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