31-05-2007 investor seminar - credit risk management (1)

7/28/2019 31-05-2007 Investor Seminar - Credit Risk Management (1)

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Credit risk management


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Contents

Absas risk appetite

Retail banking six months ago

Retail banking - current situation and going forward

Credit environment

Advances growth Impairment trends

Actions to mitigate trends

Corporate and investment banking - current situation and goingforward

Credit environment

Corporate and Business Bank - progress made

Absa Capital - progress made

Credit risk strategies and priorities

Conclusion


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Absas risk appetite

A chosen methodology to balance risk and return in the

implementation of strategies and business plans

Risk appetite sets a maximum loss that we are prepared to absorbgiven the overall returns of the business:

Overall portfolio

Home loans

Corporate

Card

Personal and micro loans

Risk appetite is validated by estimating Absas sensitivity tomacroeconomic events using stress testing and scenario analysis

Absas risk appetite is formally approved by the board It is a dynamic measure and revised to reflect market conditions

and shareholder expectations


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Retail banking - six months ago we said

House prices to grow at a slower rate

Household debt to income to increase

Upturn in sector overdue position

Impairments to grow

Balance risk and return in credit strategies and business plans

Improve automated decisioning in risk assessment

Invest in collections and retail credit risk team


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Credit environment

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Jan-07

Private sector credit

extension growing at aslower rate, from 27% end-

06 to 24% and expected to

drop to 21% by end-07

Asset based financegrowth slowing down

Nominal house price

growth stable at 15% over

past quarter

Higher interest rates,

inflation, fuel prices and

debt to income ratios likely

to cool credit extension

Short-term risk of interest

rates rising as well

Private sector credit extension

Mortgage advances vs. house price growth

Mortgage advances yoy growth

Nominal house prices yoy growth


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Credit environment - debt and servicing costs rising

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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Household debt as % of household disposable income (LH)

Prime rate (RH)

Debt servicing costs as % of HDI (RH)

Debt servicing leads

debt levels


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Credit environment

2004 2005 2006 2007F 2008F

Private sector credit % 19.2 20.5 26.3 21.5 21.6

CPIX 4.3 3.9 4.6 5.6 5.5

Real GDE 7.9 5.9 8.7 5.5 5.0

Real GDP 4.8 5.1 5.0 4.8 4.4


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Advances - retail banking

Home loans still contributing nearly 60% to total advances

Highest growth areas - Absa Card and Retail Banking Services

Policy of cross selling into the existing customer base maintained in

Absa Card, with the mono-line approach restricted to Virgin and

Barclaycard


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Impairment trends

South African banking sector at the end of a long downturn trend inimpairments

Clear evidence of a rise in delinquencies, owing to higher interest

rates and household indebtedness in line with our 2006 expectations

Absas internal data indicates a rise in arrears in line with ourexpectations

Based on what weve seen to date, we expect the impairment ratio tobe at the lower end of 60-70bps for 2007

The impact of the NCA remains uncertain, but will be clearer in thesecond half of 2007


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Actions to mitigate trends

Implement new scorecards for improved risk assessment andtighten certain scorecard cut-offs

Reduce manual intervention on current account risk assessments

Implement further risk based pricing

Apply strict credit line decreases to high risk card accounts

Develop models to optimise credit card limit assignment

Implement advanced fraud detection models in card

Collections - be on top of our game


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Credit environment - corporate and investment banking

Credit environment remains benign

Infrastructure investment will result in positive conditions remaining

Absa intends to grow the earnings contributions from these areas

Credit risk management is a source of competitive advantage

(processes, people and systems)


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Absa Corporate and Business Bank - progress made

Structure: Revised industry focused structure implemented

Policy: Credit policy updated and target market criteria and sub policies finalised forkey segments including Commercial Property Finance (CPF), Leverage andAcquisition Finance and Public Sector

Risk appetite: Mandate and scale limits defined and implemented for CPF and Agri

Measurement:

Credit grading rolling-out across the portfolio, with PD, EAD and LGD data nowavailable at customer level

Risk/reward decisioning now available at customer/sub portfolio level as part ofVAPM rollout

Detailed statistical information on key risk (e.g. expected loss and economiccapital concentrations) and performance indicators (e.g. turnaround times,

application quality) now available Process:

Streamlined applications formats for specialist sectors e.g. CPF

ICA (electronic application/sanctioning system) roll out almost complete

New credit mandates/discretions implemented and have significantly improved

turnaround times. Average turnaround now


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Systems and data: Barclays Global limit monitoring system (GCIS) fully rolled outand populated providing portfolio management information and total Group large

exposure monitoring and tracking

Processes:

Dedicated Absa Capital credit team created with revised roles, responsibilities andindustry focused teams

Credit sanctioning processes, policies and procedures significantly enhanced

Streamlined and enhanced application formats

Credit committees significantly rationalised and streamlined, multi-layers reducedto one layer in Absa

Measurement: Portfolio fully risk graded using Basel 2 compliant models and in line

with Barclays Group policies Management of traded product exposure: Marginal models for equity, forex and

interest rate derivatives introduced and managed by a newly created front office creditteam.

Barcap Global and Absa Capital credit partnership: Good working relationshipestablished with frequent attachments, in both directions, and support/trainingprovided

Risk appetite: Established and set clear mandate and scale limits for certain higherrisk sectors and where concentrations exist

Absa Capital - progress made


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Strategies and priorities

Maximise value by upgrading and developing scorecards andmodels

Reduce costs by streamlining and automating underwriting functions

across all retail products

Limit impairments by improving collection capabilities and investing

in best-of-breed systems

Win new business by responding quickly

Use the best of Barclays methodologies to gain advantage

C


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Conclusion

The market is as we expected it to be

Macro economic conditions remain attractive

Retail delinquencies have risen, but are within our

expectations/appetite

We are working hard to mitigate these trends and to maintain

income growth

Significant progress in enhancing risk management in Absa Capitaland Absa Corporate and Business Bank

31-05-2007 investor seminar - credit risk management (1)

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