BIDVEST BANK LIMITED

(Registration number 2000/006478/06)

BASEL III

CONSOLIDATED PILLAR 3 DISCLOSURE

AS AT 30 JUNE 2019

Contents 1. Pillar 3 public disclosure

1. Pillar 3 public disclosure 1.1 Introduction 1.2 Goals and objectives 1.3 Appropriateness assessment 1.4 Nature and extent of information

2. Risk management 2.1 Risk management systems 2.2 Risk reporting 2.3 Stress testing 2.4 Risk mitigation

3. Risk governance 3.1 Board of Directors 3.2 Audit Committee 3.3 Asset / Liability Committee 3.4 Credit Committee 3.5 Risk and Capital Management Committee

4. Interrelationship of risk management functions and risk culture 4.1 The four lines of defence 4.2 Risk culture

5. Main ERM categories 6. Risk appetite 7. Components of the Bank’s ERM framework 8. Capital management

8.1 Table 1: Components of the Bank’s risk weighted exposure 8.2 Table 2 & 3: Capital composition 8.3 Table 4: Summary comparison of accounting assets vs. leverage ratio

exposure measure 8.4 Minimum required capital 8.5 Table 5: Linkages between financial statements and regulatory exposures 8.6 Table 6: Main sources of differences between regulatory exposure amounts and

carrying values in financial statements

9. Credit risk 9.1 IFRS 9 impairment calculation 9.2 Restructured exposure 9.3 Table 7: Credit quality of assets 9.4 Table 8: Changes in stock of defaulted loans and debt securities 9.5 Table 9: Breakdown of credit exposure by geographical area 9.6 Table 10: Credit concentration risk – geographical information 9.7 Table 11: Credit concentration risk – sectorial distribution 9.8 Table 12: Impaired exposure 9.9 Table 13: Age analysis 9.10 Credit risk portfolio

10. Credit risk mitigation (CRM) 10.1 Table 14: Credit risk mitigation techniques 10.2 External credit assessment 10.3 Table 15: Standardised approach – credit risk exposure and CRM effects 10.4 Table 16: Standardised approach – exposure by asset classes and risk weights

11. Counterparty credit risk (CCR) 11.1 Table 17: Credit valuation adjustment (cva) capital charge 11.2 Table 18: CCR exposure by regulatory portfolio and risk weight 11.3 Table 19: composition of collateral of CCR exposure 11.4 Credit derivative exposure

12. Market risk 12.1 Table 20: Market risk under the standardised approach

13. Equity risk 14. Operational risk 15. Interest rate risk in the banking Book 16. Liquidity risk 16.1 Table 21: Liquidity Coverage Ratio (LCR) 16.2 Table 22: Net Stable Funding Ratio (NSFR)

17. Pillar 3 Disclosure Requirements for Remuneration

1. Pillar 3 public disclosure 1.1 Introduction

The Basel III International Convergence of Capital Measurement and Capital Standards saw the development of a third Pillar namely Market Discipline. This third pillar complements pillars I and II, the minimum capital requirements (Pillar I) and the Supervisory Review Process (Pillar II). Pillar III sets out disclosure requirements which allows market participants to assess key pieces of information on the capital, risk exposures, risk assessment processes, and hence the capital adequacy of Bidvest Bank Limited (the Bank).

Transparency and effective communication between the Bank and its stakeholders, as well as the general public, is of the utmost importance. The Bank therefore provides information that will enable the users of such information to form a fair opinion of the financial condition of the Bank.

In light of the above, the Bank’s Disclosure Policy, as approved by the Board of Directors (the Board), has been developed not only to meet the criteria of the Regulations, but also to implement a process to ensure the effectiveness of the Bank’s disclosures.

1.2 Goals and objectives

The information disclosed by the Bank is consistent with that available to senior management and the Board in their assessment and management of the risks of the Bank. By disclosing the information, the Bank aims to meet the following goals and objectives:

● inform the market regularly about the Bank’s exposure to all risk areas;

● provide a consistent and understandable disclosure of information that will enhance decision-making and comparability;

● provide a fair presentation of the Bank’s financial position, including its capital adequacy position, financial performance, business activities, risk profile and risk mitigation practices; and

● provide reliable, relevant and timely information.

1.3 Appropriateness assessment

The review of the Bank’s disclosure strikes an appropriate balance between the need for meaningful disclosure and the protection of proprietary and confidential information, where the disclosure of information could make the Bank’s investment in products or systems less valuable, and therefore undermine its competitive position, or which may be contrary to the provisions of any agreement.

The Bank further assesses whether the information disclosed adequately reflects the financial position of the Bank, and reasonably reflects the Bank’s position in the banking environment.

The Board reviews the Bank’s Disclosure Policy annually, to asses, whether the Bank’s disclosure documents fulfil the requirements of the Regulations and whether any additional

disclosures should be made, or the Bank’s disclosure documents be amended. During such reviews, it will be determined whether the Bank’s disclosures meet industry standards.

1.4 Nature and extent of information

In order for the Bank to maintain a high level of transparency between itself and the market, the Bank has adopted the following approach towards determining the materiality, nature and extent of the information that will be disclosed to the public:

● information is considered to be material if its omission or misstatement could change or influence a user relying on that information to take banking, economic or investment decisions. Materiality is determined in accordance with the International Accounting Standards (IAS) and accounting concepts;

● the nature and extent of the information will be in compliance with the International Financial Reporting Standards (IFRS);

● the nature and extent of the information disclosed will be in compliance with the minimum requirements as set out in the Regulations and Basel III;

● the information will be consistent with the Bank’s audited financial statements and subject to internal control and verification; and

● the information shall be consistent with that available to the directors and senior management to enable them to assess and manage the Bank’s risk exposures.

2. Risk management The Board recognises the importance of on-going identification and management of risk in order to maintain a sound financial and reputational condition. The Board adopts a Risk Management Policy to affirm its awareness of the need to establish a program for enterprise risk management (ERM). The Board further commits to providing sufficient personnel and other resources to ensure full implementation of an enterprise risk management program. The Board also acknowledges that each of the Bank’s activities has an element of risk. Due to the diverse nature of the Bank’s business units, products and services, and the fact that not all risk can be transferred to third parties through insurance policies, contracts or waivers, the management of residual risk at all levels of the Bank is imperative. The Board has delegated responsibility for Risk Management Policy matters to the Risk and Capital Management Committee which is a sub-committee of the Board.

The Bank maintains an ERM Policy and ERM Framework to coordinate the many aspects of risk. The Bank’s Risk Management Policy articulates the content of the Bank’s ERM and Risk Appetite.

The Board expects executive management of the Bank to be committed to building a risk culture, increased awareness and a shared responsibility for risk management at all levels of the Bank. A clearly defined Risk Management Policy including a Risk Appetite Statement supports this.

Risk is an inherent component of the Bank’s activities. The ability to effectively identify, assess, measure, respond, monitor and report on risk in activities is critical to the achievement of the Bank’s mission and strategic objectives. This risk management approach reflects the Bank’s values, influences the Bank’s culture and guides the Bank’s operations. It is captured in policy statements, Board and management directives, operating procedures, training programs, and is demonstrated in daily activities by management and staff.

ERM is a group of structured and consistent risk management processes that are applied across the Bank. The ERM program identifies, assesses, prioritises, and provides a formal structure for the internal and external risks that impact the organization. These activities are categorised under commonly accepted categories of risk.

The ERM program is driven by a formal approach that is aligned with the Bank’s profile and strategic objectives. It is enhanced by formalising roles within the Bank, active committees, policies and procedures, reporting, communication, and technology. The ERM program produces various risk mitigation activities within the business units. The resulting strategic, financial, and operational risk mitigation activities implemented strengthen the Bank, reduce the potential for unexpected losses, and manage the volatility experienced by the Bank.

The Board has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board sub-committees are responsible for developing and monitoring the Bank’s risk management policies in their specified areas. All Board subcommittees report regularly to the Board on their activities.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to reflect changes in strategy, products and services offered. The Bank, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Board is satisfied that the risk management system and processes for identifying, evaluating and managing significant risks are adequate for the size and nature of the business.

A documented and regularly tested business continuity plan exists to ensure continuity of business-critical activities.

2.1 Risk measurement systems The Bank’s risk system serves as the risk tool that allows the Bank to:

● Record new and current risks; ● Determine impact and likelihood of risks; ● Assign inherent risk ratings to the risk; ● Document root causes; ● List controls and mitigating actions against the risks; ● Assign residual risk ratings to the risk; ● Generate automatic e mail instructions on actions required; ● Generate a complete risk register; ● Generate risk registers per business units; ● Create reports and dashboards.

2.2 Risk reporting Risk reporting takes place on daily, weekly, monthly and quarterly basis through various forums and committees. Quarterly reporting to the Risk and Capital Management Committee contains details of significant operational losses, measured against appetite levels, as well as other ad-hoc topics which were relevant during the quarter under consideration. The report contains relevant information on Capital risk, credit risk, liquidity risk, market risk, regulatory risk and interest rate risk, amongst others. Reporting of risks per business unit includes:

● heat map, risk distribution and overview of top risks; ● trend analysis of the KRI framework (with commentary on indicators falling outside

acceptable tolerance levels); ● trend analysis of unresolved internal audit findings; ● review status of risk register action plans, policies, procedures and BIAs, with

commentary in relation to overdue items; and ● executive summaries on new risks/concerns identified, and incidents of operational

losses occurred. 2.3 Stress testing Credit risk The Bank uses stress testing and scenario analysis as a supplementary risk management tool, as well as to determine the amount of capital held for Pillar II capital within the Internal Capital Adequacy Assessment Process (ICAAP). Stress scenarios applied to credit risk include downgrade assumptions affecting Expected Credit Losses. Sector concentration risk stress testing is performed in order to determine the amount of required capital based on historical information on sector performance. Asset class stress testing assumes down grade scenarios causing an increase in the risk weighting of a particular asset class.

Interest rate risk Potential changes in net interest income (NII) are quantified by applying potential interest rate movements to the cumulative mismatch position in each defined time band and in each currency book. The GAP model assumes that the derived potential rate movements will occur by way of a parallel rate shock to all maturities along the yield curve. The potential rate change applied to a gap depends on whether the gap is asset-sensitive (more assets re-pricing than liabilities) or liability-sensitive (more liabilities re-pricing than assets). The risk to an asset-sensitive position is that rates will fall. If this occurs, more assets will re-price at a lower rate than liabilities, thereby squeezing the net interest margin and reducing NII. The risk to a liability-sensitive position is that rates will rise also causing a squeeze as higher borrowing costs are not offset by an equivalent earnings rate on assets. Various scenarios are run, and the scenario which results in the biggest loss (either NII or EVE) is used in calculation of economic capital. Operational risk The Bank applies the Modified Standardised Approach by adjusting the business lines’ beta factors to calculate the internal capital requirement for operational risk under Pillar II. The Bank assumes a low risk appetite for operational risk and applies a 1% limit against the aggregate of the allocated operational risk capital, thus an upward adjustment of 1% across the beta factors of all the business lines is applied. A behavioural analysis for the applicable business lines across the seven event type categories is based on a three-year average of actual operational losses reported to the SARB. This behavioural analysis aims at determining the most likely event categories to be affected by operational losses as well as the relative extent to which said categories will be affected by operational losses. The operational risk strategy is aimed at limiting operational losses, as opposed to the effective recovery thereof; hence, the behavioural analysis is based on gross losses as opposed to losses net of any recoveries. The calculated appetite per event type category is a function of the behavioural analysis for each revenue line. The Bank assumes a low risk appetite for operational risk and a 1% limit is applied against the aggregate of the allocated operational risk capital. Liquidity risk The Bank performs a reverse stress test on its Liquidity Coverage Ratio (LCR) to reach a Point of Non-Viability (PONV) which would result in a post-stress ratio less than the regulatory required minimum of 100%. Other assets Other assets which includes Full Maintenance leases and Operating Rentals are stress tested in a similar manner as the credit risk component, by multiplying the Bank’s Net Book Value (NBV) of each sector by the worst performing quarter of each industrial sector based on historic information.

Equity investment risk The Bank utilises a historical simulation method to calculate a Value at Risk (VaR) figure over a one-year horizon. Daily profit and loss (PnL) values are calculated over the period. The value which sits on the normal distribution (Gaussian bell curve) is assumed and a one-year VaR figure is calculated by multiplying the confidence interval chosen’s (99.50%) scalar of 2.58, with the Net Open Position (NOP) and the portfolio sigma. Exchange rate risk The Bank uses the variance covariance method to estimate its FX VaR. This method uses a one-year data set and uses a 99.50% confidence under the normal distribution. 2.4 Risk mitigation The Bank considered one or more of the following risk strategies to mitigate the risk or reduce the exposure to the risk:

● Manage: Controls or action plans are implemented to mitigate the risk; ● Taking or increasing the risk in order to pursue an opportunity; ● Removing the risk source; ● Changing the likelihood or consequence; ● Transfer: The risk is transferred to another party (e.g. a service is outsourced to a third-

party vendor). Because risk transfer is an imperfect substitute for sound controls and risk management programmes, the Bank views risk transfer tools as complementary to, rather than a replacement for, thorough internal operational risk control. Having mechanisms in place to quickly identify, recognise and rectify distinct risk errors can greatly reduce exposures. Careful consideration is given to the extent to which risk mitigation tools such as insurance truly reduce risk, transfer the risk to another business sector or area, or create a new risk (e.g. counterparty risk);

● Finance: Financial measures may be taken to absorb the impact of expected or unexpected losses (e.g. provisioning for losses, pricing services or fees according to the level of the risk undertaken, issuing capital to protect against unforeseen losses or insuring against losses);

● Avoid: Discontinuing products, services or processes when the risks associated with these starts to exceed the potential benefits that can be derived.

3. Risk governance

3.1 Board of Directors

The Board is responsible for approving new policies and changes to all policies; participating in committees with managers, reviewing status; providing guidance on strategies and risk appetite; staying apprised of significant risk exposures; and ensuring that risks are managed within tolerance levels.

3.2 Audit Committee & Internal Audit

The Audit Committee is a Board level committee responsible for providing assistance to the Board in fulfilling their need for consistency and their responsibility to the shareholders and investment community related to corporate accounting, reporting practices, the quality and integrity of financial reports, and the quality and effective administration of the controls and procedures of all systems and work processes. In terms of the Banks Act (Act 94 of 1990, amended 2007) the Audit Committee is responsible to assist the Board in its evaluation of the adequacy and efficiency of the internal control systems, accounting practices, information systems and auditing processes applied in the Bank in the day-to-day management of its business. The Committee will facilitate and promote communication on the matters referred to above, between the Board and senior management, the external auditors and the internal auditors. The Committee will also be responsible to introduce such measures as, in the Committee’s opinion, may serve to enhance the credibility and objectivity of financial statements and reports about the affairs of the Bank.

It will be the task of the Internal Audit Department to provide reasonable assurance over the effectiveness and integrity of the Bank’s risk management system in identifying, prioritising, managing and communicating significant exposure to risk and to provide reasonable assurance that the controls as designed are the most appropriate to mitigate risks in a cost-effective manner. Internal controls and procedures will be assessed in terms of the Internal Audit Charter of the Bank. 3.3 Asset and Liability Committee

The Asset and Liability Committee (ALCO) is chaired by an independent non-executive director, to oversee liquidity and interest rate risk programs, shock tests, monitor key risk indicators, develop and agree policies and procedures, set limits, prioritises activities and investments, and provide input to the senior management and the Board regarding the management of risks.

3.4 Credit Committee

The Credit Committee is chaired by an independent non-executive director and oversees credit risk activities, assessments and stress tests, develops and agrees on policies and procedures, sets limits, monitors key risk indicators, prioritises activities and investments, and provides input to the senior management and the Board regarding the management of credit risks.

3.5 Risk and Capital Management Committee

The Risk and Capital Management Committee is chaired by an independent non-executive director, and oversees compliance and operational risk programs, assessments, develops and agrees on policies and procedures, sets limits, monitors key risk indicators, prioritises activities and investments, and provides input to the senior management and the Board regarding the management of risks and the status of the programs, including matters relating to the Bank’s capital adequacy levels.

4. Interrelationship of risk management functions

4.1 The four lines of defence

The Bank adopts the four lines of defence model.

First line of defence

Business units are the first line of defence. They take risks and are responsible and accountable for the ongoing management of such risks. This includes identifying, assessing and reporting such exposures, taking into account the Bank’s risk appetite and its policies, procedures and controls. The manner in which the business line executes its responsibilities reflects the Bank’s existing risk culture.

Second line of defence

The second line of defence includes an independent Risk Management function. The Risk Management function complements the business line’s risk activities through its monitoring and reporting responsibilities. Among other things, it is responsible for overseeing the Bank’s risk-taking activities and assessing risks and issues independently from the business line. The function promotes the importance of senior management and business line managers in identifying and assessing risks critically rather than relying only on surveillance conducted by the risk management function. Among other things, the Finance function plays a critical role in ensuring that business performance and profit and loss results are accurately captured and reported to the Board, management and business lines that will use such information as a key input to risk and business decisions.

The second line of defence also includes an independent and effective Compliance function. The Compliance function, should among other things, routinely monitor compliance with laws, corporate governance rules, regulations, codes and policies to which the Bank is subject. The Board approves compliance policies that are communicated to all staff. The Compliance

function assesses the extent to which policies are observed and reports to senior management and, as appropriate, to the Board on how the Bank is managing its compliance risk. The function also has sufficient authority, stature, independence, resources and access to the Board.

Third line of defence

The third line of defence consists of an independent and effective internal audit function. Among other things, it provides independent review and objective assurance on the quality and effectiveness of the Bank’s internal control system, the first and second lines of defence and the risk governance framework including links to organisational culture, as well as strategic and business planning, compensation and decision-making processes. Internal audit is not involved in developing, implementing or operating the risk management function or other first or second line of defence functions.

Fourth line of defence

Assurance from external independent bodies such as the external auditors and other external bodies. External bodies may not have the existing familiarity with the organisation that an internal audit function has, but they can bring a new and valuable perspective. Additionally, their outsider status is clearly visible to third parties, so that they can not only be independent but be seen to be independent. 4.2 Risk culture Values and Ethics

The Board of Directors (the Board) endorses the Bank’s commitment to the conduct of the business in accordance with the highest ethical standards, as expressed in the Code of Conduct, and to responsibility, accountability, fairness and transparency. Bank employees receive training on and are required to acknowledge and accept the Code of Conduct at induction. During the year employees were required to participate in an online survey to confirm their adherence to the Code of Conduct, and policies including the Conflict of Interests policy. The Bank’s commitment to ethical conduct in its business is expressed in policies addressing procurement, fraud, criminal activity, zero tolerance, money laundering, proceeds of crime, discrimination and sexual harassment. The responsibility for implementing and executing the Code of Conduct and ethics policies lies with management, and disciplinary action is taken against employees who contravene the policies.

Related Parties

The Conflicts of Interest policy regulates the conduct of dealings with related parties, to ensure that potential conflicts of interest are avoided, and all related party transactions are fully disclosed.

Declarations of related party transactions are required to be made at least quarterly and are reported to the Audit Committee. The directors are required to make declarations of interest at each directors’ meeting in accordance with the provisions of the Companies Act, the Corporate Governance Policy and the Board Charter and Code of Conduct. Whistleblowing

The Bank participates in the Bidvest Group confidential anti-fraud tip-off line: all reports are investigated, and disciplinary or other appropriate action taken. The Protected Disclosure Policy, to which all employees are subject, specifies the protection of whistle-blowers and their recourse for any occupational detriment they may suffer. In appropriate cases rewards may be given.

5. Main ERM categories The Bank is exposed to various forms of risk in strategic, tactical and daily activities. The main risks the Bank is exposed to are set out in broad categories below.

5.1 Bank Specific Risks

Credit risk

The current and prospective risk to earnings or capital arising from an obligor’s failure to meet the term of any contract with the Bank or otherwise perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance. Credit risk is managed within the risk appetite of the Bank. Acceptable credit risk identified in a credit application is mitigated through sufficient underlying security. To enhance the return on funds, and therefore shareholder value, a certain amount of risk has to be taken in the lending activities of the Bank. The risk tolerance of the Bank is, however, low and therefore all credit risk is mitigated through sound credit principles, and all lending done against appropriate security, except where other factors deem it not necessary to obtain specific security.

The basic principle governing the Bank’s lending philosophy is the need for management to satisfy itself that the business of the borrower has the capacity to deploy its assets in a way that will generate the earnings/cash flows on a sustainable basis to facilitate the repayment of any facilities granted.

Interest rate risk

The risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting Bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest‐related options embedded in products (options risk).

Liquidity risk

The current and prospective risk to earnings or capital arising from incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from failure to recognise or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. Liquidity risk can be divided into two sub-categories:

● Market liquidity risk: The ease with which assets can be liquidated; and ● Funding liquidity risk: The ease with which additional funding can be raised e.g. in

the interbank or wholesale markets.

Effective liquidity risk management is a daily process used to monitor and project cash flows to ensure adequate liquidity is maintained. The mismatch of cash flows could lead to situations where cash outflows exceed cash inflows in a given period. This may result in the Bank’s failure to meet its obligations to pay creditors, repay depositors and fulfil commitments to lend.

Liquidity management is the process to meet the Bank’s commitments as they fall due, at an appropriate cost, whilst maintaining market confidence in the Bank.

Market risk

The risk to earnings or capital arising from changes in the value of traded portfolios of financial instruments. This risk arises from market-making, dealing and position-taking in interest rate, foreign exchange, equity and commodities markets. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Overall authority for market risk is vested in ALCO. The Risk Department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation.

Currency risk

The risk of financial loss due to fluctuations in exchange rates.

Solvency risk

The risk of financial loss due to inability both to meet long-term fixed expenses and to have adequate funds for long-term expansion and growth.

Concentration risk

The risk of an adverse overall spread of the Bank's outstanding accounts over the number or variety of debtors to whom the Bank has lent money.

Counterparty credit risk

The risk arising from the possibility that the counterparty may default on amounts owed on a derivative transaction. Derivatives are financial instruments that derive their value from the performance of assets, interest or currency exchange rates, or indexes.

5.2 Other and operational risks

Compliance risk

The current and prospective risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Compliance risk also arises in situations where the laws governing certain Bank products or activities of the Bank’s clients may be ambiguous or untested. This risk exposes the Bank to fines, civil money penalties, payment of damages and the voiding of contracts. Compliance risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential and lack of contract enforceability.

Strategic risk

The current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes. This risk is a function of the compatibility of the Bank’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against those goals and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks and managerial capacities and capabilities. The organisation’s internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory and other environmental changes.

Reputation risk

The current and prospective impact on earnings and capital arising from negative public opinion. This affects the Bank’s ability to establish new relationships or services or continue servicing existing relationships. This risk may expose the institution to litigation, financial loss or a decline in its customer base. Reputation risk exposure is present throughout the organisation and includes the responsibility to exercise an abundance of caution in dealing with customers and the community.

Operational risk

The risk of loss resulting from inadequate or failed internal processes, people and systems from external events. This includes legal risk. These are the types of non-credit and non-interest rate exposures that can lead to financial loss – fraud, business outages, IT failures, vendor outages or failures, financial statement control issues and processing errors. The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses not part of operational risk with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The Operational Risk Committee is responsible for oversight of the Bank’s operational risks.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit.

Human resource risk

The risk of financial loss due to failure of human resource policies and procedures, including failure to appoint and retain knowledgeable, skilled, and talented staff.

Technology risk

The risk of financial loss due to technology related failure.

Business continuity and disaster recovery risk

The risk of financial loss due to insufficient business continuity or disaster recovery planning.

Systemic risk

The risk of financial loss due to the financial system as a whole not being able to withstand the effects of a market crisis.

Legal risk

The risk of financial loss due to legal action against the Bank, or through the inability of the Bank to exercise its rights.

Tax risk

The risk of non-compliance to tax laws.

Regulatory risk

The risk of a change in regulations and law that might affect the Bank.

Environmental risk

The actual or potential threat of adverse effects on living organisms and the environment by effluents, emissions, wastes, resource depletion, etc., arising out of the Bank’s activities.

6. Risk appetite

The Board and management use a balanced approach in determining acceptable levels of risk to undertake. The Bank will only tolerate those risks which permit it to:

● achieve its stated strategic business objectives; ● provide a return that meets or exceeds expectations; ● comply with all applicable laws and regulations; and ● conduct its business in a safe and sound manner. The Board approves, and management sets general risk appetite levels annually through several means including:

● The overall internal and external risk environments are considered in conjunction with the strategic planning process.

● Key strategic business objectives and their financial and non‐financial risk appetite levels are set annually and expressed in the strategic plan and policies. Within the scope of their authority and guidelines established in business plans, policies, and procedures, business unit managers make decisions regarding acceptable levels of risk. Managers are also responsible for implementing risk mitigation strategies of retention, control, avoidance and transfer.

For monitoring and reporting purposes, management and the Board use a set of Key Risk Indicators of inherent risk across the predefined risk categories, assessing if they are within tolerances, and if the trend is increasing, stable, or decreasing. These are tracked in a common reporting format. High risk indicators and action plans are tracked by the various committees with update reporting to the Board at least quarterly or as requested.

Bank-wide risk appetite statement

The Bank considers both qualitative and quantitative measures as part of its risk appetite and focuses on capital, liquidity, profitability, and growth as primary measures. Financial operations are managed to obtain a reasonable risk / return relationship within the management of the various risks to which the Bank is exposed, including strategy risk, credit risk, liquidity risk and reputational risk. The Bank’s risk appetite is linked to its short and longer-term strategy focussing on higher return on equity, growth in profitability, year on year growth and revenue diversification. The Bank’s risk appetite also specifies, as part of risk appetite, risk tolerances around its risk appetite, such as acceptable limits of credit losses. The risk appetite is reviewed annually and is adjusted to take cognisance of target values and market prospects. The Bank’s overall risk appetite is relatively low.

7. Components of the Bank’s ERM framework

Mandate and Commitment

Design of framework for managing risk

Understanding the organisation and its context Establishing Risk Management Policy

Accountability Integration into the Bank’s processes

Resources Establishing internal communication and

reporting mechanisms Establishing external communication and

reporting mechanisms

Monitoring and review of the framework

Implementing risk management

Implementing the framework for managing risk

Implementing the risk management process

Continual improvement of the framework

8. Capital management

The South African Reserve Bank (“SARB”) sets and monitors capital requirements for the Bank as a whole. In implementing current capital requirements, the SARB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets, market risk exposure and operational risk exposure. The Bank follows the Standardised Approach under Basel III and calculates requirements for market risk in its banking portfolios based upon the Bank’s market risk models and uses both external and internal grading as the basis for risk weightings for credit risk.

The Bank’s regulatory capital is analysed into two categories:

● tier I capital, which includes ordinary share capital, share premium and appropriated retained earnings; and

● tier II capital, which includes collective impairment allowances.

Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet statement of financial position exposures.

The Bank’s ICAAP is formalised and approved by the Board. The Bank’s policy is to maintain a strong capital base to maintain investor, credit and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Bank and its operations have complied with all externally imposed capital requirements throughout the year and previous year.

There have been no material changes in the Bank’s management of capital during the year.

The Bank’s ICAAP reflects its internal assessment of risk. The ICAAP determines the most suitable level of economic capital, i.e. the capital required to remain solvent under conditions that are extreme in nature. For potential losses arising from risk types that are statistically quantifiable, economic capital reflects the worst- case loss, taking risk-adjusted returns on capital into account.

The final economic capital level determined through the ICAAP reflects the capital to be held for risks as assessed by management instead of implicated by a prescribed regulatory formula. The economic capital requirement is then compared to the regulatory capital requirement to determine the buffer to be held for uncertainties to ensure adequate capitalisation for the Bank.

Statement of financial position forecasting based on business and strategy planning allows management to ensure that minimum required capital ratios are adhered to.

The table below provides a breakdown of the Bank’s Risk Weighted Assets and required capital as at 31 December 2019.

8.1 Table 1: Components of the Bank’s risk weighted exposure

RWA (R’000)

Minimum capital requirements (R’000)

Dec-19 Dec-18 Dec-19

Credit risk (excluding counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA) 4,700,963 3,757,339 540,611

Of which Standardised Approach (SA) 4,700,963 3,757,339 540,611

Of which Internal Rating-Based (IRB) approach - - -

Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA) 61,485 22,105 7,071

Of which Standardised Approach for counterparty credit risk (SA - CCR) 61,485 22,105 7,071

Of which Internal Model Method (IMM) - - - Equity positions in banking book 76,298 63,134 8,774 Market Risk 16,961 18,171 1,951 Of which Standardised Approach (SA) 16,961 18,171 1,951 Of which Internal Model Method approaches (IMM) - - -

Operational Risk 2,527,147 2,765,194 290,622 Of which Basic Indicator Approach - - - Of which Standardised Approach 2,527,147 2,765,194 290,622

Of which Advanced Measurement Approach - - -

Other risks 2,111,470 2,162,607 242,819 Total 9,494,325 8,788,550 1,091,848

The percentage minimum capital requirement used for calculating the capital requirement is constructed as follows: 8% minimum capital requirement, plus 1% systemic risk (Pillar II A) add-on, plus 2.5% capital conservation buffer - Total: 11.5%.

Other risks reflected in the table above relate to property and equipment and other assets as contained in the Bank’s statement of financial position.

8.2 Table 2 & 3: Capital composition (R’000)

As at 31 December 2019 the Bank was adequately capitalised and the below capital related items are highlighted.

a b c d e T T-1 T-2 T-3 T-4 Available capital 1 Common Equity Tier 1 2,019,497 2,039,816 2,046,373 2,039,293 1,907,370 1a Fully loaded ECL

accounting model 2,019,497 2,039,816 2,046,373 2,039,293 1,907,370

2 Tier 1 2,019,497 2,039,816 2,046,373 2,039,293 1,907,370 2a Fully loaded ECL

accounting model Tier 1 2,019,497 2,039,816 2,046,373 2,039,293 1,907,370

3 Total qualifying capital 2,023,657 2,044,625 2,051,182 2,043,054 1,911,131 3a Fully loaded ECL

accounting model total capital

2,023,657 2,044,625 2,051,182 2,043,054 1,911,131

Risk weighted assets

4 Total risk-weighted assets (RWA)

9,494,325 9,059,488 8,975,515 8,646,319 8,931,734

Risk based capital ratios as percentage of RWA

5 Common Equity Tier 1 (%)

21.27% 22.52% 22.80% 23.59% 21,36%

5a Fully loaded ECL accounting model Common Equity Tier 1 (%)

21.27% 22.52% 22.80% 23.59% 21.36%

6 Tier 1 ratio (%) 21.27% 22.52% 22.80% 23.59% 21.36% 6a Fully loaded ECL

accounting model Tier 1 ratio (%)

21.27% 22.52% 22.80% 23.59% 21.36%

7 Total qualifying capital ratio (%)

21.31% 22.57% 22.85% 23.63% 21.40%

7a Fully loaded ECL accounting model total capital ratio (%)

21.31% 22.57% 22.85% 23.63% 21.40%

Additional CET1 buffer requirements as percentage of RWA

8 Capital conservation buffer requirement (2.5% from 2019) (%)

2.5% 2.5% 2.5% 2.5% 1.88%

9 Countercyclical buffer requirement (%)

- - - - -

10 Bank G-SIB and/or D-SIB additional requirement (%)

- - - - -

11 Total of bank CET1 specific buffer requirement (%) (row 8 + row 9 + row 10)

2.5% 2.5% 2.5% 2.5% 1.88%

12 CET1 available after meeting the bank’s

9.77% 10.27% 10.55% 11.34% 9.11%

a b c d e T T-1 T-2 T-3 T-4

minimum capital requirements (%)

Basel III Leverage Ratio

13 Total Basel III leverage ratio exposure measure

10,962,013 10,656,925 10,444,599 9,811,948 9,460,492

14 Basel III leverage ratio (%) (row 2/ row 13)

18.42% 19.41% 19.59% 20.78% 20.16%

14a Fully loaded ECL accounting model Basel III leverage ratio (%)

18.42% 19.41% 19.59% 20.78% 20.16%

Liquidity Coverage Ratio 15 Total HQLA 1,451,422 1,560,377 803,909 589,039 585,773 16 Total net cash outflow 431,743 464,779 454,717 455,673 487,254 17 LCR ratio (%) 336% 336% 177% 129% 120% Net Stable Funding Ratio 18 Total Available Stable

funding 8,544,132 8,505,698 8,246,342 7,459,060 7,133,896

19 Total Required Stable funding

5,577,237 5,406,212 5,175,522 5,223,784 5,192,572

20 NSFR ratio 153% 157% 159% 143% 137%

Description R’000 Total Capital and reserves 2,864,815 Qualifying capital and reserves 2,023,657 Of which: Tier I 2,019,497 Of which: Tier II 4,160 Total amount of qualifying capital required 1,091,848 Total risk weighted assets 9,494,325 Capital Adequacy Ratio (CAR) (qualifying capital and reserves) 21.31% Capital Adequacy Ratio (CAR) (total capital and reserves) 30.17% Regulatory minimum CAR 11.50% Internal Board approved CAR 15.00%

Basel III common disclosure

Common Equity Tier I capital: instruments and reserves (R’000)

1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus

527,779

2 Retained earnings 1,716,096

3 Accumulated other comprehensive income (and other reserves) (3,444)

4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)

-

Public sector capital injections grandfathered until 1 January 2018 -

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

-

6 Common Equity Tier 1 capital before regulatory adjustments 2,240,431

Common Equity Tier 1 capital: regulatory adjustments 7 Prudential valuation adjustments 8 Goodwill (net of related tax liability) 45,440

9 Other intangibles other than mortgage-servicing rights (net of related tax liability)

175,494

10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) -

11 Cash-flow hedge reserve - 12 Shortfall of provisions to expected losses - 13 Securitisation gain on sale - 14 Gains and losses due to changes in own credit risk on fair valued liabilities - 15 Defined benefit pension fund net assets -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) -

17 Reciprocal crossholdings in common equity -

18

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)

-

19 Significant investments in 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)

-

20 Mortgage servicing rights (amount above 10% threshold) -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) -

22 Amount exceeding the 15% threshold -

23 of which: significant investments in the common stock of financials -

24 of which: mortgage servicing rights -

25 of which: deferred tax assets arising from temporary differences -

26 National specific regulatory adjustments

REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -

27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions -

28 Total regulatory adjustments to Common equity Tier 1 220,934

29 Common Equity Tier 1 capital (CET1) 2,019,497

Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus -

31 of which: classified as equity under applicable accounting standards - 32 of which: classified as liabilities under applicable accounting standards -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 -

34 Additional Tier 1 instruments (and CET1) instruments not included in line 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

-

35 Of which: instruments issued by subsidiaries subject to phase out - 36 Additional Tier 1 capital before regulatory adjustments -

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments - 38 Reciprocal crossholdings in Additional Tier 1 instruments -

39

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 common share capital of the entity (amount above 10% threshold)

-

40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

41 National specific regulatory adjustments -

REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -

42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions -

43 Total regulatory adjustments to Additional Tier 1 capital -

44 Additional Tier 1 capital (AT1) -

45 Tier 1 capital (T1 = CET1 + AT1) 2,019,497

Tier 2 capital and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus -

47 Directly issued capital instruments subject to phase out from Tier 2 -

48 Tier 2 instruments (and CET1 and AT1 instruments not included in lines 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

-

49 of which: instruments issued by subsidiaries subject to phase out -

50 Provisions 4,160 51 Tier 2 capital before regulatory adjustments 4,160

Tier 2 capital: regulatory adjustments 52 Investment in own Tier 2 instruments - 53 Reciprocal crossholdings in Tier 2 instruments -

54

Investments in 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 win more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

-

55 regulatory consolidation (net of eligible short positions) - 56 National specific regulatory adjustments -

REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -

57 Total regulatory adjustments to Tier 2 capital - 58 Tier 2 capital (T2) 4,160 59 Total capital (TC = T1 + T2) 2,023,657

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -

60 Total risk weighted assets 9,494,325

Capital ratios

61 Common Equity Tier 1 (as percentage of risk weighted assets) 21.27%

62 Tier 1 (as percentage of risk weighted assets) 21.27% 63 Total capital (as percentage of risk weighted assets) 21.31%

64

Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of risk weighted assets)

-

65 of which: capital conservation buffer requirements 2.5%

66 of which: bank-specific countercyclical buffer requirement 0%

67 of which: G-SIB buffer requirement 0%

68 Common Equity Tier 1 available to meet buffers (as percentage of risk weighted assets) 21.27%

National Minima (if different from Basel 3)

69 National Common Equity Tier 1 minimum ratio (if different from Basel 3 minimum) 7.5%

70 National Tier 1 minimum ratio 9.25% 71 National total capital minimum ratio 11.5%

Amounts below the threshold for deductions (before risk weighting)

72 Non-significant investments in the capital of other financials -

73 Significant investments in the common stock of financials -

74 Mortgage servicing rights (net of related tax liability) -

75 Deferred tax assets arising from temporary differences (net of related tax liability) -

Applicable caps on the inclusion of provisions in Tier 2

76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to Standardised Approach (prior to the application of cap)

4,160

77 Cap on inclusion of provisions in Tier 2 under Standardised Approach (1.25% of RWE)

118,679

78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to the application of cap) -

79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach -

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022)

80 Current cap on CET1 instruments subject to phase out arrangements -

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) -

82 Current cap on AT1 instruments subject to phase out arrangements -

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) -

84 Current cap on T2 instruments subject to phase out arrangements -

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) -

8.3 Table 4: Leverage ratio

Summary comparison of accounting assets vs leverage ratio exposure measure

Item R'000

1 Total consolidated assets as per published financial statements (excluding derivative assets) 10,727,507

2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

-56,479

3 Adjustment for fiduciary assets recognised on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure

-222,386

4 Adjustments for derivative financial instruments 56,878

5 Adjustment for securities financing transactions (ie repos and similar secured lending) -

6 Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off- balance sheet exposures) 456,492

7 Other adjustments - 8 Leverage ratio exposure 10,962,012

Item Leverage

ratio framework

On-balance sheet exposures

1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 10,727,507

2 (Asset amounts deducted in determining Basel III Tier 1 capital) -278,865

3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2) 10,448,642

Derivative exposures

4 Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin) 40,724

5 Add-on amounts for PFE associated with all derivatives transactions 16,154

6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework -

7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) -

8 (Exempted CCP leg of client-cleared trade exposures) - 9 Adjusted effective notional amount of written credit derivatives -

10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) -

11 Total derivative exposures (sum of lines 4 to 10) 56,878

Securities financing transaction exposures

12 Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions -

13 (Netted amounts of cash payables and cash receivables of gross SFT assets) -

14 CCR exposure for SFT assets - 15 Agent transaction exposures -

16 Total securities financing transaction exposures (sum of lines 12 to 15) -

Other off-balance sheet exposures

17 Off-balance sheet exposure at gross notional amount 2,403,981

18 (Adjustments for conversion to credit equivalent amounts) -1,947,489 19 Off-balance sheet items (sum of lines 17 and 18) 456,492

Capital and total exposures

20 Tier 1 capital 2,019,497

21 Total exposures (sum of lines 3, 11, 16 and 19) 10,962,012

Leverage ratio

22 Basel III leverage ratio 18.42%

8.4 Minimum required capital

The graphs below depict the Bank’s risk weighted exposure to each type of risk and the minimum required capital to be held against each of these risks as at 31 December 2019.

Capital: Credit & Counterparty Credit Risk

The biggest driver of required capital in the Bank for Credit risk is corporate lending. Although the majority of the lending relates to asset-based finance, such underlying assets do not qualify as eligible collateral for capital purposes. The vast majority of the Bank’s credit lending carries a 100% risk weighting. The gradual increase in the risk weighted assets is mainly due to excess liquidity placed in the interbank market.

Capital: Operational Risk

The capital requirement for operational risk is based on a three-year average gross income, which is allocated to certain business lines depending on the type of income. The business lines carry a prescribed beta factor, as per the Standardised Approach for Operational risk, used for calculating the capital charge. The constant increase from June 2014 for the operational risk is due to an increase in gross income.

Capital: Market Risk

The only contributor to the Bank’s risk weighted exposure for market risk is the Net Open Position in foreign currency. The capital charge for market risk is calculated based on the largest leg of the Bank’s Net Open Position in foreign currency.

Capital: Other Risks

Other risks consist mainly of Property and Equipment, which includes the Bank’s Full Maintenance Leases and Operating Rentals. The risk weighting charge against these items is 100%.

Total required capital versus actual qualifying capital and reserve funds

The Bank is adequately capitalised and holds sufficient and stable capital against its risk weighted assets. The Bank’s Qualifying Capital Adequacy Ratio (qualifying capital and reserve funds as percentage of risk weighted assets) is 21,31%, while the Bank total Capital Adequacy Ratio (total capital and reserve funds as percentage of risk weighted assets) is 30,17%.

Breakdown of capital requirement

The risk weighted exposure for each of the Bank’s risk categories are indicated below:

8.5 Table 5: Linkages between financial statements and regulatory exposures (R’000)

a b

Carrying values as

reported in published financial

statements & under scope of

regulatory consolidation

Carrying value of items ***

Assets Subject to credit risk framework

Cash and cash equivalents 3,492,260 3,295,123 Derivative financial assets 40,724 - Negotiable Securities 355,457 374,084 Loans and advances 2,890,485 3,320,197 Leased assets 1,526,445 - Investment securities 1,571,439 1,495,141 Other assets 516,261 - Equipment 120,258 - Current Taxation 33,969 Intangible assets 220,934 -

Total assets 10,768,231 8,484,545

Equity and liabilities Equity 2,864,815 - Share capital 2,070 - Share premium 525,709 - Fair value reserve -3,444 - Retained earnings 2,340,480 - Liabilities 7,903,416 Intergroup loans - - Derivative financial liabilities 34,136 - Deposits 7,127,616 - Other funding related liabilities 100,407 - Other liabilities 431,008 - Deferred taxation 209,730 - Current taxation - - Defined benefit liability 519 - Total equity and liabilities 10,768,231 -

*** The carrying values of the items subject to the regulatory framework are based on average daily balances (where applicable) as required in terms of the Regulations relating to banks (Reg 23 & Reg 24). The amounts are post Credit Conversion Factors (CCF) and Credit Risk Mitigation (CRM). Foreign currency and equity items are marked-to market on a daily basis.

c d e

Carrying value of items ***

Assets

Subject to counterparty credit risk framework

Subject to the securitisation

framework

Subject to the market risk framework

Cash and cash equivalents - - 1,399,810 Derivative financial assets 47,665 - - Negotiable Securities - - - Loans and advances - - 614 Leased assets - - - Investment securities - - - Investment in subsidiaries - - - Intergroup loans - - - Other assets - - - Equipment - - - Current taxation - - - Intangible assets - - -

Total assets 47,665 - 1,400,424

Equity and liabilities Equity Share capital - - - Share premium - - - Fair value reserve - - - Retained earnings - - - Liabilities Intergroup loans - - - Derivative financial liabilities - - - Deposits - - 1,266,541 Other liabilities - - - Deferred taxation - - - Current taxation - - - Defined benefit liability - - -

Total equity and liabilities - - 1,266,541

*** The carrying values of the items subject to the regulatory framework are based on average daily balances (where applicable) as required in terms of the Regulations relating to banks (Reg 23 & Reg 24). The amounts are post Credit Conversion Factors (CCF) and Credit Risk Mitigation (CRM). Foreign currency and equity items are marked-to-market on a daily basis.

f g h Carrying value of items ***

Assets

Subject to equity risk framework

Subject to other risk

frameworks

Not subject to capital

requirement or subject to

deduction from capital

Cash and cash equivalents - 638,883 - Derivative financial assets - - - Negotiable Securities - - - Loans and advances - - -

Leased assets - 1,526,445 -

Investment securities 76,298 - -

Other assets - 516,261 -

Equipment - 120,258 -

Intangible assets - - 220,934

Total assets 76,298 2,801,847 220,934

Equity and liabilities Equity - - - Share capital - - - Share premium - - - Fair value reserve - - - Retained earnings - - -

Liabilities Intergroup loans - - - Derivative financial liabilities - - - Deposits - - - Other liabilities - - - Deferred taxation - - - Current taxation - - - Defined benefit liability - - - Total equity and liabilities - - -

*** The carrying values of the items subject to the regulatory framework are based on average daily balances (where applicable) as required in terms of the Regulations relating to banks (Reg 23 & Reg 24). The amounts are post Credit Conversion Factors (CCF) and Credit Risk Mitigation (CRM) and net of impairments. Foreign currency and equity items are marked-to-market on a daily basis.

8.6 Table 6: Main sources of differences between regulatory exposure amounts and carrying values in financial statements (R’000)

a b c d Items subject to:

31/12/2019 R'000 Total

Credit Risk framework

Securitisation framework

Counterparty Credit Risk framework

1 Assets carrying value amount under scope of regulatory consolidation

10,768,231 8,484,545 - 47,665

2 Liabilities carrying value amount under regulatory scope of consolidation

10,768,231 - - -

3 Total net amount under regulatory scope of consolidation - 8,484,545 - 47,665

4 Off-balance sheet amounts 2,403,981 281,933 - -

5 Differences in valuations - - - -

6 Differences due to different netting rules, other than those already included in row 2

- - -

7 Differences due to consideration of provisions - - - -

8 Differences due to prudential filters - - - -

9 Other - - - -

10 Exposure amounts considered for regulatory purposes 13,172,212 8,766,478 - 47,665

e f g Items subject to:

31/12/2019 R'000

Market risk framework

Equity risk framework

Other risk frameworks

1 Assets carrying value amount under scope of regulatory consolidation (as per template LI1)

1,400,424 76,298 2,803,847

2 Liabilities carrying value amount under regulatory scope of consolidation (as per template LI1)

1,266,541 - -

3 Total net amount under regulatory scope of consolidation 133,883 76,298 2,803,847

4 Off-balance sheet amounts - - - 5 Differences in valuations - - -

6 Differences due to different netting rules, other than those already included in row 2 - - -

7 Differences due to consideration of provisions - - -

8 Differences due to prudential filters - - -

9 Other -116,922 - -

10 Exposure amounts considered for regulatory purposes 16,961 76,298 2,803,847

The differences between the accounting and regulatory exposure amounts are due to the following:

● Credit risk: Amounts are based on daily averages (where applicable) as required in terms of Regulation 23 of the Regulations relating to Banks and are reported post CCF and CRM.

● Credit risk (Off-balance sheet): Revocable loan commitments are excluded from off-balance sheet exposure for purposes of regulatory exposure and are reported post CCF and CRM.

● Counterparty credit risk: Amounts are based on the positive (out-of-the money) fair value on derivative contracts plus an add-on of 1% of the absolute nominal amount of all contracts.

● Market risk: The accounting value of market risk exposure, which consists of the Net Open Position in foreign currency is adjusted to incorporate positions to purchase or sell foreign currency.

9. Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Bank’s loans and advances to customers.

The sound practices of the Bank set out in its Credit Risk Management Policy document specifically address the following areas:

● establishing an appropriate credit risk environment; ● managing the credit activities of the Bank with integrity, using strictly and exclusively

prudential credit criteria; ● maintaining an appropriate credit administration, measurement and monitoring

process; ● reviewing at least once a year the policy and related techniques, procedures and

information systems; ● clearly defining the roles and responsibilities of different parties within the Bank, i.e.

the Board of Directors (the Board), Senior Credit Committee as well as the related departments; and

● reviewing all significant exposures to credit concentration risk.

These practices are also applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk.

9.1 IFRS 9 impairment calculation

As a result of the adoption of IFRS 9 the Bank changed from the incurred credit loss model detailed in IAS 39 to the Expected Credit Loss (ECL) model to calculate impairments of financial instruments. The new standard outlines a ‘three-stage’ model (‘general model’) for impairment based on changes in credit quality since initial recognition. The Bank applies the general ECL impairment method to all its financial assets that are subject to IFRS9 impairment requirements. Summarised below are the aforementioned changes and additional disclosures.

ECL impairment requirements

IFRS 9’s Expected Credit Loss (ECL) impairment model’s requirements represented the most material IFRS 9 transition impact for the Bank. The ECL model applies to financial assets measured at either amortised cost or at Fair Value through Other Comprehensive Income (FVOCI), loan commitments when there is a present commitment to extend credit (unless these are measured at Fair Value Through Profit or Loss (FVTPL)) and guarantees. ECL is, at a minimum, required to be measured through a loss allowance at an amount equal to the 12-month ECL. However, where the lifetime is less than 12 months, lifetime ECL will be measured for the financial asset. A loss allowance for full lifetime ECL is required for a financial asset if the credit risk of that financial instrument has increased significantly since initial recognition.

Measurement of ECL

The Bank calculates and recognises ECL on financial instruments while taking into consideration the following factors:

● an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

● the time value of money; and ● reasonable and supportable information that is available without undue cost or effort

at the reporting date about past events, current conditions and forecasts of future economic conditions.

Time Value of Money

The Bank discounts the calculated ECL to the reporting date. Calculated ECL considers the amount and timing of payments, therefore the Bank deems a credit loss to arise even if the Bank expects to be paid in full but later than when contractually due.

The discount rate for calculating ECL is based on the following:

● for fixed rate assets, the Effective Interest Rate (EIR) determined at initial recognition or an approximation thereof; and

● for variable interest rate assets, the current EIR.

Group assessments

ECL reflects the Bank’s own expectations of credit losses. The Bank assesses significant increase in credit risk without taking into account any collateral values. For financial instruments that do not contain a significant financing component the loss allowance is measured at initial recognition and throughout the life of the instrument at an amount equal to the lifetime ECL. The Bank considers that its cash and cash equivalents have a low credit risk as the cash is deposited with reputable financial institutions and thus no ECL is raised on this balance.

The probability of default (PD) used in the calculation of ECL is a Point-In-Time (PIT) probability (that is, probability of default in current economic conditions) and does not contain any adjustment for prudence. The Bank expects that, with all other things staying constant, the probability of default of a financial instrument should reduce with the passage of time and therefore the Bank considers the relative maturities of a financial instrument at inception and at the reporting date when comparing PDs. The Bank estimates its probability of default at a point in time. Point-in-time PD estimates incorporate macroeconomic and the obligors own credit quality. The Bank computes ‘Point-in-Time’ PDs over the expected life of a financial instrument.

Credit loss

Credit loss is the difference between all contractual cash flows that are due to an entity in accordance with the contract and all cash flows that the entity expects to receive, discounted at the original effective interest rate or credit-adjusted EIR.

When estimating cash flows for determination of ECL, the Bank has taken the following into account:

● expected life of a financial instrument; ● all contractual terms of the financial instrument, and; ● other credit enhancements integral to the contractual terms.

12-month ECL

The Bank defines 12-month ECL as a portion of the lifetime ECL and represents the lifetime ECL that will result if a default occurs in the 12 months after the reporting date weighted by the probability of that default occurring. The 12-month ECL is seen as neither the lifetime ECL that the Bank will incur on financial instruments that it predicts will default in the next 12 months nor the cash shortfalls that are predicted over the next 12 months. The Bank has measured the ECL of all financial instruments in a way that reflects an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes.

Changes in accounting policies

As permitted by the transition provisions of IFRS 9, the Bank elected not to restate comparative period results; accordingly, all comparative period information is presented in accordance with previous accounting policies.

IFRS 9 introduced an expected credit loss impairment model that differs from the incurred loss model under IAS 39. Provision for Credit Losses (PCL) is recorded to recognize estimated credit losses on all financial assets, except for financial assets classified or designated as Fair Value Through Profit or Loss (FVTPL) and equity securities designated as Fair Value through Other Comprehensive Income (FVOCI), which are not subject to impairment assessment.

Under IFRS 9 loss allowances are measured on either of the following bases:

● twelve-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and

● lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

Provision for credit losses (PCL)

The amount charged to income necessary to bring the allowance for credit losses to a level determined appropriate by management. Under IFRS 9, this includes provisions on performing and impaired financial instruments.

Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are calculated as the product of Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default (EAD). However, there are certain key differences under current Basel and IFRS 9 reporting frameworks which could lead to significantly different expected loss estimates, including:

● Basel PDs are based on long-run averages over an entire economic cycle. IFRS 9 PDs are based on current conditions, adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios.

● Basel PDs consider the probability of default over the next 12 months. IFRS 9 PDs consider the probability of default over the next 12 months only for instruments in Stage 1. Expected credit losses for instruments in Stage 2 and stage 3 are calculated using lifetime PDs.

● Basel LGDs are based on severe but plausible downturn economic conditions. IFRS 9 LGDs are based on current conditions, adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios.

Allowance for credit losses

An Allowance for Credit Losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments.

The Bank measures the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:

• Stage 1: performing

Stage 1 includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month Expected Credit Losses (ECL) are recognised and interest revenue is calculated on the gross carrying amount of the asset (that is, without deduction for credit allowance). 12-month ECL are the expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months. From initial recognition of a financial asset to the date on which the asset has experienced a Significant Increase in Credit Risk (SICR) relative to its initial recognition, a loss allowance is

recognised equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date.

• Stage 2: underperforming

Stage 2 includes financial instruments that have had a Significant Increase in Credit Risk (SICR) since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest revenue is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Following a Significant Increase in Credit Risk (SICR) relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.

• Stage 3: non-performing

Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised and interest revenue is calculated on the net carrying amount (that is, net of credit allowance). When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.

The ECL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable. The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three stages and the application of forward-looking information. The underlying assumptions and estimates may result in changes to the provisions from period to period that significantly affects the Bank’s results of operations.

Measurement of ECL

Expected credit losses are based on a range of possible outcomes and consider all available reasonable and supportable information including internal and external ratings, historical credit loss experience, and expectations about future cash flows. The measurement of expected credit losses is based primarily on the product of the instrument’s Probability of Default (PD), Loss Given Default (LGD), and Exposure At Default (EAD) discounted to the reporting date. The main difference between Stage 1 and Stage 2 expected credit losses for performing financial assets is the respective calculation horizon. Stage 1 estimates project PD, LGD and EAD over a maximum period of 12 months while Stage 2 estimates project PD, LGD and EAD over the remaining lifetime of the instrument. An expected credit loss estimate is produced for each individual exposure. Relevant parameters are modelled on a collective basis using portfolio segmentation that allows for appropriate incorporation of forward-looking information. To reflect other characteristics that are not already considered through modelling, expert credit judgment is exercised in determining the final expected credit losses. These approaches have been designed to maximize the available information that is reliable and supportable for each portfolio and may be collective in nature. Expected credit losses are discounted to the reporting period date using the effective interest rate.

Expected Life

For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the instrument. For most instruments, the expected life is limited to the remaining contractual life.

9.2 Restructured Exposure

Debt is being considered to be restructured when a borrower’s financial condition has deteriorated, and a revised repayment plan is necessary.

Restructured credit exposure as defined by Regulation 67 of the Regulations relating to Banks includes any loan, advance or facility in respect of which the Bank granted a concession to the obligor owing to a deterioration in the obligor’s financial condition, that is, owing to a financial distressed situation of the relevant obligor:

a) which financial distressed situation results or is likely to result in the relevant obligor no longer being able to meet the terms of conditions originally agreed,

b) which restructuring agreement: (i) may include a modification of terms or conditions such as, for example:

a. a reduction in the relevant interest rate from that originally agreed; b. a reduction in the relevant interest amount due; c. a reduction in the relevant principal amount due; d. an amendment to the originally agreed contractual maturity or payment

frequency; e. any forgiveness, deferral or postponement of a principal amount, interest

amount or fee due; and f. any subsequent increase in the relevant level of working capital or

revolving facility.

(ii) may include the transfer from the obligor to the bank of real estate, receivables from third parties, other assets, or an equity interest in the obligor in full or partial satisfaction of the said loan, advance or facility;

(iii) may include the substitution or addition of a new debtor for the original obligor; and

(iv) shall be in writing.

provided that no loan, advance, increased credit limit of facility extended or renewed by the reporting bank in its ordinary course of business at a stated interest rate or on terms or conditions for new debt with similar risk shall constitute a restructured loan or credit exposure for the purpose of the Regulations.

Credit risk is managed within the risk appetite of the Bank. Acceptable credit risk identified in a credit application is mitigated through sufficient underlying security. To enhance the return on funds, and therefore shareholder value, a certain amount of risk has to be taken in the lending activities of the Bank. The risk tolerance of the Bank is, however, low and therefore all credit is mitigated through sound credit principles, and all lending done against appropriate security, except where other factors deem it not necessary to obtain specific security.

The basic principle governing the Bank’s lending philosophy is the need for management to satisfy themselves that the business of the borrower has the capacity to deploy its assets in a way that will generate the earnings/cash flows on a sustainable basis to facilitate the repayment of any facilities granted.

The Bank’s Board of Directors is ultimately responsible for the maintenance of effective risk management in the Bank. In discharging its responsibilities, the Board has to play a critical role in overseeing the credit granting and credit risk management functions of the Bank. The Board, as a minimum:

● approves the Credit Risk Management Policy and reviews it at least annually; ● ensures that the Bank operates within sound and well-defined credit-granting criteria; ● ensures the senior management is fully capable of managing credit activities

conducted by the Bank; ● ensures through independent inspection and audit, adherence to the policy,

techniques, controls, procedures and information systems; ● reviews all significant credit exposures of the Bank; ● reviews all significant delinquent credits and management’s actions taken or

contemplated for their recovery; ● reviews any credit granted in conflict of the written Credit Risk Management Policy; ● reviews trends in the quality of, and concentration in, the Bank’s credit portfolio, to

identify emerging problems and take action to deal with the problems; and ● ensures that the Bank’s Remuneration Policy is in line with the credit risk strategy and

does not reward imprudent activities of credit staff.

The Board has delegated responsibility for the management of credit risk to its Credit Committee, which is chaired by a non-executive director. The role and responsibilities of the Credit Committee, as reported in the Credit Committee Charter, is to support the Board in

fulfilling its duties and responsibilities regarding the management of credit risk. Senior management who are members of the Credit Committee have the responsibility of implementing the credit risk strategy approved by the Board and of developing policies and processes for identifying, measuring, monitoring and controlling credit risk. Such policies and processes address credit risk in all of the Bank’s credit activities and at both the individual credit and portfolio levels. A separate Credit Department is responsible for oversight of the Bank’s credit risk, including:

● formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;

● establishing the authorisation structure for the approval and renewal of credit facilities. All key facilities require approval by the Head of Credit, Credit Committee or the Board of Directors according to authorisation limits;

● reviewing and assessing credit risk. The Credit Department assesses all credit exposures prior to facilities being committed to customers. Renewals and reviews of facilities are subject to the same review process;

● limiting concentration of exposure to counterparties, geographies, products and industries;

● reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided to the Credit Committee on the credit quality of portfolios and appropriate corrective action is taken; and

● providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

The Bank operates within sound, well-defined credit granting criteria. These criteria include a clear indication of the Bank’s target market and a thorough understanding of the borrower or counterparty.

The Bank adopted the Standardised Approach for the measurement of its exposure to credit risk and applies the requirements of Regulation 23 and 24 of the Regulations relating to Banks to its credit exposures. Information disclosed is consistent with the manner in which the Board of Directors and senior management assess and manage risk exposures.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset including derivatives in the statement of financial position. Instalment sales and finance lease agreements have been included in the above credit risk analysis.

Where a company has a rating issued by a recognised rating agency, that rating has been applied. If not, an internal risk-based rating process has been applied. In the latter case, the Bank determines the financial condition of a borrower by calculating certain financial ratios and changes to certain ratios in order to determine the Internal Credit Rating allocated to the borrower.

Leased assets

The leased assets are moveable assets rented to customers under operating leases. The majority of the leases are in the range of three to five years’ tenor. The leased assets are depreciated over the period of the lease or the useful life of the asset, whichever is the lesser period. The maintenance costs are borne by the Bank and are expensed as they are incurred. The leased assets’ residual values are reviewed and adjusted if appropriate, at each reporting date.

Trade finance and negotiable securities

Trade finance includes such activities as lending, issuing letters of credit, factoring, export credit and insurance. Companies involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, as well as other service providers. The Bank applies the standard credit assessment in line with the Bank’s Credit Policy in the granting of trade finance with the main reason to assist businesses to grow or meet specific contractual obligations.

Impaired loans

An impaired loan is a loan in respect of which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the terms of the loan agreement.

Impairment policy

The Bank writes off loans (and any related allowance for impairment losses) when the Credit Committee determines that the loan is uncollectible. This determination is reached after considering information such as significant changes in the borrower’s financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance loans, impairment decisions generally are based on a product specific past due status.

Security held

The Bank holds financial collateral and other security against loans and advances to customers in the form of mortgage bonds over property, assets financed, and other registered securities over assets, and guarantees. Estimates of fair value are based on the value of security assessed at the time of borrowing and are updated regularly. The Bank applies the comprehensive approach for credit risk mitigation as set out in Regulation 23 of the Regulations relating to banks.

Additional credit risk disclosure can be found in Note 18 of the Bank’s Annual Financial Statements (AFS) as published on the Bank’s website: www.bidvestbank.co.za.

9.3 Table 7: Credit quality of assets (R’000)

a b c d

Gross carrying values of Allowances/ impairments

Net values (a + b - c)

Defaulted exposures

Non-defaulted exposures

1 Loans 22,460 3,299,189 1,452 3,320,197 2 Investment securities - 1,495,141 - 1,495,141

3 Cash and balances with banks - 3,295,123 - 3,295,123

4 Debt securities 22,603 366,451 14,970 374,084

5 Off-balance sheet exposures 22 281,911 - 281,933

6 Total 45,085 8,737,815 16,422 8,766,478

9.4 Table 8: Changes in stock of defaulted loans and debt securities (R’000)

a

1 Defaulted loans and debt securities at the end of the previous reporting period

62,599

2 Loans and debt securities that have defaulted since the last reporting period - 3 Returned to non-defaulted status -17,514 4 Amounts written off - 5 Other changes -

6 Defaulted loans and debt securities at the end of the reporting period (1+2-3-4±5) 45,085

9.5 Table 9: Breakdown of credit exposure by geographical area (R’000)

Standardised approach:

On balance sheet

exposure

Off balance sheet

exposure Total

(col. 1 & 2)

Credit concentration risk - geographical distribution

1 2 3 1 South Africa 7,959,398 281,933 8,241,331 2 Other African countries 1,044 - 1,044 3 AAA to A- 192 - 192 4 BBB+ to B- 797 - 797 5 CCC+ to C 55 - 55 6 Europe 457,174 - 457,174 7 AAA to A- 457,174 - 457,174 8 Asia 5,402 - 5,402 9 AAA to A- 5,402 - 5,402 10 BBB+ to B- - - - 11 North America 42,641 - 42,641 12 AAA to A- 42,641 - 42,641 13 Other 18,886 - 18,886 14 AAA to A- 18,886 - 18,886

15 Total 8,484,545 281,933 8,766,478

16 AAA to A- 524,295 - 524,295 17 BBB+ to B- 7,960,195 281,933 8,242,128 18 CCC+ to C 55 - 55

9.6: Table 10: Credit concentration risk – geographical information (R’000)

Line no.

On balance sheet

exposure

Off balance sheet

exposure

Total (col. 1 & 2)

Standardised approach: Credit concentration risk - geographical information

1 2 3

1 Advanced economies, excluding China 507,642

- 507,642

2 of which: United Kingdom 431,445

- 431,445

3 Emerging market and developing countries, including China 7,976,903 281,933 8,258,836

4 South Africa 7,959,398 281,933 8,241,331

5 African countries, excluding South Africa 1,044 - 1,044

6 of which: 7 Sub-Saharan Africa 1,044 - 1,044 8 of which: 9 Mauritius 250 - 250 10 Botswana 192 - 192 11 Namibia 547 - 547 12 Mozambique 55 - 55 13 Central and Eastern Europe 11,812 - 11,812

14 Commonwealth of Independent States and Mongolia - - -

15 Developing Asia, including China 4,649 - 4,649 16 of which: 17 People’s Republic of China 1,343 - 1,343 18 India - - - 19 Middle East - - - 20 Western Hemisphere - - - 21 Other - - - 22 Total 8,484,545 281,933 8,766,478

9.7 Table 11: Credit concentration risk – sectorial distribution (R’000)

Line no.

Credit concentration risk - sectoral distribution (R'000)

On balance sheet exposure

Off balance sheet

exposure Total

1 2 3

1 Agriculture, hunting, forestry and fishing 245 - 245

2 Mining and quarrying 9,591 - 9,591 3 Manufacturing 765,341 10,306 775,647

4 Electricity, gas and water supply 682 - 682

5 Construction 113,247 39 113,286

6 Wholesale and retail trade, repair of specified items, hotels and restaurants

430,422 34,017 464,439

7 Transport, storage and communication 242,260 17,919 260,179

8 Financial intermediation and insurance 4,230,577 132,740 4,363,317

9 Real estate 609,279 14,125 623,404 10 Business services 409,406 47,453 456,859

11 Community, social and personal services 1,290,951 24,104 1,315,055

12 Private households 382,544 1,230 383,774 13 Other

Total 66,814,531 2972297,939 8,766,478

14 Total (of items 15 to 17) 1,286,368 24,039 1,310,407

15 of which: Sovereign (central government and central bank) 1,118,358 24,039 1,142,397

16 Public sector entities 29,030 - 29,030

17 Local government and municipalities 138,980 - 138,980

9.8 Table 12: Impaired exposure (R’000)

Geographical area

Impaired amount Impairment Industrial sector

Impaired Amount

Specific Impairment

South Africa 212,352 16,422 Business services 72,692 9,677

Manufacturing 6,119 2,205 Community, Social and Personal services

93,807 160

Mining and Quarrying 1,872 2

Real Estate 1,795 2 Private Households 270 - Wholesale and retail trade 35,797 4,376

Total 212,352 16,422

9.9 Table 13 .1: Age analysis (R’000)

Gross (Impairment) Net R’000 R’000 R’000 Current 8,328,802 -1,255 8,327,547 30 - 60 days 154,246 -160 154,086 61 - 91 days 4,867 - 4,867 92 - 180 days 4,316 - 4,316 180 days 75,851 -15,007 60,844

Total 8,568,082 -16,422 8,551,660

9.10 Credit risk portfolio

Amounts shown in the diagram is post CCF, CRM and impairment.

Credit risk asset classes

Based on balances post CCF, CRM and impairment.

10. Credit risk mitigation (CRM)

The provision of security is not itself the determining factor in deciding whether or not to approve credit. The Bank regards it as a form of insurance against unforeseen events that could result in the borrower being unable to repay his/her indebtedness from the generation of profits or other sources.

Eligible financial collateral

The Bank follows the comprehensive approach regarding Collateral Management, i.e. as described in Regulation 23 paragraph 9 (iv).

For risk mitigation purposes, the instruments specified below shall be regarded as eligible collateral for capital purposes in terms of the comprehensive approach for collateral management as defined in the Basel III requirements:

● cash, including certificates of deposit or comparable instruments issued by the Bank, on deposit with the Bank;

o When cash on deposit, certificates of deposit or comparable instruments issued by the Bank are held as collateral at a third-party bank in a non-custodial arrangement, the Bank may assign the risk weight related to the third party bank to the exposure amount protected by the collateral provided that the cash / instruments are pledged / assigned to the Bank, the pledge / assignment is unconditional and irrevocable, and the Bank has applied the relevant haircut rate in respect of currency risk (i.e. the measure used to reduce the value of collateral to ensure that the realisable value taking volatility and adverse price changes into account, will cover the credit exposure).

● credit-linked notes issued by the Bank in order to protect an exposure in the banking book;

● gold coins; ● debt securities; ● equities, including convertible bonds, that are included in a main index; ● undertakings for collective investments in transferable securities (“UCITS”) and mutual

funds; and ● securities issued by the Central Government of the RSA or by the SA Reserve Bank

provided that the Bank’s exposure and the securities are denominated in Rand.

Terms of agreement and legal risk The terms of agreement regarding collateral will relate to the exposure to ensure sufficient collateralisation. Legal risks are mitigated through sufficient reference to legal procedures in case of default and call-up of relevant collateral.

Administration and resolution of disputes All collateral agreements and related original documents are kept in a fire resistant safe where documents are lodged and removed under dual control of safe lock combinations and safe keys.

Any disputes are referred to the Bank’s attorneys.

Concentration risk The Bank ensures that collateral accepted does not increase concentration risk, by firstly avoiding collateral in the same business line as the exposure and secondly preventing non-cash collateral to be grouped in concentrated sectors.

10.1 Table 14: Credit risk mitigation techniques (R’000)

a b c d

Exposures unsecured:

carrying amount

Exposures secured by

collateral

Exposures secured by

collateral, of which:

secured amount

Exposures secured

by financial

guarantees

1 Cash and cash equivalents 3,295,574 - - - 2 Derivative financial assets 49,428 1,763 1,763 - 3 Negotiable Securities 374,084 - - 374,084 4 Investment Securities 1,495,141 - - - 5 Loans and advances 3,321,649 - - -

e f g

Exposures secured by

financial guarantees,

of which: secured amount

Exposures secured by

credit derivatives

Exposures secured by

credit derivatives, of

which: secured amount

Cash and cash equivalents - - - Derivative financial assets - - - Negotiable Securities 200,000 - - Loans and advances - - -

10.2 External credit assessment

In calculating the required amount of capital to be held against credit risk, the Bank applies the long term, international credit ratings as published by the Moody’s Investors Services. The Bank applies the long term, international scale credit ratings to all its asset classes, where such ratings are available. The Bank applies the Standardised Approach for the measurement of credit risk in terms of Regulation 23 and 24 of the Regulations relating to banks.

The Moody’s external assessment ratings are mapped to the risk weighting table as follows:

Aaa AAA Prime Aa1 AA+

High grade

Aa2 AA Aa3 AA− A1 A+

Upper medium grade

A2 A A3 A−

Baa1 BBB+ Lower medium grade

Baa2 BBB Baa3 BBB− Ba1 BB+

Non-investment grade speculative

Ba2 BB Ba3 BB− B1 B+

Highly speculative

B2 B B3 B−

Caa1 CCC+ Substantial risks

Caa2 CCC Caa3 CCC−

Ca CC Extremely speculative C Default imminent

C RD In default

Credit assessment issued by eligible institution

Claim in respect of

AAA to AA- A+ to A- BBB+ to BBB-

BB+ to B- Below B- Unrated

Sovereigns 0% 20% 50% 100% 150% 100% Public sector entities 20% 50% 50% 100% 150% 50% Bank 20% 50% 50% 100% 150% 50% Securities firms 20% 50% 50% 100% 150% 50% Bank: short term claims

20% 20% 20% 50% 150% 20%

Securities firms: short term claims

20% 20% 20% 50% 150% 20%

AAA to AA- A+ to A- BBB+ to BB-

Below BB-

Unrated

Corporate entities 20% 50% 100% 150% 100% Short term credit assessment A-1/P-1 A-2/P-2 A-3/P-3 Other Banks and corporate entities

20% 50% 100% 150%

10.3 Table 15: Standardised approach – credit risk exposure and Credit Risk Mitigation (CRM) effects (R’000)

a b

Exposures before CCF and CRM

Asset classes On-balance

sheet amount

Off-balance

sheet amount

1 Sovereigns and their central banks 1,118,358 54,634

2 Non-central government public sector entities 29,030 3,400

3 Multilateral development banks - - 4 Banks 3,518,113 76,523 5 Local Government and Municipalities 139,140 - 6 Securities firms 294,660 - 7 Corporates 2,823,038 2,024,510 8 Regulatory retail portfolios 564,109 19,505 9 of which: Secured by residential property 41,833 40 10 Secured by commercial real estate 52,103 - 11 Equity - - 12 Past-due loans 1,314 - 13 Higher-risk categories 1,300 - 14 Other assets - - 15 Total 8,486,448 2,178,572

c d

Exposures post CCF and CRM

Asset classes

On-balance sheet

amount

Off-balance

sheet amount

1 Sovereigns and their central banks 1,118,358 24,040 2 Non-central government public sector entities 29,030 - 3 Multilateral development banks - - 4 Banks 3,517,662 76,523 5 Local Government and Municipalities 138,980 - 6 Securities firms 294,660 - 7 Corporates 2,865,917 169,052 8 Regulatory retail portfolios 519,938 12,318 9 of which: Secured by residential property 41,833 40 10 Secured by commercial real estate 52,103 - 11 Equity - - 12 Past-due loans 1,314 - 13 Higher-risk categories 1,285 - 14 Other assets - - 15 Total 8,484,545 281,933

e f RWA and RWA density

Asset classes RWA RWA

density 1 Sovereigns and their central banks - - 2 Non-central government public sector entities 5,806 0.12% 3 Multilateral development banks - - 4 Banks 896,559 19.05% 5 Local Government and Municipalities 149,537 3.18% 6 Securities firms 294,660 6.26% 7 Corporates 2,929,662 62.26% 8 Regulatory retail portfolios 429,423 9.13% 9 of which: Secured by residential property 22,396 - 10 Secured by commercial real estate 62,089 - 11 Equity - - 12 Past-due loans 986 - 13 Higher-risk categories 1,927 - 14 Other assets - - 15 Total 4,705,647 100%

10.4 Table 16: Standardised approach – exposure by asset classes and risk weights (R’000)

a b c d e Risk weight Asset class 0% 10% 20% 35% 50%

1 Sovereigns and their central banks 1,142,398 - - - -

2 Non-central government public sector entities (PSEs) - - 29,030 - -

3 Multilateral development banks (MDBs) - - - -

4 Banks - - 3,002,079 - 592,106

5 Local Government and Municipalities - - 45,333 - -

6 Securities firms - - - - - 7 Corporates 5,738 - 200,297 - - 8 Regulatory retail portfolios - - - 22,522 -

9 of which: Secured by residential property

- - - 22,522 -

10 Secured by commercial real estate - - - - -

11 Equity - - - - -

12 Past-due loans - - - - -

13 Higher-risk categories

14 Other assets 15 Total 1,148,136 - 3,276,739 22,522 592,106

f g h i j Risk weight

Asset class 75% 100% 150% Other

Total credit

exposures amount

(post CCF and post

CRM)

1 Sovereigns and their central banks - - - - 1,142,398

2 Non-central government public sector entities (PSEs) - - - - 29,030

3 Multilateral development banks (MDBs) - - - - -

4 Banks - - - - 3,594,185

5 Local Government and Municipalities - - 93,647 - 138,980

6 Securities firms - 294,659 - - 294,659

f g h i j Risk weight

Asset class 75% 100% 150% Other

Total credit

exposures amount

(post CCF and post

CRM) 7 Corporates - 2,748,011 80,923 - 3,034,969 8 Regulatory retail portfolios 355,348 153,102 1,285 - 532,257

9 of which: Secured by residential property

19,351 - - - 41,873

10 Secured by commercial real estate 910 61,407 - - 62,317

11 Equity - - - - -

12 Past-due loans 1,314 - - - 1,314

13 Higher-risk categories - - 1,285 - 1,285 14 Other assets - - - - - 15 Total 355,348 3,195,772 175,855 - 8,766,478

Additional CRM disclosure can be found in Note 18 of the Bank’s AFS as published on the Bank’s website: www.bidvestbank.co.za.

11. Counterparty credit risk (CCR)

Counterparty credit risk (CCR) is the risk that the counterparty to the contract, transaction or agreement may default before the final settlement of the underlying cash flows arising from the said contract, transaction or agreement.

The credit exposure relates to the positive economic value at the time of default or the cost of replacing the contract, transaction or agreement when the counterparty to the transaction defaults, assuming no recovery value.

The risk may also increase if the amount of the credit exposure is uncertain and may vary over time due to movements in underlying market factors, that is, the market value of the contract, transaction or agreement has an associated random future value based on market variables and the market value of the contract may be positive or negative during the remaining period to the maturity of the contract.

Counterparty credit risk in the Bank arises through the use of forward exchange contracts and includes any exposure to credit risk arising from a bilateral contract.

The Bank holds capital against counterparty credit risk. The risk weighted exposure amount for counterparty credit risk is calculated as the positive (out-of-the-money) value of the contract plus 1% of the notional amount of all contracts. An additional Credit Valuation Adjustment (CVA) is added to the risk weighted amount.

The Bank manages its Forward Exchange Contracts (FECs) as follows:

FEC between zero and six months in tenor: Risk weighted at 10%. Customers are required to give the Bank cash collateral of 10% and are required to submit their latest AFS within six months of the company’s year-end. On application, the Bank may consider amending the cash collateral required on submission of the lasted Audited Financial Statements and quarterly management accounts.

Forward Exchange Contract between six and 12 months in tenor: Risk weighted at 15%. Customers are required to give the Bank cash collateral of 15% and are required to submit their latest AFS within six months of the company’s year-end. On application, the Bank may consider amending the cash collateral required on submission of the lasted AFS and quarterly management accounts.

The Bank does not consider Forward Exchange Contracts in excess of 12 months in tenor.

11.1 Table 17: Credit Valuation Adjustment (CVA) capital charge (R’000)

a b EAD post-CRM RWA

1 All portfolios subject to the Standardised CVA capital charge 47,665 47,027

2 Total subject to the CVA capital charge 47,665 47,027

11.2 Table 18: CCR exposure by regulatory portfolio and risk weight (R’000)

a b c d e Risk weight

Regulatory portfolio 0% 10% 20% 50% 75%

Sovereigns - - - - - Non-central government public sector entities (PSEs) - - - - -

Multilateral development banks (MDBs) - - - - - Banks - - 526 - - Securities firms - - - - - Corporates - - - - -

Regulatory retail portfolios - - - - 872

Other assets - - - - - Total - - 526 - 872

f g h i

Risk weight

Regulatory portfolio 100% 150% Others

Total credit

exposure Sovereigns - - - - Non-central government public sector entities (PSEs) - - - -

Multilateral development banks (MDBs) - - - - Banks - - - 526 Securities firms - - - - Corporates 46,267 - - 46,267 Regulatory retail portfolios - - - 872 Other assets - - - - Total 46,267 - - 47,665

11.3 Table 19: Composition of collateral for CCR exposure (R’000)

a b c d e f

Collateral used in derivative transactions collateral used in SFTs

Fair value of collateral received Fair value of posted collateral Fair value of

collateral received

Fair value of posted

collateral Segregated Unsegregated Segregated Unsegregated

Cash - domestic currency - 3,072 - 1,763 - -

Cash - other currencies - - - - - -

Domestic sovereign debt - - - - - -

Other sovereign debt - - - - - -

Government agency debt - - - - - -

Corporate bonds - - - - - - Equity securities - - - - - - Other collateral - - - - - - Total - 3,072 - 1,763 - -

11.4 Credit Derivative Exposure

The Bank does not have any exposure to credit derivative instruments.

12. Market risk

Market risk is the risk that changes in the market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return on risk.

Overall authority for market risk is vested in ALCO. The Bank’s Risk Department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation.

The overall objective of market risk management is to maximise the risk/return ratio and improve shareholder value.

The Bank’s primary market risk exposures are limited to exchange rate risk and interest rate risk.

The Bank follows the Standardised Approach for market risk regulatory reporting purposes. The Bank measures its exposure to foreign exchange risk arising from a portfolio of foreign currency positions. The nominal amount or net present value of forward contract positions,

of the net position in each foreign currency is converted at spot rates into the reporting currency.

Sensitivity analyses and a simulation model are also used to assess and predict the impact of future exchange rate changes on income.

The Bank does not have a trading book and therefore all instruments that could impact on the Bank’s market risk are contained in the Bank’s banking book.

The internal controls over the market risk management process are subject to independent reviews and evaluations of effectiveness by both the Bank’s internal auditors and external auditors. These reviews are undertaken at least annually and made available to the supervisory authorities.

The capital charge for market risk takes into consideration the longest or shortest leg of the Bank’s Net Open Position (whichever is the largest). Due to the Bank running relatively flat NOPs, the capital charge for market risk is minimal.

12.1 Table 20: Market Risk under the Standardised Approach (R’000)

a RWA

Outright products 16,961

1 Interest rate risk (general and specific) - 2 Equity risk (general and specific) - 3 Foreign exchange risk 16,961 4 Commodity risk - Options -

5 Simplified approach - 6 Delta-plus method - 7 Scenario approach - 8 Securitisation - 9 Total 16,961

The Bank’s market risk position is derived from its activities in foreign exchange and considers all foreign denominated assets and liabilities including commitments to purchase or sell foreign exchange.

Due to volatility in the exchange rate, the Bank runs a relatively flat NOP to reduce exchange rate risk. A regulatory limit of 10% of the Bank’s qualifying capital and reserves has been imposed by the Regulator.

Additional disclosure for market risk can be found in Note 18 of the Bank’s AFS as published on the Bank’s website: www.bidvestbank.co.za.

13. Equity risk

The Bank’s equity portfolio consists out of listed and unlisted shares. The Bank has little exposure to equity risk with the capital charge against equity risk being minimal.

14. Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems from external events. This includes legal risk. These are the types of non-credit and non-interest rate exposures that can lead to financial loss – fraud, business outages, IT failures, vendor outages or failures, financial statement control issues and processing errors.

The Bank uses the Standardised Approach for purposes of capital calculation.

The capital requirement for operational risk is based on a three-year average gross income, which is allocated to certain business lines depending on the type of income. The business lines carry a prescribed beta factor, as per the Standardised Approach for operational risk, used for calculating the capital charge.

The key issue when determining the categorisation of a risk event is its primary cause. A loss event will be considered an operational risk event if it arose as a result of inadequate or failed internal processes, people and systems or from external events.

Risk is expressed in terms of three components: event, cause and effect. This may be illustrated by a simple example, a worm virus:

• risk event: a virus enters your computer; • cause: the external cause is a hacker; the internal cause is a lack of current virus

protection software; and • effect: computer software fails, data is lost, with potential financial and non-financial

consequences.

Identifying the root cause(s) of a risk event helps to isolate the operational loss element from other losses and to understand what action might be appropriate to mitigate against exposure to the risk, for example, by amending a process, system, control or management approach. Some examples of operational risk causes include:

• lack of policies and procedures; • inadequate segregation of duties; • inadequate activity management; • lack of management review; • inadequate analyses; • information processing errors; • inadequate physical controls; and • external events.

When an internal issue is at the root of a risk, the focus should be on how to address the issue. This generally involves modifying a business process or enhancing controls to reduce the potential likelihood and impact of a risk event. For example, if “miscommunication” of critical information caused exposure to a risk, consideration should be given to improving the frequency and quality of communications.

When an external event is at the root of exposure to risk, focus should be on how leading indicators of the external event are monitored. For example, while it may be difficult to

prevent lightning from striking the building, weather can be monitored for early warning signs of lightning and lightning conductors installed.

15. Interest rate risk in the banking book (IRRBB)

As per the Basel standards published for Interest rate risk in the banking book (IRRBB), IRRBB refers to the current or prospective risk to the Bank’s capital and earnings arising from adverse movements in interest rates that affect the Bank’s banking book positions. When interest rates change, the present value and timing of future cash flows change. This in turn changes the underlying value of the Bank’s assets, liabilities and off-balance sheet items and hence its economic value. Changes in interest rates also affect the Bank’s earnings by altering interest rate-sensitive income and expenses, affecting its NII.

Three main sub-types of IRRBB are defined for the purposes of IRRBB principles:

● Gap risk arises from the term structure of banking book instruments, and describes the risk arising from the timing of instruments’ rate changes. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk);

● Basis risk describes the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices; and

● Option risk arises from option derivative positions or from optional elements embedded in the Bank’s assets, liabilities and/or off-balance sheet items, where the Bank or its customer can alter the level and timing of their cash flows. Option risk can be further characterised into automatic option risk and behavioural option risk.

All three sub-types of IRRBB potentially change the price/value or earnings/costs of interest rate sensitive assets, liabilities and/or off-balance sheet items in a way, or at a time, that can adversely affect the Bank’s financial condition.

Credit spread risk in the banking book (CSRBB)

While the three sub-types listed above are directly linked to IRRBB, Credit Spread Risk in the Banking Book (CSRBB) is a related risk that the Banks needs to monitor and assess in its interest rate risk management framework. CSRBB refers to any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB and by the expected credit/jump to default risk.

Economic value and earnings-based measures

IRRBB in the Bank is defined as the current or prospective risk to the Bank’s capital and earnings arising from adverse movements in interest rates that affect the Bank’s banking book positions.

The Bank’s ALCO has responsibility for the oversight of IRRBB. This includes the setting of the appetite and tolerance levels based on various stress scenarios on the impact on NII and Economic Value of Equity (EVE).

The sensitivity of the IRRBB is measured by the use of prescribed stresses. Under this approach, IRRBB is measured by means of the following six scenarios:

(i) parallel shock up; (ii) parallel shock down; (iii) steepener shock (short rates down and long rates up); (iv) flattener shock (short rates up and long rates down); (v) short rates shock up; and (vi) short rates shock down.

∆EVE

The Bank excludes its own equity from the computation of the exposure level. The Bank includes all cash flows from all interest rate-sensitive assets, liabilities and off-balance sheet items in the banking book in the computation of its exposure. The Bank has excluded commercial margins and other spread components in its cash flows. Cash flows are discounted using a risk-free rate.

∆EVE is computed with the assumption of a run-off balance sheet, where existing banking book positions amortise and are not replaced by any new business.

∆NII

The Bank includes expected cash flows arising from all interest rate-sensitive assets, liabilities and off-balance sheet items in the banking book. ∆NII is computed assuming a constant balance sheet, where maturing or repricing cash flows are replaced by new cash flows with identical features with regard to the amount, repricing period and spread components. ∆NII is disclosed as the difference in future interest income over a rolling 12-month period.

*(above information is based on the Basel Committee on Banking Supervision April 2016 paper: “Interest rate risk in the banking book”)

∆EVE (R’000) ∆NII (R’000) Period T T Parallel up (200bps)

117,078 48,213

Parallel down (200bps)

(124,212) (56,843)

Steepener (25,484) Flattener 73,786 Short rate up 154,025 Short rate down (60,030) Maximum (124,212) (56,843) Tier 1 capital 2,019,497 2,019,497

16. Liquidity risk

Liquidity risk is the current and prospective risk to earnings or capital arising from incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from failure to recognise or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

Active management of liquidity is critical to the continued solvency of the Bank. At all times the Bank must be able to meet its financial commitments as they fall due. In this context, the Liquidity Risk Policy of the Bank is concerned with the management of future cash flows so that at no stage is the Bank unable to fund net cash outflows from either the market or through the sale of liquid assets.

The Bank’s liquidity risk management recognises that the analysis of net funding requirements is only one aspect of a sound liquidity management framework. Another critical liquidity management practice is the maintenance of sufficiently diversified sources of funding to ensure that there is no undue reliance on any funding source which could expose the Bank to financial conditions. The Bank’s ability to withstand a net funding requirement in a liquidity crisis also depends on the calibre of its formal contingency plans.

The Bank is highly liquid with the vast majority of its liquidity placed in the interbank market.

The analysis of the net funding requirements involves the construction of a maturity ladder and the calculation of a net cumulative surplus or deficit over specified time periods. The net funding requirement is determined by analysing future cash flows based on assumptions concerning the future behaviour of on-balance sheet and off-balance sheet assets and liabilities.

Evaluating whether the Bank is sufficiently liquid depends on the behaviour of future cash flows under different scenarios. Scenarios are divided into two main categories:

● business-as-usual scenarios (normal business conditions); and

● stress scenarios (bank-specific stress scenarios or market-wide stress scenarios).

The Bank measures whether there is an adequate level of diversification of funding by monitoring diversification by term (e.g. short, medium and long term), source (e.g. Government, Corporates, Retail) and instrument (e.g. T-Bills, NCDs).

There are a number of liquidity management techniques, which contribute to the overall soundness of the Bank’s liquidity. These include:

● ensure effective cash management in order to meet daily liquidity requirement;

● maintain adequate diversification of funding;

● building strong relationships with providers of funding; and

● incorporating liquidity costs in internal pricing, performance measurement and new product approval.

Liquidity coverage ratio (LCR)

This standard aims to ensure that the Bank has an adequate stock of unencumbered High Quality Liquid Assets (HQLA) that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. Given the uncertain timing of outflows and inflows, the Banks is also expected to be aware of any potential mismatches within the 30-day period and ensure that sufficient HQLA are available to meet any cash flow gaps throughout the period.

*(above information is based on the Basel Committee on Banking Supervision January 2013 paper: “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”)

Additional disclosure on liquidity risk can be found in Note 18 of the Bank’s AFS as published on the Bank’s website: www.bidvestbank.co.za.

16.1 Table 21: LCR common disclosure template (R’000)

(R'000)

Total Unweighted

Value (Average)

Total Weighted

Value (Average)

HIGH-QUALITY LIQUID ASSETS 1 Total `-quality liquid assets (HQLA) 1,451,422

CASH OUTFLOWS

2 Retail deposits and deposits from small business customers, of which: 4,658,863 465,886

3 Stable deposits - - 4 Less stable deposits 4,658,863 465,886 5 Unsecured wholesale funding, of which: 2,349,411 939,779

6 Operational deposits (all counterparties) and deposits in networks of cooperative banks - -

7 Non-operational deposits (all counterparties) 2,349,411 939,779 8 Unsecured debt - - 9 Secured wholesale funding 154,865

10 Additional requirements, of which:

11 Outflows related to derivative exposures and other collateral requirements 47,932 47,932

12 Outflows related to loss of funding on debt products - - 13 Credit and liquidity facilities 211,494 21,149 14 Other contractual funding obligations - - 15 Other contingent funding obligations 1,976,574 97,362

16 TOTAL CASH OUTFLOWS 1,726,973

CASH INFLOWS 17 Secured lending (e.g. reverse repos) - - 18 Inflows from fully performing exposures 3,062,311 2,991,850 19 Other cash inflows - -

20 TOTAL CASH INFLOWS 2,991,850

TOTAL ADJUSTED VALUE 21 TOTAL HQLA 1,451,422 22 TOTAL NET CASH OUTFLOWS 431,743 23 LIQUIDITY COVERAGE RATIO (%) 336%

16.2 Table 22: Net Stable Funding Ratio (NSFR)

The Net Stable Funding Ratio (NSFR) is one of the Basel Committee’s key reforms to promote a more resilient banking sector. The NSFR requires the Bank to maintain a stable funding profile in relation to the composition of its assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to the Bank’s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.

The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis.

“Available stable funding” is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required ("Required stable funding") of the Bank is a function of the liquidity characteristics and residual maturities of the various assets held by the Bank as well as those of its off-balance sheet (OBS) exposures.

The amount of available stable funding (ASF) is measured based on the broad characteristics of the relative stability of the Bank’s funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of ASF is calculated by first assigning the carrying value of the Bank’s capital and liabilities to various categories. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts. Carrying value represents the amount at which a liability or equity instrument is recorded before the application of any regulatory deductions, filters or other adjustments.

The amount of required stable funding is measured based on the broad characteristics of the liquidity risk profile of the Bank’s assets and OBS exposures. The amount of required stable funding is calculated by first assigning the carrying value of the Bank’s assets to various categories. The amount assigned to each category is then multiplied by its associated required stable funding (RSF) factor, and the total RSF is the sum of the weighted amounts added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.

*(The above information is based on the Basel Committee on Banking Supervision October 2014 paper: “Basel III: the net stable funding ratio”)

a b c d e Unweighted value by residual maturity Weighted

value No

maturity < 6 months 6 months to

< 1 year

Greater or equal to 1

year

Available stable funding (ASF item)

1 Capital: - - - - 2 Regulatory capital - - 2,244,591 2,244,591 3 Other capital instruments - - - - 4 Retail deposits and

deposits from small business customers:

- - - -

5 Stable deposits - - - - 6 Less stable deposits - 4,945,286 909,309 11,101 5,280,237 7 Wholesale funding: - - - - 8 Operational deposits - - - - 9 Other wholesale funding - 1,186,007 176,085 - 421,780 10 Liabilities with matching

interdependent assets - - - -

11 Other liabilities - - - - 12 NSFR derivative liabilities - - - 13 All other liabilities and

equity not included in the above categories

- 737,527 - 597,524 597,524

14 Total ASF 8,544,132

Required stable funding (RSF) item

15 Total NSFR high-quality liquid assets (HQLA)

55,522

16 Deposits held at other financial institutions for operational purposes

- 3,515,620 202,826 103,447 732,204

17 Performing loans and securities:

- - - - -

18 Performing loans to financial institutions secured by Level 1 HQLA

- - - - -

19 Performing loans to financial institutions secured by non-level 1 HQLA and unsecured performing loans to financial institutions

- - - - -

20 Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs of which:

- 653,920 23,995 1,962,381 1,968,018

21 With a risk weight of less than or equal to 35% under the Basel II

- - - 22,522 14,639

a b c d e Unweighted value by residual maturity Weighted

value No

maturity < 6 months 6 months to

< 1 year

Greater or equal to 1

year

Available stable funding (ASF item) Standardized Approach for credit risk

22 Performing residential mortgages of which:

- - - - -

23 With a risk weight of less than or equal to 35% under the Basel II Standardized Approach for credit risk

- - - - -

24 Securities that are not in default and do not qualify as HQLA, including exchange-traded equities.

- - - - -

25 Assets with matching interdependent liabilities

- - - - -

26 Other assets: - - - - - 27 Physical traded

commodities, including gold

- - - - -

28 Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs

- - - - -

29 NSFR derivative assets - - - - - 30 NSFR derivative liabilities

before deduction of variation margin posted

- - - - -

31 All other assets not included in the above categories

- - - 2,697,450 2,697,450

32 Off-balance sheet items - 2,188,067 - - 109,403 33 Total RSF 5,577,236 34 Net Stable Funding

Ratio %

153%

17. Pillar 3 – Disclosure requirements for remuneration – 31 December 2019

The Basel Committee on Banking Supervision’s guidance to improve compensation practices and strengthen supervision in this area incorporates the Financial Stability Board’s Principles for Sound Compensation Practices. In terms of this requirement the Bank is required to disclose clear, comprehensive and timely information about its compensation practices to facilitate constructive engagement by all stakeholders, including in particular shareholders.

The requirements have been designed to be sufficiently granular and detailed to allow meaningful assessment by market participants of the Bank’s compensation practices, while not requiring disclosure of sensitive or confidential information. As a result, the Bank is required to disclose qualitative and quantitative information about its remuneration practices and policies covering the following areas:

● the governance / committee structures; ● the design / operation of remuneration structure, frequency of review; ● the independence of remuneration for risk / compliance staff; ● the risk adjustment methodologies; ● the link between remuneration and performance; ● the long-term performance measures (deferral, malus, claw-back); and ● the types of remuneration (cash / equity, fixed / variable).

The quantitative remuneration disclosure only covers senior management and other material risk takers as required.

To this end, the Bank's remuneration disclosure is set out in the table below.

(a) Name, composition and mandate of

the main body overseeing remuneration. External consultants whose advice has been sought, the body by which they were commissioned, and in what areas of the remuneration process. A description of the scope of the Bank’s Remuneration Policy (e.g. by regions, business lines), including the extent to which it is applicable

The main body overseeing remuneration is the Remuneration Committee (REMCO), which is chaired by an independent non-executive director and comprises solely of non–executive members of the Bank’s Board. The Bank uses external consultants where required to advise and guide on best practice in the market. The Bank conducts an annual benchmarking exercise using external consultants. The Bank’s Remuneration Policy and philosophy sets out the rules, regulations, procedures, forms and standard documents relating to remuneration. Remuneration is determined based on the complexity of the

to foreign subsidiaries and branches. A description of the types of employees considered as material risk takers and as senior managers, including the number of employees in each group.

role, the span of control and influence internally and externally, budget responsibility, people responsibility, scarcity of the skill and seniority of role. The Executive Committee conceptualises strategy and the senior management team executes the strategy. This group consists of 30 individuals. In the context of Bidvest Bank, Senior management is the Executive team and formulates the strategy and other material key risk takers are the Heads of departments who execute the strategy.

(b) Design and structure of remuneration processes, including an overview of the key features and objectives of the Remuneration Policy.

The Remuneration Policy is designed to achieve the following defined principles:

1. Adopting a competitive market remuneration position and targeting the market median (50th Percentile) for all total cost to company employees, with ability to accept counter-offers under specific conditions,

2. Creating an effective balance between guaranteed and variable pay,

3. Using both cash and non-cash incentives to reward, enhance and sustain individual performance, including short-term incentives to achieve short term outcomes,

4. Providing flexibility and choice for employment benefits, such as medical aid and retirement provision,

5. Practicing pay parity among employees in the same role, and

6. Utilising the Remuneration Committee to ensure that a fair and robust process is followed.

The Bank’s annual salary increase process is linked to individual performance and supported by the performance management process.

Review of the Remuneration Policy. Remuneration of risk and compliance employees.

Job sizing (Job Evaluation/Grading) Every role in the Bank is profiled and sized in terms of its content, complexity, requirements and expected outputs, an appropriate job size is allocated. The role, as guided by the job size, is benchmarked against the external market to inform the remuneration range for the Bank. The Bank has adopted the Paterson Grading System. The system is used to determine the grades applicable to jobs in the Bank and in relation to the market, and grading is determined in line with the rules and principles of the Paterson Grading System. The Remuneration Policy is reviewed annually and was last reviewed in July 2019 Remuneration of Risk and Compliance staff is based on Total Cost of Employment (TCE) as agreed upon at the time of employment. Any additional remuneration in the form of variable pay e.g. performance bonus is based on an individual’s performance and the overall performance of the Bank.

(c) Current and future risks and its incorporation into the remuneration processes. Key risks taken into account when implementing remuneration measures. Nature and type of the key measures used to take account of the risks, including risks difficult to measure. Impact on the key measures on remuneration.

The Bank’s main risk that affects remuneration relates to Credit Risk. Credit risk is considered in the remuneration of sales staff. Remuneration of employees is based on regular performance reviews and is informed by industry benchmark and prevailing market conditions. Executive directors’ employment contracts do not contain unusual leave or other benefit provisions and are terminable on reasonable notice. Directors’ and senior management’s remuneration are approved by the Remuneration Committee. The Bank does not offer a share incentive scheme but

Changes in the nature, type, reasons and impact of the measures over the past year

executives participate in the share incentive scheme of The Bidvest Group Limited. There have been changes to the variable remuneration namely commission structures, for reasons of sustainability of the incoming business as well as for purposes of a self-funding principle.

(d) How the Bank links performance during a performance measurement period with levels of remuneration. Main performance metrics for the Bank, top-level business lines and individuals. How individual remuneration is linked to Bank-wide and individual performance. Measures the bank will in general implement to adjust remuneration in the event that performance metrics are weak.

An incentive scheme is implemented that is linked directly to the Bank Performance Management System. Levels of remuneration and increases are directly determined by the individual’s performance. An incentive award is paid annually based on the results of the performance review and the performance of the business. The performance bonuses are a component of variable remuneration, due to the following: ● They have to be earned from a zero base

each year and thus have no carry-through effect,

● The quanta in any specific year is a direct function of the availability of funds,

● They serve as an attraction and retention mechanism, and

● They are aligned with strategy i.e. towards achievement of annual strategic goals.

Performance will be rewarded in terms of the performance management system subject to affordability. The bonus is in addition to remuneration and is not guaranteed.

(e) How the Bank adjusts remuneration to take account of longer-term performance. The Bank’s policy on deferral and vesting of variable remuneration and, if the fraction of variable

The Bank’s does not have a deferred variable remuneration practice. A limited number of senior employees participate in the Bidvest Group Limited share incentive scheme. Such participation

remuneration that is deferred differs across employees or groups of employees, the factors that determine the fraction and their relative importance. The Bank’s policy and criteria for adjusting deferred remuneration before vesting and (if permitted by national law) after vesting through clawback arrangements.

is subject to oversight by the Remuneration Committee. The share incentive scheme is managed by Bidvest Group Ltd and allocations of shares are made annually. Vesting of such shares occurs on a three-year cycle.

(f) Forms of variable remuneration that the Bank utilises and the rationale for using these different forms: Forms of variable remuneration offered (i.e. cash, shares and share-linked instruments and other forms). Use of the different forms of variable remuneration and, if the mix of different forms of variable remuneration differs across employees or groups of employees, the factors that determine the mix and their relative importance.

Remuneration in the Bank is in the form of fixed earnings, variable pay which include commission structures and shares. The composition of the remuneration is based on the role and seniority, and differs across the employee base, for example, sales employees are incentivised with variable pay in the form of commission and fixed earnings. Non-sales employees are remunerated on fixed earnings and variable pay in the form of performance bonuses. Senior management are remunerated on fixed earnings, variable pay in the form of performance bonuses and shares.

(g) Number of meetings held by the main body overseeing remuneration during the financial year and remuneration paid to its members.

There were two meetings held during the reporting period.

(h) Number of employees having received a variable remuneration award during the financial year.

In the past financial year, all employees received variable bonuses excluding sales employees, poor performers, employees subject to disciplinary proceedings, temporary employees and employees serving notice, as well as employees who had only been with the Bank for three months.

Number and total amount of guaranteed bonuses awarded during the financial year. Number and total amount of sign-on awards made during the financial year. Number and total amount of severance payments made during the financial year.

The Bank does not offer guaranteed bonuses. No sign-on payments were made during the financial year. There was no severance paid out during this period.

(i) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms. Total amount of shares paid out in the financial year.

The Bank does not have a deferred remuneration structure. The remuneration structure is concluded in a financial year, with the exception of the incentive share scheme which spans a period of three years from date of issue. Total amount of shares paid out that were due for vesting is R18 760 824 (for the six months 1 July 2019 to 31 December 2019).

(j) Breakdown of amount of remuneration awards for the financial year, including fixed and variable, deferred and non-deferred, different forms used (cash, shares and share-linked instruments, other forms).

Breakdown of amount of remuneration awards for the financial year to date (for the six months 1 July 2019 to 31 December 2019):

1. Fixed remuneration – R199 676 006 2. Incentive Bonus – R29 319 086 3. Sales Incentives – 1 808 084 4. Shares cashed in – R18 760 824

(k) Employees’ exposure to implicit (e.g. fluctuations in the value of shares or performance units) and explicit adjustments (e.g. malus, clawbacks or similar reversals or downward revaluations of awards) of deferred remuneration and retained remuneration: Total amount of outstanding deferred remuneration and retained remuneration exposed to ex post explicit and/or implicit adjustments. Total amount of reductions during the financial year due to ex post explicit adjustments.

Executive and Senior management eligible for shares, are exposed to changes in the value of listed shares in The Bidvest Group Limited through participation in the Bidvest Group share scheme.

The philosophy underpinning the compensation model is that people should be rewarded for their performance within the context of Bidvest Bank with the aim to attract, retain and energise talented, key individuals.

The Bank’s Remuneration Policy and philosophy sets out the rules, regulations, procedures, forms and standard documents relating to remuneration. Remuneration is determined based on the complexity of the role, the span of control and influence internally and externally, budget responsibility, people responsibility, scarcity of the skill and seniority of role.

Remuneration of employees is based on regular performance reviews and is informed by industry benchmark and prevailing market conditions. An incentive scheme is implemented that is linked directly to the Bank Performance Management System. The incentive award is paid annually based on the results of the performance review. The performance bonuses are a component of variable remuneration, due to the following:

● they have to be earned from a zero base each year and thus have no carry-through effect;

● the quanta in any specific year is a direct function of the availability of funds; ● they serve as an attraction and retention mechanism; and ● they are aligned with strategy i.e. towards achievement of annual strategic goals.

In the context of the Bank, Senior management is the Executive team and formulates the strategy and other material key risk takers are the Heads of departments who execute the strategy. This group consists of 30 individuals in this period. The Bank does not have a deferred variable remuneration practice.

A limited number of senior employees participate in the Bidvest Group Ltd share incentive scheme. Such participation is subject to oversight by the Remuneration Committee.

The share incentive scheme is managed by Bidvest Group Ltd and allocations of shares are made annually. Vesting of such shares occurs on a three-year cycle.

Remuneration in the Bank is in the form of fixed earnings, variable pay which include commission structures and shares.

The composition of the remuneration is based on the role and seniority, and differs across the employee base, for example, sales employees are incentivised with variable pay in the form of commission and fixed earnings.

Non-sales employees are remunerated on fixed earnings and variable pay in the form of performance bonus.

Senior management are remunerated on fixed earnings, variable pay in the form of performance bonus and shares.

Special Payments

The incentive scheme is used to promote and encourage Bidvest Bank employees to perform and help the business achieve its goals. The incentive award is paid annually based on the results of performance review. The Sign-on bonus is aimed at incentivising talent with critical skills to join the Bank.

Incentives are awarded in terms of the performance management system subject to affordability. The bonus is in addition to remuneration and is not guaranteed.

The performance bonuses are a component of variable remuneration, due to the following:

● They have to be earned from a zero base each year and thus have no carry-through effect;

● the quanta in any specific year is a direct function of the availability of funds; ● they serve as an attraction mechanism; and ● they are aligned with strategy i.e. towards achievement of annual strategic goals.

Bidvest Bank does not have guaranteed bonuses. Bonuses are discretionary and are based on performance for the financial year.

Sign-on awards are payments allocated to critical skills employees upon recruitment during the financial year.

Severance payments are payments allocated to employees dismissed during the financial year.