measuring credit risk across the group, from the level of individual facilities up to the total portfolio defining, implementing and continually re-evaluating our risk appetite under actual and stressed conditions monitoring the group’s credit risk exposure relative to limits ensuring that there is expert scrutiny and approval of credit risks and its mitigation independently of the business functions. Primary responsibility for credit risk management resides with the business lines within the group’s business units. This is complemented by an independent credit risk function embedded within the business units, which is in turn supported with standards and oversight provided through the group risk function. Governance The primary management level governance committees overseeing credit risk are the CIB and PBB credit governance committees, the group ERC and the intragroup exposure committee, which are all GROC subcommittees. These committees are responsible for credit risk and credit concentration risk decision-making, and delegation thereof to credit officers and committees within defined parameters. The PBB, CIB and group model approval committees approve key aspects of rating systems and credit risk models. Regular model validation and reporting to these committees is undertaken by the central validation function that is independent of the credit risk function. The principal governance documents are the group credit risk governance standard and the model risk governance framework. 1As distinct from ‘counterparty credit risk’ which is specific to the bilateral credit risks arising between trading counterparties. 23 Risk and capital management report Credit risk | Governance continued Approved regulatory capital approaches The group has approval from the SARB to adopt the AIRB approach for most credit portfolios in SBSA. The group has adopted the standardised approach for its rest of Africa portfolios and for some of its less material subsidiaries and portfolios. The group has approval from the SARB to adopt the market-based and PD/LGD approaches for material equity portfolios. Standardised approach The calculation of regulatory capital is based on a risk weighting and the net counterparty exposures after recognising a limited set of qualifying collateral. The risk weighting is based on the exposure characteristics and, in the case of corporate, bank and sovereign exposures, the external agency credit rating of the counterparty. In the case of counterparties for which there are no credit ratings available, exposures are classified as unrated for determining regulatory capital requirements. Basel: Exposure subject to the standardised approach per risk weighting June 2015 Exposure Rm Mitigation1 Rm Exposure after mitigation Rm December 2014 Exposure after mitigation Rm Based on risk weights 0% – 35% 50% 33 081 62 956 33 081 62 956 55 239 27 913 Rated Unrated 3 819 59 137 3 819 59 137 340 27 573 75% 100% and above 56 588 198 455 249 14 381 56 339 184 074 31 554 210 046 Rated Unrated 3 198 452 14 381 3 184 071 36 210 010 Total 351 080 14 630 336 450 324 752 1Constitutes eligible financial collateral. Internal ratings-based approach Introduction Under the IRB regulatory capital approaches the calculation of regulatory capital is based on an estimate of exposure at default (EAD) and a risk weighting. The risk weighting is based on asset class, and estimates of PD, LGD, and maturity. Under the AIRB approaches all the parameters need to be estimated internally, while only PD is estimated internally under the FIRB approach. EAD, LGD and maturity are regulatory-prescribed under the FIRB approach. All IRB models are managed under model development and validation policies that set out the requirements for model governance structures and processes, and the technical framework within which model performance and appropriateness is maintained. The models are developed using internal historical default and recovery data. In low-default portfolios, internal data is supplemented with external 24 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 benchmarks and studies. Models are assessed frequently to ensure ongoing appropriateness as business environments and strategic objectives change, and are recalibrated annually using the most recent internal data. IRB risk components Probability of default The group uses a 25-point master rating scale to quantify the credit risk for each borrower (corporate asset classes) or facility (retail asset classes), as illustrated in the table on the next page. Ratings are mapped to PDs by means of calibration formulae that use historical default rates and other data from the applicable portfolio. The group distinguishes between through-the-cycle PDs and point-in-time PDs, and utilises both measures in decision-making, managing credit risk exposures and measuring impairments against credit exposures. Credit rating scales1 Group master rating scale Grading Moody’s Investor Services Standard & Poor’s Fitch Aaa, Aa1, Aa2, Aa3 AAA, AA+, AA, AA- AAA, AA+, AA, AA- A1, A2, A3 A+, A, A- A+, A, A- Baa1, Baa2, Baa3 BBB+, BBB, BBB- BBB+, BBB, BBB- Ba1, Ba2, Ba3, B1, B2, B3 BB+, BB, BB-, B+, B, B- BB+, BB, BB-, B+, B, B- Close monitoring Caa1, Caa2, Caa3, Ca CCC+, CCC, CCC- CCC+, CCC, CCC- Default C D D Credit quality 1–4 5–7 Investment grade Normal monitoring 8 – 12 13 – 21 22 – 25 Default Sub-investment grade Default 1The table describes the internally defined relationship between the group master rating scale, generally accepted defined investment gradings, the group’s credit quality definitions (as described and disclosed further on page 42 – 47) and external rating scales. Loss given default LGD measures are a function of customer type, product type, seniority of loan, country of risk and level of collateralisation. LGDs are estimated based on historic recovery data per category of LGD. A downturn LGD is used in the estimation of the capital charge and reflects the anticipated recovery rates in a downturn period. Exposure at default EAD captures the impact of potential draw-downs against unutilised facilities and potential changes in counterparty credit risk positions due to changes in market prices. By using historical data, it is possible to estimate an account’s average utilisation of limits when default occurs, recognising that customers may use more of their facilities as they approach default. Expected loss The expected loss provides a measure of the value of the credit losses that may reasonably be expected to occur in the portfolio. Provisions must be sufficient to cover the expected losses in the credit portfolio. In its most basic form the expected loss can be represented as: PD x EAD x LGD. 25 Risk and capital management report Credit risk | Approved regulatory capital approaches continued Basel: Analysis of PDs, EADs and LGDs by risk grade under the IRB approach Corporate Average PD % Total EAD1 Rm EAD Rm LGD % Sovereign Exposure weighted average risk weight2 % EAD Rm LGD % Banks Exposure weighted average risk weight2 % EAD Rm LGD % Exposure weighted average risk weight2 % June 2015 Non-default 1–4 5–7 8 – 12 13 – 21 22 – 25 Default 0.02 0.06 0.28 2.14 30.92 100.00 Total 989 922 322 864 112 151 7 406 65 776 436 261 446 024 34 455 34 18 398 164 685 139 082 665 35.48 39.98 27.24 27.31 27.47 8.62 18.01 33.55 61.68 124.10 90.78 29 304 5 584 35.87 1 019 226 328 448 28.14 90 814 3 931 25.26 2.16 100 060 8 118 42 27.22 14.82 35.89 20.10 34.61 181.85 19 36.98 84.54 112 170 26.26 1 602 40 803 43 629 4 780 37.50 38.39 42.18 49.57 90 814 40.78 10.08 18.57 35.73 102.13 December 2014 Non-default 976 138 307 178 1–4 5–7 8 – 12 13 – 21 22 – 25 0.02 0.06 0.28 2.15 30.42 24 998 57 445 402 742 455 352 35 601 2 848 12 324 140 871 150 058 1 077 16.87 41.67 30.28 28.52 30.61 18.52 24.31 37.90 67.74 165.48 17 220 328 96 819 4 921 55 45.00 45.00 27.20 29.19 39.54 8.27 27.53 17.26 64.33 220.20 2 979 36 992 36 146 8 968 39.23 41.65 43.45 47.93 Default 100.00 30 675 8 349 40.48 84.04 9 33.07 44.24 69 45.29 1 006 813 315 527 30.04 119 352 29.90 85 154 42.99 Total 119 343 85 085 12.70 24.50 44.19 92.29 1Excludes equity EAD. 2Exposure weighted average risk weights have been weighted by the sum of the EAD within each of the PD bands. Corporate, sovereign and bank portfolios Retail portfolio Corporate entities include large companies as well as small and medium enterprises that are managed on a relationship basis or have a combined exposure to the group of more than R7,5 million. Corporate exposures also include specialised lending (project, object and commodity finance as well as income-producing real estate), public sector entities and central counterparties (CCPs). Retail mortgage exposures relate to mortgage loans to individuals and are a combination of both drawn and undrawn EADs. Sovereign and bank borrowers include sovereign government entities, central banks, local and provincial government entities, bank financial institutions and non-bank financial institutions. The creditworthiness of corporate (excluding specialised lending), sovereign and bank exposures is assessed based on a detailed individual assessment of the financial strength of the borrower. This quantitative analysis coupled with a detailed qualitative analysis of the entity together with expert judgement and external rating agency ratings, leads to an assignment of an internal rating to the entity. Specialised lending’s creditworthiness is assessed on a transactional level, rather than on the financial strength of the borrower, as the group relies on repayment from the cash flows generated by the underlying asset. 26 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 QRRE relates to cheque accounts, credit cards and revolving personal loans and products, and include both drawn and undrawn exposures. Retail other covers other branch lending and vehicle finance for retail, retail small and retail medium enterprise portfolios. Branch lending includes both drawn and undrawn exposures, while vehicle and asset finance only has drawn exposures. Internally developed behavioural scorecards are used to measure the anticipated performance for each account. Mapping of the behaviour score to a PD is performed for each portfolio using a statistical calibration of portfolio-specific historical default experience. The behavioural scorecard PDs are used to determine the portfolio distribution on the master rating scale. Separate LGD models are used for each product portfolio and are based on historical recovery data. EAD is measured as a percentage of the credit facility limit and is based on historical averages. EAD is estimated per portfolio and per portfolio-specific segment, using internal historical data on limit utilisation. Retail mortgages EAD Rm LGD % QRRE Exposure weighted average risk weight2 % 300 725 EAD Rm LGD % Retail other Exposure weighted average risk weight2 % 76 133 111 1 283 104 856 171 917 22 558 12.29 13.14 12.72 15.37 17.43 1.24 2.44 8.39 30.92 91.92 14 566 19.21 4.18 315 291 14.80 299 845 EAD Rm LGD % Equity Exposure weighted average risk weight2 % 87 235 2 351 8 292 59 233 6 257 62.90 63.06 64.90 64.77 3.12 8.71 56.54 176.68 5 431 64.34 63.05 81 564 64.61 1 728 2 941 14 739 62 894 4 933 38.41 41.69 41.03 34.42 43.57 4.53 7.44 22.64 47.40 110.90 3 704 44.19 2.42 90 939 36.69 75 014 89 673 1.18 2.38 8.20 31.15 94.77 2 613 8 281 57 893 6 227 62.90 63.05 64.90 64.77 3.27 9.19 56.71 177.46 1 834 3 731 14 526 64 756 4 826 38.41 41.68 41.01 34.41 43.55 4.38 7.83 24.74 49.04 110.12 13 622 19.25 3.27 4 942 64.34 57.31 3 684 44.21 1.35 313 467 14.78 79 956 64.60 93 357 36.67 The market-based and PD/LGD approaches are used to model the capital requirement for equity exposure. The market-based approach includes portfolios subject to the simple risk-weight method. For the PD/LGD approach, the group’s approved credit risk grade models are used together with the regulatory prescribed LGD of 90% and maturity factor of five years. 500 2 462 0.29 1.43 78 3 040 12.29 13.14 12.71 15.36 17.43 Equity risk held on the banking book is substantively controlled in accordance with the credit risk governance standard, except insofar as it is approved and overseen under the mandate of the ERC rather than under the normal credit risk delegated authority structures. Please refer to page 66 for more information regarding equity risk on the banking book. PD % 2 962 117 1 457 106 099 168 756 23 416 Equity portfolio Exposure Rm 2 759 304 2 455 0.26 1.24 78 2 837 Equity exposures under the simple risk-weight method June 2015 Rm December 2014 Rm Listed Unlisted 97 830 89 1 056 Total 927 1 145 Use of internal estimates The group’s credit risk rating systems and processes differentiate and quantify credit risk across counterparties and asset classes. Internal risk parameters are used extensively in risk management and business processes, including: setting risk appetite setting limits for concentration risk and counterparty limits credit approval and monitoring pricing transactions determining portfolio impairment provisions calculating economic capital. 27 Risk and capital management report Credit risk | continued Credit portfolio characteristics and metrics in terms of Basel Credit portfolio analysis The credit portfolio is analysed in the tables that follow in terms of the Basel approach and asset class. Basel: Exposure by approach and asset class1 On-balance sheet Standardised Rm Off-balance sheet Securities financing transactions AIRB Rm Standardised Rm 111 059 83 006 53 405 46 049 264 020 107 750 59 085 444 613 34 730 1 713 2 638 12 179 99 823 9 635 9 622 84 699 14 340 1 486 31 709 302 981 62 394 79 238 10 693 29 339 34 508 20 852 293 519 875 468 51 260 230 356 97 579 34 496 438 181 30 313 521 1 918 11 635 300 478 59 679 78 024 1 782 800 612 44 387 FIRB Rm FIRB Rm AIRB Rm Standardised Rm FIRB Rm AIRB Rm June 2015 Corporate Sovereign Banks Retail exposure Retail mortgages QRRE Other retail Total 1 443 626 42 748 7 740 111 886 203 779 2 069 162 374 96 778 8 688 11 997 89 163 2 019 2 024 147 15 267 14 112 40 369 7 670 73 790 4 190 29 379 121 829 December 2014 Corporate Sovereign Banks Retail exposure Retail mortgages QRRE Other retail Total 107 392 77 148 23 677 47 892 12 622 16 957 14 202 14 633 3 33 256 256 109 43 781 1Amount before the application of any offset, mitigation or netting. 28 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 54 69 30 463 35 927 22 773 9 853 123 206 626 Derivative instruments Standardised Rm FIRB Rm 3 318 106 808 32 596 20 497 540 73 889 94 926 Standardised Rm EAD Gross past due but not impaired exposures Rm Impairment of exposures Gross defaulted exposures1 Rm AIRB Rm Total Rm 150 550 85 451 56 851 58 228 421 883 126 967 213 561 529 312 572 433 212 418 270 412 587 540 328 448 112 170 90 814 487 794 2 269 1 8 387 19 3 823 6 33 265 27 182 10 298 15 826 42 402 332 320 96 902 100 090 348 146 96 902 142 492 315 291 81 564 90 939 19 937 6 406 6 922 15 303 5 561 6 318 3 915 3 247 3 136 50 102 351 080 1 291 723 1 642 803 1 019 226 35 535 35 588 14 127 15 944 4 733 35 073 171 365 79 925 26 465 59 527 383 447 118 670 155 356 527 344 603 252 216 092 284 093 586 871 289 073 101 633 56 503 486 780 1 621 1 30 397 10 540 9 70 25 575 3 372 3 61 10 017 16 415 3 43 109 330 941 95 606 100 797 347 356 95 609 143 906 313 467 79 956 93 357 16 940 4 076 9 381 14 273 5 061 6 241 3 513 2 967 3 537 337 282 168 209 1 184 817 1 690 308 933 989 32 019 36 194 13 453 AIRB Rm 15 292 1 842 32 968 4 232 31 641 232 723 Total by approach 55 750 FIRB Rm 48 440 17 497 102 272 FIRB Rm 26 454 17 719 28 651 72 824 AIRB Rm Specific Rm Portfolio Rm 6 114 5 315 29 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Basel II: Exposure by approach and asset class (Rbn) 450 400 350 300 250 200 150 100 50 Corporate Sovereign Banks Retail mortgages ● Standardised June 2015 ● FIRB June 2015 ● AIRB June 2015 ● Standardised December 2014 ● FIRB December 2014 ● AIRB December 2014 Concentration risk Concentration risk is the risk of loss arising from an excessive concentration of exposure to a single counterparty, an industry, a product, a geography, maturity, or collateral. The group’s credit risk portfolio is well diversified. The group’s management approach relies on reporting of concentration risk along key dimensions, the setting of portfolio limits and stress testing. 30 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 QRRE1 Other retail Basel: Exposures by type of asset and industry1 Securities financing transactions Rm On-balance sheet Rm Off-balance sheet Rm 27 559 42 797 65 569 19 523 10 946 65 655 23 864 5 161 37 280 18 910 9 164 10 273 22 619 19 246 275 956 432 038 205 080 48 621 68 369 15 396 163 817 626 1 168 987 255 039 164 443 22 775 39 964 62 641 15 065 12 386 63 032 22 324 5 684 31 861 25 491 7 629 10 743 23 029 16 665 245 740 426 371 190 204 41 815 70 423 17 796 146 546 2 225 1 100 502 251 136 155 398 Gross defaulted exposures1 Rm Impairment of exposures Derivative instruments Rm Total gross exposure Rm 47 39 275 835 461 278 391 32 767 80 116 84 754 29 522 21 680 88 552 43 501 866 2 177 801 997 421 2 932 888 236 916 460 348 154 1 497 365 51 862 146 540 256 500 407 221 248 1 656 23 353 1 497 905 8 506 740 54 334 1 642 803 35 588 14 127 55 588 4 698 3 858 466 6 326 1 433 28 514 72 413 93 294 26 552 23 595 98 550 40 422 685 2 112 852 216 1 403 4 897 1 628 285 857 478 89 294 1 665 395 165 436 412 599 537 496 794 210 637 1 458 21 781 1 162 571 8 136 683 183 272 1 690 308 36 194 13 453 Specific Rm Portfolio Rm June 2015 Agriculture Mining Manufacturing Electricity Construction Wholesale Transport Finance, real estate and other business services Private households Other Total 6 114 December 2014 Agriculture Mining Manufacturing Electricity Construction Wholesale Transport Finance, real estate and other business services Private households Other Total 464 6 163 5 315 1Amount before the application of any offset, mitigation or netting. Basel: Total gross exposure by type of industry (%) ● 33 Finance, real estate and other business services ● 30 Private households ● 13 Other ● 5 Wholesale ● 19 Agriculture, mining, manufacturing, electricity, construction and transport (December 2014: 35) (December 2014: 29) (December 2014: 12) (December 2014: 6) (December 2014: 18) 31 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Basel: Exposures by type of asset and geographic region1 Securities financing transactions Rm Gross defaulted exposures1 Rm Impairment of exposures Derivative instruments Rm Total gross exposure Rm 1 047 884 292 087 199 653 57 249 29 127 11 592 5 211 26 737 7 130 10 012 2 774 1 384 1 077 20 16 831 1 472 23 570 5 740 6 698 1 22 182 155 150 114 255 039 164 443 54 334 1 642 803 35 588 14 127 747 098 237 128 64 394 29 005 9 361 10 822 2 694 190 729 39 438 9 730 5 184 4 947 544 564 21 328 4 101 109 477 14 863 519 4 766 344 22 928 2 732 119 017 17 281 20 454 608 252 982 083 283 399 302 618 66 333 35 281 16 740 3 854 24 784 7 498 70 3 503 9 297 2 617 61 1 225 174 165 140 113 1 100 502 251 136 155 398 183 272 1 690 308 36 194 13 453 On-balance sheet Rm Off-balance sheet Rm 812 629 244 273 38 952 45 926 11 711 11 190 4 306 191 933 42 560 9 238 3 202 6 842 401 863 26 491 3 782 127 893 2 381 3 876 1 168 987 Specific Rm Portfolio Rm June 2015 South Africa Other African countries Europe Asia North America South America Other Total 6 114 December 2014 South Africa Other African countries Europe Asia North America South America Other Total 1Amount before the application of any offset, mitigation or netting. Basel: Total gross exposure by geographic region (%) ● 64 South Africa (December 2014: 58) ● 18 Rest of Africa (December 2014: 17) ● 18 Outside Africa (December 2014: 25) 32 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 5 315 Basel: Exposures by residual contractual maturity1 Less than 1 year Rm 1 to 5 years Rm Greater than 5 years Rm Total gross exposure Rm 247 559 144 216 199 146 163 851 283 325 53 651 57 973 64 619 41 549 14 551 13 293 359 070 572 433 212 418 270 412 587 540 4 431 96 902 62 518 2 991 340 724 61 628 18 346 348 146 96 902 142 492 754 772 459 568 428 463 1 642 803 288 276 153 666 212 334 165 309 272 969 45 307 56 775 67 621 42 007 17 119 14 984 353 941 603 252 216 092 284 093 586 871 4 641 95 609 65 059 2 828 339 887 64 793 14 054 347 356 95 609 143 906 819 585 442 672 428 051 1 690 308 June 2015 Corporate Sovereign Banks Retail exposure Retail mortgages QRRE Other retail Total December 2014 Corporate Sovereign Banks Retail exposure Retail mortgages QRRE Other retail Total 1 Amount before the application of any offset, mitigation or netting. 33 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Loss analysis Estimated losses versus actual losses Actual losses The table on the next page provides a comparison of actual PDs, LGDs and EADs to the estimated through-the-cycle PDs, LGDs and EADs. The table below shows the actual losses experienced in the group’s IRB exposure classes during the six months ended 30 June 2015, compared to the six months ended 30 June 2014. Actual losses comprise impairments as determined by IFRS, and exclude post write-off recoveries. The values displayed in the table below exclude all standardised approach portfolios. Basel: Analysis of actual losses1 June 2015 Rm June 2014 Rm Corporate Retail exposure 641 3 617 572 3 994 Retail mortgages QRRE Other retail 1 220 1 605 792 1 301 2 130 563 Total 4 258 4 566 IRB exposure class 1Excludes post write-off recoveries and all the standardised approach portfolios. Note that this comparison is an approximation as the PD, LGD and EAD actual and estimated parameters are different for reasons that include: Estimated PDs are determined at the beginning of the 12-month cycle using calibrated regulatory models. The models are calibrated to long-run default experience to ensure stable regulatory models over an entire credit cycle and would tend to underestimate actual defaults at the top of the credit cycle and overestimate actual defaults at the bottom of the credit cycle. The actual PDs are the defaults experienced over the 12-month period. A change in the vehicle and asset finance definition of default has occurred between the 2013 and 2014 reporting periods, resulting in different PD values for other retail exposure class. LGD estimates are determined at the beginning of the 12-month cycle using the regulatory long-run average-based models that include downturn adjustments. Actual LGD values can take several years to be determined as defaulted exposures have to reach a write-off stage to allow for accurate LGD calculations. In order to determine comparable actual LGD values, all accounts that reached a write-off stage during the prior three-year period were used to determine the actual LGD values. The EAD ratio reflects estimated through-the-cycle EADs, used to derive the regulatory expected loss, as a percentage of EADs derived from the actual losses. In order to be meaningful the calculated EADs are computed as averages over a three-year period. The analysis is based on the AIRB portfolios only. The zero or low level of bank and sovereign defaults, experienced in the AIRB portfolio during the period and comparative periods, did not allow for a meaningful calculation of actual LGD and PD values for sovereign and banks’ values or a meaningful calculation of sovereign or bank’s EAD ratios. 34 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Basel: IRB exposure class1 LGD2 PD EAD Estimated % Actual % Estimated % Actual % Estimate to actual ratio % Corporate Sovereign Banks Retail exposure 1.35 0.36 0.67 4.10 0.89 25.23 111.00 4.17 33.03 23.13 42.69 28.11 68.11 23.35 102.54 Retail mortgages QRRE Other retail 3.91 5.29 3.71 3.73 6.11 3.88 18.40 64.32 40.37 15.02 51.27 38.49 100.53 104.24 107.21 Total 2.25 1.98 28.45 23.59 102.75 Corporate Sovereign Banks Retail exposure 1.60 2.23 0.93 4.01 0.62 21.96 110.10 4.57 33.00 29.22 40.74 27.10 22.91 102.72 Retail mortgages QRRE Other retail 3.97 4.91 3.43 4.21 6.33 4.22 18.64 63.72 42.25 15.53 51.21 41.98 101.11 104.47 106.51 Total 2.56 2.15 27.49 22.79 102.88 Corporate Sovereign Banks Retail exposure 1.94 1.52 0.85 4.67 1.40 15.20 103.31 0.17 4.37 32.66 16.75 37.21 26.19 66.10 22.54 261.79 104.70 Retail mortgages QRRE Other retail 4.53 4.87 4.94 4.24 4.92 4.33 18.71 64.71 41.07 14.97 57.45 41.76 102.57 106.29 112.71 Total 2.83 2.27 26.56 22.27 105.07 June 2015 December 2014 December 2013 1 No data in the columns headed actual reflects either that no default occurred or, if there was a default, there was no loss incurred. 2 Excludes FIRB portfolios. 35 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Credit risk mitigation Collateral, guarantees, credit derivatives and on- and off-balance sheet netting are widely used to mitigate credit risk. Credit risk mitigation policies and procedures ensure that credit risk mitigation techniques are acceptable, used consistently, valued appropriately and regularly, and meet the risk requirements of operational management for legal, practical and timely enforcement. Detailed processes and procedures are in place to guide each type of mitigation used. The main types of collateral obtained by the group for its banking book exposures include: mortgage bonds over residential, commercial and industrial properties cession of book debts bonds over plant and equipment the underlying movable assets financed under leases and instalment sales. Reverse repurchase agreements and commodity leases to customers are collateralised by the underlying assets. Guarantees and related legal contracts are often required, particularly in support of credit extension to groups of companies and weaker counterparties. Guarantor counterparties include banks, parent companies, shareholders and associated counterparties. Creditworthiness is established for the guarantor as for other counterparty credit approvals. For derivative transactions, the group typically uses internationally recognised and enforceable International Swaps and Derivatives Association agreements, with a credit support annexure, where collateral support is considered necessary. Other credit protection terms may be stipulated, such as limitations on the amount of unsecured credit exposure acceptable, collateralisation if the mark-to-market credit exposure exceeds acceptable limits, and termination of the contract if certain credit events occur, for example, downgrade of the counterparty’s public credit rating. 36 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Wrong-way risk arises in transactions where the likelihood of default by a counterparty and the size of credit exposure to that counterparty tend to increase at the same time. This risk is managed both at an individual counterparty level and at an aggregate portfolio level by limiting exposure to such transactions, taking adverse correlation into account in the measurement and mitigation of credit exposure and increasing oversight and approval levels. To manage actual or potential portfolio risk concentrations in areas of higher credit risk and credit portfolio growth, the group implements hedging and other strategies from time-to-time. This is done at individual counterparty, sub-portfolio and portfolio levels through the use of syndication, distribution and sale of assets, asset and portfolio limit management, credit derivatives and credit protection. Basel II: Exposure and mitigation by asset class (Rbn) 700 600 500 400 300 200 100 Corporate Banks Sovereign Retail ● Gross exposure June 2015 ● Credit risk mitigation June 2015 ● Gross exposure December 2014 ● Credit risk mitigation December 2014 Basel: Credit risk mitigation for portfolios under the IRB approach Eligible financial collateral Rm Other eligible IRB collateral Rm Guarantees and credit derivatives Rm 53 237 11 088 103 767 72 273 791 1 144 Effects of netting agreements1 Rm Total credit risk mitigation Rm Total exposure Rm 373 153 138 880 13 330 140 753 373 153 421 883 126 967 213 561 529 312 315 516 248 57 389 315 516 248 57 389 332 320 96 902 100 090 June 2015 Corporate Sovereign Banks Retail exposures Retail mortgages QRRE Other retail Total 12 226 1 451 36 986 168 092 446 217 1 144 50 663 666 116 1 291 723 64 600 8 031 94 386 69 867 1 708 6 173 29 773 4 344 103 898 374 992 170 413 14 083 198 284 374 992 431 887 136 167 257 628 527 344 317 036 305 57 651 317 036 305 57 651 330 941 95 606 100 797 757 772 1 353 026 Total credit risk mitigation Rm Total exposure Rm December 2014 Corporate Sovereign Banks Retail exposures Retail mortgages QRRE Other retail Total 167 017 446 567 6 173 138 015 1Netting is not equivalent to offsetting in terms of IFRS. Basel: Credit risk mitigation for portfolios under the standardised approach Eligible financial collateral Rm Guarantees and credit derivatives Rm Effects of netting agreements1 Rm June 2015 Corporate Sovereign Banks Retail exposures 14 381 Total 14 630 70 249 150 550 85 451 56 851 58 228 70 14 700 351 080 9 479 21 944 2 309 111 171 365 79 925 26 465 59 527 22 366 337 282 249 14 451 December 2014 Corporate Sovereign Banks Retail exposures 12 166 2 251 111 299 Total 12 530 299 58 9 537 1Netting is not equivalent to offsetting in terms of IFRS. 37 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Counterparty credit risk The group is exposed to counterparty credit risk through movements in the fair value of securities financing and derivative contracts. The risk amounts reflect the aggregate replacement costs that would be incurred by the group in the event of counterparties defaulting on their obligations. The group’s exposure to counterparty credit risk is affected by the nature of the trades, the creditworthiness of the counterparty, and underlying netting and collateral arrangements. Counterparty credit risk is measured in potential future exposure terms and recognised on a net basis where netting agreements are in place and are legally enforceable, or otherwise on a gross basis. Exposures are generally marked-to-market daily. Cash or near cash collateral is posted where contractually provided for. Counterparty credit risk, reflecting both pre-settlement and settlement risk, is subjected to explicit credit limits which are formulated and approved for each counterparty and economic group, with specific reference to its credit rating and other credit exposures to that counterparty. The tables that follow detail the group’s exposure to securities financing transactions and derivatives. 38 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Basel: Securities financing transactions June 2015 Rm December 2014 Rm Exposure With master netting agreement Without master netting agreement 21 066 143 377 29 164 126 233 Total 164 443 155 398 27 892 Collateral Cash Commodities Debt securities Equities 120 549 13 048 32 561 5 378 117 806 8 359 Total 161 489 164 105 EAD 20 084 9 250 Basel: Derivatives exposure June 2015 December 2014 Centrally cleared Centrally cleared Noncentrally cleared Rm On behalf of clients Rm Total exposure to CCPs Rm Noncentrally cleared Rm 81 493 1 924 176 258 14 30 276 456 808 6 591 265 139 19 30 292 4 246 161 1 424 311 71 177 37 928 137 046 131 936 On behalf of clients Rm Total exposure to CCPs Rm 61 936 1 886 150 390 52 9 923 585 838 12 555 204 320 6 535 151 151 Notional principal amount1 Interest rate products Forex and gold Equities Precious metals Other commodities Credit derivatives Protection bought Protection sold Total 4 472 236 784 978 50 071 242 12 163 35 391 24 098 11 293 72 603 59 333 5 355 081 289 965 758 849 6 048 559 224 187 960 399 Gross positive fair value 52 099 398 1 837 168 495 1 473 13 304 Interest rate products Forex and gold Equities Precious metals Other commodities Credit derivatives 24 357 24 652 2 308 2 25 306 1 116 58 606 2 14 1 370 459 323 65 57 35 154 93 473 1 997 2 291 33 285 2 295 4 256 49 2 796 33 6 170 Netted current credit exposure (net fair value) Protection bought Protection sold Netting benefits2 236 87 (40 454) 87 1 756 539 (242) (331) (148 625) (1 059) (5 021) Total 11 645 156 1 506 19 870 414 8 283 EAD 21 392 1 228 11 038 59 756 1 263 20 861 Collateral Cash Gold Debt securities 4 246 2 526 14 413 1 1 937 Total 6 772 16 351 1 Notional principal amount for derivative assets and liabilities. 2 Netting is not equivalent to offsetting in terms of IFRS. 39 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of Basel continued Securitisation The group uses SEs to securitise customer loans and advances that it has originated to diversify its sources of funding for asset origination, for capital efficiency purposes and to reduce risk. In addition, the group plays a secondary role as an investor in certain third party securitisation note issuances (SEs established by third parties). Securitisation is a transaction whereby the credit risk associated with an exposure, or pool of exposures, is tranched, typically through loan notes, and where payments to investors via the loan notes in the transaction are dependent upon the performance of the exposure or pool of exposures. The following SEs have been established by the group: Blue Granite Investments No 1 (RF) Limited (BG 1) Blue Granite Investments No 2 (RF) Limited (BG 2) Blue Granite Investments No 3 (RF) Limited (BG 3) Blue Granite Investments No 4 (RF) Limited (BG 4) Siyakha Fund (RF) Limited (Siyakha) Blue Titanium Conduit (RF) Limited (BTC) A traditional securitisation involves the transfer of the exposures being securitised to a structured entity (SE) which issues securities. In a synthetic securitisation, the tranching is achieved by the use of credit derivatives and the exposures are not removed from the SOFP. Basel: Roles fulfilled in securitising assets Securitisation transactions Originator Investor Liquidity provider Servicer Credit enhancement provider Swap counterparty Traditional securitisations BG 1 BG 2 BG 3 BG 4 Siyakha Asset-backed commercial paper programme BTC Third party transactions Basel: Securitisation transactions Assets outstanding Asset type Year initiated BG 1 BG 23 BG 33 BG 43 Siyakha Retail mortgages Retail mortgages Retail mortgages Retail mortgages Retail mortgages 2005 2006 2006 2007 2007 Asset-backed commercial paper programme BTC4 Various 2002 Total June 2015 Rbn December 2014 Rbn June 2015 Rbn December 2014 Rbn June 2015 Rbn December 2014 Rbn 17,9 8,3 8,9 9,2 9,8 5,1 5,4 2032 2041 2032 2037 2043 4,6 2,8 3,0 5,1 2,4 0,9 1,9 1,5 2,5 1,5 1,0 2,0 1,6 2,7 1,6 1,0 2,1 1,7 2,8 1,6 1,1 2,2 1,8 3,0 1,7 0,9 1,2 1,0 1,1 0,9 1,0 1,2 1,1 1,2 0,9 N/A N/A 4,3 4,1 4,3 4,1 0,7 0,7 17,9 12,6 13,0 13,5 13,9 5,8 6,1 1Capital plus accrued interest. 2 Includes notes and subordinated loans held by SBG. 3 Rating agency: Moody’s. 4 Rating agency: Fitch. 40 Retained exposure1,2 Assets securitised Rbn Expected close Traditional securitisations 3,4 Notes outstanding1 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 For originated and sponsored or administered securitisations consolidated under IFRS (that is, BG1 – 4, Siyakha and BTC), intragroup exposures to and between these securitisations have been eliminated and the underlying assets consolidated in the relevant sections and classes (that is, primarily retail mortgages) of the risk disclosure. Only exposures to securitisations of assets originated by third parties are disclosed below. The approach applied in the calculation of risk-weighted assets is dependent on the group’s approved model for the underlying assets and the existence of a rating from an eligible external credit assessment institution. To date, the group has applied the standardised approach, ratings-based approach and standard formula approach, where relevant, in the calculation of risk-weighted assets. For local securitisations in South Africa, Moody’s Investor Services and/or Fitch act as rating agencies. R2 billion of securitisation activities took place during the period ended 30 June 2015 (31 December 2014: R4,6 billion) (relates to the facilitation of the securitisation of third-party assets into an SE that is not consolidated by the group). The transfer of assets by the group to an SE may give rise to the full or partial derecognition of the financial assets concerned. Only in the event that derecognition is achieved are sales and any resultant gains or losses on disposals recognised in the financial statements. Where the SEs are consolidated at group level, such gains or losses are eliminated. Basel: Securitised on-balance sheet exposures June 2015 December 2014 Retail mortgages Rm Retail loans Rm Total Rm Total Rm Standardised – unrated1 IRB 850 235 571 235 1 421 2 175 Unrated1 Investment grade 362 488 571 362 1 059 766 1 409 Total 850 806 1 656 2 175 1This includes rated securitisation exposures whose ratings are not eligible for recognition from a regulatory perspective. Basel III: Securitised off-balance sheet exposures June 2015 December 2014 Retail mortgages Rm Retail loans Rm Total Rm Total Rm Standardised – unrated1 IRB 2 932 265 175 265 3 107 500 2 229 Unrated1 Investment grade 2 344 588 175 2 344 763 1 438 791 Total 2 932 440 3 372 2 729 1 This includes rated securitisation exposures whose ratings are not eligible for recognition from a regulatory perspective. 41 Risk and capital management report Credit risk | continued Credit portfolio characteristics and metrics in terms of IFRS Analysis of loans and advances The tables on the pages that follow analyse the credit quality of loans and advances measured in terms of IFRS. Maximum exposure to credit risk Loans and advances are analysed and categorised based on credit quality using the following definitions. Performing loans Performing loans are classified into two categories, namely: neither past due nor specifically impaired loans early arrears but not specifically impaired loans. These loans are current and fully compliant with all contractual terms and conditions. Normal monitoring loans within this category are generally rated 1 to 21, and close monitoring loans are generally rated 22 to 25 using the group’s master rating scale. Early arrears but not specifically impaired loans include those loans where the counterparty has failed to make contractual payments and payments are less than 90 days past due, but it is expected that, most likely, the full carrying value will be recovered when considering future cash flows, including collateral. Ultimate loss is unlikely but could occur if the adverse conditions persist. 42 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Non-performing loans Non-performing loans are those loans for which: the group has identified objective evidence of default, such as a breach of a material loan covenant or condition, or instalments are due and unpaid for 90 days or more. Non-performing but not specifically impaired loans are not specifically impaired due to the expected recoverability of the full carrying value when considering the recoverability of future cash flows, including collateral. Non-performing specifically impaired loans are those loans that are regarded as non-performing and for which there has been a measurable decrease in estimated future cash flows. Specifically impaired loans are further analysed into the following categories: Sub-standard: Items that show underlying well-defined weaknesses and are considered to be specifically impaired. Doubtful: Items that are not yet considered final losses due to some pending factors that may strengthen the quality of the items. Loss: Items that are considered to be uncollectible in whole or in part. The group provides fully for its anticipated loss, after taking collateral into account. Loans Performing loans Non-performing loans Neither past due nor specifically impaired loans (Rm) Early arrears but not specifically impaired loans (Rm) Nonperforming but not specifically impaired loans (Rm) June 2015 June 2015 June 2015 June 2015 997 802 35 535 89 32 681 December 2014 December 2014 December 2014 December 2014 885 725 32 019 30 30 477 Normal monitoring (Rm) Close monitoring (Rm) Sub-standard (Rm) Doubtful (Rm) Specifically impaired loans (Rm) Loss (Rm) June 2015 June 2015 June 2015 June 2015 June 2015 980 551 17 251 7 154 21 250 4 277 December 2014 December 2014 December 2014 December 2014 December 2014 865 486 20 239 7 222 18 871 4 384 Portfolio credit impairments. Specific credit impairments. 43 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of IFRS continued IFRS: Maximum exposure to credit risk by credit quality Performing loans Neither past due nor specifically impaired Not specifically impaired Gross advances total Rm Normal monitoring Rm Close monitoring Rm Early arrears Rm Personal & Business Banking 611 365 534 804 16 088 33 960 Mortgage loans Instalment sale and finance leases Card debtors Other loans and advances 319 168 75 229 31 139 185 829 275 212 65 964 25 448 168 180 8 798 1 851 1 555 3 884 20 010 4 581 2 260 7 109 Personal unsecured lending Business lending and other 53 310 132 519 42 505 125 675 1 950 1 934 4 481 2 628 Corporate & Investment Banking 512 499 503 506 1 163 1 575 89 Corporate loans Commercial property finance 459 498 53 001 450 875 52 631 1 160 3 1 575 82 7 17 251 35 535 89 Nonperforming1 Rm June 2015 Other services Gross loans and advances Less: Impairments for loans and advances Tutuwa2 loans and advances IFRS adjustment Net loans and advances 1 Includes loans of R78 million that are past due but not specifically impaired. 2 Tutuwa is the group’s black economic empowerment ownership initiative. 44 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 (57 757) 1 066 107 (20 241) (254) 1 045 612 (57 759) 980 551 Non-performing loans Specifically impaired loans Net after securities and expected recoveries on specifically impaired loans Rm Balance sheet impairments for nonperforming specifically impaired loans Rm Gross specific impairment coverage % Total nonperforming loans Rm Nonperforming loans % Substandard Rm Doubtful Rm Loss Rm Total Rm Securities and expected recoveries on specifically impaired loans Rm 5 804 17 033 3 676 26 513 15 711 10 802 10 802 41 26 513 4.3 3 791 451 508 1 054 10 965 1 278 469 4 321 392 1 104 899 1 281 15 148 2 833 1 876 6 656 11 196 1 466 690 2 359 3 952 1 367 1 186 4 297 3 952 1 367 1 186 4 297 26 48 63 65 15 148 2 833 1 876 6 656 4.7 3.8 6.0 3.6 450 604 3 192 1 129 732 549 4 374 2 282 1 344 1 015 3 030 1 267 3 030 1 267 69 56 4 374 2 282 8.2 1.7 1 350 4 217 599 6 166 2 843 3 323 3 323 54 6 255 1.2 1 100 250 4 120 97 586 13 5 806 360 2 613 230 3 193 130 3 193 130 55 36 5 888 367 1.3 0.7 2 2 2 2 100 2 7 154 21 250 4 277 32 681 18 554 14 127 14 127 43 32 770 3.1 45 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of IFRS continued IFRS: Maximum exposure to credit risk by credit quality continued Performing loans Neither past due nor specifically impaired Not specifically impaired Gross advances total Rm Normal monitoring Rm Close monitoring Rm Early arrears Rm Personal & Business Banking 589 811 514 379 20 054 30 817 Mortgage loans Instalment sale and finance leases Card debtors Other loans and advances 317 069 72 483 30 029 170 230 274 374 63 766 24 723 151 516 11 803 1 908 1 910 4 433 16 996 4 119 1 898 7 804 Personal unsecured lending Business lending and other 54 362 115 868 43 594 107 922 1 943 2 490 4 667 3 137 Corporate & Investment Banking 412 717 405 386 185 1 202 30 Corporate loans Commercial property finance 365 008 47 709 357 977 47 409 185 1 201 1 28 2 Other services (54 277) (54 279) Gross loans and advances 948 251 865 486 20 239 32 019 30 50 026 49 965 Nonperforming1 Rm December 2014 Discontinued operation Less: Impairments for loans and advances Tutuwa2 loans and advances IFRS adjustment Discontinued operations loans and advances (18 707) (1 303) (50 026) Net loans and advances 928 241 1Includes loans of R24 million that are past due but not specifically impaired. 2 Tutuwa is the group’s black economic empowerment ownership initiative. 46 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Non-performing loans Specifically impaired loans Net after securities and expected recoveries on specifically impaired loans Rm Balance sheet impairments for nonperforming specifically impaired loans Rm Gross specific impairment coverage % Total nonperforming loans Rm Nonperforming loans % Substandard Rm Doubtful Rm Loss Rm Total Rm Securities and expected recoveries on specifically impaired loans Rm 4 865 16 163 3 533 24 561 14 314 10 247 10 247 42 24 561 4.2 3 062 285 391 1 127 10 420 1 399 333 4 011 414 1 006 774 1 339 13 896 2 690 1 498 6 477 10 351 1 259 468 2 236 3 545 1 431 1 030 4 241 3 545 1 431 1 030 4 241 26 53 69 65 13 896 2 690 1 498 6 477 4.4 3.7 5.0 3.8 454 673 2 885 1 126 819 520 4 158 2 319 1 247 989 2 911 1 330 2 911 1 330 70 57 4 158 2 319 7.6 2.0 2 357 2 708 849 5 914 2 771 3 143 3 143 53 5 944 1.4 2 192 165 2 610 98 815 34 5 617 297 2 611 160 3 006 137 3 006 137 54 46 5 645 299 1.5 0.6 2 2 2 2 100 2 4 384 30 477 13 392 13 392 44 30 507 3.2 61 61 100 61 0.1 7 222 18 871 61 61 17 085 47 Risk and capital management report Credit risk | Credit portfolio characteristics and metrics in terms of IFRS continued IFRS: Movement in group loans and advances impairment June 2015 Retail secured Rm Corporate Rm December 2014 Retail unsecured Rm Total Rm Total Rm Specific impairments Balance at beginning of the period Net impairment raised and released Impaired accounts written off Discount element recognised in interest income1 Exchange and other movements 3 143 347 (187) 4 976 1 813 (1 224) 5 273 2 565 (2 055) 13 392 4 725 (3 466) 13 802 10 154 (9 908) (9) 29 (263) 17 (190) (108) (462) (62) (763) 107 Balance at end of the period 3 323 5 319 5 485 1 429 212 (3) 3 050 374 (19) 14 127 13 392 Portfolio impairments Balance at beginning of the period Net impairment raised and released Exchange and other movements 836 260 (25) 5 315 846 (47) 5 364 (47) (2) Balance at end of the period 1 071 1 638 3 405 6 114 5 315 Total 4 394 6 957 8 890 20 241 18 707 1Unwinding of discounting of expected recoveries in terms of IAS 39. IFRS: Ageing of loans and advances past due but not impaired Less than 31 days Rm 31 – 60 days Rm 61 – 90 days Rm Personal & Business Banking 20 994 8 132 4 834 33 960 Mortgage loans Instalment sale and finance leases Card debtors Other loans and advances 11 791 3 237 1 318 4 648 5 331 879 580 1 342 2 888 465 362 1 119 20 010 4 581 2 260 7 109 Personal unsecured lending Business term lending and other 2 985 1 663 920 422 576 543 4 481 2 628 Corporate & Investment Banking 1 260 315 78 1 653 Corporate loans 1 260 315 78 1 653 22 254 8 447 4 834 78 35 613 Personal & Business Banking 20 813 6 562 3 442 30 817 Mortgage loans Instalment sale and finance leases Card debtors Other loans and advances 11 028 3 045 1 222 5 518 4 098 823 433 1 208 1 870 251 243 1 078 16 996 4 119 1 898 7 804 3 215 2 303 853 355 599 479 4 667 3 137 Corporate & Investment Banking 694 508 24 1 226 Corporate loans Commercial property finance 694 507 1 24 1 225 1 7 256 3 950 24 32 043 91 – 180 days Rm More than 180 days Rm Total Rm June 2015 Total December 2014 Personal unsecured lending Business term lending Total 48 20 813 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Compliance risk Definition Compliance risk is the risk of legal or regulatory sanction, financial loss or damage to reputation that the group may suffer as a result of its failure to comply with laws, regulations, codes of conduct and standards of good practice applicable to its banking services activities. 49 Definition 49 49 50 50 50 50 50 Approach to managing compliance risk • General approach • Approach to market conduct • Approach to managing money laundering and terrorist financing • Approach to sanctions management • Approach to managing regulatory change • Approach to occupational health and safety 50 Governance Approach to managing compliance risk General approach The compliance function operates independently of business as a second line of defence function, in terms of its mandate. The mandate is approved annually by the GAC and is drawn primarily from Regulation 49 of the Banks Act. The group’s approach to managing compliance risk is standardised across the group, is proactive and is premised on internationally accepted principles of compliance risk management and supervisory expectations. Compliance risk management is a core risk management activity overseen by the GCCO. The GCCO has unrestricted access to the group chief executives and to the chairman of the GAC, thereby supporting the function’s independence. A robust risk management reporting and escalation procedure requires business unit and functional area compliance heads to report on the status of compliance risk management in the group to the GCCO, who escalates significant matters to group management, executive and independent board committees. There is a key focus on treating customers fairly (TCF) and market conduct as the South African regulatory framework moves towards a Twin Peaks model of supervision. This focus includes ensuring regular interaction with the regulators and programmes of work to support integration at all operational levels of business. Attention to the group’s technological capability and coverage continues with the extension of compliance surveillance capability in the group’s rest of Africa banking subsidiaries. 49 Risk and capital management report Compliance risk | Approach to managing compliance risk continued Approach to conduct risk Approach to managing regulatory change Conduct risk is defined by the group as the risk that detriment is caused to the group’s customers, the markets or the group itself because of inappropriate execution of business activities. The group operates in a highly regulated industry across multiple jurisdictions and is increasingly subject to international legislation with extra-territorial reach. The group’s approach to conduct risk is informed by the regulatory initiatives to transform the financial sector with the focus on a dedicated market conduct regulator. The group distinguishes between market integrity and conduct of business. Market integrity is maintained through the management of conflicts of interest and market abuse risk. The group aims to embed regulatory best-practice in our operations in a way that balances the interests of various stakeholders, while supporting the long-term stability and growth in the markets where we have a presence. Conduct of business is currently driven through the implementation of TCF. As regulators incrementally embed TCF in regulatory and supervisory frameworks, the group continuously updates its risk management frameworks to ensure board-level sponsorship and business ownership of conduct risk management. The group continuously reviews its strategy and business models from a market conduct risk perspective. Conduct risk is considered in decision-making, communication, performance, reward and recognition. Approach to managing money laundering and terrorist financing Legislation pertaining to money laundering and terrorist financing control imposes significant requirements in terms of customer due diligence, record keeping, staff training and the obligation to detect, prevent and report suspected money laundering and terrorist financing. The group subscribes to the principles of the Financial Action Task Force, an intergovernmental body that develops and promotes policies to combat money laundering and terrorist financing. An integrated systems approach is being followed to support surveillance and reporting responsibilities. Group minimum standards are implemented throughout the group, taking into account local jurisdictional requirements. Approach to sanctions management The group actively manages the legal, regulatory, reputational and operational risks associated with doing business in jurisdictions which, or with customers who, are subject to embargoes or sanctions imposed by competent authorities. Sanctions surveillance capability has been enhanced to manage sanctions alerts and the staff complement has been increased to meet supervisory expectations. The group sanctions review committee, supported by a sanctions desk, is responsible for providing advice on all sanctions-related matters in a fluid sanctions environment. 50 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 The group’s regulatory advocacy unit assesses the impact that emerging policy and regulation will have on the business. The group’s approach to regulatory advocacy is to engage with government policymakers, legislators, regulators and standard and policy setters in a proactive and constructive manner. The group regulatory and legislative oversight committee enhances regulatory risk management by proactively considering the impacts of regulatory developments on the group. Approach to occupational health and safety Any risks to the health and safety of employees and stakeholders resulting from hazards in the workplace and/or potential exposure to occupational illness are managed by the occupational health and safety team and are supported by executive management accountability structures. Governance The primary management level governance committee overseeing compliance risk is the group compliance committee. It is chaired by the GCCO and is a subcommittee of GROC. Compliance is now also represented on the group management committee which facilitates executive awareness of compliance risk-related matters. The group compliance committee reports, through the GCCO, to both the GAC and GRCMC. The principal governance document is the compliance risk governance standard. Country risk Definition Country risk, also referred to as cross-border country risk, is the uncertainty that obligors (including the relevant sovereign, and including the obligations of group branches and subsidiaries in a country) will be able to fulfil obligations to the group given political or economic conditions in the host country. 51 Definition 51 Approach to managing country risk 51 Governance 52 Approved regulatory capital approaches 52 Country risk portfolio characteristics and metrics Approach to managing country risk All countries to which the group is exposed are reviewed at least annually. Internal rating models are employed to determine ratings for country, sovereign and transfer and convertibility risk. In determining the ratings, extensive use is made of the group’s network of operations, country visits and external information sources. These ratings are also a key input into the group’s credit rating models, with credit loan conditions and covenants linked to country risk events. The model inputs are continuously updated to reflect economic and political changes in countries. The model outputs are internal risk grades that are calibrated to a country risk grade (CR) from CR01 to CR25, as well as sovereign risk grade and transfer and convertibility risk grade (SB) from SB01 to SB25. Countries rated CR08 and higher, referred to as medium- and high-risk countries, are subject to increased analysis and monitoring. Country risk is mitigated through a number of methods, including: political and commercial risk insurance co-financing with multilateral institutions structures to mitigate transferability and convertibility risk such as collection, collateral and margining deposits outside the jurisdiction in question. Governance The primary management level governance committee overseeing this risk type is the group country risk management committee. It is chaired by the group CRO and is a subcommittee of GROC. The principal governance documents are the country risk governance standard and the model risk governance framework. 51 Risk and capital management report Country risk | continued Approved regulatory capital approaches There are no regulatory capital requirements for country risk. Country risk is, however, incorporated into regulatory capital for credit in the IRB approaches through the country risk and transfer and convertibility risk ratings’ impact on credit grades. Country risk portfolio characteristics and metrics The risk distribution of cross-border country risk exposures is weighted towards European and North American low-risk countries, as well as sub-Saharan African medium- and high-risk countries. Country risk exposure by region and risk grade Europe % Asia % 25.6 0.2 1.7 2.3 14.5 SubSaharan Africa % North America % Latin America % Middle East and North Africa % Australasia % June 2015 Risk grade CR01-CR07 CR08-CR11 CR12-CR14 CR15-CR17 CR18-CR21 CR22+ 7.0 1.4 4.8 11.2 23.6 1.5 1.8 0.5 2.3 0.7 0.1 0.8 December 2014 Risk grade CR01-CR07 CR08-CR11 CR12-CR14 CR15-CR17 CR18-CR21 CR22+ 22.4 1.0 3.6 0.2 0.1 5.7 14.4 0.1 0.4 7.5 5.4 7.6 20.9 1.8 0.7 0.3 2.7 0.5 2.3 0.3 0.6 0.1 Total medium- and high-risk country risk exposures and total low-risk country risk exposures for the year ended 30 June 2015 amounted to USD10 billion and USD10 billion, respectively (31 December 2014: USD17 billion and USD10 billion, respectively). Medium and highrisk country exposure by region (%): June 2015 25 20 15 10 5 CR08 – CR11 ● Europe 52 ● Asia CR12 – CR14 ● Sub-Saharan Africa CR15 – CR17 ● Latin America Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 CR18 – CR21 ● Middle East and North Africa CR22+ 1.4 Exposure to the top five medium- and high-risk countries is shown together with comparatives in the graph below. These exposures are in line with the group’s growth strategy focused on Africa and selected emerging markets. Top five medium and highrisk country risk EAD (USDm) 3 500 3 000 2 500 2 000 1 500 1 000 500 China ● June 2015 Nigeria Kenya Zambia Ghana ● December 2014 Medium and highrisk country EAD concentration by country rating (%) 25.00 20.00 15.00 10.00 5.00 CR08 ● June 2015 CR09 CR10 CR11 CR12 CR13 CR14 CR15 CR16 CR17 CR18 CR19 CR20 CR21 CR22+ ● December 2014 53 Funding and liquidity risk 54 Definition 54 Approach to managing liquidity risk 56 Governance 56 56 58 Liquidity characteristics and metrics • Contingency liquidity risk management • Structural liquidity mismatch 60 SBG’s credit ratings 60 Conduits Definition Liquidity risk is defined as the risk that an entity, although solvent, cannot maintain or generate sufficient cash resources to meet its payment obligations in full as they fall due, or can only do so at materially disadvantageous terms. Approach to managing liquidity risk The group’s liquidity risk framework is designed to ensure the comprehensive management of liquidity risks within the group in all geographies and that regulatory, prudential as well as internal minimum requirements are met at all times. This is achieved through a combination of maintaining adequate liquidity buffers to ensure that cash flow requirements can be met and ensuring that the group’s SOFP is structurally sound and supportive of the group’s strategy. Liquidity risk is managed on a consistent basis across the group’s banking subsidiaries, allowing for local requirements. Information relating to the period ended 30 June 2015 is based on Basel III principles, including behavioural profiling methods and assumptions, as well as phasing-in requirements where applicable. The nature of the group’s banking and trading activities gives rise to continuous exposure to liquidity risk. Liquidity risk arises when the group, despite being solvent, cannot maintain or generate sufficient cash resources to meet its payment obligations as they fall due, or can only do so at materially disadvantageous terms. This type of event may arise where counterparties, who provide the group with short-term funding, withdraw or do not roll over that funding, or normally liquid assets become illiquid as a result of a generalised disruption in asset markets. The group manages liquidity in accordance with applicable regulations and within the group’s risk appetite framework. The group’s liquidity risk management governance framework supports the measurement and management of liquidity across both the corporate and retail sectors to ensure that payment obligations can be met by the group’s legal entities, under both normal and stressed conditions. Liquidity risk management ensures that the group has the appropriate amount, diversification and tenor of funding and liquidity to support its asset base at all times. 54 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 The group manages liquidity risk as three interrelated pillars, which are aligned to Basel III liquidity requirements. Liquidity management categories Tactical (shorter-term) liquidity risk management manage intra-day liquidity positions monitor interbank and repo shortage levels monitor daily cash flow requirements manage short-term cash flows manage daily foreign currency liquidity set deposit rates in accordance with structural and contingent liquidity requirements as informed by ALCO. Structural (long-term) liquidity risk management ensure a structurally sound balance sheet identify and manage structural liquidity mismatches determine and apply behavioural profiling manage long-term cash flows preserve a diversified funding base inform term funding requirements assess foreign currency liquidity exposures establish liquidity risk appetite ensure appropriate transfer pricing of liquidity costs ensure Basel III NSFR readiness by 1 January 2018. The LCR, which was implemented on 1 January 2015, is a metric introduced by the BCBS to measure a bank’s ability to manage a sustained outflow of customer funds in an acute stress event over a 30-day period. The ratio is calculated by taking the group’s high-quality liquid assets (HQLA) and dividing it by net cash outflows. The minimum regulatory LCR requirement effective 1 January 2015 is 60%, increasing by 10% annually to reach 100% by 1 January 2019. The group has exceeded the 60% minimum phase-in requirement for the first half of 2015. Contingency liquidity risk management monitor and manage early warning liquidity indicators establish and maintain contingency funding plans undertake regular liquidity stress testing and scenario analysis convene liquidity crisis management committees, if needed set liquidity buffer levels in accordance with anticipated stress events advise on the diversification of liquidity buffer portfolios ensure compliance with Basel III liquidity coverage ratio (LCR). From 2018, the group will also be required to comply with the Basel III NSFR. This is a metric designed to ensure that the majority of term assets are funded by stable sources, such as capital, term borrowings or other stable funds. Further available stable funding will have to be raised in order to fully meet the proposed Basel III NSFR liquidity regime. Ongoing industry analysis and engagement through the Banking Association of South Africa and the SARB continue to explore market-based solutions to meeting the NSFR. Liquidity Basel III implementation timeline LCR NSFR 2015 2016 2017 2018 2019 60% minimum standard 70% minimum standard 80% minimum standard 90% minimum standard 100% 100% 100% 55 Risk and capital management report Funding and liquidity risk | continued Governance The primary governance committee overseeing liquidity risk is the group ALCO, which is chaired by the group financial director and is a subcommittee of GROC. ALCOs have been established in each of the banking subsidiaries of the group and manage in-country liquidity risk. The principal governance documents are the liquidity risk governance standard and model risk governance framework. Liquidity characteristics and metrics Contingency liquidity risk management Contingency funding plans Contingency funding plans are designed to protect stakeholder interests and maintain market confidence in the event of a liquidity crisis. The plans incorporate an early warning indicator process supported by clear crisis response strategies. Early warning indicators cover bank-specific and systemic crises and are monitored according to assigned frequencies and tolerance levels. Crisis response strategies are formulated for the relevant crisis management structures and address internal and external communications and escalation processes, liquidity generation management actions and operations, and heightened and supplementary information requirements to address the crisis event. The updating of contingency funding plans while considering budget forecasting continues to be a focus for the ALM teams across the group. 56 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 The group, in line with the SARB’s requirements, updates and submits its recovery and resolution plans to the SARB on an annual basis. The group’s recovery plan incorporates the contingent liquidity funding plan in addition to the focus given to capital planning and business continuity planning. Liquidity stress testing and scenario analysis Stress testing and scenario analysis are based on both hypothetical as well as historical events. These are conducted on the group’s funding profiles and liquidity positions. The crisis impact is typically measured over a 30 calendar day period as this is considered the most crucial time horizon for a liquidity event. This measurement period is also consistent with the Basel III LCR requirements. This measure is, however, adapted to meet different regulatory environments. Anticipated on- and off-balance sheet cash flows are subjected to a variety of bank-specific and systemic stresses and scenarios to evaluate the impact of unlikely but plausible events on liquidity positions. The results are assessed against the liquidity buffer and contingency funding plans to provide assurance as to the group’s ability to maintain sufficient liquidity under adverse conditions. Internal stress testing metrics are supplemented with the regulatory Basel III LCR in monitoring the group’s ability to survive severe stress scenarios. The Basel III LCR analysis that follows includes banking and/or deposit taking entities and represents an aggregation of the relevant individual net cash outflows and HQLA portfolios. These results reflect the simple average of the month-end values at 30 April 2015, 31 May 2015 and 30 June 2015, based on the regulatory submissions to the SARB. LCR (average) Total unweighted1 value (average) Rm Total weighted2 value (average) Rm HQLA Total HQLA Cash outflows 160 300 1 151 583 339 432 325 785 27 855 47 234 278 551 27 855 517 105 267 730 137 291 378 222 1 592 39 471 226 667 1 592 86 155 17 226 5 908 2 645 77 602 5 908 2 645 8 673 Other contractual funding obligations Other contingent funding obligations 21 016 201 522 21 016 5 605 Cash inflows 219 873 189 745 Secured lending Inflows from fully performing exposures Other cash inflows 5 760 198 473 15 640 5 760 172 695 11 290 Retail deposits and deposits from small business customers, of which: Stable deposits Less stable deposits Unsecured wholesale funding, of which: Operational deposits (all counterparties) and deposits in networks of cooperative banks Non-operational deposits (all counterparties) Unsecured debt Secured wholesale funding Additional requirements Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Total adjusted3 value Rm Total HQLA 160 300 Total net cash outflows 149 687 LCR (%) 107.1 1 Unweighted value represents the outstanding balances maturing or callable within 30 days (for inflows and outflows). 2 Total weighted value is calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows). 3Adjusted value calculated after the application of both (i) haircuts and inflow and outflow rates and (ii) any applicable caps (i.e. cap on level 2B and level 2 assets for HQLA and cap on inflows). The group seeks to exceed the minimum LCR requirement with a sufficient buffer to allow for funding flow volatility as determined by its internal liquidity risk appetite. A buffer is maintained above the minimum regulatory requirement to cater for balance sheet and market volatility. For the period under review, the group’s LCR of 107.1% was well above the targeted LCR tolerance limit. 57 Risk and capital management report Funding and liquidity risk | Liquidity characteristics and metrics continued Liquidity buffer Portfolios of highly marketable liquid securities to meet prudential, regulatory and internal stress testing requirements are maintained as protection against unforeseen disruptions in cash flows. These portfolios are managed within ALCO-defined limits on the basis of diversification and liquidity. The table below provides a breakdown of the group’s liquid and marketable securities as at 30 June 2015 and 31 December 2014. Eligible Basel III LCR HQLA are defined according to the BCBS January 2013 LCR and liquidity risk monitoring tools framework. Managed liquidity represents unencumbered marketable securities other than eligible Basel III LCR HQLA (excluding trading assets) which would be able to provide significant sources of liquidity in a stress scenario. Total liquidity June 2015 Rbn Eligible LCR HQLA1 comprising: December2 2014 Rbn The graph below shows the group’s cumulative maturity mismatch between assets and liabilities for the 0 to 12 months bucket, after applying behavioural profiling. The cumulative maturity is expressed as a percentage of the group’s total funding-related liabilities. Expected aggregate cash outflows are subtracted from expected aggregate cash inflows. Limits are set internally to restrict the cumulative liquidity mismatch between expected inflows and outflows of funds in different time buckets. These mismatches are monitored on a regular basis with active management intervention if potential limit breaches are evidenced. Liquidity transfer restrictions across the group are considered as part of the prudent liquidity risk management assumptions that are followed. The behaviourally adjusted cumulative liquidity mismatch remains within the group’s liquidity risk appetite. Whilst following a consistent approach to liquidity risk management in respect of the foreign currency component of the SOFP, specific indicators are observed in order to monitor changes in market liquidity as well as the impacts on liquidity as a result of movements in exchange rates. 158 174 15 19 29 103 11 45 98 12 Managed liquidity 137 114 0 Total liquidity 295 288 (5) Total liquidity as a % of funding-related liabilities 25.2 24.8 Notes and coins Cash and deposits with central banks Government bonds and bills Other eligible liquid assets 1 Eligible LCR HQLA considers any liquidity transfer restrictions that will inhibit the Behaviourally adjusted cumulative liquidity mismatch (%) 10 5 (10) (15) transfer of HQLA across jurisdictions. 2 Restated. Refer to page 76. Liquid assets held remain adequate to meet all internal stress testing, prudential and regulatory requirements. Structural liquidity mismatch (20) (25) 0–7 days 0–1 month 0–3 months 0 – 12 months – Internal limit Maturity analysis of financial liabilities using behavioural profiling ● June 2015 With actual cash flows typically varying significantly from the contractual position, behavioural profiling is applied to assets, liabilities and off-balance sheet commitments as well as to certain liquid assets. Behavioural profiling assigns probable maturities based on historical customer behaviour. This is used to identify significant additional sources of structural liquidity in the form of core deposits, such as current and savings accounts, which exhibit stable behaviour despite being repayable on demand or at short notice. Funding activities In order to highlight potential risks within the group’s defined liquidity risk thresholds, structural liquidity mismatch analyses are performed regularly to anticipate the mismatch between payment profiles of SOFP items. Primary funding sources are in the form of deposits across a spectrum of retail and wholesale clients, as well as loan and debt capital markets across the group. Total funding-related liabilities grew from R1 161 billion as at 31 December 2014 to R1 170 billion as at 30 June 2015. 58 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 ● December 2014 0–6 months Funding markets are evaluated on an ongoing basis to ensure appropriate group funding strategies are executed depending on the market, competitive and regulatory environment. The group continued to focus on building its deposit base as a key component of the group’s funding mix. Deposits sourced from South Africa and other major jurisdictions in the rest of Africa, Isle of Man and Jersey provide diversity of stable sources of funding for the group. Depositor concentrations Funding diversification by product (%) Single depositor Top 10 depositors ● ● ● ● ● ● ● ● ● 22 16 17 12 12 10 6 3 2 Call deposits Term deposits Current accounts Cash management deposits Deposits from banks and central banks Negotiable certificates of deposits Senior and subordinated debt Other funding Savings accounts (December 2014: 22) (December 2014: 21) (December 2014: 16) (December 2014: 11) (December 2014: 10) (December 2014: 8) (December 2014: 6) (December 2014: 4) (December 2014: 2) Funding-related liabilities composition1 Corporate funding Retail deposits2 Institutional funding Deposits from banks Government and parastatals Senior debt Subordinated debt Other liabilities to the public Non-current funding related liabilities held for sale Total funding-related liabilities June 2015 Rbn December 2014 Rbn 353 279 255 137 73 49 23 1 351 268 233 98 69 42 23 3 74 1 170 1 161 1 Composition aligned to Basel III liquidity classification. 2 Comprises individual and small business customers. Concentration risk limits are used within the group to ensure that funding diversification is maintained across products, sectors, geographic regions and counterparties. June 2015 % December 2014 % 2.0 9.4 8.1 1.9 A component of the group’s funding strategy is to ensure that sufficient contractual term funding is raised in support of term lending and to ensure adherence to the structural mismatch tolerance limits and appetite guidelines. The group successfully accessed the longer-term funding market during 2015 raising R17 billion through a combination of senior and subordinated debt, and syndicated loans. SBSA issued R2,8 billion of the Basel III compliant tier II instruments for the period ended 30 June 2015 (December 2014: R2,3 billion). The graph below is a representation of the market cost of liquidity, which is measured as the spread paid on the negotiable certificates of deposits (NCDs) relative to the prevailing swap curve for that tenor. The graph is based on actively-issued money market instruments by banks, namely 12- and 60-month NCDs. For the period under review, long term funding spreads continued to increase, however some stabilisation of funding cost was observed during the second quarter of 2015. 12 and 60month liquidity spread (bps) 140 120 100 80 60 40 20 December 2010 – 12-month NCD – 60-month NCD June 2015 Six month period ended 30 June 2015 59 Risk and capital management report Funding and liquidity risk | Liquidity characteristics and metrics continued Rating downgrades will reduce thresholds above which collateral must be posted with counterparties to cover the group’s negative mark-to-market on derivative contracts. These are managed within the liquidity management pillar. The potential cumulative impact on additional collateral requirements is as follows: SBG’s credit ratings The group’s ability to access funding at cost-effective levels is dependent on maintaining or improving the borrowing entity’s credit rating. 1, 2 and 3 notch rating downgrades The following table provides a summary of the major credit ratings for the group and its principal operating subsidiary, SBSA. Credit ratings Long-term SBG foreign currency issuer default rating SBSA foreign currency issuer default rating RSA sovereign foreign currency issuer rating Fitch BBB BBB BBB Moody’s SBG foreign currency issuer default rating SBSA foreign currency deposit rating RSA sovereign foreign currency rating Baa3 Baa2 Baa2 Credit ratings for SBSA are dependent on multiple factors, including the South Africa sovereign rating, capital adequacy levels, quality of earnings, credit exposure, the credit risk governance framework and funding diversification. These parameters and their possible impact on the borrowing entity’s credit rating are monitored closely and incorporated into the group’s liquidity risk management and contingency planning considerations. A reduction in these ratings could have an adverse effect on the group’s access to liquidity sources and funding costs, may trigger collateral calls or lead to the activation of downgrade clauses and early termination associated with certain structured deposits. 60 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Impact on the group’s liquidity of a collateral call linked to downgrading by 1 notch 2 notch 3 notch June 2015 Rm December 2014 Rm 121 243 243 296 724 781 Conduits The group provides standby liquidity facilities to two conduits, namely BTC and Thekwini Warehouse Conduit. These facilities, which totalled R5,6 billion as at 30 June 2015 (31 December 2014: R4,9 billion), had not been drawn on. The liquidity risk associated with these facilities is managed in accordance with the group’s overall liquidity position and represents less than 2% of the group’s total liquidity (31 December 2014: 2%). The liquidity facilities are included in both the group’s structural liquidity mismatch as well as in liquidity risk stress testing. Market risk 61 Definition 61 Governance 61 Approved regulatory capital approaches 62 Trading book market risk 65 Interest rate risk in the banking book 66 Equity risk in the banking book 67 Foreign currency risk 68 Own equity-linked transactions 69 Post-employment obligation risk Definition Market risk is the risk of a change in the market value, actual or effective earnings, or future cash flows of a portfolio of financial instruments, including commodities, caused by adverse movements in market variables such as equity, bond and commodity prices, currency exchange and interest rates, credit spreads, recovery rates, correlations and implied volatilities in all of these variables. The group’s key market risks are: trading book market risk interest rate risk in the banking book (IRRBB) equity risk in the banking book foreign currency risk own equity-linked transactions post-employment obligation risk. Governance The governance management level committees overseeing market risk are group ALCO, which is chaired by the group financial director, and the group equity risk committee, which is chaired by the CIB CRO. Both are subcommittees of GROC. The principal governance documents are the market risk governance standard and the model risk governance framework. Approved regulatory capital approaches The group has approval from the SARB to adopt the internal models approach for most asset classes and across most market variables. For material equity portfolios, the group has approval from the SARB to adopt either the market-based or PD/LGD approach. There are no regulatory capital requirements for IRRBB, structural foreign exchange exposures or own equity-linked transactions. 61 Market risk | continued Trading book market risk Definition Trading book market risk is represented by financial instruments, including commodities, held in the trading book, arising out of normal global market’s trading activity. Approach to managing market risk in the trading book The group’s policy is that all trading activities are undertaken within the group’s global markets’ operations. The market risk functions are independent of the group’s trading operations and are accountable to the relevant legal entity ALCOs. ALCOs have a reporting line into group ALCO, a subcommittee of GROC. All VaR and SVaR limits require prior approval from the respective entity ALCOs. The market risk functions have the authority to set these limits at a lower level. Market risk teams are responsible for identifying, measuring, managing, monitoring and reporting market risk as outlined in the market risk governance standard. Exposures and excesses are monitored and reported daily. Where breaches in limits and triggers occur, actions are taken by market risk functions to bring exposures back in line with approved market risk appetite, with such breaches being reported to management and entity ALCOs. Measurement The techniques used to measure and control trading book market risk and trading volatility include VaR and SVaR, stop-loss triggers, stress tests, backtesting and specific business unit and product controls. VaR and SVaR The group uses the historical VaR and SVaR approach to quantify market risk under normal and stressed conditions. For risk management purposes VaR is based on 251 days of unweighted recent historical data, a holding period of one day and a confidence level of 95%. The historical VaR results are calculated in four steps: Calculate 250 daily market price movements based on 251 days’ historical data. Calculate hypothetical daily profit or loss for each day using these daily market price movements. Aggregate all hypothetical profits or losses for day one across all positions, giving daily hypothetical profit or loss, and then repeat for all other days. VaR is the 95th percentile selected from the 250 days of daily hypothetical total profit or loss. Daily losses exceeding the VaR are likely to occur, on average, 13 times in every 250 days. 62 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 SVaR uses a similar methodology to VaR, but is based on a period of financial stress and assumes a 10-day holding period and a worst case loss. Where the group has received internal model approval, the market risk regulatory capital requirement is based on VaR and SVaR, both of which use a confidence level of 99% and a 10-day holding period. Limitations of historical VaR are acknowledged globally and include: The use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature. The use of a one-day holding period assumes that all positions can be liquidated or the risk offset in one day. This will usually not fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or hedge all positions fully. The use of a 95% confidence level, by definition, does not take into account losses that might occur beyond this level of confidence. VaR is calculated on the basis of exposures outstanding at the close of business and, therefore, does not necessarily reflect intra-day exposures. VaR is unlikely to reflect loss potential on exposures that only arise under significant market moves. Trading book credit risk Credit issuer risk is assumed in the trading book by virtue of normal trading activity, and managed according to the market risk governance standard. These exposures arise from, inter alia, trading in debt securities issued by corporate and government entities as well as trading derivative transactions with other banks and corporate clients. The credit spread risk is incorporated into the daily price movements used to compute VaR and SVaR mentioned above. The VaR models used for credit risk are only intended to capture the risk presented by historical day-to-day market movements, and therefore do not take into account instantaneous or jump to default risk. Issuer risk is incorporated in the standardised approach interest rate risk charge for SBSA. The largest single issuer risk exposure is to the SA Sovereign with an EAD of R12,40 billion (31 December 2014: R12,75 billion). Stop-loss triggers Stop-loss triggers are used to protect the profitability of the trading desks, and are monitored by market risk on a daily basis. The triggers constrain cumulative or daily trading losses through acting as prompt to a review or close-out positions. Stress tests Stress testing provides an indication of the potential losses that could occur under extreme but plausible market conditions, including where longer holding periods may be required to exit positions. Stress tests comprise individual market risk factor testing, combinations of market factors per trading desk and combinations of trading desks using a range of historical, hypothetical and Monte Carlo simulations. Daily losses experienced during the period ended 30 June 2015 did not exceed the maximum tolerable losses as represented by the group’s stress scenario limits. Backtesting The group backtests its VaR models to verify the predictive ability of the VaR calculations and ensure the appropriateness of the models within the inherent limitations of VaR. Backtesting compares the daily hypothetical profit and losses under the one-day buy and hold assumption to the prior day’s calculated VaR. In addition, VaR is tested by changing various model parameters, such as confidence intervals and observation periods to test the effectiveness of hedges and risk-mitigation instruments. Regulators categorise a VaR model as green, amber or red and assign regulatory capital multipliers based on this categorisation. A green model is consistent with a satisfactory VaR model and is achieved for models that have four or less backtesting exceptions in a 12-month period. All of the group’s approved models were assigned green status for the period ended 30 June 2015 (31 December 2014: green). Four exceptions occurred during the period ended 30 June 2015 (31 December 2014: 11) for 95% VaR and nil exceptions (31 December 2014: one) for 99% VaR. Refer to the graph below for the results of the group’s backtesting for the period ended 30 June 2015. Backtesting: Hypothetical income of trading units and VaR (Rm)1 100 50 0 (50) (100) (150) (200) January 2015 ● Hypothetical income June 2015 – 95% VaR (including diversification benefits) – 99% VaR (including diversification benefits) 1 Includes SB Plc. 63 Risk and capital management report Market risk | Trading book market risk continued Specific business unit and product controls Other market risk limits and controls specific to individual business units include permissible instruments, concentration of exposures, gap limits, maximum tenor, stop-loss triggers, price validation and balance sheet substantiation. Trading book portfolio characteristics VaR for the period ended 30 June 2015 Trading book market risk exposures arise mainly from residual exposures from client transactions and limited trading for the group’s own account. In general, the group’s trading desks have run similar levels of market risk throughout the period when compared to 31 December 2014. Trading book normal VaR analysis by market variable Normal VaR Maximum1 Rm Minimum1 Rm Average Rm Closing Rm June 2015 Commodities risk Foreign exchange risk Equity position risk Debt securities Diversification benefits2 16,8 26,9 14,2 35,7 0,1 13,6 3,5 7,9 2,6 19,5 8,0 23,4 (21,0) 0,1 17,0 9,2 23,5 (21,0) Aggregate 49,4 23,7 32,6 28,7 Commodities risk Foreign exchange risk Equity position risk Debt securities Diversification benefits2 19,8 18,6 18,2 55,0 8,4 5,3 2,5 23,6 13,3 10,2 8,6 36,2 (27,5) 14,2 17,8 6,1 27,5 (25,6) Aggregate 52,0 27,9 40,8 40,0 December 2014 1The maximum and minimum VaR figures reported for each market variable do not necessarily occur on the same day. As a result, the aggregate VaR will not equal the sum of the individual market VaR values, and it is inappropriate to ascribe a diversification effect to VaR when these values may occur on different dates. 2Diversification benefit is the benefit of measuring the VaR of the trading portfolio as a whole, that is, the difference between the sum of the individual VaRs and the VaR of the whole trading portfolio. Trading book stressed VaR analysis Stressed VaR Maximum Rm Minimum Rm Average Rm Closing Rm 476,3 244,9 533,6 369,0 425,7 312,2 676,2 286,1 722,0 436,9 409,3 June 2015 Pre-diversification Aggregate December 2014 Pre-diversification Aggregate 64 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 703,1 Analysis of trading profit The graph below shows the distribution of daily profit and losses for the period. It captures trading volatility and shows the number of days in which the group’s trading-related revenues fell within particular ranges. The distribution is skewed favourably to the profit side. For the period ended 30 June 2015, trading profit was positive for 126 out of 128 days (30 June 2014: 127 out of 128 days) on an aggregated global basis Endowment risk: exposure arising from the net differential between interest rate insensitive assets such as non-earning assets and interest rate insensitive liabilities such as non-paying liabilities and equity. Approach to managing IRRBB Banking book-related market risk exposure principally involves managing the potential adverse effect of interest rate movements on banking book earnings (net interest income and banking book mark-to-market profit or loss) and the economic value of equity. The group’s approach to managing IRRBB is governed by applicable regulations and is influenced by the competitive environment in which the group operates. The group’s treasury and capital management team monitors banking book interest rate risk operating under the oversight of group ALCO. Distribution of daily trading profit or loss (Rm) 70 Frequency of days 60 Measurement 50 The analytical techniques used to quantify IRRBB include both earnings- and valuation-based measures. The analysis takes account of embedded optionality such as loan prepayments and accounts where the account behaviour differs from the contractual position. 40 30 The results obtained from forward-looking dynamic scenario analyses, as well as Monte Carlo simulations, assist in developing optimal hedging strategies on a risk-adjusted return basis. 20 10 (30) – 0 ● June 2015 0 – 30 >30 – 60 >60 – 90 >90 ● June 2014 Interest rate risk in the banking book Definition This risk results from the different repricing characteristics of banking book assets and liabilities. IRRBB is further divided into the following sub-risk types: Repricing risk: timing differences in the maturity (fixed rate) and repricing (floating rate) of assets and liabilities. Yield curve risk: shifts in the yield curve that have adverse effects on the group’s income or underlying economic value. Basis risk: hedge price not moving in line with the price of the hedged position. Examples include bonds/swap basis, futures/ underlying basis and prime/Johannesburg Interbank Agreed Rate (JIBAR) basis. Optionality risk: options embedded in bank asset and liability portfolios, providing the holder with the right, but not the obligation, to buy, sell, or in some manner alter the cash flow of an instrument or financial contract. Desired changes to a particular interest rate risk profile are achieved through the restructuring of on-balance sheet repricing or maturity profiles, or through derivative overlays. Limits Interest rate risk limits are set in relation to changes in forecast banking book earnings and the economic value of equity. The economic value of equity sensitivity is calculated as the net present value of aggregate asset cash flows less the net present value of aggregate liability cash flows. All assets, liabilities and derivative instruments are allocated to gap intervals based on either their repricing or maturity characteristics. Assets and liabilities for which no identifiable contractual repricing or maturity dates exist are allocated to gap intervals based on behavioural profiling. Hedging of endowment risk IRRBB is predominantly the consequence of endowment exposures, being the net effect of non-rate sensitive liabilities and equity less non-rate sensitive assets. The endowment risk is hedged using liquid instruments as and when it is considered opportune. Where permissible, hedge accounting (in terms of IFRS) is adopted using the derivatives designated as hedging instruments. Following meetings of the monetary policy committees, or notable market developments, the interest rate view is formulated through ALCO processes. Non-endowment IRRBB (repricing, yield curve, basis and optionality) is managed within the treasury and the global markets portfolios. 65 Risk and capital management report Market risk | Trading book market risk continued Banking book interest rate exposure characteristics The table below indicates the rand equivalent sensitivity of the group’s banking book earnings (net interest income and banking book mark-tomarket profit or loss) and other comprehensive income (OCI) given a parallel yield curve shock. A floor of 0% is applied to all interest rates under the decreasing interest rate scenario resulting in asymmetric rate shocks in low-rate environments. Hedging transactions are taken into account while other variables are kept constant. Assuming no management intervention, an upward 100 basis point parallel interest rate shock across all foreign currency yield curves and a 200 basis point parallel interest rate shock across rand yield curves would, based on the 30 June 2015 SOFP, increase the forecast 12-month net interest income by R2,9 billion (31 December 2014: R2,5 billion). The group is well positioned for a rising interest rate environment. Interest rate sensitivity analysis1 ZAR USD GBP EUR 200 2 254 153 200 (2 348) (153) 100 284 (87) 100 (117) 25 100 (3) 100 (12) 100 2 100 200 1 975 18 200 (2 170) (18) 100 217 (74) 100 (103) 19 100 1 (3) 100 (1) 2 100 (11) Other Total June 2015 Increase in basis points Sensitivity of annual net interest income Sensitivity of OCI Decrease in basis points Sensitivity of annual net interest income Sensitivity of OCI Rm Rm Rm Rm 100 335 (81) 100 (361) 81 2 858 (15) (2 824) (47) December 2014 Increase in basis points Sensitivity of annual net interest income Sensitivity of OCI Decrease in basis points Sensitivity of annual net interest income Sensitivity of OCI Rm Rm Rm Rm 100 1 100 323 (149) 100 (349) 149 2 505 (208) (2 622) 152 1Before tax. Equity risk in the banking book Definition Equity risk is defined as the risk of loss arising from a decline in the value of an equity or equity-type instrument held on the banking book, whether caused by deterioration in the underlying operating asset performance, net asset value (NAV), enterprise value of the issuing entity, or by a decline in the market price of the equity or instrument itself. Though issuer risk in respect of tradable equity instruments constitutes equity risk, such traded issuer risk is managed under the trading book market risk framework. 66 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Approach to managing equity risk in the banking book Equity risk relates to all transactions and investments subject to approval by the group ERC, in terms of that committee’s mandate, and includes debt, quasi-debt and other instruments that are considered to be of an equity nature. For the avoidance of doubt, equity risk in the banking book excludes strategic investments by the group in subsidiaries, associates and joint ventures deployed in delivering the group’s business and service offerings unless the group financial director and group CRO deem such investments to be subject to the consideration and approval by the group ERC. Governance The group ERC is constituted as a subcommittee of GROC and operates under delegated authority from that committee, with additional reporting accountability to the CIB credit governance equity risk portfolio committee. GROC grants the group ERC authority to approve equity risk transactions to be held on the banking book and to manage such equity risk in accordance with the provisions of the group equity risk governance standard and associated policies. This includes the authority to: exercise such powers as are necessary to discharge its responsibilities in terms of this mandate seek independent advice at the group’s expense, and investigate matters within its mandate delegate authority to a combination of group ERC voting members based on the investment size. To the extent equity exposures approved by the group ERC are held on the banking book, they are substantively managed and reviewed according to the credit risk governance standard. Banking book equity portfolio characteristics Basel equity positions in the banking book1 June 2015 Rm December 2014 Rm Fair value Listed Unlisted 191 2 554 162 2 131 Total 2 745 2 293 Foreign currency risk Definition The group’s primary non-trading-related exposures to foreign currency risk arise as a result of the translation effect on the group’s net assets in foreign operations, intragroup foreign-denominated debt and foreign-denominated cash exposures and accruals. Approach to managing foreign currency risk The group foreign currency management committee, a subcommittee of the group capital management committee, manages the risk according to existing legislation, South African exchange control regulations and accounting parameters. It takes into account naturally offsetting risk positions and manages the group’s residual risk by means of forward exchange contracts, currency swaps and option contracts. Hedging is undertaken in such a way that it does not constrain normal operating activities. In particular, for banking entities outside of the South African common monetary area, the need for capital to fluctuate with risk-weighted assets is taken into account. The repositioning of the group’s NAV by currency, which is managed at a group level, is a controlled process based on underlying economic views and forecasts of the relative strength of currencies. The group does not ordinarily hold open exposures of any significance with respect to its banking book. Gains or losses on derivatives that have been designated as either net investment or cash flow hedging relationships in terms of IFRS, are reported directly in OCI, with all other gains and losses on derivatives being reported in profit or loss. 1Banking book equity exposures are equity investments which comprise listed and unlisted private equity and strategic investments, and do not form part of the trading book. Unrealised gains or losses recognised in OCI were R3 million (31 December 2014: R3 million). 67 Risk and capital management report Market risk | Interest rate risk in the banking book continued Own equity-linked transactions Definition The group has exposure to changes in its share price arising from its equity-linked remuneration contractual commitments. Refer to the SBG 2014 annual integrated report for details regarding the group’s equity-linked share incentive schemes. Depending on the nature of the group’s equity-linked share schemes, the group is exposed to either income statement risk or NAV through equity risk (NAV risk) due to changes in its own share price as follows: Income statement risk arises as a result of losses being recognised in the group’s income statement as a result of increases in the price of the group’s share price on cash-settled share schemes above the award price. NAV risk arises as a result of the group settling an equity-linked share scheme at a higher price than the price at which the share incentive was awarded to the group’s employees. The following table summarises the group’s most material share schemes together with an explanation of which risk (where applicable) the share scheme exposes the group to, and why, and an indication as to whether the share schemes are hedged: Share scheme Risk to the group Explanation Hedged Equity growth scheme and the group share incentive scheme N/A The equity growth scheme and group share incentive scheme are equity-settled share schemes that are settled through the issuance of new shares. Accordingly, the group is not required to incur any cash flow in settling the share schemes and hence is not exposed to any risk as a result of changes in its own share price. No Quanto stock unit scheme Income statement risk The Quanto stock unit scheme is a cash-settled share scheme. Increases in the group’s share price result in losses being recognised in the income statement. Yes Deferred bonus scheme and performance reward plan NAV risk The deferred bonus scheme and performance reward plan are equity-settled share schemes that are settled through the purchase of shares from the external market. Accordingly, increases in the group’s share price above the grant price will result in losses being recognised in the group’s equity. Yes 68 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Approach to managing own equity-linked transactions The ALCOs of the respective group entities that issue the equity linked transactions approve hedges of the group’s share price risk with quarterly reporting to group ALCO which is chaired by the group financial director. Hedging is undertaken taking into account a number of considerations which include expected share price levels based on investment analyst reports; the value of the issued share scheme awards; the cost of hedging; and the ability to hedge taking into account the nature of the share scheme and applicable legislative requirements. Hedging instruments typically include equity forwards and equity options. Hedge accounting in terms of IFRS is applied to the extent that the hedge accounting requirements are complied with. Hedges are only transacted outside of the group’s closed periods which are in effect from 1 June until the publication of the group’s interim results; 1 December until the publication of the group’s year end results; and any period where the group is trading under a cautionary announcement. Post-employment obligation risk The group operates both defined contribution plans and defined benefit plans, with the majority of its employees participating in defined contribution plans. The group’s defined benefit pension and healthcare provider schemes for past and certain current employees create post-employment obligations. Post-employment obligation risk arises from the requirement to contribute as an employer to an under-funded defined benefit plan. 69 Operational risk Definition Operational risk is defined as the risk of loss suffered as a result of the inadequacy of, or failure in, internal processes, people and/or systems or from external events. 70 Definition 70 71 Approach to managing operational risk • Insurance cover 71 Governance 71 Approved regulatory capital approach 71 71 72 72 72 Operational risk subtypes • Operational risk subtype: Model risk • Operational risk subtype: Tax risk • Operational risk subtype: Legal risk • Operational risk subtype: Environmental and social risk • Operational risk subtype: IT risk and IT change risk • Operational risk subtype: Information risk • Operational risk subtype: Financial crime risk • Operational risk subtype: Physical commodities 72 73 73 73 Operational risk subtypes are managed and overseen by specialist functions. These subtypes include: model risk tax risk legal risk environmental and social risk IT risk and IT change risk information risk compliance risk (more information on page 49) financial crime risk physical commodities. Approach to managing operational risk Operational risk exists in the natural course of business activity. The group operational risk governance standard sets out the minimum standards for operational risk management to be adopted across the group. The governance standard seeks to ensure adequate and consistent governance, identification, assessment, monitoring, managing and reporting of operational risk to support the group’s business areas. In addition, it ensures that the relevant regulatory criteria can be met by those banking entities adopting the advanced measurement approach (AMA), and those adopting the basic indicator approach or the standardised approach for regulatory capital purposes. It is not an objective to eliminate all exposure to operational risk as this would be neither commercially viable nor possible. The group’s approach to managing operational risk is to adopt fit-for-purpose operational risk practices that assist business line management in understanding their inherent risk and reducing their risk profile while maximising their operational performance and efficiency. The integrated operational risk (IOR) management function is independent from business line management and is part of the second line of defence reporting to the group CRO. It is responsible for the development and maintenance of the operational risk governance framework, facilitating business’s adoption of the framework, oversight and reporting, as well as for challenging the risk profile. The team proactively analyses root causes, trends and emerging threats, advises on the remediation of potential control weaknesses and recommends best practice solutions. 70 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Individual teams are dedicated to each business line and report to the business unit CRO with a functional reporting line to the group head of operational risk management. The IOR team provides dedicated teams to enabling functions such as finance, IT and human capital. These teams work alongside their business areas and facilitate the adoption of the operational risk governance framework. As part of the second line of defence, they also monitor and challenge the business units’ and enabling functions’ management in respect of their operational risk profile. Business continuity management is a process that identifies potential operational disruptions and provides a basis for planning for the mitigation of the negative impact from such disruptions. In addition, it promotes operational resilience and ensures an effective response that safeguards the interests of the group and its stakeholders. The group’s business continuity management framework encompasses emergency response preparedness and crisis management capabilities to manage the business through a crisis to full recovery. The group’s business continuity capabilities are evaluated by testing business continuity plans and conducting crisis simulations. The group is fully cognisant of the risks which the prevailing electricity shortages in South Africa pose to the continuity of SBSA’s services and operations and to the broader group through services provided out of South Africa. The group has completed a high-level assessment of its readiness to withstand both routine load shedding and a national grid interruption to ensure that the risks are mitigated proactively. Insurance cover The group buys insurance to mitigate operational risk. This cover is reviewed on an annual basis. The group insurance committee oversees a substantial insurance programme designed to protect the group against loss resulting from its business activities. The principal insurance policies in place are the group crime, professional indemnity, and group directors’ and officers’ liability policies. In addition, the group has fixed assets and liabilities coverage in respect of office premises and business contents; third-party liability for visitors to the group’s premises, and employer’s liability. The group’s business travel policy provides cover for group staff whilst travelling on behalf of the group. Governance The primary management level governance committees overseeing operational risk are GROC and the group operational risk committee. The primary governance documents are the operational risk governance standard and the operational risk governance framework. Operational risk subtypes report to various governance committees and have various governance documentation applicable to each risk subtype. Approved regulatory capital approach The group has approval from the SARB to adopt the AMA for SBSA and the standardised approach for all other legal entities. The journey to migrate all countries in Africa to the AMA is currently underway. The group does not include insurance as a mitigant in the calculation of regulatory capital. Operational risk subtypes Operational risk subtype: Model risk Model risk arises from potential weaknesses in a model that is used in the measurement, pricing and management of risk. These weaknesses include incorrect assumptions, incomplete information, inaccurate implementation, limited model understanding, inappropriate use or inappropriate methodologies leading to incorrect conclusions by the user. The group’s approach to managing model risk is based on the following principles: Fit-for-purpose governance, which includes: an approved model risk governance framework a three lines of defence governance structure comprising independent model development, model validation and GIA oversight functions 71 Risk and capital management report Operational risk | Approach to managing operational risk continued technical forums that challenge and recommend models for approval to model approval committees model approval committees with board and executive management membership based on model materiality and regulatory requirements policies that define minimum standards, materiality, validation criteria, approval criteria, validation frequency, and roles and responsibilities. A skilled and experienced pool of technically competent staff is maintained in the development, validation and audit functions. Robust model-related processes, including: the application of best-practice modelling methodologies independent model validation in accordance with both regulatory and internal materiality assessments to test the appropriateness and effectiveness of models validation of regulatory capital models at initial development and at least annually thereafter validation of other models at initial development and thereafter reviewed at intervals determined by materiality and performance criteria adequate model documentation, including the coverage of model use and limitations controlled implementation of approved models into production systems ongoing monitoring of model performance review and governance of data used as model inputs peer challenge in technical forums. Operational risk subtype: Tax risk Tax risk is defined as any event, action or inaction in tax strategy, operations, financial reporting, or compliance that either adversely affects the group’s tax or business objectives or results in an unanticipated or unacceptable level of monetary, financial statement or reputational exposure. The group’s approach to tax risk is governed by the GAC-approved tax risk control framework which, in turn, is supported by policies dealing with specific aspects of tax risk such as, for example, transfer pricing, indirect taxes, withholding taxes and remuneration taxes. Operational risk subtype: Legal risk Legal risk is defined as the exposure to the adverse consequences resulting from non-compliance with applicable laws, the conclusion of agreements that do not mitigate all relevant legal risks or the inability to enforce legal rights or defend against unforeseen liabilities arising from inadequate or inappropriate contracts. It applies to the full scope of group activities and may also include the protection of group member’s rights in enforcement actions by regulators. The adverse consequences include financial losses arising from unenforceable rights or obligatory payment of unforeseen liabilities, damages, fines and penalties and the putting at risk of licences required to conduct business. The group has processes and controls in place to identify, manage and mitigate its legal risks. 72 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Operational risk subtype: Environmental and social risk Environmental risk is described as a measure of the potential threats to the environment. It combines the probability that events will cause or lead to the degradation of the environment and the magnitude of such degradation. Environmental risk includes risks related to or resulting from climate change, human activities or from natural processes that are disturbed by changes in natural cycles. Social risk is described as risks to people, their livelihoods, health and welfare, socioeconomic development, social cohesion and the ability to adapt to changing circumstances. Environmental and social risk assessment and management deals with two aspects: Risks over which the group has direct control. These include our immediate direct impact, such as our waste management and the use of energy and water as well as our broader impact, including risks that occur as a result of our lending or financial services activities. Risks over which the group does not have control but which have the potential to impact on the group’s operations and its clients. The group sustainability management unit develops the strategy, policy and management frameworks that enable the identification, management, monitoring and reporting of both aspects. The environmental and social risk management framework includes: identifying risk prone sectors tracking how risks interact with each other. The group has an environmental and social risk management policy and subscribes to a number of international norms and codes, such as those of the United Nations Environment Programme Finance Initiative, the Equator Principles and the Banking Association of South Africa’s code of conduct for banks. In support of these policy commitments, it has developed guidance to bankers, screening tools to assist in categorising environmental and social risk and various training programmes to assist credit evaluators, deal makers and other key individuals. Operational risk subtype: IT risk and IT change risk IT risk encompasses both IT risk and IT change risk. The group’s IT risk refers to the risk associated with the use, ownership, operation, involvement, influence and adoption of IT within the group. It consists of IT-related events and conditions that could potentially impact business operations. IT change risk refers to the risk arising from changes, updates or alterations made to the IT infrastructure, systems or applications that could affect service reliability and availability. The advancement of IT has brought about rapid changes in the way businesses and operations are being conducted in the financial industry. IT is no longer a support function within the organisation but is a key enabler for business strategies including reaching out to external customers and meeting their needs. As technology becomes increasingly important and integrated into business processes, the need for adequate and effective governance and management of IT resources, risks and any constraints becomes imperative. The execution of these policies and practices is driven through a network of embedded representatives within the business lines. The head of group information risk oversees the execution in conjunction with the heads of embedded operations risk per business area. The board is responsible for ensuring that prudent and reasonable steps have been taken with respect to fulfilling its responsibilities for IT governance. To assist the board to fulfil this obligation, the group IT committee has been delegated the authority to ensure the implementation of the IT governance framework. It delegates this responsibility to management. A group IT executive committee has been established to provide assurance that management has implemented an effective IT governance framework. The group IT executive committee has established a group IT architecture governance committee and a group IT risk and compliance committee to assist in the fulfilment of its architecture and risk obligations. The Promotion of Access to Information Act 2 of 2000 gives effect to the constitutional right of access to information that is held by a private or public body. The following information was disclosed in terms of applicable regulations: From January 2015 to June 2015, the group processed 14 (January 2014 to December 2014: six) requests for access to information, of which zero were granted, five were denied, eight are still in progress and one was for access to own information, which was directed to the relevant business compliance officers. The reason for the denial of access was that the owners of the personal information declined to give consent for access to be given to the requestor. The GRCMC ensures that all risks are adequately addressed through its risk management, monitoring and assurance processes. It considers IT risk as a crucial element of the effective oversight of risk management and it places reliance on the group IT committee and IOR to provide oversight of the first line of defense risk activities. IT, as it relates to financial reporting and the ongoing concern aspects of the organisation, is the responsibility of the GAC. Our main IT risks include the failure or interruption of critical systems, cybercrime, unauthorised access to systems and the inability to serve our customers’ needs in a timely manner. These risks are mitigated through various controls which are implemented and closely monitored by management. We continuously review and invest in our security systems and processes to ensure our customers are well protected. Actions to reduce the likelihood of risks materialising are identified and accountabilities for remediation are allocated to management. For more information, refer to the IT report in the SBG annual integrated report. Operational risk subtype: Information risk Information risk encompasses the risk of accidental or intentional unauthorised use, modification, disclosure or destruction of information resources, which would compromise the confidentiality, integrity or availability of information and which would potentially be harmful to the group’s business. Additionally, it comprises of all the challenges that result from the need to control and protect the group’s information. The group has adopted a risk-based approach to managing information risks. The IOR management function oversees the information risk management system, policies and practices across the group. Cyber risk Cyber risk is the risk associated with injury, damage or loss from electronic exposure that can result in an adverse impact on the group’s business. This risk may arise due to the disclosure, modification, destruction or theft of information, or from the unavailability of the transaction site, systems or networks. The cyber security operations centre, within IOR, manages this risk by proactively identifying malicious activity that poses a risk to the confidentiality, integrity and availability of the group’s information assets. Identification and mitigation of cyber threats includes services to deliver both the proactive immobilisation of threats that are active in the group and the identification, investigation, resolution and reporting of threats that have materialised into cyber incidents. Operational risk subtype: Financial crime risk Financial crime risk includes fraud, bribery, corruption, theft and integrity misconduct by staff, customers, suppliers, business partners and stakeholders. The group financial crime control function combats financial crime risk through the prevention and detection of, and response to, all financial crime incidents to mitigate economic loss, reputational risk and regulatory sanction. As is the case with the other functions within operational risk, group financial crime control maintains close working relationships with other risk functions, specifically compliance, legal risk and credit risk, and with other group functions such as IT, human capital, and finance. Operational risk subtype: Physical commodities Exposure to physical commodities arises as a result of collateral held in relation to lending activity, and periodically from inventory held as a result of trading activity. This is managed by the relevant lending or trading business area together with the group’s operations department. 73 Business risk Business risk is the risk of loss due to operating revenues not covering operating costs after excluding the effects of market risk, credit risk, structural interest rate risk and operational risk. Business risk is therefore not directly attributable to internal operational failures or external market price events, but nevertheless covers a host of internal and external factors. Business risk is usually caused by the following: inflexible cost structures market-driven pressures, such as decreased demand, increased competition or cost increases group-specific causes, such as a poor choice of strategy, reputational damage or the decision to absorb costs or losses to preserve reputation. The group mitigates business risk in a number of ways, including: performing extensive due diligence during the investment appraisal process, in particular for new acquisitions and joint ventures detailed analysis of the business case for, and financial, operational and reputational risk associated with, disposals the application of new product processes per business line through which the risks and mitigating controls for new and amended products and services are evaluated stakeholder management to ensure favourable outcomes from external factors beyond the group’s control 74 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 monitoring the profitability of product lines and customer segments maintaining tight control over the group’s cost base, including the management of its cost-to-income ratio, which allows for early intervention and management action to reduce costs being alert and responsive to changes in market forces a strong focus in the budgeting process on achieving headline earnings growth while containing cost growth; and building contingency plans are built into the budget that allow for costs to be significantly reduced in the event that expected revenues do not materialise increasing the ratio of variable costs to fixed costs which creates flexibility to reduce costs during an economic downturn. Business risk includes strategic risk. Strategic risk is the risk that the group’s future business plans and strategies may be inadequate to prevent financial loss or protect the group’s competitive position and shareholder returns. The group’s business plans and strategies are discussed and approved by executive management and the board and, where appropriate, subjected to stress tests. The group mitigates strategic risk through independent asset managers and independent asset and liability management advisors for material funds. Potential residual risks which may impact the group are managed within the group asset and liability management process. The primary governance committee for overseeing this risk is the group ALCO which is chaired by the group financial director. The primary governance document is the business risk governance standard. Reputational risk Reputational risk is the risk of potential or actual damage to the group’s image which may impair the profitability and/or sustainability of its business. Such damage may result from a breakdown of trust, confidence or business relationships on the part of customers, counterparties, shareholders, investors or regulators that can adversely affect the group’s ability to maintain existing business or generate new business relationships and continued access to sources of funding. The breakdown may arise from a number of factors or incidents such as a poor business model, continued losses and failures in risk management. Safeguarding the group’s reputation is of paramount importance. There is growing emphasis on reputational risks arising from compliance breaches, as well as from ethical considerations linked to countries, clients and sectors, and environmental considerations. The breakdown may be triggered by an event or may occur gradually over time. The group’s crisis management processes are designed to minimise the reputational impact of such events or developments. Crisis management teams are in place both at executive and business line level. This includes ensuring that the group’s perspective is fairly represented in the media. The principal governance document is the reputational risk governance standard. The group’s code of ethics is an important reference point for all staff. The group ethics officer and group chief executives are the formal custodians of the code of ethics. 75 Restatements Risk-weighted assets Risk-weighted assets on securitisation exposures have been restated to reflect the group’s exposure to external party securitisation vehicles only. The restatement had no effect on the overall risk-weighted assets total or the group’s capital requirements. Refer to page 15 – 16. Capital adequacy ratios Capital adequacy ratios for some rest of Africa countries were restated following final in-country regulatory submissions. Refer to page 17. Total liquidity Liquidity policies and calculations have been updated in line with the Basel III liquidity framework and the comparative results have accordingly been restated. Refer to page 58. 76 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Additional information Terms and conditions of capital instruments issued Share capital Authorised 2 000 000 000 (December 2014: 2 000 000 000) ordinary shares of 10 cents each 8 000 000 (December 2014: 8 000 000) 6,5% first cumulative preference shares of R1 each 1 000 000 000 (December 2014: 1 000 000 000) non-redeemable, non-cumulative, non-participating preference shares of 1 cent each June 2015 Rm December 2014 Rm 200 8 200 8 10 10 218 218 162 162 17 814 17 905 5 503 5 503 8 000 000 (December 2014: 8 000 000) 6,5% first cumulative preference shares of R1 each – first preference shares 8 8 52 982 248 (December 2014: 52 982 248) non-redeemable, non-cumulative, non-participating preference shares of 1 cent each - second preference shares 1 1 5 494 5 494 23 479 23 570 Issued Ordinary share capital 1 618 268 746 (December 2014: 1 618 361 000) ordinary shares of 10 cents each Ordinary share premium A premium of R308 million (December 2014: R554 million) was raised on the allotment and issue during the year of 2 188 716 ordinary shares (December 2014: 4 879 268). During 2015 there was a share buyback of 2 281 819 shares by the group. R399 million was reduced from ordinary share premium. Preference share capital and premium Preference share premium - non-redeemable, non-cumulative, non-participating preference shares second preference shares The non-redeemable, non-cumulative, non-participating preference shares are entitled to an annual dividend, if declared, payable in two semi-annual instalments of not less than 77% of the prime interest rate multiplied by the subscription price of R100 per share. All classes of preference shares in issue are non-redeemable. 77 Additional information Composition of capital – SBG Composition of capital1 June 2015 Basel III Rm December 2014 Basel III Rm 99 051 100 406 CET I capital before regulatory adjustments 127 610 123 936 Directly issued qualifying common share capital plus related stock surplus Retained earnings Accumulated other comprehensive income (and other reserves) 17 976 104 022 5 612 18 067 97 455 8 414 4 968 4 159 (33 527) (27 689) (3 573) (16 579) (3 711) (15 850) (511) (7) (2 156) (511) (467) (2 054) (54) (439) (289) (195) (516) (308) (9 919) (4 074) CET I capital Instruments and reserves Directly issued capital subject to phase out from CET I (only applicable to non-joint stock companies) Public sector capital injections grandfathered until 1 January 2018 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET I) Regulatory adjustments Less: total regulatory adjustments to CET I Prudential valuation adjustments Goodwill (net of related tax liability) Other intangibles other than mortgage-servicing rights (net of related tax liability) Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) Cash-flow hedge reserve Shortfall of provisions to expected losses Securitisation gain on sale Gains and losses due to changes in own credit risk on fair valued liabilities Defined-benefit pension fund net assets Investments in own shares (if not already netted of paid-in capital on reported balance sheet) Reciprocal cross-holdings in common equity Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Mortgage servicing rights (amount above 10% threshold) Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) Amount exceeding the 15% threshold, relating to: Significant investments in the common stock of financials Mortgage servicing rights Deferred tax assets arising from temporary differences National specific regulatory adjustments Regulatory adjustments applied to CET I in respect of amounts subject to pre-Basel III treatment Regulatory adjustments applied to CET I due to insufficient additional tier I and tier II to cover deductions 1 Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 78 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 (3) Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm 4 011 4 515 Additional tier I capital before regulatory adjustments 4 011 4 515 Directly issued qualifying additional tier I instruments plus related stock surplus, classified as: 3 846 4 396 Equity under applicable accounting standards Liabilities under applicable accounting standards 3 846 4 396 Directly issued capital instruments subject to phase out from additional tier I 5 495 5 495 165 119 103 062 104 921 21 058 23 993 Tier II instruments (and CET I and additional tier I instruments not included in common share capital and additional tier I instruments) issued by subsidiaries and held by third parties (amount allowed in group tier II), including: 19 405 22 727 Instruments issued by subsidiaries subject to phase out 15 860 26 283 1 653 1 266 Additional tier I capital Instruments Additional tier I instruments (and CET I instruments not included in common share capital ) issued by subsidiaries and held by third parties (amount allowed in group additional tier I), including: Instruments issued by subsidiaries subject to phase out Regulatory adjustments Total regulatory adjustments to additional tier I capital Investments in own additional tier I instruments Reciprocal cross-holdings in additional tier I instruments Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) National specific regulatory adjustments: Regulatory adjustments applied to CET I in respect of amounts subject to pre-Basel III treatment Regulatory adjustments applied to additional tier I due to insufficient additional tier I due to insufficient tier II to cover deductions Tier I capital Capital and provisions Tier II capital before regulatory adjustments Directly issued qualifying tier II instruments plus related stock surplus Directly issued capital instruments subject to phase out from tier II Provisions 1 Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 79 Additional information Composition of capital – SBG | continued Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm Regulatory adjustments Total regulatory adjustments to tier II capital Investments in own tier II instruments Reciprocal cross-holdings in tier II instruments Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments Regulatory adjustments applied to tier II in respect of amounts subject to pre-Basel III treatment Tier II capital 21 058 23 993 Total capital 124 120 128 914 Total risk-weighted assets 856 380 915 213 11.6 12.0 14.5 11.0 11.5 14.1 6.5 5.5 5.7 5.5 Risk-weighted assets in respect of amounts subject to pre-Basel III treatment Capital ratios and buffers CET I (as a percentage of risk-weighted assets) % Tier I (as a percentage of risk-weighted assets) % Total capital (as a percentage of risk-weighted assets) % Institution specific buffer requirement (minimum CET I requirement plus capital conservation buffer plus countercyclical buffer requirements plus global systemically important banks (G-SIB) buffer requirement, expressed as a percentage of risk-weighted assets) % Capital conservation buffer requirement Bank specific countercyclical buffer requirement G-SIB buffer requirement % % % Common equity tier I available to meet buffers (as a percentage of risk-weighted assets) % 1 Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 80 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm 6.5 8.0 5.5 7.0 10.0 10.0 404 10 897 484 10 448 National minima (if different from Basel III) National CET I minimum ratio (if different from Basel III minimum) – excluding individual capital requirement (ICR) and D-SIB % National tier I minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB % National total capital minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB% Amounts below the threshold for deductions (before risk weighting) Non-significant investments in the capital of other financials Significant investments in the common stock of financials Mortgage servicing rights (net of related tax liability) Deferred tax assets arising from temporary differences (net of related tax liability) 422 Applicable caps on the on the inclusion of provisions in tier II Provisions eligible for inclusion in tier II in respect of exposures subject to standardised approach (prior to application of cap) Cap on inclusion of provisions in tier II under standardised approach Provisions eligible for inclusion in tier II in respect of exposures subject to internal ratings-based approach (prior to application of cap) Cap for inclusion of provisions in tier II under internal ratings-based approach 1 653 2 906 1 266 2 951 2 319 2 435 Capital instruments subject to phase-out arrangements (only applicable between 1 January 2018 and 1 January 2022) Current cap on CET I instruments subject to phase out arrangements Amount excluded from CET I due to cap (excess over cap after redemptions and maturities) Current cap on additional tier I instruments subject to phase out arrangements Amount excluded from additional tier I due to cap (excess over cap after redemptions and maturities) Current cap on tier II instruments subject to phase out arrangements Amount excluded from tier II due to cap (excess over cap after redemptions and maturities) 1 Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 81 Additional information Composition of capital – SBSA Composition of capital1 June 2015 Basel III Rm December 2014 Basel III Rm 62 776 57 156 CET I capital before regulatory adjustments 82 100 76 256 Directly issued qualifying common share capital plus related stock surplus Retained earnings Accumulated other comprehensive income (and other reserves) Directly issued capital subject to phase out from CET I (only applicable to non-joint stock companies) Public sector capital injections grandfathered until 1 January 2018 39 057 42 127 916 36 356 39 211 689 CET I capital Reference Instruments and reserves Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET I) Regulatory adjustments Less: total regulatory adjustments to CET I Prudential valuation adjustments Goodwill (net of related tax liability) Other intangibles other than mortgage-servicing rights (net of related tax liability) Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) Cash-flow hedge reserve Shortfall of provisions to expected losses Securitisation gain on sale Gains and losses due to changes in own credit risk on fair valued liabilities Defined-benefit pension fund net assets Investments in own shares (if not already netted of paid-in capital on reported balance sheet) Reciprocal cross-holdings in common equity Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Mortgage servicing rights (amount above 10% threshold) Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) Amount exceeding the 15% threshold, relating to: (f) (19 324) (19 100) ( 36) ( 36) (b) (16 441) (15 486) (b) ( 71) ( 134) (2 150) ( 183) ( 23) (2 750) (a) ( 54) ( 438) ( 106) ( 516) Significant investments in the common stock of financials Mortgage servicing rights Deferred tax assets arising from temporary differences National specific regulatory adjustments Regulatory adjustments applied to CET I in respect of amounts subject to pre-Basel III treatment Regulatory adjustments applied to CET I due to insufficient additional tier I and tier II to cover deductions 1Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 82 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 (c) (d) (d) Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm Reference Additional tier I capital Instruments Additional tier I capital before regulatory adjustments Directly issued qualifying additional tier I instruments plus related stock surplus, classified as: Equity under applicable accounting standards Liabilities under applicable accounting standards (e) (e) Directly issued capital instruments subject to phase out from additional tier I (e) Additional tier I instruments (and CET I instruments not included in common share capital ) issued by subsidiaries and held by third parties (amount allowed in group additional tier I), including: Instruments issued by subsidiaries subject to phase out Regulatory adjustments Total regulatory adjustments to additional tier I capital Investments in own additional tier I instruments Reciprocal cross-holdings in additional tier I instruments Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) National specific regulatory adjustments: Regulatory adjustments applied to CET I in respect of amounts subject to pre-Basel III treatment Regulatory adjustments applied to additional tier I due to insufficient additional tier I due to insufficient tier II to cover deductions Tier I capital 62 776 57 156 Tier II capital before regulatory adjustments 20 443 19 679 Directly issued qualifying tier II instruments plus related stock surplus 20 085 19 490 Directly issued capital instruments subject to phase out from tier II 15 250 18 250 Capital and provisions Tier II instruments (and CET I and additional tier I instruments not included in common share capital and additional tier I instruments) issued by subsidiaries and held by third parties (amount allowed in group tier II), including: Instruments issued by subsidiaries subject to phase out Provisions (g) 358 189 1Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 83 Additional information Composition of capital – SBSA | continued Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm Regulatory adjustments Total regulatory adjustments to tier II capital Investments in own tier II instruments Reciprocal cross-holdings in tier II instruments Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments (2 088) (1 964) (2 088) (1 964) 18 355 17 715 Regulatory adjustments applied to tier II in respect of amounts subject to pre-Basel III treatment Tier II capital Total capital 81 131 74 871 542 175 513 856 % % % 11.6 11.6 15.0 11.1 11.1 14.6 Institution specific buffer requirement (minimum CET I requirement plus capital conservation buffer plus countercyclical buffer requirements plus global systemically important banks (G-SIB) buffer requirement, expressed as a percentage of risk-weighted assets) % 6.5 5.5 4.4 5.3 Total risk-weighted assets Risk-weighted assets in respect of amounts subject to pre-Basel III treatment Capital ratios and buffers CET I (as a percentage of risk-weighted assets) Tier I (as a percentage of risk-weighted assets) Total capital (as a percentage of risk-weighted assets) Capital conservation buffer requirement Bank specific countercyclical buffer requirement G-SIB buffer requirement % % % Common equity tier I available to meet buffers (as a percentage of risk-weighted assets) % 1Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. 84 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Reference Composition of capital1 continued June 2015 Basel III Rm December 2014 Basel III Rm % 6.5 5.5 % 8.0 7.0 % 10.0 10.0 547 439 697 113 Reference National minima (if different from Basel III) National CET I minimum ratio (if different from Basel III minimum) – excluding individual capital requirement (ICR) and domestic systemically important banks (D-SIB) National tier I minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB National total capital minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB Amounts below the threshold for deductions (before risk weighting) Non-significant investments in the capital of other financials Significant investments in the common stock of financials Mortgage servicing rights (net of related tax liability) Deferred tax assets arising from temporary differences (net of related tax liability) 4 ( 3) Applicable caps on the on the inclusion of provisions in tier II Provisions eligible for inclusion in tier II in respect of exposures subject to standardised approach (prior to application of cap) Cap on inclusion of provisions in tier II under standardised approach Provisions eligible for inclusion in tier II in respect of exposures subject to internal ratings-based approach (prior to application of cap) Cap for inclusion of provisions in tier II under internal ratings-based approach 358 362 262 363 2 398 2 185 Capital instruments subject to phase-out arrangements (only applicable between 1 January 2018 and 1 January 2022) Current cap on CET I instruments subject to phase out arrangements Amount excluded from CET I due to cap (excess over cap after redemptions and maturities) Current cap on additional tier I instruments subject to phase out arrangements Amount excluded from additional tier I due to cap (excess over cap after redemptions and maturities) Current cap on tier II instruments subject to phase out arrangements Amount excluded from tier II due to cap (excess over cap after redemptions and maturities) 1Disclosure based on prescribed SARB template. All blank line items are not applicable as at 30 June 2015 and 31 December 2014. Leverage ratio – SBSA Tier I capital (excluding unappropriated profit) Tier I capital (including unappropriated profit) Total exposures Leverage ratio (excluding unappropriated profits, %) Leverage ratio (including unappropriated profits, %) June 2015 Rm December 2014 Rm 62 776 67 036 57 155 63 311 1 290 141 1 213 657 4.9 5.2 4.7 5.2 85 Additional information Capital instruments: main features disclosure template SBG capital instruments – main features disclosure template Ordinary share capital (including share premium) Subordinated bond – SBK9 Subordinated bond – SBK12 Subordinated bond – SBK13 Subordinated bond – SBK14 Subordinated bond – SBK15 SBSA SBSA ZAG000029687 SBSA ZAG000073388 SBSA ZAG000073396 SBSA ZAG000091018 SBSA ZAG000092339 SA SA SA SA SA SA CET I CET I Solo Ordinary share capital and premium ZAR39 067 Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt ZAR1 050 ZAR1 120 ZAR805 ZAR1 190 ZAR854 ZAR1 Equity attributable to ordinary shareholders Ongoing Perpetual N/A No N/A ZAR1 500 Subordinated debt ZAR1 600 Subordinated debt ZAR1 150 Subordinated debt ZAR1 780 Subordinated debt ZAR1 220 Subordinated debt 2006/04/10 Dated 2023/04/10 Yes 2018/04/10 ZAR1 500 2018/04/10 or any subsequent interest payment date 2009/11/24 Dated 2021/11/24 Yes 2016/11/24 ZAR1 600 N/A 2009/11/24 Dated 2021/11/24 Yes 2016/11/24 ZAR1 150 N/A 2011/12/01 Dated 2022/12/01 Yes 2017/12/01 ZAR1 780 2017/12/01 or any subsequent interest payment date 2012/01/23 Dated 2022/1/23 Yes 2017/01/23 ZAR1 220 N/A Fixed 10.82% semi-annual No Mandatory Floating JIBAR + 2.20 No Mandatory Fixed 9.66% semi-annual No Mandatory Floating JIBAR + 2.00 No Full discretionary Fixed 8.40% semi-annual No Mandatory No Yes Yes Yes No No Non-cumulative Non-convertible N/A Most subordinated Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured June 2015 Issuer Unique identifier (for example, CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Regulatory treatment Transitional Basel III rules Post-transitional Basel III rules Eligible at solo/group/group & solo Instrument type (types to be specified by each jurisdiction) Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) Par value of instrument Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount (currency in Rm) Subsequent call dates, if applicable N/A Coupons/dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem Non-cumulative or cumulative Convertible or non-convertible Write-down feature Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Non-compliant transitioned features If yes, specify non-compliant features 86 N/A N/A No Mandatory No Yes Yes Yes Yes Yes N/A Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(i) (a)(i) (a)(i) (a)(i) (a)(i) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(D) (a)(iv)(D) (a)(iv)(D) (a)(iv)(H)(ii) (a)(iv)(H)(ii) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Ordinary share capital (including share premium) Subordinated bond – SBK16 Subordinated bond – SBK17 Subordinated bond – SBK18 Subordinated bond – SBK19 Subordinated bond – SBK20 Subordinated bond – SBK21 Subordinated bond – SBK22 Subordinated bond – SBK23 SBSA ZAG000093741 SBSA ZAG000097619 SBSA ZAG000100827 SBSA ZAG000100835 SBSA ZAG00121781 SBSA ZAG000123258 SBSA ZAG000126442 SBSA ZAG000126434 SBG SBK ZAE000109815 SA SA SA SA SA SA SA SA SA Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt N/A Tier II Group & solo Subordinated debt N/A Tier II Group & solo Subordinated debt N/A Tier II Group & solo Subordinated debt N/A Tier II Group & solo Subordinated debt ZAR1 400 ZAR1 400 ZAR2 450 ZAR350 ZAR2 250 ZAR750 ZAR1 000 ZAR1 000 CET I CET I Group Ordinary share capital and premium ZAR17 976 ZAR2 000 Subordinated debt ZAR2 000 Subordinated debt ZAR3 500 Subordinated debt ZAR500 Subordinated debt ZAR2 250 Subordinated debt ZAR750 Subordinated debt ZAR1 000 Subordinated debt ZAR1 000 Subordinated debt 10c Equity attributable to ordinary shareholders 2012/03/15 Dated 2023/3/15 Yes 2018/03/15 ZAR2 000 2012/07/30 Dated 2024/07/30 Yes 2019/07/30 ZAR2 000 2012/10/24 Dated 2025/10/24 Yes 2020/10/24 ZAR3 500 2012/10/24 Dated 2024/10/24 Yes 2019/10/24 ZAR500 2014/12/02 Dated 2024/12/02 Yes 2019/12/02 ZAR2 250 2015/01/28 Dated 2025/01/28 Yes 2020/01/28 ZAR750 2015/05/28 Dated 2025/05/28 Yes 2020/05/28 ZAR1 000 2015/05/28 Dated 2027/5/28 Yes 2022/05/28 ZAR1 000 Ongoing Perpetual N/A No N/A N/A N/A N/A N/A 2019/12/02 or any interest payment date thereafter 2020/01/28 or any interest payment date thereafter 2020/05/28 or any interest payment date thereafter 2022/05/28 or any interest payment date thereafter N/A Floating JIBAR + 2.10 Floating JIBAR + 2.20 Floating JIBAR + 2.35 Floating JIBAR + 2.20 Floating JIBAR + 3.50 Floating JIBAR + 330 Floating JIBAR + 350 N/A N/A No Mandatory No Mandatory No Mandatory No Mandatory No Mandatory No Mandatory No Mandatory Fixed 11.56% semi-annual No Mandatory No Full discretionary No No No No No No No No No Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible Yes Senior unsecured Non-cumulative Non-convertible Yes Senior unsecured Non-cumulative Non-convertible Yes Senior unsecured Yes Yes Yes Yes Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(i) (a)(i) (a)(i) (a)(i) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) No N/A No N/A No N/A Non-cumulative Non-cumulative Non-convertible Non-convertible Yes N/A Senior Non-cumulative unsecured preference shares No N/A No N/A 87 Additional information Capital instruments: main features disclosure | continued SBG capital instruments – main features disclosure template Subordinated bond – Standard Bank Swaziland 1 Subordinated bond – Standard Bank Swaziland 2 Subordinated bond – Stanbic Bank Botswana 1 Subordinated bond – Stanbic Bank Botswana 5 Standard Bank Standard Bank Stanbic Bank Swaziland Limited Swaziland Limited Botswana Limited SBBL056 Stanbic Bank Botswana Limited SBBL057 Swaziland Botswana Botswana N/A N/A Solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt E50 ZAR35 E50 ZAR43 BWP50 ZAR68 BWP80 E50 Subordinated debt ZAR50 E50 Subordinated debt ZAR61 BWP50 Subordinated debt ZAR97 BWP80 Subordinated debt 2014/12/14 2010/10/14 2011/06/13 2012/05/23 Dated 2024/12/14 Yes Dated 2020/10/14 Yes Dated 2021/06/13 Yes Dated 2022/05/23 Yes 2015/10/14 E50 On or after 2015/10/14 2016/06/13 BWP50 On or after 2016/06/13 2017/05/23 BWP80 On or after 2017/05/23 Fixed margin linked to a floating base rate 91 day BoBC +150bps No Mandatory Cumulative preference share capital Non-cumulative preference share capital SBG SBG SBKP ZAE000038881 SA SBPP ZAE000056339 SA SZD000551465 SZD000551242 Swaziland Tier II Tier II Group Preference share capital and share premium ZAR8 Additional tier I Additional tier I Group Preference share capital and share premium ZAR3 846 June 2015 Issuer Unique identifier (for example, CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Regulatory treatment Transitional Basel III rules Post-transitional Basel III rules Eligible at solo/group/group & solo Instrument type (types to be specified by each jurisdiction) Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) Par value of instrument ZAR1 1c Preference share capital and share premium 1969/11/25 Perpetual N/A No Preference share capital and share premium 2004/07/07, 2006/05/23, 2006/08/12 Perpetual N/A No N/A N/A N/A N/A 2019/12/14 E50 2019/12/15 or any interest payment date thereafter Fixed or floating dividend/coupon Fixed Floating Fixed Fixed Coupon rate and any related index 6.50% 8.75% 8.1% No Full discretionary 77% of prime interest rate No Full discretionary No Mandatory No Mandatory Fixed margin linked to a floating base rate 91 day BoBC +130bps No Mandatory No No Yes Yes Yes Yes Cumulative Non-convertible N/A Subordinated debt Non-cumulative Non-convertible N/A Cumulative preference shares Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Yes No loss absorbency features at the point of non-viability Yes No loss absorbency features at the point of non-viability N/A Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount (currency in Rm) Subsequent call dates, if applicable Coupons/dividends Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem Non-cumulative or cumulative Convertible or non-convertible Write-down feature Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Non-compliant transitioned features If yes, specify non-compliant features 88 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Yes Yes Yes Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(i) (a)(i) (a)(i) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(D) (a)(iv)(D) (a)(iv)(D) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) Subordinated bond – Standard Bank Mozambique Subordinated bond – CfC Stanbic Bank Kenya 3 Subordinated bond – CfC Stanbic Bank Kenya 3 Subordinated bond – CfC Stanbic Bank Kenya Subordinated bond – Stanbic Bank Ghana 1 Subordinated loan – Standard Bank Mauritius Subordinated loan – Standard Bank Tanzania Subordinated loan – Stanbic Bank Uganda Subordinated loan – Standard Bank Angola Standard Bank CFC Stanbic Bank CFC Stanbic Bank CFC Stanbic Bank Mozambique Limited Limited Limited Stanbic Bank Ghana Limited Standard Bank Mauritius Standard Bank Tanzania Stanbic Bank Uganda Standard Bank Angola Standard Bank South Africa Mauritius Standard Bank South Africa Tanzania Standard Bank South Africa Uganda Standard Bank South Africa Angola SBM-2007 KE1000001684 KE1000001672 KE4000002438 SBG001 Mozambique Kenya Kenya Kenya Ghana Tier II Tier II Group & solo Subordinated debt Tier II Tier II Group & solo Subordinated debt ZAR28 MT260 ZAR42 KES2 402 ZAR2 KES98 KES4 000 ZAR15 GHS7 USD25 TZS10 011 UGX20 973 AOA3 277 ZAR88 MT260 Subordinated debt ZAR292 KES2 402 Subordinated debt ZAR12 KES98 Subordinated debt KES4 000 Subordinated debt ZAR22 GHS7 Subordinated debt USD25 Subordinated loan TZS10 011 Subordinated loan UGX20 973 Subordinated loan AOA3 277 Subordinated loan 2007/06/29 2009/07/07 2009/07/07 2014/12/15 2012/01/23 2012/12/03 2011/12/15 2011/10/31 2013/05/23 Dated 2017/06/29 Yes Dated 2016/07/07 Yes Dated 2016/07/07 Yes Dated 2021/12/08 Yes Dated 2022/01/23 Yes Dated 2022/12/04 Yes Dated 2021/12/15 Yes Dated 2021/10/31 Yes Dated 2023/04/23 Yes N/A N/A N/A N/A N/A N/A June 2020 KES4 000 June 2020 or any interest payment date thereafter 2017/01/23 GHS7 2017/01/23 or any interest payment date thereafter 2017/12/04 USD25 2017/12/05 or any interest date thereafter 2016/12/15 TZS10 011 2016/12/16 or any interest date thereafter 2016/10/31 UGX20 973 2016/11/01 or any interest date thereafter 2018/04/23 AOA3 277 2018/04/24 or any interest date thereafter Fixed margin linked to a floating base rate WA +50bps No Mandatory Fixed . Fixed Fixed Fixed margin linked to a floating base rate LIBOR + 300bps Fixed margin linked to a floating base ratee LIBOR + 395bps Fixed margin linked to a floating base rate LIBOR + 376bps Fixed margin linked to a floating base rate LIBOR + 360bps No Mandatory No Mandatory No Mandatory No Mandatory Tier II N/A Tier II Tier II Tier II Tier II N/A Tier II N/A Tier II Tier II Tier II Tier II N/A Group & solo Solo Group & solo Solo Solo Solo Solo Subordinated Subordinated debt Subordinated debt Subordinated loan Subordinated loan Subordinated loan Subordinated loan debt No Mandatory . Fixed margin linked to a floating base rate 182 day T-bill +175 bps No Mandatory No Mandatory 11.25% Semi-annual No Mandatory Yes Yes Yes No Yes Yes Yes Yes Yes Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior/ unsecured Non-cumulative Non-convertible N/A Senior unsecured Non-cumulative Non-convertible N/A Senior debt Non-cumulative Non-convertible N/A Senior debt Non-cumulative Non-convertible N/A Senior debt Non-cumulative Non-convertible N/A Senior debt Yes Yes Yes Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(i) (a)(i) (a)(i) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(D) (a)(iv)(H)(ii) (a)(iv)(D) Regulation 38(14) Regulation 38(14) (a)(iv)(H)(ii) (a)(iv)(H)(ii) N/A Yes Yes Yes Yes Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(i) (a)(i) (a)(i) (a)(i) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(D) (a)(iv)(D) (a)(iv)(D) (a)(iv)(D) Regulation 38(14) Regulation 38(14) Regulation 38(14) Regulation 38(14) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) (a)(iv)(H)(ii) N/A 12.5% 12.95% 89 Additional information Capital instruments: main features disclosure | continued SBG capital instruments – main features disclosure template Subordinated loan – Stanbic Bank IBTC Subordinated loan – Standard Bank Zambia Subordinated loan – Stanbic Bank DRC Subordinated bond – Stanbic Bank IBTC Subordinated bond – Standard Bank Namibia Stanbic Bank IBTC Standard Bank South Africa Standard Bank Zambia Standard Bank South Africa Stanbic Bank DRC Standard Bank South Africa Stanbic Bank IBTC NGSB20245181 Standard Bank Namibia NA000A1ZRK11 Nigeria Zambia DRC Congo Nigeria Namibia N/A N/A Solo Subordinated loan Tier II Tier II Solo Subordinated loan N/A N/A Solo Subordinated loan N/A N/A Solo Subordinated debt N/A N/A Solo Subordinated debt NGN7 913 ZMK111 CDF2 739 NG15 440 NAD100 NGN7 913 Subordinated loan 2013/04/30 Dated 2025/10/31 Yes 2020/05/31 NGN7 913 ZMK111 Subordinated loan 2011/12/13 Dated 2021/12/13 Yes 2016/12/13 ZMK111 CDF2 739 Subordinated loan 2014/06/03 Dated 2024/06/03 Yes 2019/06/03 CDF2 736 NGN15 440 Subordinated debt 2014/09/30 Dated 2024/09/30 Yes 2019/10/01 NGN15 440 NAD100 Subordinated debt 2014/10/23 Dated 2024/10/23 Yes 2019/10/24 NAD100 2016/11/01 or any interest date thereafter 2016/12/14 or any interest date thereafter 2019/06/04 or any interest date thereafter 2019/10/01 or any interest date thereafter 2019/10/24 or any interest date thereafter Fixed margin linked to a floating base rate LIBOR + 360bps Fixed margin linked to a floating base rate LIBOR + 385bps Fixed margin linked to a floating base rate LIBOR + 975bps Fixed Fixed 13.25% 9.00% No Mandatory Yes Non-cumulative Non-convertible N/A Senior debt No Mandatory Yes Non-cumulative Non-convertible N/A Senior debt No Mandatory Yes Non-cumulative Non-convertible N/A Senior debt No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured No Mandatory Yes Non-cumulative Non-convertible N/A Senior unsecured N/A Yes Regulation 38(14) (a)(i) Regulation 38(14) (a)(iv)(D) Regulation 38(14) (a)(iv)(H) (ii) N/A N/A N/A June 2015 Issuer Unique identifier (for example, CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Regulatory treatment Transitional Basel III rules Post-transitional Basel III rules Eligible at solo/group/group & solo Instrument type (types to be specified by each jurisdiction) Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) Par value of instrument Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount (currency in Rm) Subsequent call dates, if applicable Coupons/dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem Non-cumulative or cumulative Convertible or non-convertible Write-down feature Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Non-compliant transitioned features If yes, specify non-compliant features 90 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Subordinated loan – Stanbic Bank Botswana Subordinated bond – Stanbic Bank Zambia Subordinated bond – Standard Bank Namibia Subordinated loan – Standard Bank Offshore Group Subordinated loan – Standard Bank Offshore Group Subordinated loan – Standard Bank Offshore Group Subordinated loan – Standard Bank Offshore Group Subordinated loan – Standard Bank Offshore Group Subordinated loan – Standard Bank Offshore Group Stanbic Bank Botswana Standard Bank South Africa Stanbic Bank Zambia ZM2000000272 Standard Bank Namibia Standard Bank South Africa SBOG SBOG SBOG SBOG SBOG SBOG Standard Bank Offshore Group Standard Bank Offshore Group Standard Bank South Africa Standard Bank Offshore Group Standard Bank Offshore Group Botswana Zamiba Namibia IOM Ltd IOM Ltd Jersey Standard Bank Group International Ltd Jersey Jersey Jersey N/A N/A Solo Subordinated loan N/A N/A Solo Subordinated debt N/A N/A Solo Subordinated loan Tier II Tier II Solo Subordinated debt Tier II Tier II Solo Subordinated debt Tier II Tier II Solo Subordinated debt Tier II Tier II Solo Subordinated debt Tier II Tier II Solo Subordinated debt Tier II Tier II Solo Subordinated debt BWP300 ZMK36.7 NAD100 GBP8 GBP3 GBP10 GBP6 GBP10 GBP11 BWP300 Subordinated loan 2014/11/28 Dated 2024/11/28 Yes 2019/11/28 BWP300 ZMK36.7 Subordinated debt 2014/10/31 Dated 2024/10/31 Yes 2019/11/01 ZMK36.7 NAD100 Subordinated loan 2015/04/30 Dated 2025/04/30 Yes 2020/04/30 NAD100 GBP8 Subordinated debt 2011/06/09 Dated 2021/06/30 N/A N/A GBP3 Subordinated debt 2011/06/09 Dated 2025/06/30 N/A N/A GBP10 Subordinated debt 2010/06/10 Dated 2025/06/30 N/A N/A GBP6 Subordinated debt 2011/06/15 Dated 2021/06/30 N/A N/A GBP10 Subordinated debt 2011/06/15 Dated 2025/06/30 N/A N/A GBP11 Subordinated debt 2011/06/29 Dated 2021/06/30 N/A N/A 29 November or any interest date thereafter 2019/11/01 or any interest payment date thereafter 2020/05/01 or any interest payment date thereafter N/A N/A N/A N/A N/A N/A Fixed Fixed margin linked to a floating base rate 182-day t-bill + 275 bps Fixed margin linked to a floating base rate JIBAR + 350bps Floating Floating Floating Floating Floating Floating No Mandatory No Non-cumulative Non-convertible N/A Senior/ unsecured No Mandatory Yes Non-cumulative Non-convertible N/A Senior/ unsecured 25bps over LIBOR, payable 3 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured 390bps over LIBOR, payable 3 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured 25bps over LIBOR, payable 3 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured LIBOR + 390bps, payable 3 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior debt 25bps over LIBOR, payable 6 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured 25bps over LIBOR, payable 3 monthly No Mandatory No Non-cumulative Non-convertible N/A Senior unsecured N/A N/A N/A Yes Non compliant with Basel III post transition Yes Non compliant with Basel III post transition Yes Non compliant with Basel III post transition Yes Non compliant with Basel III post transition Yes Non compliant with Basel III post transition Yes Non compliant with Basel III post transition 10.25% 91 Additional information LCR (average) – SBSA LCR (average) Total unweighted1 value (average) Rm Total weighted2 value (average) Rm HQLA Total HQLA 116 343 Cash outflows 880 539 290 563 Retail deposits and deposits from small business customers, of which: 225 318 18 979 35 530 189 788 18 979 392 498 230 885 137 291 255 191 16 39 471 191 398 16 80 954 15 344 4 369 2 645 73 940 4 369 2 645 8 330 Other contractual funding obligations Other contingent funding obligations 20 958 160 811 20 958 4 397 Cash inflows 177 275 154 228 Secured lending Inflows from fully performing exposures Other cash inflows 5 760 158 567 12 948 5 760 140 021 8 447 Stable deposits Less stable deposits Unsecured wholesale funding, of which: Operational deposits (all counterparties) and deposits in networks of cooperative banks Non-operational deposits (all counterparties) Unsecured debt Additional requirements, of which: Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Total adjusted3 value Rm Total HQLA 116 343 Total net cash outflows 136 335 LCR (%) 85.3 1 Unweighted value represents the outstanding balances maturing or callable within 30 days (for inflows and outflows). 2 Total weighted value is calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows). 3 Adjusted value calculated after the application of both (i) haircuts and inflow and outflow rates and (ii) any applicable caps (i.e. cap on level 2B and level 2 assets for HQLA and cap on inflows). 92 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 Acronyms and abbreviations A F AIRB Advanced internal ratings-based ALCO Asset and liability committee AMA Advanced measurement approach AOA Angolan kwanza B FIRB Foundation internal ratings-based G GAC Group audit committee GBP British pound sterling GCCO Group chief compliance officer Banks Act South African Banks Act 94 of 1990 GHS Ghana cedi Basel Basel Capital Accord GIA Group internal audit BCBS Basel Committee on Banking Supervision GRCMC Group risk and capital management committee BG1 Blue Granite Investments No. 1 (RF) Limited GROC Group risk oversight committee BG2 Blue Granite Investments No. 2 (RF) Limited G-SIB Global systemically important banks BG3 Blue Granite Investments No. 3 (RF) Limited The group Standard Bank Group banking activities BG4 Blue Granite Investments No. 4 (RF) Limited Board Standard Bank Group Board of Directors BTC Blue Titanium Conduit (RF) Limited BWP Botswana Pula H HQLA High quality liquid assets I C CCPs Central counterparties ICAAP Internal capital adequacy assessment process CET I Common equity tier I ICBC Industrial and Commercial Bank of China CIB Corporate & Investment Banking ICR Individual capital requirement CoE Cost of equity IFRS International Financial Reporting Standards Country risk grade IOR Integrated operational risk Chief risk officer IRB Internal ratings-based IRRBB Interest rate risk in the banking book IT Information technology CR CRO D DRC Democratic Republic of Congo D-SIB Domestic systemically important banks J JIBAR Johannesburg interbank agreed rate E L E Swazi emalangeni EAD Exposure at default ERC Equity risk committee EUR Euro LCR Liquidity coverage ratio LGD Loss given default 93 Additional information Acronyms and abbreviations | continued M S M Mozambican metical N NAD Namibian dollar NAV Net asset value NCDs Negotiable certificates of deposit NGN Nigerian naira NSFR Net stable funding ratio SARB The South African Reserve Bank SB Sovereign risk grade transfer and convertibility SBG Standard Bank Group SBSA The Standard Bank of South Africa Limited SE Structured entity Siyakha Siyakha Fund (RF) Limited SOFP Statement of financial position SVaR Stressed value-at-risk T O OCI Other comprehensive income P TCF Treating customers fairly TCM Treasury and capital management Tier I Primary capital Tier II Secondary capital Tier III Tertiary capital PBB Personal & Business Banking Tutuwa Black economic empowerment ownership initiative PD Probability of default Tutuwa 1 Tutuwa Strategic Holdings 1 Proprietary Limited Tutuwa 2 Tutuwa Strategic Holdings 2 Proprietary Limited TZS Tanzanian shilling Q QRRE Qualifying retail revolving exposure R R South African rand Rbn Billions of rand RAPM Risk-adjusted performance measurement RAS Risk appetite statement RCCM Risk, compliance and capital management Rm Millions of rand 94 Standard Bank Group Risk and capital management report for the six months ended 30 June 2015 U UGX Ugandan shilling USD United States dollar V VaR Value-at-risk Z ZAR South African rand ZMK Zambian kwacha Contact details Standard Bank Group Limited Registration No. 1969/017128/06 Incorporated in the Republic of South Africa Website: www.standardbank.com Head: Investor relations Registered address David Kinsey 9th Floor, Standard Bank Centre 5 Simmonds Street Johannesburg 2001 PO Box 7725 Johannesburg 2000 Tel: +27 11 631 3931 Group secretary Zola Stephen Tel: +27 11 631 9106 Group financial director Simon Ridley Tel: +27 11 636 3756 Contact details Tel: +27 11 636 9111 Fax:+27 11 636 4207 Website: www.standardbank.com Online Please direct all annual report queries and comments to: [email protected] Please direct all customer-related queries and comments to: [email protected] Please direct all investor relations queries and comments to: [email protected] Disclaimer This document contains certain statements that are ’forward-looking’ with respect to certain of the group’s plans, goals and expectations relating to its future performance, results, strategies and objectives. Words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “predict” or similar expressions typically identify forward-looking statements. These forward-looking statements are not statements of fact or guarantees of future performance, results, strategies and objectives, and by their nature, involve risk and uncertainty because they relate to future events and circumstances which are difficult to predict and are beyond the group’s control, including but not limited to, domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of changes in domestic and global legislation and regulations in the jurisdictions in which the group and its affiliates operate. The group’s actual future performance, results, strategies and objectives may differ materially from the plans, goals and expectations expressed or implied in the forward-looking statements. The group makes no representations or warranty, express or implied, that these forward-looking statements will be achieved and undue reliance should not be placed on such statements. The group undertakes no obligation to update the historical information or forward-looking statements in this document and does not assume responsibility for any loss or damage arising as a result of the reliance by any party thereon. www.standardbank.com