standard bank air 2016 risk and capital management...

Risk and capital management report and

annual financial statements 2016

Standard Bank Group

Contents

Standard Bank Group Risk and capital management report and annual financial statements 2016 1

RISK AND CAPITAL MANAGEMENT REPORT

4 Overview9 Summary

16 Capital management 25 Risk appetite and stress testing 29 Linkages 32 Credit risk 85 Compliance risk 87 Country risk 90 Funding and liquidity risk

102 Market risk 121 Insurance risk 127 Operational risk 131 Business risk 132 Reputational risk 133 Restatements 135 Annexure A – regulatory and legislative

developments impacting the group 148 Annexure B – IFRS and Basel reporting

frameworks156 Annexure C – composition of capital160 Annexure D – main features disclosure

template168 Annexure E – pillar 3 disclosure guide

ANNUAL FINANCIAL STATEMENTS

172 Directors’ responsibility for financial reporting

172 Group secretary’s certification 173 Report of the group audit committee 176 Directors’ report 179 Independent auditors’ report

190 Statement of financial position 191 Income statement 192 Statement of other comprehensive

income 193 Statement of cash flows 194 Statement of changes in equity 198 Accounting policy elections 201 Key management assumptions 209 Notes to the annual financial

statements 281 Standard Bank Group Limited

– company annual financial statements 290 Annexure A – subsidiaries,

consolidated and unconsolidated structured entities

306 Annexure B – associates and joint ventures

311 Annexure C – group share incentive schemes

316 Annexure D – emoluments and share incentives of directors and prescribed officers

330 Annexure E – detailed accounting policies

378 Annexure F – six-year review 384 Annexure G – third-party funds

under management

ADDITIONAL INFORMATION

ibc Contact details



We produce a full suite of reporting publications to cater for the diverse needs of our broad stakeholder base. The following reports and sources of information, which support our annual integrated report, are tailored to meet our readers' specific information requirements.

Our reports

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TOUR REPORT SUITE

Risk and capital management report and annual financial statements

Provides a detailed discussion of the management of strategic risks related to the group’s banking and insurance operations, and sets out the group and company’s full audited annual financial statements, including the report of the group audit committee.

Intended readers: providers of financial capital and regulators.

Assurance KPMG Inc. and PricewaterhouseCoopers Inc. have audited selected information in the risk and capital management report and have audited the annual financial statements for the year ended 31 December 2016, on which they have expressed an unmodified audit opinion.

Risk and capital management report and

annual financial statements 2016

Standard Bank Group

RCM/AFS

These icons refer readers to information in other reports that form part of the group’s suite of reporting publications:

Governance and remuneration report

Provides a detailed review of the group’s governance and remuneration practices, including the group’s remuneration policy. The report also provides shareholders with the notice of the group’s annual general meeting, together with the associated proxy forms.

Intended readers: providers of financial capital and regulators.

Frameworks applied Companies Act JSE Listings Requirements King Code Banks Act

Assurance Certain information in the governance and remuneration report has been extracted from the group’s audited annual financial statements.

Governance and remuneration

report 2016Standard Bank Group

Annual integrated report

As the group’s primary report, our annual integrated report provides a holistic assessment of the group’s ability to create value over time. It considers the issues that are material to maintaining the commercial viability and social relevance required to achieve our strategy in the medium to long term, including the macroeconomic and socio-political conditions within which we operate. Where applicable, information has been extracted from other reports within our report suite.

Intended readers: principally providers of financial capital but also considered to be of interest to our other stakeholders.

Frameworks applied International <IR> Framework of the

International Integrated Reporting Council Companies Act JSE Listings Requirements King Code Banks Act

Assurance While the annual integrated report is not audited, it contains certain information from the group’s audited consolidated annual financial statements, on which an unmodified audit opinion has been expressed, and from the group’s report to society on which assurance has been provided on selected information.

Annual integrated report 2016Standard Bank Group

AIR

For the latest financial information, including the latest financial results presentations, booklets, SENS and results announcements, refer to our investor relations page at www.standardbank.com/reporting or scan the QR code to be taken there directly.

We welcome the views of our stakeholders on our reports. Please email your feedback to [email protected]. You can also use this address to request printed copies of our reports.

Denotes text in the risk and capital management report that forms part of the group’s audited financial statements.

Frameworks applied Various regulations relating to financial services,

including Basel Capital Accord (Basel) III International Financial Reporting Standards (IFRS) South African Companies Act 71 of 2008

(Companies Act) Johannesburg Stock Exchange Limited (JSE)

Listings Requirements King Report on Corporate Governance (King Code) South African Banks Act 94 of 1990 (Banks Act)

GOV/REM

All our reports are available online at www.standardbank.com/reporting. Financial and other definitions, as well as a list of acronyms and abbreviations used in this report are also available online.

(This report)

4

Key elements of this policy include:

guiding principles for pillar 3 disclosure

frequency of reporting

governance processes

internal controls and procedures.

The board is satisfied that this report has been prepared in accordance with the requirements of the disclosure policy and that an appropriate control framework has been applied in the preparation of this report.

AssuranceAll disclosures in this report are unaudited, unless marked as audited.

RISK GOVERNANCE

Governance frameworkThe group’s approach to managing risk and capital is set out in the group’s risk, compliance and capital management (RCCM) governance framework, which is approved by the group risk and capital management committee (GRCMC). The framework has two components:

governance committees

governance documents such as standards, frameworks and policies.

REPORT OVERSIGHT

Board responsibilityThe Standard Bank Group’s (the group) board of directors (the board) has the ultimate responsibility for the oversight of risk.

As at 31 December 2016, the board is satisfied that:

the group’s risk, compliance, treasury, capital management and group internal audit (GIA) processes generally operated effectively

the group’s business activities have been managed within the board-approved risk appetite

the group is adequately funded and capitalised to support the execution of the group’s strategy.

In the instances where the group incurred losses, breached risk appetite or was fined by its regulators, the board is satisfied that management has taken appropriate remedial action.

Basel pillar 3 disclosureDuring 2016, the group audit committee (GAC), on behalf of the board, approved the group disclosure policy, which has been updated to incorporate the revised pillar 3 disclosure requirements set out by the Basel Committee on Banking Supervision (BCBS).


4 Report oversight

4 – Board responsibility

4 Risk governance

4 – Governance framework

5 – Governance committees

7 – Governance documents

7 Risk management landscape

7 – Emerging risks

7 – Three lines of defence model

8 – Enterprise risk management

8 – Risk culture

8 – Reporting

Overview


Governance committeesGovernance committees that operate within the RCCM governance framework are in place at both a board and management level. These committees have mandates and delegated authorities that are regularly reviewed.

Direct reporting line

Indirect reporting line

Group IT committee

Group audit committee

Group model approval committee

Group executive committee

Group management committee

Group risk oversight committee

Group risk and capital management committee

PBB1 model approval committee

CIB2 model approval committee 1 Personal & Business Banking.

2 Corporate & Investment Banking.

STANDARD BANK GROUP BOARD

Board committees Chief executives

Board committeesThe board committees that are responsible for the oversight of the group’s RCCM comprise the GRCMC, the GAC, the group information technology (IT) committee and the group model approval committee. The key roles and responsibilities of these committees, as they relate to RCCM, are summarised in the sections that follow.

Group risk and capital management committeeThe GRCMC provides independent oversight of RCCM across the group by:

ensuring adequate and effective implementation of risk governance processes, standards, policies and frameworks

ensuring that the risk strategy is executed by management in accordance with the board-approved risk appetite and the RCCM governance framework

considering the quarterly risk management report which includes detailed updates on risk types, as well as the separate updates from legal, compliance, capital and liquidity risk and intragroup exposures

reporting material risk and capital management matters to the board.

The GRCMC is a subcommittee of the board. It provides an independent objective oversight of risk, compliance and capital management in the group. It also reviews and assesses the adequacy and effectiveness of the group RCCM governance framework, and the integrity of risk controls and systems.

The GRCMC’s full terms of reference can be found in the governance and remuneration report. These are considered annually by the GRCMC and approved by the board.

The chairmen of the board, the GAC, the remuneration committee, the group social and ethics committee and the group IT committee are all members of the GRCMC. This common membership supports an integrated view of financial controls, IT and risk, and ensures that relevant finance and risk input is considered in the determination of levels of compensation.

A total of four meetings of the GRCMC were held during 2016, all of which were attended by the group’s external auditors. One special meeting was held to approve the group’s interim risk and capital management report. At each meeting of the GRCMC, the chief risk officer (CRO) provided

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In order to ensure the independence of the second line of defence functions, the chairman of the GAC meets individually with the group chief compliance officer (GCCO), the group financial director, the group chief audit officer and the group head of operational risk management, who is also responsible for financial crime control, without management being present, on a quarterly basis and as required.

The group IT committeeThe group IT committee’s purpose is to assist the board in fulfilling its corporate governance responsibilities with respect to IT and reports to the board through its chairman. The committee has the authority to review and provide guidance on matters related to the group’s IT strategy, budget, operations, policies and controls, the group’s assessment of risks associated with IT, including disaster recovery, business continuity and IT security, as well as oversight of significant IT investments and expenditure.

The group model approval committeeThe group model approval committee is designated by the board to discharge the board’s regulatory responsibility of reviewing and approving the group’s material risk models, as well as models used in the calculation of regulatory capital. This committee is supported by the PBB and CIB model approval subcommittees, with the models being assigned to these three committees for approval based on an assessment of the materiality of each model.

Management committeeThe group risk oversight committeeExecutive management responsibility for all material risk types has been delegated by the group management committee to GROC which, in turn, assists the GRCMC in fulfilling its mandate.

As is the case with the GRCMC, GROC calls for and evaluates in-depth investigations and reports based on its assessment of the group’s risk profile and external factors.

GROC delegates authority to various subcommittees which deal with specific risk types or oversight activities. Material matters are escalated to GROC through reports or feedback from each subcommittee chairman.

The GROC subcommittees are as follows:

CIB credit governance committee, chaired by the CIB CRO

PBB credit governance committee, chaired by the PBB CRO

the committee with an overview of the key risk issues discussed at the group risk oversight committee (GROC). During the year, the GRCMC considered the following:

an update by group risk-type heads and business line CROs on the specific issues of group-level significance, as well as other relevant items in their respective areas of responsibility. In relation to capital adequacy, the committee approved the internal capital adequacy assessment process (ICAAP) and its submission to the South African Reserve Bank (SARB). Capital adequacy was also assessed in light of Basel III requirements which are being phased in from 2013 to 2019

the group’s current and future risk profile relative to the group’s risk appetite. During 2016, specific consideration was given to the effect of the commodity downturn on certain geographies and markets in which the group operates. The committee also considered management updates on risk appetite across sectors and countries to ensure that concentration to specific sectors were appropriately managed and risk appetite adjusted, where appropriate

the impact of persistent drought conditions on its agriculture portfolio, as well as the effect of the macroeconomic and operating environment, which included a view of consumer strain on the personal and business banking portfolios

key risks to the group in the event of a South African sovereign rating downgrade to sub-investment grade, an overview of the anticipated implications from a revenue, capital and liquidity perspective, as well as the group’s mitigation strategies were considered

the impact on the group of increased de-risking by global banks of their correspondent banking portfolios in Africa.

The committee reported to the board following each meeting on its consideration of the group’s risk profile and any concerns it may have had.

Ongoing committee education sessions were held during the year which covered risk data aggregation and risk reporting (RDARR) and model risk management.

The group audit committeeThe GAC has oversight of the group’s financial position and makes recommendations to the board on all financial matters, financial risks, internal financial controls, fraud, compliance, IT risks and the impact of IT on financial controls. In relation to RCCM, the GAC plays a role in assessing the adequacy and operating effectiveness of the group’s internal financial controls.

RISK AND CAPITAL MANAGEMENT REPORT Overview Risk governance continued


of a more structured assessment process to ensure consideration and consolidation of all potential risks as part of the combined assurance approach.

Three lines of defence modelThe group uses the three lines of defence governance model which promotes transparency, accountability and consistency through the clear identification and segregation of roles.

The first line of defence consists of the management of business lines and legal entities. It is the responsibility of first line management to identify and manage risks. This includes, at an operational level, the day-to-day effective management of risk in accordance with agreed risk policies, appetite and controls. Effective first line management includes:

the proactive self-identification of issues and risks, including emerging risks

the design, implementation and ownership of appropriate controls

the associated operational control remediation

a strong control culture of effective and transparent risk partnership.

The second line of defence functions provide independent oversight and assurance. They have resources at the centre and embedded within the business lines. Central resources provide groupwide oversight of risks, while resources embedded within the business lines support management in ensuring that their specific risks are effectively managed as close to the source as possible. Central and embedded resources jointly oversee risks at a legal entity level.

The second line of defence functions develop, implement and integrate governance standards, frameworks and policies for each material risk type to which the group is exposed. This ensures consistency and an enterprise-wide approach across the group’s business lines and legal entities. Compliance with the standards and frameworks is ensured through annual self-assessments by the second line of defence and reviews by GIA.

The third line of defence provides independent and objective assurance to the board and senior management on the effectiveness of the first and second lines of defence. This responsibility lies with the GIA function.

All three levels report to the board, either directly or through the GRCMC and the GAC.

group asset and liability committee (ALCO) and its subcommittees, the group capital management committee and the intragroup exposure committee, all chaired by the group financial director

group compliance committee, chaired by the GCCO

group country risk management committee, chaired by the group CRO

group equity risk committee (ERC), chaired by the CIB CRO

group internal financial control governance committee, chaired by the group financial director

group operational risk committee, chaired by the group head of operational risk management

group sanctions review committee, chaired by the group chief executive officer

group stress testing and risk appetite committee, chaired by the group CRO

recovery and resolution planning committee, chaired by the group financial director.

Governance documentsGovernance documents within the RCCM governance framework comprise standards, frameworks and policies which set out the requirements for the identification, assessment, measurement, monitoring, managing and reporting of risks and the effective management of capital.

Governance standards and frameworks are approved by the relevant board committee. Relevant group policies are approved by the group management committee or subcommittee, relevant GROC subcommittee, GROC itself or, where regulations require board approval, by the board or relevant board committee.

Business line and legal entity policies are aligned to these group policies and are applied within their governance structures.

RISK MANAGEMENT LANDSCAPE

Emerging risksIn an ever evolving world that is interconnected through technology it is becoming increasingly important for the group to remain forward-looking in its management of the risk environment. Through the continuous assessment of current and emerging risks, the group is better equipped to identify these potential risks and manage and mitigate them effectively. The group is focusing on the development

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RISK AND CAPITAL MANAGEMENT REPORT Overview Risk management landscape continued

Enterprise risk managementThrough the three lines of defence framework, the group continues to monitor, manage and mitigate its material risks on a groupwide basis. With an increasing focus on consistency and transparency, the group regularly assesses and enhances its risk management framework to ensure it is fit-for-purpose. Risk management efforts are focused on the groupwide alignment of risk and financial reporting and underlying data, governance and monitoring thereof, education and awareness initiatives, as well as systems capabilities, providing the ability to more easily identify and leverage opportunities between the various risk types.

Risk cultureThe group leverages off the three lines of defence model to build and maintain a strong risk culture, where resilience is a priority for the effective management of risk across the group. The group focuses on multiple drivers to enhance risk culture, with emphasis on doing the right business, the right way. Through the embedding of its values and ethics, policies, compliance training programmes and a whistle-blowing programme, the group empowers its employees to act with confidence, driving meaningful behavioural changes and placing the customer at the centre of everything it does.

In 2017, increased emphasis will be placed on the critical values-based behaviours that are required from all group employees.

ReportingThe group’s risk appetite, risk profile and risk exposures are reported on a regular basis to the board and senior management through various governance committees. Risk management reports originate in the business units and are

then escalated through a formalised governance structure as mandated, based on materiality. A group risk management report is tabled at both board and senior management risk committees. These include the group executive committee, the group management committee, GROC and the GRCMC.

Reports to board committees comply with the group’s internal risk reporting standards, which are set out in the group’s RDARR policy.

Risk data aggregation and risk reportingIn January 2013, the BCBS published principles for effective RDARR with the aim to improve the quality of information that banks use in decision making, particularly as it pertains to risk management. Global systemically important banks (G-SIBs) were required to comply by 1 January 2016 and domestic systemically important banks (D-SIBs) by 1 January 2017. Given the complexity, scope and scale of the requirements, it has been broadly accepted by South African regulators that full compliance was not possible by the deadline, although banks had to demonstrate material compliance, in terms of the scope agreed with the SARB, by 1 January 2017. Notwithstanding this, it is important to note that the SARB is resolute that full compliance to the directive across the group remains a requirement. The SARB has further indicated that there will be an increase in focus on our remedial actions in the Africa Regions. As such, the SARB has requested detailed plans to oversee the journey to full compliance across the group for 2017 and beyond.

Given the group’s material compliance and its planned journey to full compliance beyond 1 January 2017, condonation for not being fully compliant at 1 January 2017 was applied for and granted by the SARB in December 2016. The SARB has indicated that a certification process will be initiated in the latter half of 2017 to validate the group’s material compliance status.


Each risk is defined within the relevant section, together with:

an explanation of the application of the group’s RCCM governance framework to the specific risk

the approved regulatory treatment for capital requirements to be held against the specific risk in terms of Basel

a description of the relevant portfolio characteristics both in terms of prescribed disclosure and the group’s business model.

RISK TYPES

CREDIT RISK

COMPLIANCE RISK

COUNTRY RISK

FUNDING AND LIQUIDITY RISK

MARKET RISK

INSURANCE RISK

OPERATIONAL RISK

BUSINESS RISK

REPUTATIONAL RISK

RISK TYPES

9 Risk types

10 Highlights

10 – Capital management

10 – Risk appetite and stress testing

11 – Credit risk

12 – Compliance risk

13 – Country risk

13 – Funding and liquidity risk

14 – Market risk

14 – Insurance risk

15 – Operational risk

Summary


RISK AND CAPITAL MANAGEMENT REPORT Summary continued

Year in brief

Focus areas for 2017

In 2017, the group will focus on:

ensuring further progress on IFRS 9 Financial Instruments (IFRS 9) expected credit loss impairment calculations and methodologies, and managing the implementation thereof for reporting purposes, with particular focus on the 2017 parallel run and external assurance reviews later in the year

increasing the attention on mitigating ongoing portfolio risks related to variable commodity prices, foreign currency liquidity concerns in some jurisdictions and political volatility

driving delivery on the objectives of enhancing credit risk data quality through the group’s RDARR programme

continuing to apply appropriate and responsible lending criteria and focus of risk appetite where required to ensure prudent lending prevails

managing exposure concentrations across counterparties, portfolios, products, industries and regions

continuing to enhance the credit risk governance framework that underpins the group’s credit risk appetite

ongoing review and refinement of credit risk rating models

continuing to focus on the effectiveness of collections.

The rate of credit extensions to corporates and households in South Africa decelerated through 2016. While demand for credit by corporates was relatively stable during the year, the financial pressure on consumers was evident in the subdued extension of credit to households. Muted levels of business confidence and increased unemployment particularly in South Africa had a somewhat dampening effect on portfolio growth.

Across the lending sector, growth in commercial property advances increased more than that for residential property. Growth in instalment sale credit and leasing finance also slowed in 2016, mainly driven by the decline in finance for new vehicles. The demand for used vehicles is insufficient to boost credit extension in this area. Demand for credit by industry reflects higher demand from the electricity, gas and utilities, telecommunications and agriculture sectors, a dampening of demand from manufacturing and a decline in demand and extension to the mining sector.

The group’s banking activities’ average gross loans and advances increased by 3%. The subdued growth can be attributed to a mortgage portfolio which, although increased by 3.2%, is still facing limitations in market demand. Other factors include a tightened risk appetite in response to economic challenges facing the continent and the impact of currency conversions which have seen some portfolio reduction in ZAR equivalent terms. All credit metrics at group level remained within approved risk appetite limits.

The group credit loss ratio (CLR) of 0.86% has improved marginally from the 0.87% in 2015. The non-recurrence of large impairments in the corporate lending portfolio, as well as a decline in impairments in the South African mortgage lending portfolio were key contributing factors to the improved result.

The CLR for PBB South Africa improved to 1.29% in 2016 from 1.34% in 2015 driven by positive performance in the mortgage portfolio on the back of loss given default (LGD) stabilisation, offset by the pressure evidenced in medium business enterprises, agricultural exposures and some deterioration in personal unsecured lending. The agricultural portfolio has reflected early signs of improvement due to the recent improved weather conditions.

In line with expectations, the quality of the PBB Africa Regions portfolio reflected deterioration year-on-year largely ascribed to the South East region and Nigeria, the latter being characterised by difficult economic and political conditions.

The CLR in CIB increased from 0.24% in 2015 to 0.3% in 2016, driven by increased performing portfolio provisions in the Africa Regions. In South Africa, the CLR improved to 0.09% in 2016 (from 0.10% in 2015). CIB’s ability to maintain its CLR within its target range during a difficult economic cycle in 2016 is attributed to the proactive management of exposures to commodity dependent customers and countries, coupled with a focus on high-quality credit names.

CREDIT RISK

Year in brief

CAPITAL MANAGEMENT RISK APPETITE AND STRESS TESTING

Year in brief


During 2017, the group will focus on:

optimising the level and composition of capital with due consideration of business plans and current and future regulatory requirements

effectively allocating resources, including capital and liquidity between product lines, trading desks, industry sectors and legal entities to enhance the overall group economic profit and return on equity (ROE)

continuing to participate in the BCBS quantitative impact studies to assess the impact of proposed amendments to regulatory requirements.

The group remained adequately capitalised above minimum regulatory requirements.

The South African D-SIB framework and the Basel III capital conservation buffer requirements came into effect from 1 January 2016 and are being phased in over a three-year period with full implementation from 1 January 2019.

In addition, from 1 January 2016 a countercyclical buffer (CCyB) framework came into effect in terms of which regulators may impose buffer requirements when there is deemed to be a risk of excess aggregate credit growth. CCyB requirements have not been announced for South Africa.


Stress testing has evolved from a regulatory tool used by supervisors to assess banks’ ability to withstand stress, to an internal risk management tool. Embedding the use of stress testing results to benefit risk management and decision making at various levels in the organisation will be ongoing, driven by a focus on:

refining internal models to determine the impact of stress scenarios, closer alignment between risk and finance planning and delivering a tool set that allows for a holistic stressed result across statement of financial position (SOFP), income statement, capital and liquidity

monitoring the consequences of a number of events, including:

• actions by rating agencies with regard to the South African sovereign rating

• political and policy changes in South Africa and elsewhere• Brexit• the newly elected US president• volatile macroeconomic conditions in key markets

embedding qualitative and quantitative risk appetite across the group.

During 2016, a number of known risks threatened to escalate further. Key among these were:

the possibility of a South African ratings downgrade

the United States of America (US) Federal Reserve rate hike

the slowdown of growth in South Africa

the unpredictable social and political environment

pressure on commodity prices

a loss of investment in emerging markets

threats to the stability of the financial sector in both South Africa and across the African continent

de-risking by correspondent banks

foreign currency liquidity shortages and sovereign weakness in a number of African countries.

Additionally, adverse weather conditions, sovereign risk arising from elections in certain countries, policy changes and spill-over effects from South Africa were also considered as risks specific to individual African countries. These all formed the basis of various macroeconomic stress testing exercises performed during the year within the group and individual legal entities.

A robust qualitative risk appetite statement was developed to guide decision making within the group. The group continued to focus on the implementation and cascading of the risk appetite on a groupwide, business unit, legal entity and risk-type basis.

HIGHLIGHTS


RISK AND CAPITAL MANAGEMENT REPORT Summary Highlights continued

FUNDING AND LIQUIDITY RISK

Year in brief


During 2017, the group will focus on:

balance sheet optimisation and mix in conjunction with NSFR compliance from January 2018

continuing industry engagement and analysis with the Banking Association South Africa (BASA) and the SARB to finalise market-based solutions and areas of national discretion in meeting the NSFR framework and implementation thereof from January 2018

continuing to diversify the group’s funding base across rand and foreign currencies with a view to mitigating specific risks (e.g. credit rating downgrade risk) and minimising funding costs for the group

ongoing systems enhancements to ensure compliance with liquidity regulations with a specific focus on daily liquidity reporting across all entities

ongoing enhancements to funds transfer pricing methodology to incorporate regulatory developments across all entities.

The group maintained its liquidity positions within the approved risk appetite and tolerance limits. Appropriate liquidity buffers were held in line with regulatory, prudential and internal stress testing requirements, taking into account the global risk profile and market conditions.

The group continued to advance its asset-liability management capabilities and its approach to liquidity risk management. The group further evolved its internal liquidity risk management framework to ensure that it has, at all times, sufficient liquidity resources to continue operating under a group-specific and industry systemic stress event.

The group successfully maintained a Basel III liquidity coverage ratio (LCR) in excess of the 70% minimum regulatory requirement.

The group continued to evaluate the funding impact relating to the Basel III net stable funding ratio (NSFR) with a focus on balance sheet optimisation and mix to ensure NSFR compliance with effect from January 2018.

The group continued to enhance the funds transfer pricing methodologies to ensure that accurate pricing and measurement of the internal cost of funding was undertaken.

Progress was made by the group in complying with BCBS 239 data aggregation and reporting principles.

Year in brief

COUNTRY RISK


Given that political and economic challenges may extend into 2017 in many markets, country risk appetite and country-specific risks will continue to be managed prudently. Risk management measures will be supplemented by ongoing refinement of the country risk operating model, portfolio management tools, and the governance framework.

SBSA cross-border exposure to sub-Saharan Africa increased during the year, consistent with the group’s strategic focus. In these markets, the group anticipated sovereign weakness and associated foreign currency liquidity shortages as a secondary result of low commodity prices. As a result, the strategy has been to increase our focus on local currency products, and seek mitigation of foreign currency liquidity risk. Africa is our home, and the group has a rigorous focus on countries in which it has a local presence. Having a significant local bank in each of these countries provides the group with a competitive edge in information flow and managing local conditions and risks, including those of a political nature.

COMPLIANCE RISK

Year in brief

During 2016, the group’s compliance framework was well-embedded in all jurisdictions, with increased onsite support being provided by central compliance subject matter experts to the Africa Regions, Standard Bank International jurisdictions and Liberty. This support included training and awareness provided to various subsidiary boards, senior management and compliance staff.

An increase in resources enhanced the group’s anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance monitoring capabilities. A dedicated enhanced due diligence function was established in the AML division to support business in the management of client risk. In addition, the implementation of an automated money laundering surveillance system significantly enhanced the group’s surveillance and reporting capabilities.

Group compliance assumed responsibility for anti-bribery and corruption (ABC) in 2016. The approach has included a review of the ABC framework across the group and there are various initiatives underway to further enhance the group’s capability in this regard, with a strong focus on ABC training.

In April 2015, the South African Competition Commission announced that it had initiated a complaint against Standard New York Securities Inc. (SNYS) and 21 other institutions concerning possible contravention of the Competition Act in relation to USD/ZAR trading between 2007 and 2013. No mention was made of The Standard Bank of South Africa Limited (SBSA). On 15 February 2017, the Competition Commission lodged five complaints with the Competition Tribunal against 18 institutions, including SBSA and SNYS, in which it alleges unlawful collusion between those institutions in the trading of USD/ZAR. The group only learned of the SBSA-related complaints at this time and are engaging with the Competition Commission to better understand the basis for the complaints and the appropriate response. The group considers these allegations in an extremely serious light and remains committed to maintaining the highest levels of control and compliance with all relevant regulations. The allegations are confined to USD/ZAR trading activities within SBSA and do not relate to the conduct of the group more broadly.


Group compliance will continue to focus on conduct and client centricity, by ensuring that systems implementation, training and other conduct initiatives are integrated with compliance risk management principles to support appropriate outcomes for all of the group’s stakeholders.


OPERATIONAL RISK

Year in brief


Financial crime mitigation will focus on the online channels, in line with increased consumer usage in this area, predominantly being geared towards real time predictive fraud analytics, while optimising the branch operations and improving overall customer experience. The group continues to innovate to stay ahead in the digital banking environment, with a focus on combating cybercrime. The bank continues to replace outdated systems and procure and implement the latest technology in order to prevent and fight online fraud in real time.

Upgrades are planned for the card fraud detection system for immediate fraud analytics. This system will provide for instantaneous fraud detection for debit and credit card transactions on the ATM, point of sale and branch channels.

In 2017, the group will focus on building awareness, thought leadership and controls aligned to emerging risks. The group will continue to enhance the data privacy control environment, including measures for security safeguards, lawful processing practices and assisting data subjects (person whose information is accessible) to exercise their rights.

Current and emerging cybercrime and cybersecurity threats will receive increased focus through continued improvement of people, process and system vulnerabilities, including increased internal and third-party attention. This will enable the proactive deployment of resources to better manage cyber threats and crimes and allow for protection of our information assets. The group’s insurance programme will continue to evolve to ensure coverage for emerging cyber-related risks.

Anticipated amendments to the Basel framework remain a source of uncertainty. Key changes related to operational risk are the removal of internal modelling and revisions to the principles for the sound management of operational risk.

The group will ensure its ability to deal with business disruption through the enhancement of the business resilience strategy and capability, as well as holistic simulations. This will also align with the recovery and resolution plan.

The group continued to make positive strides in the adoption of conscious risk taking through maturing the integrated operational risk (IOR) area. Operational risk must be managed by all employees, therefore, ongoing training and awareness of key trends and threats remains a critical focus.

As announced by the group on 23 May 2016 on the Stock Exchange News Service (SENS), the group’s South African banking operations were the victim of a sophisticated,

coordinated fraud incident that involved the withdrawal of cash using a number of fictitious cards at various automated teller machines (ATM) in Japan. Standard Bank was the target of the fraud and there has been no financial loss for its customers.

Early warning systems, enhanced detection rules and new preventative strategies implemented in the fraud environment have proved beneficial for the group.

The group developed and improved data privacy processes, enabling its

global operations to attain a consistent data privacy control environment.

Additionally, efforts on emerging and current cybercrime and cybersecurity threats, as well as improvement of the vulnerability management posture, through increased internal and third-party coverage have been a focus for the year.

The group developed a model to assess and monitor third-party risk aligned to the changing regulatory focus.


The group will focus on monitoring and managing the traded market risk, banking book interest rate, equity risk, own equity-linked transactions, foreign currency risk and associated hedges in the context of current market volatility, including monetary policy decisions.

The implications of the revised trading book regulations and interest rate risk in the banking book standards recently published will be a continued area of focus.

Year in brief

MARKET RISK

The group maintained its trading and banking book positions within the approved risk appetite and tolerance levels.

The group continued to advance its interest rate risk management and make changes to its global markets and market risk technology.

The group provided comment on proposed changes to regulations impacting trading and banking book positions.

Year in brief

INSURANCE RISK


The group will continue to monitor and actively respond to the rapid pace of change in the emerging regulatory landscape affecting the insurance industry. There will be ongoing focus on the management of insurance risks across the group, with particular emphasis on ensuring readiness for SAM implementation, which is expected to take place during the latter half of 2017.

Progress was made in implementing a number of emerging regulations, with specific focus on:

embedding the solvency assessment management (SAM) programme

assessing the retail distribution review (RDR) proposals

preparing for the Financial Sector Regulation Bill model of financial regulation (Twin Peaks).

RISK AND CAPITAL MANAGEMENT REPORT Summary Highlights continued

16

Main heading

REGULATORY UPDATE

The SARB adopted the Basel III framework introduced by the BCBS from 1 January 2013. The group has complied with the minimum requirements from that date. The Basel III capital adequacy requirements are subject to phase-in rules and the group is well-positioned to comply with the requirements when they become effective. The South African D-SIB framework and the Basel III capital conservation buffer requirements came into effect from 1 January 2016 and will be phased in over a three-year period with full implementation from 1 January 2019. In addition, from 1 January 2016, a CCyB framework came into effect in terms of which regulators may impose buffer requirements when there is deemed to be a risk of excess aggregate credit growth associated with a build-up of system-wide risk. CCyB requirements have not been announced for South Africa, but the group is subject to CCyB requirements on exposures in other jurisdictions where these buffers apply from time-to-time. Currently, the group has private sector credit exposure to three jurisdictions that have announced CCyBs greater than zero, namely Hong Kong, Sweden and Norway. These exposures result in risk-weighted assets (RWA) of R40 million, R31 million and R0.1 million respectively, resulting in a buffer requirement of 0.0001%.

The graph on the following page reflects the Basel III capital requirements and phase-in periods applicable to South Africa.

OVERVIEW AND OBJECTIVES

The group’s capital management function is designed to ensure that regulatory requirements are met at all times and that the group and its principal subsidiaries are capitalised in line with the group’s risk appetite and target ratios, both of which are approved by the board.

It further aims to facilitate the allocation and use of capital, such that it generates a return that appropriately compensates shareholders for the risks incurred. Capital adequacy is actively managed and forms a key component of the group’s budget and forecasting process. The capital plan is tested under a range of stress scenarios as part of the group’s annual ICAAP and recovery plan.

The capital management function is governed primarily by management level subcommittees that oversee the risks associated with capital management, namely the group ALCO and one of its subcommittees, the group capital management committee. The principal governance documents are the capital management governance framework and the model risk governance framework.

Subject to compliance with the corporate laws of relevant jurisdictions and appropriate motivation to and approval by exchange control authorities, no significant restrictions exist on the transfer of funds and regulatory capital within the group.


16 Overview and objectives

16 Regulatory update

17 Regulatory capital

17 – Banking operations

23 – Insurance operations

23 Economic capital

23 – Banking operations

24 – Insurance operations

24 Risk-adjusted performance measurement

24 Cost of equity

Capital management


16

14

12

10

8

6

4

2

CET I Additional tier IConservation buffer Tier II

South African minimum capital requirements1

(capital as a % of RWA) effective 1 January each year (%)

1 Graph excludes CCyB and confidential bank-specific pillar 2b capital requirement, but includes maximum potential D-SIB requirement which is also bank-specific and, therefore, confidential.

12.00

6.50

2.75

1.25

1.50

2017

14.00

6.00

3.25

2.50

2.25

2019

6.25

3.00

1.88

1.63

13.01

2018

11.01

6.50

2.50

0.631.38

2016

Finalisation of the Basel III regulatory reform proposals post the global financial crisis is expected in 2017. Annexure A provides a summary of the regulatory and legislative developments that impact the group. In particular, the proposals on revised standardised approaches for credit and operational risk, a capital floor based on the standardised approaches for internal ratings-based accredited banks, proposals for the fundamental review of the trading book and the loss absorbing and recapitalisation capacity of systemically important banks may impact capital levels going forward. These proposals and implementation timelines are at different stages of finalisation.

REGULATORY CAPITAL

The group manages its capital levels to support business growth, maintain depositor and creditor confidence, create value for shareholders and ensure regulatory compliance.

The main regulatory requirements to be complied with are those specified in the Banks Act and related regulations, which are aligned with Basel III.

Banking operationsRegulatory capital adequacy is measured through the following three risk-based ratios:

common equity tier I (CET I): ordinary share capital, share premium, retained earnings, other reserves and qualifying non-controlling interest less impairments divided by total RWA.

tier I: CET I and other qualifying non-controlling interest plus perpetual, non-cumulative instruments with either contractual or statutory principal loss absorption features that comply with the Basel III rules divided by total RWA. Perpetual non-cumulative preference shares that comply with Basel I and Basel II rules are included in tier I capital but are currently subject to regulatory phase-out requirements over a 10-year period, which commenced on 1 January 2013.

total capital adequacy: tier I plus other items such as general credit impairments and subordinated debt with either contractual or statutory principal loss absorption features that comply with the Basel III rules divided by total RWA. Subordinated debt that complies with Basel I and Basel II rules is included in total capital but is currently subject to regulatory phase-out requirements, over a 10-year period, which commenced on 1 January 2013.

The ratios are measured against internal targets and regulatory minimum requirements.

The following graph discloses the group’s total capital adequacy and the components thereof and indicates that the group’s capital is well-above the required level of capital.

18

15

12

9

6

3

Tier I Tier II Required capital

Capital adequacy1, 2 (%)

1 2011 is on a Basel II basis. Basel III was implemented on 1 January 2013. RWA and capital adequacy for 2012 are on a Basel III basis.2 Group, including Liberty.

2013 2014 2015 20162011 2012

18

RWA are calculated in terms of the Banks Act and related regulations, which are aligned with Basel III.

The group’s CET I capital, including unappropriated profit, was R122.6 billion as at 31 December 2016 (2015: R121.6 billion). The group’s tier I capital, including unappropriated profit, was R126.2 billion as at 31 December 2016 (2015: R125.7 billion) and total capital, including unappropriated profit was R146 billion as at 31 December 2016 (2015: R148 billion).

The group has a balanced tier II subordinated debt maturity profile. During 2016, the group issued R1.7 billion Basel III compliant tier II instruments (2015: R3.6 billion).

2 000

1 500

1 000

500

Total assets RWA

RWA history1 (Rbn) (closing balances)

2013 20162012 2014 20152011

1 Banking activities and other banking interests.

7 000

6 000

5 000

4 000

3 000

2 000

1 000

2019

Callable date

Maturity profile of the group’s tier II instruments (Rm)

2017 20222018 2020 2021

BASEL QUALIFYING CAPITAL, EXCLUDING UNAPPROPRIATED PROFITS

2016Rm

2015Rm

IFRS ordinary shareholders’ equity 150 757 151 069Qualifying non-controlling interest 4 488 5 896Less: regulatory adjustments (32 676) (35 394)

Goodwill (2 239) (4 152)Other intangible assets (19 289) (17 773)Shortfall of credit provisions to expected losses (2 118) (2 186)Investments in financial entities (8 432) (10 358)Other adjustments (598) (925)

Less: regulatory exclusions (8 168) (9 472)

CET I capital 114 401 112 099

Perpetual preference shares 3 297 3 846Qualifying non-controlling interest 322 293

Tier I capital 118 020 116 238

Tier II subordinated debt 17 773 20 118General allowance for credit impairments 2 357 2 170

Tier II capital 20 130 22 288

Total regulatory capital 138 150 138 526

Total capital requirement 91 631 94 403

Total RWA 883 179 944 039

RISK AND CAPITAL MANAGEMENT REPORT Capital management Regulatory capital continued


OV1: BASEL RWA AND ASSOCIATED CAPITAL REQUIREMENTS

Tablereference2

a b c

RWA

Minimum capital

requirements1

T3 T-14 T

Credit risk (excluding counterparty credit risk) 627 691 692 137 65 123

Of which standardised approach5 CR4 258 526 298 400 26 822 Of which internal ratings-based (IRB) approach CR6, CR7, CR8 369 165 393 737 38 301

Counterparty credit risk (CCR) CCR1 21 184 22 769 2 198CCR2

Of which standardised approach for CCR (SA-CCR) 2 640 5 407 274 Of which IRB approach 18 544 17 362 1 924

Equity positions in banking book under market-based approach CR10 6 167 4 863 640

Securitisation exposures in banking book 678 752 71

Of which IRB approach SEC3 228 94 24 Of which IRB supervisory formula approach SEC3 450 376 47 Of which standardised approach 282

Market risk 39 444 46 745 4 092

Of which standardised approach MR1 21 411 31 658 2 221 Of which internal model approach MR2 18 033 15 087 1 871

Operational risk 149 163 140 163 15 476

Of which standardised approach 89 971 86 256 9 335 Of which advanced measurement approach (AMA) 59 192 53 907 6 141

Amounts below the thresholds for deduction (subject to 250% risk weight) 38 852 36 610 4 031

Total 883 179 944 039 91 631

1 Capital requirement at 10.38% (December 2015: 10%) excludes the confidential bank-specific add-ons.2 Refer to annexure E for more information.3 2016.4 2015.5 Portfolios on the standardised approach relate to the Africa Regions and portfolios for which application to adopt the internal model approach has not been

submitted, or for which an application has been submitted but approval has not been granted.

The lower RWA in 2016 is mainly attributable to appreciation of the ZAR against the USD and major African currencies coupled with decreased counterparty credit risk and market risk from exposures that are subject to mark-to-market. These reductions in RWA were partially offset by higher operational risk requirements from increased revenue, impacting both exposures on the standardised approach and those on the AMA approach due to capital floor requirements.

20

1 200

1 000

800

600

400

200

RWA reconciliation (Rbn)

Dec 2015RWA

Foreign exchangemovement

ThresholdRWA increase

Operationalgrowth

Dec 2016RWA

944.0 2.2 33.7

883.2

(96.7)

20.0

16.0

12.0

8.0

4.0

Total capital adequacy ratio movement (%)

DividendsForeignexchange

impact

Dec 2015capital

adequacyratio

Movementin RWA

Increasein reserves

Othermovements

Dec 2016capital

adequacyratio

15.716.60.4

2.4 (1.2)(0.6) (0.1)

CAPITAL ADEQUACY RATIOS1

2016 SARB minimum

regulatory requirement2

%

Internaltargetratios

%

Including unappropriated profits

Excluding unappropriated profits

2016%

2015%

2016%

2015%

Total capital adequacy ratio 10.4 15.0 – 16.0 16.6 15.7 15.6 14.7Tier I capital adequacy ratio 8.1 12.0 – 13.0 14.3 13.3 13.4 12.3CET I capital adequacy ratio 6.9 11.0 – 12.5 13.9 12.9 13.0 11.9

1 Group, including Liberty.2 Excludes confidential bank-specific add-ons.



CAPITAL ADEQUACY RATIOS OF BANKING SUBSIDIARIES

Tier I host regulatory

requirements%

Total hostregulatory

requirements%

2016 2015

Tier I capital%

Total capital%

Tier I capital%

Total capital%

Standard Bank Group 8.11 10.41 14.3 16.6 13.3 15.7The Standard Bank of

South Africa Group2 8.1 10.4 13.7 16.8 12.1 15.3Africa RegionsStanbic Bank Kenya3 10.5 14.5 15.4 17.6 15.4 18.1Stanbic Bank Botswana 7.5 15.0 10.0 18.0 14.0 24.2Stanbic Bank Ghana 6.7 10.0 14.7 18.6 11.8 13.7Stanbic Bank Tanzania 10.0 12.0 19.1 20.5 17.2 19.2Stanbic Bank Uganda 8.0 12.0 16.6 19.9 15.2 16.9Stanbic Bank Zambia 5.0 10.0 15.6 18.5 11.2 13.9Stanbic Bank Zimbabwe 8.0 12.0 20.8 23.5 19.8 22.8Stanbic IBTC Bank

(Nigeria) 5.0 10.0 13.7 18.3 12.6 16.5Standard Bank de Angola 5.0 10.0 21.6 26.8 15.3 20.1Standard Bank Malawi 10.0 15.0 19.7 22.0 15.9 18.2Standard Bank Mauritius 8.5 10.0 32.6 41.4 29.5 39.0Standard Bank

Mozambique 4.0 8.0 14.9 17.0 12.5 15.3Standard Bank Namibia 7.0 10.0 11.5 14.0 11.3 13.6Standard Bank RDC

(Democratic Republic of Congo) 5.0 10.0 27.2 40.0 15.9 24.6

Standard Bank Swaziland 4.0 8.0 10.8 13.1 12.1 14.5Standard Lesotho Bank 4.0 8.0 15.3 17.7 11.6 13.3Standard Bank InternationalStandard Bank Isle of Man 11.0 15.7 17.4 12.3 14.2Standard Bank Jersey 12.0 10.9 14.7 9.2 13.1

Liberty Group Limited (calculated in terms of the Long-term Insurance Act4) – capital adequacy requirement (CAR) – times covered 2.7 3.0

1 Represents 2016 SARB Basel III minimum capital requirements, excluding confidential bank-specific add-ons.2 Incorporating SBSA.3 Previously CFC Stanbic Bank (Kenya).4 Long-term Insurance Act 52 of 1998.

The SARB adopted the leverage framework that was issued by the BCBS in January 2014, with final calibrations expected by 2017. Formal disclosure requirements commenced from 1 January 2015 and the ratio is expected to transition to a pillar 1 requirement by 2018.

The non-risk-based leverage measure is designed to complement the Basel III risk-based capital framework. The group’s leverage ratio, inclusive of unappropriated profit, was 6.9% as at 31 December 2016 (2015: 6.9%), in excess of the SARB minimum requirement of 4%.

22


TOTAL ASSETS VS LEVERAGE RATIO1

2016Rm

20152

Rm

Total consolidated assets as per published financial statements 1 954 290 1 986 928

Adjustments for investment in banking, financial, insurance and commercial entities that are consolidated (225 436) (209 172)

Adjustment for derivative financial instruments (17 972) (65 601)Adjustments for securities financing transactions (SFTs)

(i.e. repos and similar securities lending) 2 256 2 256Adjustment for off-balance sheet items 103 118 91 616Other adjustments 5 295 6 345

Leverage ratio exposure 1 821 551 1 812 372

1 Group, including Liberty.2 Restated. Refer to page 133.

LEVERAGE RATIO COMMON DISCLOSURE TABLE1

2016Rm

20152

Rm

On-balance sheet exposures (excluding derivatives and SFTs) 1 539 493 1 549 394

On-balance sheet items (excluding derivatives and SFTs, but including collateral) 1 572 169 1 584 608Assets amount deducted in determining Basel III tier I capital (32 676) (35 214)

Derivatives exposures 50 647 45 489

Replacement cost associated with all derivatives transactions 12 929 10 058Add-on amounts for potential future exposures (PFE) associated with all derivatives transactions 39 694 37 407Deductions receivables assets for cash variation margin provided in derivatives transactions (12 083) (12 083)Exempted central counterparties (CCP) leg of client-cleared trade exposures (12 047) (12 047)Adjusted effective notional amount of written credit derivatives 22 154 22 154

Securities financing transactions exposures 128 293 125 873

Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions 126 037 123 617CCR exposure for SFT assets 2 256 2 256

Other off-balance sheet exposures 103 118 91 616

Off-balance sheet exposure at gross notional amount 313 791 293 094Adjusted for conversion to credit equivalent amounts (210 673) (201 478)

Capital and total exposuresTier 1 capital 118 020 116 238Total exposures 1 821 551 1 812 372

Leverage ratioBasel III leverage ratio (%) 6.5 6.4Basel III leverage ratio (including unappropriated profits) (%) 6.9 6.9

1 Group, including Liberty.2 Restated. Refer to page 133.


RECONCILIATION WITH ANNUAL FINANCIAL STATEMENTS

2016Rm

20151

Rm

Total consolidated assets per published financial statements 1 954 290 1 986 928derivative assets as per statement of financial position (68 620) (111 089)security financing transactions as per the statement of financial position (126 037) (123 617)

Total consolidated assets excluding derivative and SFT assets 1 759 633 1 752 222

Gross-up for cash management schemes 37 972 41 558Adjustment for share of consolidated insurance assets (225 436) (209 172)

Total on-balance sheet items as per line 1 of common disclosure table 1 572 169 1 584 608

1 Restated. Refer to page 133.

Insurance operationsThe quarterly and annual returns submitted to the Financial Services Board (FSB) in terms of the Long-term Insurance Act and the Short-term Insurance Act 53 of 1998 (Short-term Insurance Act) indicated that the capital adequacy ratio were met throughout 2016.

STANDARD INSURANCE LIMITED (SIL) REGULATORY CAPITAL ADEQUACY

2016Times

covered

2015Times

covered

Actual CAR coverage ratio 2.2 2.5

LIBERTY CAR RATIO1

2016 2015

Statutory CAR Rm 5 253 5 145Available statutory

capital Rm 15 486 15 585Liberty minimum CAR

coverage ratio (times) 1.5 1.5Actual CAR coverage (times) 2.7 3.0

1 Liberty includes Liberty Holdings and its subsidiaries (Liberty).

ECONOMIC CAPITAL

Economic capital adequacy is the internal basis for measuring and reporting all quantifiable risks on a consistent risk-adjusted basis. The group assesses its economic capital adequacy by measuring its risk profile under both normal and stress conditions.

ICAAP considers the qualitative capital management processes within the organisation and includes the

organisation’s governance, risk management, capital management and financial planning standards and frameworks. Furthermore, the quantitative internal assessments of the group’s business models are used to assess capital requirements to be held against all risks that the group is or may become exposed to, in order to meet current and future needs, as well as to assess the group’s resilience under stressed conditions.

Banking operationsECONOMIC CAPITAL BY RISK TYPE

2016Rm

20151

Rm

Credit risk 70 680 72 210Equity risk 6 805 8 359Market risk 2 092 1 584Operational risk 11 947 11 062Business risk 3 913 3 847Interest rate risk in the

banking book 3 381 4 486

Economic capital requirement 98 818 101 548

Available financial resources 144 537 143 832

Economical capital coverage ratio (times) 1.46 1.42


The economic capital requirement of R99 billion as at 31 December 2016 (2015: R102 billion) is the internal assessment of the amount of capital that is required to support the group’s economic risk profile. For statistically quantifiable potential losses arising from risk types, economic capital reflects the worst-case loss commensurate with a confidence level of 99.92%.

Available financial resources refer to capital supply as defined by the group for economic capital purposes and includes capital and reserve funds after adjusting for certain non-qualifying items.

24

RISK AND CAPITAL MANAGEMENT REPORT Capital management Economic capital continued

Insurance operationsThe FSB plans to implement the new SAM regulatory regime in 2017. As prescribed under SAM, the assessment of capital will be on an economic basis for South African insurance entities. This will apply to Liberty Group Limited, STANLIB Multi-Manager and SIL. The regulatory capital will be the amount of financial resources required to protect against economic insolvency under extreme events. Liberty has completed the various SAM supervision submissions requested by the FSB in 2016. These indicate that Liberty is well-capitalised.

SIL continues to embed group model risk and capital management principles in its business operations. The economic capital model in SIL was expanded in 2015 to include all material lines of business and other major risk types. Currently, market risk is being updated to allow for more accurate modelling techniques. The economic capital model will be externally reviewed thereafter. Following the review, it is intended that the model will be used to assess economic capital requirements, reinsurance optimisation, capital allocation and revised forward-looking stresses for risk appetite purposes.

RISK-ADJUSTED PERFORMANCE MEASUREMENT

Risk-adjusted performance measurement (RAPM) maximises shareholder value by optimally managing financial resources within the board-approved risk appetite. Capital is centrally monitored and allocated, based on usage and performance in a manner that enhances overall group economic profit and ROE. Business units are held accountable for achieving their RAPM targets. RAPM is calculated on both regulatory and economic capital measures.

160 000

140 000

120 000

100 000

80 000

60 000

40 000

20 000

2013

Shareholders’ funds (average Rm) ROE (%)

Return on ordinary equity

2011 20162014 2015

18

16

14

12

10

8

6

4

2

(Rm) (%)

2012

COST OF EQUITY

The group’s rand-based cost of equity (COE) is estimated using the capital asset pricing model. COE is calibrated twice a year using estimates of risk-free rate, beta and equity risk premium.

The group applied an average COE of 14.0% as at 31 December 2016 (2015: 13.3%) given estimates of the risk-free rate of 8.8% (2015: 8.2%), equity risk premium of 6.5% (2015: 6.6%) and a beta of 79% (2015: 78%).


The group has adopted the following definitions, where entity refers to a business line or legal entity within the group, or the group itself:

risk appetite: an expression of the amount or type of risk an entity is generally willing to take in pursuit of its financial and strategic objectives, reflecting its capacity to sustain losses and continue to meet its obligations as they fall due, under both normal and a range of stress conditions. The metric is referred to as a risk appetite trigger

risk tolerance: the maximum amount of risk an entity is prepared to tolerate above risk appetite. The metric is referred to as a risk tolerance limit

risk capacity: the maximum amount of risk the entity is able to support within its available financial resources

risk appetite statement (RAS): the documented expression of risk appetite and risk tolerance which have been approved by the entity’s relevant governance committee. The RAS is reviewed and revised, if necessary, on an annual basis

risk profile: the risk profile is defined in terms of three dimensions, namely:

• current risk profile or forward risk profile• unstressed or stressed risk profile• pre- or post-management actions.

The current risk profile is the amount or type of risk to which the entity is currently exposed. The unstressed forward risk profile is the forward-looking view of how the entity’s risk profile is expected to evolve under expected conditions. The effectiveness of available management actions can be assessed through an analysis of pre- and post-management action risk profiles against risk appetite triggers and tolerance limits.

Key to the group’s long-term sustainable growth and profitability lies in ensuring that there is a strong link between its risk appetite and its strategy.

Risk appetite is set, and stress testing activities are undertaken, at a group level, in business units, in risk types and at a legal entity level within the risk appetite and stress testing governance frameworks.

GOVERNANCE

The primary management level governance committee overseeing risk appetite and stress testing is the group stress testing and risk appetite committee. It is chaired by the group CRO and is a subcommittee of GROC.

The principal governance documents are the risk appetite governance framework and the stress testing governance framework.

RISK APPETITE

Risk appetite governance frameworkThe risk appetite governance framework provides guidance on the following:

setting and cascading of risk appetite by group, business line, risk type and legal entity

measurement and methodology

governance

monitoring and reporting of the risk profile

escalation and resolution.

25 Governance

25 Risk appetite

25 – Risk appetite governance framework

27 – Risk appetite statement

27 Stress testing

27 – Stress testing governance framework

28 – Stress testing programme

Risk appetite and stress testing

26

The following diagram provides a schematic view of the three levels of risk appetite and the integral role that risk types play in the process of cascading risk appetite from dimensions such as regulatory capital, economic capital, stressed earnings and liquidity to more granular portfolio limits.

RISK APPETITE

LEVEL ONE

Risk appetite dimensions

• Regulatory capital • Economic capital • Stressed earnings • Liquidity.

LEVEL TWO

Risk appetite dimensions by risk type

• Credit and equity risk • Operational risk • Market risk • Interest rate risk • Business risk • Liquidity risk.

Capital demand/earnings at risk utilisation per risk type

LEVEL THREE

RAS

Portfolio limits by risk type

Credit and equity risk • CLR • non-performing loans (NPL) % • concentrations.

Operational risk • operational risk losses % to

total income.

Market risk • normal value-at-risk (VaR) and

stressed VaR (SVaR) limits.

Interest rate risk • interest rate sensitivity

Business risk • cost-to-income ratio • RoE • headline earnings

per share (HEPS).

Liquidity risk • NSFR • LCR.

RISK AND CAPITAL MANAGEMENT REPORT Risk appetite and stress testing Risk appetite continued


Conduct: The group has no appetite for wilful conduct failures, inappropriate market conduct or knowingly causing a breach of regulatory requirements. The group strives to meet customers’ expectations for efficient and fair engagements by doing the right business, the right way, thereby upholding the trust of its customers.

Level two risk appetite represents the allocation of level one risk appetite to risk types. Specifically, the contribution of individual risk types to earnings volatility and overall capital demand (both economic and regulatory) is controlled through triggers and limits.

Level three consists of key metrics used to monitor the portfolio. Portfolio triggers and limits are required to be broadly congruent with level one and level two triggers and limits. These metrics are regularly monitored at a risk type level and ensure proactive risk management.

STRESS TESTING

Stress testing governance frameworkStress testing is a key management tool within the group and is used to evaluate the sensitivity of the current and forward risk profile relative to different levels of risk appetite. Stress testing supports a number of business processes, including:

strategic and financial planning

the ICAAP, including capital planning and management, and the setting of capital buffers

liquidity planning and management

informing the setting of risk appetite

identifying and proactively mitigating risks through actions such as reviewing and changing limits, limiting exposures, and hedging

facilitating the development of risk mitigation or contingency plans, including recovery plans, across a range of stressed conditions

supporting communication with internal and external stakeholders, including industry-wide stress tests performed by the regulator.

Stress testing within the group is subject to the group’s stress testing governance framework which sets out the responsibilities for and approaches to stress testing activities. Broadly aligned and fit-for-purpose stress testing programmes are implemented for the group to ensure appropriate coverage of the different risks.

Risk appetite statementExecutive management is responsible for recommending the group’s RAS, which is then approved by the GRCMC on behalf of the board. In developing the RAS, executive management considers the group’s strategy and the desired balance between risk and return. The GRCMC reviews the group’s current risk profile on a quarterly basis and forward risk profile (both stressed and unstressed) at least annually.

Level one risk appetite dimensions can be either quantitative or qualitative.

Quantitative level one risk appetite dimensions relate to available financial resources and earnings volatility. The standardised quantitative dimensions used by the group, as well as legal entities and business lines, are:

stressed earnings

economic capital

regulatory capital

liquidity (short-term liquidity and term liquidity).

The group’s qualitative RAS, set out below, serves as a guide for embedding the risk appetite framework to guide strategic and operational decision making across the group.

Capital position: The group aims to have a strong capital adequacy position measured by regulatory and economic capital adequacy ratios. The group manages its capital levels to support business growth, maintain depositor and creditor confidence, create value for shareholders and ensure regulatory compliance. Each banking subsidiary must further comply with regulatory requirements in the countries in which they operate

Funding and liquidity management: The group’s approach to liquidity risk management is governed by prudence and is in accordance with the applicable laws and regulations and takes into account the competitive environment in which each banking subsidiary operates. Each banking subsidiary must manage liquidity risk on a self-sufficient basis

Earnings volatility: The group aims to have sustainable and well-diversified earning streams in order to minimise earnings volatility through business cycles

Reputation: The group has no appetite for compromising its legitimacy or for knowingly engaging in any business, activity or relationship which could result in foreseeable reputational risk or damage to the group

28

RISK AND CAPITAL MANAGEMENT REPORT Risk appetite and stress testing Stress testing continued

Supervisory stress testsFrom time-to-time, a regulator may call for the group or a legal entity to run a supervisory stress test or common scenario with prescribed assumptions and methodologies. The purpose of these stress test requests could be for the regulator to assess the financial stability of the entire financial sector, or targeted stress tests where they may have a specific concern regarding a specific asset class or other potential stress event.

SBSA participated in a common scenario stress test conducted by the Financial Stability Department of the SARB in the first quarter of 2016 to evaluate the soundness of the South African domestic banking sector.

Business model stress testingBusiness model stress testing utilises the reverse stress testing technique to explore vulnerabilities in a particular strategy or business model. The outcome does not necessarily target business or bank failure, but rather seeks to inform what could have a severe impact, given a plausible but in most cases highly improbable event within a given set of circumstances and assumptions.

Stress testing for the recovery planAs part of the annual review of the group’s recovery plan, the group’s procedures require the execution of stress tests in order to test the effectiveness of the recovery options proposed in the recovery plan, and to provide guidance on the selection of early warning indicators. The range of scenarios that are considered include both systemic, group-specific and combination events, as well as fast- and slow-moving scenarios.

Risk type stress testingRisk type stress tests apply to individual risk types. Risk type stress testing could take the form of scenario or sensitivity analysis.

Stress testing programmeThe group’s stress testing programme uses one or a combination of stress testing techniques, including scenario analysis, sensitivity analysis and reverse stress testing to perform stress testing for different purposes.

Groupwide macroeconomic stress testingMacroeconomic stress testing is conducted across all major risk types on an integrated basis for a range of economic scenarios varying in severity from mild to very severe but plausible macroeconomic shocks. The impact, after consideration of mitigating actions, on the group’s income statement, SOFP and capital demand and supply of the group is measured against the group’s risk appetite.

Macroeconomic stress testing for the group and SBSA is performed, as a minimum, once a year for selected scenarios that are specifically designed by a scenario working group targeting the group’s risk profile, geographical presence and strategy.

Group and SBSA macroeconomic stress testing results are presented at a board level in order to consider whether the group’s risk profile is consistent with the group’s risk appetite buffer. Groupwide macroeconomic stress testing results are submitted as part of the annual ICAAP.

Additional stress testingGroupwide macro-economic stress testing results are supplemented with additional ad hoc stress testing at the group, legal entity, business line, sector, or risk type level that may be required from time-to-time for risk management or planning purposes. The purpose of this stress testing is to inform management of risks that may not yet form part of routine stress testing or where the focus is on a specific portfolio or business unit. Additional stress testing can take the form of either scenario analysis or sensitivity analysis. This type of stress testing will be performed and governed at the appropriate group, legal entity, business line, or risk type level.


Table LI1 highlights the difference between the accounting and regulatory scopes of consolidation and also provides a mapping of the in scope portion of the IFRS financial statements to the Basel III regulatory risk categories.

Table LI2 provides a reconciliation of the in scope carrying values as included on the IFRS financial statements to the exposure amounts used for regulatory purposes.

Linkages

30

RISK AND CAPITAL MANAGEMENT REPORT Linkages continued

Linkages between financial statements and regulatory exposuresLI1: DIFFERENCES BETWEEN ACCOUNTING AND REGULATORY SCOPE OF CONSOLIDATION1

a b

Carrying value of items

Carryingvalue asreported

in thepublished

financialstatements2

Rm

Underscope of

regulatoryconsolidation3

Rm

Subjectto the

credit riskframework

Rm

Subjectto the

counterpartycredit riskframework

Rm

Subjectto the

securitisationframework

Rm

Subjectto the

market riskframework

Rm

Not subjectto capital

requirementsor subject to

deductionfrom capital

Rm

Assets Cash and balances with

central banks 77 474 77 451 77 451Derivative assets 68 620 61 752 61 7524 60 672Trading assets 129 845 128 098 46 629 128 098Pledged assets 18 777 3 313 3 313 3 313Financial investments 483 774 151 914 151 914 12 681Current tax assets 479 121 121Loans and advances 1 065 405 1 065 967 982 117 83 124 725Policyholders’ assets 7 314Other assets 21 547 12 005 12 005Interest in associates

and joint ventures 8 196 21 578 13 147 8 431Investment property 31 155Property and

equipment 16 041 12 843 12 843Goodwill and other

intangible assets 23 675 23 285 23 285Deferred tax assets 1 988 1 985 1 918 67

Total assets 1 954 290 1 560 312 1 254 829 207 499 725 188 770 31 783

Liabilities 1 774 931 1 396 651 68 020 113 825

Derivative liabilities 75 083 68 020 68 020 65 716Trading liabilities 47 867 48 109 48 109Current tax liabilities 5 522 2 521 2 521Deposits and debt

funding 1 213 621 1 228 167 1 228 167Policyholders’ liabilities 307 230Subordinated debt 25 997 22 130 22 130Provisions and other

liabilities 96 816 24 956 24 956Deferred tax liabilities 2 795 2 748 2 748

Total liabilities 1 774 931 1 396 651 68 020 113 825 1 280 522

1 The most significant differences between columns a and b of the table are as a result of the exclusion of Liberty Holdings, the group's insurance operations, from the regulatory scope of consolidation.

2 Including Liberty.3 Refer to page 148 for reporting framework consolidation differences.4 Cross reference to CCR1.


LI2: SOURCES OF DIFFERENCES BETWEEN REGULATORY EXPOSURE AMOUNTS AND CARRYING VALUES IN FINANCIAL STATEMENTS

TotalRm

Credit riskframework

Rm

CCRframework

Rm

Securitisationframework

Rm

Market riskframework

Rm

2016Asset carrying value amount under

scope of regulatory consolidation (as per template LI1) 1 651 823 1 254 829 207 499 725 188 770

Liabilities carrying value amount under scope of regulatory consolidation (as per template LI1) (181 845) (68 020) (113 825)

Total net amount under regulatory scope of consolidation 1 469 978 1 254 829 139 479 725 74 945

Off-balance sheet amounts1 288 773 141 358 18 445 3 765Differences due to different

netting rules2 (6 955)Differences due to consideration

of impairment3 21 793 21 793 Differences due to potential

future exposure4 53 787 Differences due to impact of collateral5 (4 045) (160 555)

Exposure amounts considered for regulatory purposes 1 780 544 1 413 935 44 201 4 490 74 945

Amounts included as follows:Standardised approach 360 559 CR4, CR5 3 396 CCR3IRB approach 1 051 922 CR6 40 805 CCR4, CCR3Equity risk 1 454 CR10

Total 1 413 935 44 201 CCR1, CCR3

1 The off-balance sheet regulatory exposures differ to that reported in the financial statements, since the regulatory exposures include revocable facilities and are subject to credit conversion factors (CCF) in determining the regulatory exposures.

2 Regulatory netting is not equivalent to offset as applied in the financial statements, since regulatory netting includes netting agreements not meeting the IFRS netting requirements .

3 Specific and general debt provisions are excluded from the exposure considered for regulatory purposes, subject to the credit risk framework, whereas these form part of the amount reported on the face of the IFRS SOFP.

4 CCR exposure considered for regulatory purposes includes an add on for potential future exposures not included as part of the IFRS SOFP.5 CCR exposures relating to resale and repurchase agreements as considered for regulatory purposes is presented after taking into account underlying collateral

values. The IFRS SOFP represents the underlying financing amount, excluding any underlying collateral.

32

defence is primarily responsible for its management, control and optimisation in the course of business generation.

The credit function acts as the second line of defence and is responsible for providing independent and objective approval and oversight for the credit risk-taking activities of business, to ensure the process of procuring revenue, while assuming optimal risk, is undertaken with integrity. Further second-line oversight is provided by the group risk function through independent credit risk assurance.

The third line of defence is provided by GIA, under its mandate from the GAC.

Credit risk is managed through:

maintaining a culture of responsible lending and a robust risk policy and control framework

identifying, assessing and measuring credit risk across the group, from an individual facility level through to an aggregate portfolio level

defining, implementing and continually re-evaluating risk appetite under actual and stressed conditions

monitoring the group’s credit risk exposure relative to approved limits

ensuring that there is expert scrutiny and approval of credit risk and its mitigation independently of the business functions.

DEFINITION

Credit risk is the risk of loss arising out of the failure of obligors to meet their financial or contractual obligations when due.

It is composed of obligor risk (including borrowers and trading counterparties), concentration risk and country risk.

BANKING OPERATIONS

Approach to managing and measuring credit riskThe group’s credit risk is a function of its business model and arises from wholesale and retail loans and advances, underwriting and guarantee commitments, as well as from the counterparty credit risk arising from derivative and securities financing contracts entered into with our customers and trading counterparties. To the extent equity risk is held on the banking book, it is also managed under the credit risk governance framework, except in so far as approval authority rests with ERC.

The management of credit risk is aligned to the group’s three lines of defence framework. The business function owns the credit risk assumed by the group and as the first line of


32 Definition

32 Banking operations

32 – Approach to managing and measuring credit risk

33 – Governance

33 – Approved regulatory capital approaches

50 – Key portfolio models

51 – Credit portfolio characteristics and metrics in terms of Basel

72 – Credit portfolio characteristics and metrics in terms of IFRS

83 Insurance operations

83 – Consolidated mutual funds

83 – Credit exposure to debt instruments

84 – Impairments

84 – Reinsurance

Credit risk


A credit portfolio limit framework has been defined to monitor and control the credit risk profile within the group’s approved risk appetite. All primary lending credit limits are set and exposures measured on the basis of risk weighting in order to best estimate exposure at default (EAD). Pre-settlement CCR inherent in trading book exposures is measured on a PFE basis, modelled at a defined level of confidence, using approved methodologies and models, and controlled within explicit approved limits for the counterparties concerned.

GovernanceCredit risk is governed in accordance with the group’s comprehensive RCCM framework as defined and detailed in the group credit risk governance standard and the model risk governance framework.

The purpose of the group credit risk governance standard is to establish and define the principles under which the group is prepared to assume credit risk and the overall framework for the consistent and unified governance, identification, measurement, management and reporting of credit risk in the group. The standard is supported by underlying policies and procedures within the business units.

The group’s credit governance process relies on both individual responsibility and collective oversight, supported by comprehensive and independent reporting. This approach balances strong corporate oversight at a group level, with participation by the senior executives of the group and its business units, in all significant risk matters.

The GRCMC is the principal board subcommittee ultimately responsible for the oversight of credit risk. GROC is responsible for credit risk management governance, effected through its subcommittees, which include the CIB and PBB credit governance committees, the group ERC and the intragroup exposure committee. These governance committees are key components of the credit risk management framework. They have clearly defined mandates and delegated authorities, which are reviewed regularly. Their mandates include responsibility for credit concentration risk decision making and delegation thereof to credit officers and subcommittees within defined parameters.

Key aspects of rating systems and credit risk models are approved by the PBB, CIB and group model approval committees, all of which are mandated by the board as designated committees. Regular model validation and reporting to these committees is undertaken by the independent central validation function.

Approved regulatory capital approachesThe group has approval from the SARB to adopt the advanced internal ratings-based (AIRB) approach for most credit portfolios in SBSA. The group has adopted the standardised approach for its Africa Regions portfolios and for some of its less material subsidiaries and portfolios. The group has approval from the SARB to adopt either the market-based or the probability of default (PD)/LGD approaches for material equity portfolios, with the latter applied to equity held on the banking book.

Standardised approachThe calculation of regulatory capital is based on a risk weighting and the net counterparty exposures after recognising a limited set of qualifying collateral. The risk weighting is based on the exposure characteristics and, in the case of corporate, bank and sovereign exposures, the external agency credit rating of the counterparty.

For bank and certain corporate asset class credit exposures on the standardised approach the group makes use of the ratings of two regulatory-approved external credit assessment institutions, Fitch and Moody’s. With respect to mainly sovereign credit exposures subject to the standardised approach (particularly in the Africa Regions) reference is also made to the export credit ratings issued by the Organisation for Economic Cooperation and Development. The group applies issuer ratings to calculate risk weights and will only apply an issuer-specific rating in the event that it invests in a particular issue that has an issue-specific assessment.

Regulatory capital for the credit risk arising on the owner-occupied sub-portfolio of the commercial property finance portfolio in South Africa is calculated on the standardised approach. Application has, however, been made to and approval has been granted by the regulator for this portfolio to be managed on the AIRB approach. Once the model recalibration, as requested by the regulator, has been completed the change will be effected.

The credit rating scale in the next section is used for the alignment with the group’s master rating scale. In the case of obligors for which there are no credit ratings available, exposures are classified as unrated for determining regulatory capital requirements.

The table on the next page presents the breakdown of credit risk exposures under the standardised approach by Basel asset class and risk weight. The total credit exposure amount represents on- and off-balance sheet amounts used for capital requirements calculation after allowances and write-offs and after application of credit risk mitigation (CRM) and CCF.


RISK AND CAPITAL MANAGEMENT REPORT Credit risk Banking operations continued

CR5: STANDARDISED APPROACH – EXPOSURES BY ASSET CLASSES AND RISK WEIGHTS

Risk weights 0% 10% 20% 35% 40% 50% 75% 100% 150% 225% 350% 650% 1 250% Others

Total credit exposures

amount (post-CCF

and post CRM)

Asset classesCorporate 644 488 7 069 711 1 325 6 362 35 682 418 52 699Small and medium enterprises (SME) corporate 1 721 432 916 808 2 190 5 111 32 969 541 44 688Public sector entities 1 958 3 292 5 250Local governments and municipalities 62 18 80Sovereign 19 449 2 021 3 416 73 337 98 223Banks 3 492 23 201 26 693Securities firms 95 95Retail mortgage advances 284 91 2 567 4 327 2 249 3 335 4 021 1 16 875Retail revolving credit 1 203 17 580 18 783SME retail 12 161 1 422 13 583Other retail 208 2 783 2 991Securitisation and resecuritisation exposureOther assets 49 765 54 18 360 136 12 284 80 599

Total 69 214 2 649 6 578 10 552 5 846 35 907 47 332 169 101 960 136 12 284 360 559

(CR4/LI2)

36


Ongoing overall South African supervisory approval of the approach taken by the group to model its exposure to credit risk on the IRB approach, as well as for all credit risk models used for regulatory capital purposes, is obtained primarily by way of an annual self-assessment. The assessment addresses all aspects of model design, the rating structure and criteria for ratings, the assessment horizon, integrity of the rating process, governance around rating overrides, maintenance of data, stress tests for capital adequacy, integrity of estimates used and validation of the models.

The technical aspects of model usage, model development, model monitoring and model validation are reviewed by a technical committee. The outcomes of model technical discussions are reported to the relevant model approval committee.

GIA is responsible, within its regular audits, for expressing an opinion on the extent of compliance with the model risk governance framework and for reviewing model inputs.

IRB risk componentsProbability of defaultPD is calculated using actual historical default rates, and in the case of retail exposures calibrated to a specific behaviour scorecard using a monotonic calibration technique that ensures a clear ranking of risk by mapping higher scores to lower PDs and vice versa. The estimates are adjusted to the long-run average default rate (through-the-cycle) to cater for potential downturn economic conditions.

The group uses a 25-point master rating scale to quantify the credit risk for each borrower (corporate asset classes) or facility (specialised lending and retail asset classes), as illustrated in the table on the next page. Ratings are mapped to PDs by means of calibration formulae that use historical default rates and other data from the applicable portfolio.

The group distinguishes between through-the-cycle PDs and point-in-time PDs, and utilises both measures in decision making, managing credit risk exposures and measuring impairments against credit exposures.

Internal ratings-based approachIntroductionUnder the IRB regulatory capital approaches, the calculation of regulatory capital is based on an estimate of EAD and a risk weighting. The risk weighting is based on asset class, and estimates of PD, LGD, and maturity. Under the AIRB approach all the parameters need to be estimated internally, while only PD is estimated internally under the foundation IRB (FIRB) approach. EAD, LGD and maturity are regulatory- prescribed under the FIRB approach.

Model development is governed by a group model risk governance framework, which applies to all models used in the assessment of credit risk, including but not limited to models used for the IRB approaches. Credit risk model development is conducted within the independent risk function, while validation is independently undertaken by a quantitative analytics function.

All IRB models are managed under model development and validation policies that set out the requirements for model governance structures and processes, and the technical framework within which model performance and appropriateness is maintained. The models are developed using internal historical default and recovery data. In low-default portfolios, internal data is supplemented with external benchmarks and studies. Models are subjected to validation to demonstrate the reliability of the model’s output.

Model validation takes place when a model is first designed and annually thereafter, or when there are material changes to the model or when rating systems are replaced or enhanced. Models are thus assessed frequently to ensure ongoing appropriateness as business environments and strategic objectives change, and are recalibrated annually using the most recent internal data. Any changes to models or to model outputs are controlled through access rights and are subject to approval at the relevant business unit or group governance committee.


The table below describes the internally defined relationship between the group master rating scale, generally accepted defined investment grades, the group’s credit quality definitions and external rating scales.

CREDIT RATING SCALES

GROUP MASTER RATING SCALE GRADING

CREDIT QUALITY

MOODY’S INVESTOR SERVICES

STANDARD & POOR’S FITCH1

1 – 4

Investment grade Normal

monitoring

Aaa, Aa1, Aa2, Aa3 AAA, AA+, AA, AA- AAA, AA+, AA, AA-

5 – 7 A1, A2, A3 A+, A, A- A+, A, A-

8 – 12 Baa1, Baa2, Baa3 BBB+, BBB, BBB- BBB+, BBB, BBB-

13 – 21

Sub-investment grade

Ba1, Ba2, Ba3, B1, B2, B3

BB+, BB, BB-, B+, B, B-

BB+, BB, BB-, B+, B, B-

22 – 25 Close monitoring

Caa1, Caa2, Caa3, Ca

CCC+, CCC, CCC-

CCC+, CCC, CCC-

Default Default Default C D D

1 During 2015, Fitch withdrew the FSB registration of their South African subsidiary. Their grades are retained in this table to cater for exposures that still reference Fitch.

Loss given defaultThe LGD is the amount of a counterparty’s obligation to the group that is not expected to be recovered after default and is expressed as a percentage of the EAD. LGD measures are a function of customer type, product type, seniority of loan, country of risk and level of collateralisation.

LGD is calculated using the workout method (discounted cash flows). Forecasting is performed for accounts that are still in default at the end of the outcome period. LGDs are estimated based on historic recovery data per category of LGD. A downturn LGD is used in the estimation of the capital charge and reflects the anticipated recovery rates in a downturn period.

Exposure at defaultEAD captures the impact of potential drawdowns against unutilised facilities and potential changes in CCR positions due to changes in market prices. By using historical data, it is possible to estimate an account’s average utilisation of limits when default occurs, recognising that customers may use more of their facilities as they approach default.

Expected lossThe expected loss (EL) provides a measure of the value of the credit losses that may reasonably be expected to occur in the portfolio. Provisions must be sufficient to cover the EL in the credit portfolio. In its most basic form the EL can be calculated as: PD x EAD x LGD.

Credit conversion factorsThe group applies regulatory-approved CCF to convert undrawn limits and other non-derivative off-balance sheet exposures to an equivalent EAD. The CCF is used to estimate the exposure at default for non-defaulted accounts. A downturn adjustment is made to cater for potential downturn economic conditions.

Use of internal estimatesThe group’s credit risk rating systems and processes differentiate and quantify credit risk across counterparties and asset classes. Internal risk parameters are used extensively in risk management and business processes, including:

setting risk appetite

setting concentration and counterparty limits

credit approval and monitoring

pricing transactions

determining portfolio impairment provisions

calculating economic capital.


The following tables provide information on the main parameters used for the calculation of capital requirements for exposures under the IRB approach. Note the following:

the original on-balance sheet gross exposure is gross of accounting provisions and does not include the effect of credit risk mitigation techniques

the off-balance sheet exposure pre-CCF is the exposure value without taking into account provisions, CCF and the effect of CRM techniques

average CCF is the EAD post-conversion factor for off-balance sheet exposure to total off-balance sheet exposure pre-CCF

average PD and LGD are weighted by EAD

average maturity is provided only for those asset classes where it is used for the RWA calculation and is weighted by EAD

RWA density is total RWA to EAD post-CRM and post-CCF.

CR6: IRB – CREDIT RISK EXPOSURES BY PORTFOLIO AND PD RANGE

Total (all portfolios)

PD scale

Original on-balance

sheet gross exposures

Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post- CRM and

post-CCFRm

Average PD

%Number

of obligors1

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm

Impairmentprovisions

Rm

0.00 to < 0.15 138 279 45 363 61.14 171 068 0.04 249 250 32.73 1.5 18 908 11.05 37 0.15 to < 0.25 73 363 40 337 48.67 94 963 0.21 167 632 23.38 1.8 17 779 18.72 47 0.25 to < 0.50 181 091 60 804 50.76 211 894 0.39 405 433 21.43 2.2 52 478 24.77 175 0.50 to < 0.75 108 942 28 823 47.02 121 889 0.64 366 569 22.23 2.2 36 595 30.02 172 0.75 to < 2.50 237 519 35 719 54.38 252 605 1.39 1 257 689 28.42 2.1 109 642 43.40 1 038 2.50 to < 10.00 125 350 14 581 55.52 129 398 4.32 1 921 629 34.27 1.9 85 576 66.13 1 948 10.00 to < 100.00 40 637 1 524 74.26 41 628 26.19 628 396 30.88 1.5 46 529 111.77 3 340 100.00 (default) 28 262 430 50.00 28 477 100.00 290 836 34.45 2.3 1 658 5.82 12 542

933 443 227 581 52.86 1 051 922 4.79 5 287 434 27.52 2.0 369 165 35.09 19 299 17 153

L12 OV1CR7

1 Represents the number of unique obligors. The total number of unique obligors will not equal the sum of the obligors in the underlying asset classes since an obligor may be present in more than one asset class.

Corporates

PD scale

Original on-balance


Rm

Off-balance sheet

exposures pre-CCF

Rm

Average CCF

%

EAD post- CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm

Impairmentprovisions

Rm

0.00 to < 0.15 10 796 10 580 45.80 18 700 0.09 112 32.80 1.9 3 463 18.52 5 0.15 to < 0.25 40 465 13 430 43.06 47 939 0.22 179 21.18 1.9 9 597 20.02 22 0.25 to < 0.50 85 036 46 696 47.75 107 542 0.39 545 23.90 2.1 35 199 32.73 101 0.50 to < 0.75 38 963 18 756 46.23 47 136 0.64 292 27.27 1.9 21 844 46.34 82 0.75 to < 2.50 49 490 16 472 48.87 57 155 1.38 1 619 30.81 1.9 39 785 69.61 248 2.50 to < 10.00 14 488 5 488 52.90 14 324 3.81 3 582 33.65 1.6 14 713 102.72 190 10.00 to < 100.00 2 453 330 73.88 2 710 17.26 84 37.07 1.5 4 843 178.71 184 100.00 (default) 2 724 430 50.00 2 939 100.00 536 35.97 1.3 218 7.42 2 044

244 415 112 182 47.29 298 445 1.87 6 949 26.58 1.90 129 662 43.45 2 876 2 512



Specialised lending – high-volatility commercial real estate (property development)

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm

Impairment provisions

Rm

0.00 to < 0.15 0.15 to < 0.25 0.25 to < 0.50 75 75 0.45 1 8.92 1.0 10 13.23 0.50 to < 0.75 0.75 to < 2.50 11 11 0.90 2 10.71 1.0 2 21.53 2.50 to < 10.00 388 388 3.58 3 25.63 1.0 289 74.65 3 10.00 to < 100.00 100.00 (default) 39 39 100.00 2 15.21 5.0 26

513 513 10.40 8 22.07 1.3 301 58.87 29 28

Specialised lending – income-producing real estate

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 2 2 0.11 10 5.19 1.4 2.870.15 to < 0.25 382 382 0.2 75 8.09 2.6 32 8.280.25 to < 0.50 5 600 19 100.00 5 620 0.43 197 12.36 2.7 1 059 18.85 30.50 to < 0.75 3 422 44 99.07 3 465 0.64 167 12.99 2.7 810 23.37 30.75 to < 2.50 5 080 5 98.10 5 085 1.16 193 15.93 2.3 1 732 34.1 102.50 to < 10.00 937 937 3.57 75 22.1 2.3 653 69.64 810.00 to < 100.00 9 9 20.4 3 8.21 3.9 5 49.06100.00 (default) 31 31 100 9 18.33 2.8 14 43.34 10

15 463 68 99.26 15 531 1.11 729 14.16 2.5 4 305 27.72 34 26

Specialised lending – project finance

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.150.15 to < 0.25 367 367 0.23 1 17.09 4.7 100 27.250.25 to < 0.50 5 502 319 64.80 5 709 0.42 14 21.73 4.6 2 539 44.47 50.50 to < 0.75 4 035 68 50.00 4 069 0.64 8 22.73 4.5 2 144 52.69 60.75 to < 2.50 5 283 870 68.96 5 882 1.36 10 28.11 4.3 4 392 74.67 232.50 to < 10.00 1 933 1 933 4.46 5 19.68 3.4 1 356 70.15 1610.00 to < 100.00100.00 (default) 759 759 100.00 2 37.23 5.0 924 121.74 350

17 879 1 257 66.50 18 719 5.21 40 24.28 4.4 11 455 61.19 400 382



SME corporate

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 645 80 70.68 1 514 0.07 29 35.14 1.8 224 14.80.15 to < 0.25 2 675 131 74.63 3 053 0.17 39 28 1.4 581 19.03 10.25 to < 0.50 2 719 565 72.41 2 400 0.36 109 29.17 1.7 817 34.04 30.50 to < 0.75 5 369 246 63.08 5 539 0.64 52 12.49 2.2 1 084 19.57 40.75 to < 2.50 12 276 930 65.24 12 729 1.28 286 20.12 2.1 5 204 40.88 352.50 to < 10.00 2 197 344 63.59 2 437 4.4 99 24.89 2.0 1 710 70.17 2910.00 to < 100.00 595 23 70.83 616 11.32 23 28.31 1.7 690 112.01 20100.00 (default) 469 50.00 469 100 17 29.64 3.0 261

26 945 2 319 67.25 28 757 2.99 654 21.77 2.0 10 310 35.85 353 327

Securities firms

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 380 380 0.08 13 40.57 1.0 75 19.80 0.15 to < 0.25 133 167 30.22 201 0.23 8 40.09 1.0 80 40.04 0.25 to < 0.50 15 3 50.00 16 0.32 10 40.09 1.0 7 39.40 0.50 to < 0.750.75 to < 2.50 7 1 99.43 7 1.76 29 39.73 1.0 6 87.64 2.50 to < 10.0010.00 to < 100.00100.00 (default)

535 171 30.88 604 0.16 60 40.39 1.0 168 27.84

Sovereign

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 80 631 3 53.67 82 357 0.01 7 28.67 1.4 2 917 3.54 3 0.15 to < 0.250.25 to < 0.50 2 591 19 13.64 2 594 0.45 9 34.97 1.0 1 054 40.68 4 0.50 to < 0.75 12 10.14 1 0.67 5 32.61 1.0 1 54.37 0.75 to < 2.50 2 608 323 51.32 1 040 1.10 12 49.34 1.0 909 87.42 6 2.50 to < 10.00 18 16 37.97 19 4.73 6 32.61 1.0 22 115.22 10.00 to < 100.00 21 17 42.16 22 21.54 13 32.61 1.0 42 192.20 2 100.00 (default) 3 3 100.00 7 32.61 1.0 3 101.64 1

85 872 390 50.04 86 036 0.05 59 29.11 1.4 4 948 5.75 16 11



Public sector entities

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 9 747 5 891 42.53 12 236 0.02 8 30.57 2.8 3 612 29.52 11 0.15 to < 0.25 2 784 1 818 33.10 3 395 0.22 11 26.29 2.9 884 26.05 3 0.25 to < 0.50 6 611 543 41.64 6 816 0.40 19 18.55 3.0 1 575 23.10 3 0.50 to < 0.75 8 18.49 2 0.66 8 26.22 2.0 1 45.51 0.75 to < 2.50 18 7 39.23 20 1.28 46 25.07 2.4 11 52.47 2.50 to < 10.00 641 9 72.67 642 3.62 60 24.16 1.0 189 29.40 3 10.00 to < 100.00 5 1 39.40 5 22.19 41 32.61 1.0 9 198.89 100.00 (default) (1)

19 806 8 277 41.55 23 116 0.27 192 26.21 2.8 6 281 27.17 20 6

Local governments and municipalities

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 67 67 0.12 19 33.09 1.0 27 40.69 0.15 to < 0.25 2 3 75.00 5 0.23 6 29.81 1.5 1 23.35 0.25 to < 0.50 51 700 39.45 329 0.32 17 21.47 1.1 69 20.94 0.50 to < 0.75 1 123 199 54.00 1 230 0.64 6 22.90 3.6 610 49.51 2 0.75 to < 2.50 206 72 73.51 277 1.26 42 29.51 2.2 172 62.20 1 2.50 to < 10.00 459 68.59 459 2.85 20 33.12 1.0 564 122.97 4 10.00 to < 100.00 20 20 11.46 8 24.86 2.3 24 116.59 1 100.00 (default) 1 1 100.00 3 32.70 1.0 1 85.08

1 929 974 45.06 2 388 1.21 121 25.76 2.5 1 468 61.46 8 6

Banks

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 32 774 6 691 87.74 38 645 0.08 103 40.54 1.0 7 658 19.82 12 0.15 to < 0.25 9 133 593 95.87 9 701 0.21 24 43.81 1.1 4 199 43.28 9 0.25 to < 0.50 839 311 55.94 1 011 0.33 47 44.97 1.0 579 57.27 2 0.50 to < 0.75 21 25 87.91 43 0.64 9 47.04 1.0 29 67.79 0.75 to < 2.50 3 654 407 23.60 3 750 1.48 57 49.51 1.0 3 740 99.73 26 2.50 to < 10.00 685 793 20.51 848 2.58 23 26.71 1.0 558 65.80 6 10.00 to < 100.00 14 99.76 14 10.26 8 55.41 1.0 37 270.50 1 100.00 (default) 22 22 100.00 2 60.16 4.8 22

47 128 8 834 78.19 54 034 0.29 273 41.63 1.0 16 800 31.09 78 58



Retail mortgages

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

Years2

RWARm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 881 12 805 43.48 6 452 0.12 35 217 11.91 214 3.32 1 0.15 to < 0.25 14 597 20 199 45.21 23 744 0.19 66 039 12.20 1 181 4.97 6 0.25 to < 0.50 60 590 5 931 62.21 64 293 0.39 132 399 12.28 5 453 8.48 31 0.50 to < 0.75 51 075 776 124.11 52 051 0.65 79 635 13.97 7 219 13.87 47 0.75 to < 2.50 101 134 339 148.39 101 083 1.35 136 123 15.81 25 418 25.15 216 2.50 to < 10.00 53 908 116 104.76 54 067 4.21 88 433 16.10 26 898 49.75 366 10.00 to < 100.00 24 196 5 84.30 24 201 27.83 43 735 16.11 21 749 89.87 1 112 100.00 (default) 13 417 13 417 100.00 23 318 16.92 403 3.00 3 422

319 798 40 171 47.47 339 308 7.20 604 899 14.64 88 535 26.09 5 201 4 510

Qualifying revolving retail exposure (QRRE)

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

Years2

RWARm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 249 4 122 98.63 4 317 0.10 143 012 59.18 165 3.82 3 0.15 to < 0.25 398 1 978 89.82 2 173 0.20 72 514 59.03 144 6.63 3 0.25 to < 0.50 948 2 493 81.83 2 964 0.35 211 038 59.62 316 10.66 6 0.50 to < 0.75 2 008 7 324 35.59 4 470 0.66 269 524 64.16 842 18.84 19 0.75 to < 2.50 18 863 13 564 57.32 24 921 1.58 951 445 65.51 9 254 37.13 259 2.50 to < 10.00 29 076 4 828 74.68 31 727 4.59 1 635 229 63.86 23 919 75.39 916 10.00 to < 100.00 6 102 821 89.04 6 693 26.95 454 687 65.15 11 354 169.64 1 179 100.00 (default) 6 490 6 490 100.00 225 553 64.15 62 0.96 4 205

64 134 35 130 64.34 83 755 12.17 3 963 002 63.98 46 056 54.99 6 590 5 979

Retail – other

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

Years2

RWARm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 10 2 119.62 13 0.14 161 25.35 1 8.40 0.15 to < 0.25 128 9 117.04 138 0.20 599 12.49 7 5.42 0.25 to < 0.50 2 409 32 112.85 2 446 0.34 1 397 26.13 390 15.94 2 0.50 to < 0.75 494 11 112.75 506 0.64 2 624 30.43 134 26.48 1 0.75 to < 2.50 17 652 79 100.98 17 733 1.61 99 242 28.96 6 571 37.06 87 2.50 to < 10.00 12 476 51 112.14 12 533 4.69 98 407 36.03 7 025 56.05 220 10.00 to < 100.00 3 726 118.90 3 726 24.39 92 136 48.46 4 106 110.20 440 100.00 (default) 1 782 1 782 100.00 31 157 41.06 2 0.08 837

38 677 184 107.82 38 877 9.20 325 723 33.44 18 236 46.91 1 587 1 395

Refer to footnote on page 48.



SME retail

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

Years2

RWARm

RWA density

%EL

Rm


Rm

0.00 to < 0.15 2 097 5 189 82.53 6 385 0.07 75 932 43.87 552 8.65 2 0.15 to < 0.25 2 208 2 009 78.30 3 774 0.20 30 259 42.29 684 18.12 3 0.25 to < 0.50 7 822 3 173 63.89 9 796 0.40 66 413 38.78 2 511 25.63 15 0.50 to < 0.75 2 179 1 354 70.14 3 124 0.59 19 306 43.14 1 124 35.98 8 0.75 to < 2.50 20 648 2 650 63.51 22 323 1.37 129 231 39.05 10 424 46.70 120 2.50 to < 10.00 7 537 2 936 32.66 8 477 4.77 143 895 43.28 5 684 67.05 172 10.00 to < 100.00 3 510 313 36.76 3 612 25.03 54 831 43.93 3 670 101.61 401 100.00 (default) 2 447 2 447 100.00 18 128 43.75 31 1.27 1 294

48 448 17 624 65.76 59 938 6.89 537 995 41.02 24 680 41.18 2 015 1 830

Equity

PD scale

Originalon-balance


Rm

Off-balance sheet

exposurespre-CCF

Rm

Average CCF

%

EAD post-CRM and

post-CCFRm

Average PD

%Number

of obligors

Average LGD

%

Average maturity

YearsRWA

Rm

RWA density

%EL

Rm


Rm

0.00 to < 0.150.15 to < 0.25 91 91 0.16 1 90.00 5.0 289 318.00 0.25 to < 0.50 283 283 0.32 1 90.00 5.0 900 318.02 0.50 to < 0.75 253 253 0.64 3 90.00 5.0 753 297.63 0.75 to < 2.50 589 589 1.38 4 90.00 5.0 2 022 343.29 7 2.50 to < 10.00 607 607 2.62 5 90.00 5.0 1 996 328.83 15 10.00 to < 100.00100.00 (default) 78 78 100.00 2 90.00 5.0 70

1 901 1 901 5.51 16 90.00 5.0 5 960 313.52 92 76

2 Average maturity years have not been provided since it has not been used in the RWA calculation.


50


Specialised lending’s creditworthiness is assessed on a transactional level, rather than on the financial strength of the borrower, in so far as the group relies only on repayment from the cash flows generated by the underlying assets thus financed.

Retail portfolioRetail mortgage exposures relate to mortgage loans to individuals and are a combination of both drawn and undrawn EADs.

QRRE relates to cheque accounts, credit cards and revolving personal loans and products, and includes both drawn and undrawn exposures.

Retail other covers other branch lending and vehicle finance for retail, personal, and small and medium enterprise portfolios. Branch lending includes both drawn and undrawn exposures, while vehicle and asset finance only has drawn exposures.

Internally developed behavioural scorecards are used to measure the anticipated performance for each account.

Mapping of the behaviour score to a PD is performed for each portfolio using a statistical calibration of portfolio-specific historical default experience.

The behavioural scorecard PDs are used to determine the portfolio distribution on the master rating scale. Separate LGD models are used for each product portfolio and are based on historical recovery data. EAD is measured as a percentage of the credit facility limit and is based on historical averages. EAD is estimated per portfolio and per portfolio-specific segment, using internal historical data on limit utilisation.

Equity portfolioEquity risk held in the banking book is substantively controlled in accordance with the credit risk governance standard, except in so far as it is approved and overseen under the mandate of the ERC rather than under the normal credit risk delegated authority structures.

Refer to page 109 for more information regarding equity risk in the banking book.

Key portfolio modelsThe group makes use of the following key models for its credit risk regulatory capital purposes:

credit rating models for corporate exposures, with distinctions made between South Africa, Africa Regions, SME and Standard Bank International

CIB portfolio, distinct credit rating models are used for exposures to banks, sovereigns, local government, brokers, hedge funds, pension funds, asset managers, long- and short-term insurers, property finance (both developer and investor cash flow) and project finance respectively

in the retail and personal lending segments, behavioural scorecard models are used for retail cheque portfolio, retail SME, card, personal loans, home loans, retail and corporate SMEs, vehicle and asset finance, Blue Banner securitisation vehicle RC1 Proprietary Limited (Blue Banner), pension-backed lending, Diners Club S.A. (Diners Club) card and access loans.

PD, EAD and LGD modelling is integral to all of the models and portfolios detailed above.

PortfoliosCorporate, sovereign and bank portfoliosCorporate entities include large companies, as well as SMEs that are managed on a relationship basis or have a combined exposure to the group of more than R12 million. Corporate exposures also include specialised lending (project, object and commodity finance, as well as income-producing real estate), public sector entities and derivative trading counterparties.

Sovereign and bank borrowers include sovereign government entities, central banks, local and provincial government entities, bank and non-bank financial institutions.

The creditworthiness of corporate (excluding specialised lending), sovereign and bank exposures is assessed based on a detailed individual assessment of the financial strength of the borrower. This quantitative analysis, coupled with a detailed qualitative analysis of the entity together with expert judgement and external rating agency ratings, leads to an assignment of an internal rating to the entity.


Credit portfolio characteristics and metrics in terms of BaselCredit portfolio analysisThe credit portfolio is analysed in the tables that follow in terms of the Basel approach and asset class.

CR1: CREDIT QUALITY OF ASSETS (BANKING OPERATIONS)

Gross carrying values of

Allowances/impair-

ments (c)Rm

Net values(a+b-c)

Rm

Defaultedexposures

(a)Rm

Non-defaulted

exposures(b)

RmTotal

exposures

2016Loans1 34 426 1 004 915 1 039 341 21 7932 1 017 548Debt securities 155 227 155 227 155 227On-balance sheet exposures 34 426 1 160 142 1 194 568 CRB(e) 21 7932 1 172 775Off-balance sheet exposures 431 288 342 288 773 CRB(e) 288 773

Total 34 857 1 448 484 1 483 341 CRB(e) 21 7932 1 461 548

CR2

1 Included in loans are placements with central banks outside of South Africa. Placements under resale agreement are included within the CCR framework and excluded from credit risk.

2 As reported in the annual financial statements.

CR2: CHANGES IN STOCK OF DEFAULTED LOANS AND DEBT SECURITIES (BANKING OPERATIONS)

AmountsRm

Defaulted loans and debt securities at 31 December 2015 37 798Loans and debt securities that have defaulted since the last reporting period 20 644Returned to non-defaulted status (12 271)Amounts written off (8 229)1

Other changes (3 085)

Defaulted loans and debt securities at 31 December 2016 34 857

CR1


52


Concentration riskConcentration risk is the risk of loss arising from an excessive concentration of exposure to a single counterparty, an industry, a product, a geography, maturity, or collateral. The group’s credit risk portfolio is well-diversified. The group’s management approach relies on the reporting of concentration risk along key dimensions, the setting of portfolio limits and stress testing.

CRB(e): EXPOSURES BY TYPE OF ASSET AND INDUSTRY (BANKING OPERATIONS)

On-balancesheet

Rm

Off-balancesheet

Rm

Total gross

exposureRm

Impairedexposures1

Rm

Specific credit

impairments1

Rm

2016Agriculture, hunting, forestry and fishing 28 092 5 257 33 349 1 241 409Business services 54 096 17 440 71 536 549 265Community, social and personal services 105 211 4 286 109 497 16 9Construction 10 233 9 068 19 301 350 168Electricity, gas and water supply 25 864 5 291 31 155 582 147Financial intermediation and insurance 102 762 37 161 139 923 313 288Manufacturing 69 538 29 848 99 386 796 329Mining and quarrying 35 001 35 237 70 238 652 652Private households 459 418 80 861 540 279 23 561 9 419Real estate 95 068 3 298 98 366 266 223Transport, storage and communication 35 590 19 865 55 455 692 468Wholesale and retail trade repair of specified

items, hotels and restaurants 59 375 21 775 81 150 2 439 1 578Other 114 320 19 386 133 706 1 543 704

Total 1 194 568 288 773 1 483 341 33 000 14 659

CR1 CR1 CR1


1

2

3

4

5

CRB(e): total gross exposure by type of industry (%)(banking operations)

2016 2015

1 Finance, real estate and other business 36 36

2 Private households 21 21

3 Agriculture, mining, manufacturing, electricity, construction and transport 21 21

4 Wholesale 6 6

5 Other 16 16


CRB(e): EXPOSURES BY TYPE OF ASSET AND GEOGRAPHIC REGION (BANKING OPERATIONS)

On-balancesheet

Rm

Off-balancesheet

Rm

Totalgross

exposureRm

Impairedexposures1

Rm

Specificcredit

impairments1

Rm

2016Africa Regions 221 443 48 904 270 347 4 392 2 175South America 11 235 815 12 050Asia 27 467 4 616 32 083 1 158 1 074Europe 51 978 11 076 63 054North America 16 918 5 423 22 341South Africa 864 431 216 282 1 080 713 27 305 11 264Other 1 096 1 657 2 753 145 146

Total 1 194 568 288 773 1 483 341 33 000 14 659

CR1 CR1 CR1

1 Amount as per the annual financial statements.

1

2

3

CRB(e): total gross exposure by geographic region (%)(banking operations)

2016 2015

1 South Africa 73 62

2 Africa Regions 18 19

3 Standard Bank International 9 19

54


CRB(e): EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY (BANKING OPERATIONS)

Less than1 year

Rm

1 to 5years

Rm

Greater than5 years

Rm

Total grossexposure

Rm

2016Bank 57 048 3 384 132 60 564Corporate 185 896 219 911 26 394 432 201Local governments and municipalities 2 349 639 24 3 012Public sector entity 13 053 15 058 7 050 35 161Securities firms treated as banks 697 15 90 802SME corporate 40 431 40 314 19 965 100 710Sovereign 182 461 3 885 8 102 194 448Specialised lending – high-volatility commercial real estate 474 39 513Specialised lending – income-producing real estate 4 695 10 521 323 15 539Specialised lending – project finance 136 9 848 9 151 19 135Retail mortgage advances 8 474 2 633 349 180 360 287Retail revolving credit 110 693 4 796 115 489SME retail 44 776 26 048 8 669 79 493Other retail 10 065 29 695 26 227 65 987

Total 661 248 366 786 455 307 1 483 341

CR1

has no material correlation to the obligor credit quality

has an active secondary market for resale.

The main types of collateral obtained by the group for its banking book exposures include:

mortgage bonds over residential, commercial and industrial properties

cession of book debts

pledge and cession of financial assets

bonds over plant and equipment

the underlying movable assets financed under leases and instalment sales.

Reverse repurchase agreements and commodity leases to customers are collateralised by the underlying assets.

Guarantees and related legal contracts are often required, particularly in support of credit extension to groups of companies and weaker obligors. Guarantors include banks, parent companies, shareholders and associated obligors. Creditworthiness is established for the guarantor as for other obligor credit approvals.

For trading and derivatives transactions where collateral support is considered necessary, the group typically uses internationally recognised and enforceable International Swaps and Derivatives Association (ISDA) agreements, with a credit support annexure (CSA).

Credit risk mitigationWherever warranted, the group will attempt to mitigate credit risk, including CCR to any counterparty, transaction, sector, or geographic region, so as to achieve the optimal balance between risk, cost, capital utilisation and reward. Risk mitigation may include the use of collateral, the imposition of financial or behavioural covenants, the acceptance of guarantees from parents or third parties, the recognition of parental support, and the distribution of risk.

Collateral, parental guarantees, credit derivatives and on- and off-balance sheet netting are widely used to mitigate credit risk. Credit risk mitigation policies and procedures ensure that risk mitigation techniques are acceptable, used consistently, valued appropriately and regularly, and meet the risk requirements of operational management for legal, practical and timely enforcement. Detailed processes and procedures are in place to guide each type of mitigation used.

In the case of collateral where the group has an unassailable legal title, the group’s policy is such that collateral is required to meet certain criteria for recognition in LGD modelling, including:

is readily marketable and liquid

is legally perfected and enforceable

has a low valuation volatility

is readily realisable at minimum expense


level by limiting exposure to such transactions, taking adverse correlation into account in the measurement and mitigation of credit exposure and increasing oversight and approval levels. The group has no appetite for wrong-way risk arising where the correlation between EAD and PD is due to a legal, economic, strategic or similar relationship (i.e. specific wrong-way risk). General wrong-way risk, which arises when the correlation between EAD and PD for the counterparty, due mainly to macro factors, is closely managed within existing risk frameworks.

To manage actual or potential portfolio risk concentrations in areas of higher credit risk and credit portfolio growth, the group implements hedging and other strategies from time-to-time. This is done at individual counterparty, sub-portfolio and portfolio levels through the use of syndication, distribution and sale of assets, asset and portfolio limit management, credit derivatives and credit protection.

Netting agreements, such as collateral under the CSA of an ISDA agreement, are only obtained where the group firstly has a legally enforceable right to offset credit risk by way of such an agreement, and secondly where the group has the intention of utilising such agreement to settle on a net basis.

Other credit protection terms may be stipulated, such as limitations on the amount of unsecured credit exposure acceptable, collateralisation if the mark-to-market credit exposure exceeds acceptable limits, and termination of the contract if certain credit events occur, for example, downgrade of the counterparty’s public credit rating.

Wrong-way risk arises in transactions where the likelihood of default (i.e. the PD) by a counterparty and the size of credit exposure (as measured by EAD) to that counterparty tend to increase at the same time. This risk is managed both at an individual counterparty level and at an aggregate portfolio

CR3: CRM TECHNIQUES – OVERVIEW (BANKING OPERATIONS)

Exposuresunsecured:

carryingamount1

Rm

Exposuressecured by

collateral1

Rm Total

Exposuressecured bycollateral, of which:

secured amount

Rm

Exposuressecured by

financialguarantees

Rm

Exposuressecured by

financialguarantees,

of which:secured amount

Rm

Exposuressecured

by creditderivatives

Rm

Exposuressecured by

creditderivatives,

of which:secured amount

Rm

Loans 473 212 544 336 1 017 548 533 345 26 032 9 830 11 598 164Debt securities 155 227 155 227 609 609

Total 628 439 544 336 1 172 7752 533 345 26 641 10 439 11 598 164

Of which defaulted 20 176 696 20 872 696 175 175

1 Exposures are net of impairments.2 Total exposure of R1 194 568 (CR1) less impairments of R21 793 (CR1).

56


CR7: IRB – EFFECT ON RWA OF CREDIT DERIVATIVES USED AS CRM TECHNIQUES (BANKING OPERATIONS)

2016

Pre-credit derivatives

RWARm

ActualRWA

Rm

Corporate 137 405 129 504Other asset classes1 239 661

Specialised lending – high-volatility commercial real estate (property development) 302Specialised lending – income-producing real estate 4 306Specialised lending – project finance 11 455SME corporate 10 310Securities firms 268Sovereign 4 961Public sector entities 6 281Local governments and municipalities 1 467Banks 16 794Retail mortgages 88 535QRRE 46 056Retail – other 18 236SME retail 24 680Equity 6 010

Total (all portfolios) 369 165

OV1 CR6

1 Other asset classes’ pre-credit derivatives RWA is equivalent to actual RWA.


CR4: STANDARDISED APPROACH – CREDIT RISK EXPOSURE AND CRM EFFECTS (BANKING OPERATIONS)

Asset classes

Exposures pre-CCF and pre-CRM

Exposures post-CCF and post-CRM

RWA and RWA density

On-balancesheet

amountRm

Off-balancesheet

amountRm

On-balancesheet

amountRm

Off-balancesheet

amountRm

RWARm

RWA density

%

Corporate 46 286 19 022 42 254 10 445 45 321 86SME corporate 43 349 19 793 43 349 594 46 199 105Public sector entities 4 780 1 335 4 780 470 4 047 77Local governments and

municipalities 80 80 42 53Sovereign 98 881 14 98 868 77 821 79Banks 21 431 8 838 21 432 5 261 11 912 45Securities firms 5 590 5 190 148 76Retail mortgage advances 16 053 1 446 16 053 822 9 363 55Retail revolving credit 18 783 2 158 18 783 21 011 112SME retail 9 558 6 592 9 558 4 025 13 673 101Other retail 2 564 1 404 2 564 427 2 125 71Other assets 80 599 80 599 26 864 33

Total 342 369 61 192 338 325 22 234 258 526 72

Sum of exposures post-CCF and post-CRM 360 559

LI2 OV1CR5

The table below explains the variations in credit RWA under the IRB approach attributable to each of the key risk drivers. Note the following:

asset size represents organic changes in the book size and composition

asset quality represents changes due to changes in borrower risk, such as risk grade migration or similar effects

foreign exchange movements are changes driven by changes in foreign exchange rates.

CR8: IRB – RWA FLOW STATEMENTS OF CREDIT RISK EXPOSURES (BANKING OPERATIONS)

RWA amounts

Rm

RWA as at 31 December 2015 364 351Asset size 14 529Asset quality (3 834)Foreign exchange movements (2 631)Other (3 250)

RWA as at 31 December 2016 369 165

CR6OV1


CR9: IRB – BACKTESTING OF PD PER PORTFOLIO (BANKING OPERATIONS)

The table below provides backtesting data to validate the reliability of PD calculations.

Current weighted-average PD estimates are determined at the beginning of a 12-month horizon using the calibrated regulatory models. The models are calibrated to actual long-run default experience to ensure stable regulatory estimates over a complete credit cycle. The PD estimates would thus tend to underestimate actual default experience at the top of the cycle and overestimate actual default experience at the bottom of the credit cycle. The average historical default rate is the actual, annual default rate experience, averaged over a five year period.

Portfolio1 PD range

Number of obligors

Average historicalannual default rate

External ratingequivalent

Weighted average PD

Arithmetic averagePD by obligors

End of previous year

End of the year

Defaulted obligors in the year

Of which: new defaulted

obligors in the year

Bank 0.03%; 10.24% BBB+ 0.15% 0.20% 305 282 4 0.20%Corporate 0.01%; 40.96% BB 0.85% 1.18% 1 866 1 703 17 1.59%Sovereign 0.01%; 1.81% BB+ 0.04% 0.47% 25 27 0.00%Specialised lending 0.11%; 14.48% BB+ 1.08% 1.10% 337 319 1.68%High-volatility commercial

real estate 0.45%; 3.62% B+ 2.32% 3.02% 10 7 3.72%Income-producing real estate 0.11%; 14.48% BB+ 1.10% 0.89% 284 272 0.49%Project finance 0.23%; 7.24% BB 1.21% 0.87% 43 40 2.34%

BankRetail mortgages 0.035% – 100% Ba1 3.38% 3.20% 553 327 550 895 18 170 14 363 3.78%Retail other 0.123% – 100% Ba3 4.83% 10.26% 395 085 356 633 27 834 25 697 9.86%Retail SME 0.030% – 100% Ba2 2.93% 3.92% 655 786 616 511 50 963 46 504 5.59%QRRE 0.030% – 100% B1 4.78% 5.19% 4 665 417 4 549 753 254 401 231 906 6.57%

1 The dimension portfolio includes the following prudential portfolios for the FIRB approach: (i) sovereign; (ii) banks; (iii) corporate; (iv) corporate – specialised lending; (v) equity (PD/LGD method); (vi) purchased receivables, and the following prudential

portfolios for the AIRB approach:

(i) sovereign; (ii) banks; (iii) corporate; (iv) corporate – specialised lending; (v) equity (PD/LGD method); (vi) retail – QRRE; (vii) retail – residential mortgage exposures; (viii) retail – SME; (ix) other retail exposures; (x) purchased receivables.

• External rating equivalent: one column has to be filled in for each rating agency authorised for prudential purposes in the jurisdictions where the bank operates

• Weighted average PD: excludes defaults and is therefore not the same as CR6

• Arithmetic average PD by obligors: PD within range by number of obligor within the range

• Number of obligors: two sets of information are required: (i) the number of obligors at the end of the previous year; (ii) the number of obligors at the end of the year subject to reporting

• Defaulted obligors in the year: number of defaulted obligors during the year; of which: new obligors defaulted in the year: number of obligors having defaulted during the last 12-month period that were not funded at the end of the previous financial year

• Average historical annual default rate: the five-year average of the annual default rate (obligors at the beginning of each year that are defaulted during that year/total obligor held at the beginning of the year) is a minimum.


60

With respect to additional collateral that the bank may be required to lodge with trading counterparties in the event of a rating downgrade refer to page 98.

Replacement cost: for trades that are not subject to margining requirements, the replacement cost is the loss that would occur if a counterparty were to default and was closed out of its transactions immediately. For margined trades, it is the loss that would occur if a counterparty were to default at present or at a future date, assuming that the closeout and replacement of transactions occur instantaneously. However, closeout of a trade upon a counterparty default may not be instantaneous. The replacement cost under the current exposure method is determined by marking contracts to market.

PFE is any potential increase in exposure between the present and up to the end of the margin period of risk. The PFE for the current exposure method is determined by applying a prescribed add-on factor to the underlying notional amount to determine the PFE over the life of the contract.

Effective expected positive exposure is the weighted average over time of the effective expected exposure over the first year, or, if all the contracts in the netting set mature before one year, over the time period of the longest-maturity contract in the netting set where the weights are the proportion that an individual expected exposure represents of the entire time interval.

EAD post-CRM: this refers to the amount relevant for the capital requirements calculation having applied CRM techniques, credit valuation adjustments (CVA) and specific wrong-way adjustments.

Counterparty credit riskThe group is exposed to CCR through movements in the fair value of securities financing and derivatives contracts. The risk amounts reflect the aggregate replacement costs that would be incurred by the group in the event of counterparties defaulting on their obligations. The approach for managing CCR is set out on page 32.

The group’s exposure to CCR is affected by the nature of the trades, the creditworthiness of the counterparty, and underlying netting and collateral arrangements. CCR is measured in PFE terms and recognised on a net basis where netting agreements are in place and are legally enforceable, or otherwise on a gross basis. Exposures are generally marked-to-market daily. Cash or near cash collateral is posted where contractually provided for.

Demand for economic capital, as a risk appetite dimension, is allocated to risk types (including CCR) in accordance with the group risk appetite governance framework, and serves as the basis for the setting of internal CCR appetite limits against which aggregate risk type exposure can be measured.

CCR, reflecting both pre-settlement and settlement risk, is subjected to explicit credit limits which are formulated and approved for each counterparty and economic group, with specific reference to its credit rating and other credit exposures to that counterparty.

In the event of a rating downgrade, the collateral that the group would have to provide is dependent on a number of variables, including the netting of existing positions and a reduction in the threshold above which collateral would have to be posted with counterparties to cover the group’s negative mark-to-market.



CCR1: ANALYSIS OF CCR EXPOSURE BY APPROACH (BANKING OPERATIONS)

ReplacementcostRm

PFERm

Alpha used for

computingregulatory

EAD

EAD post-CRM

RmRWA

Rm

Current exposure method (for derivatives) 61 752 53 787 1.4 35 081 11 869Comprehensive approach for CRM (for SFTs) 9 120 2 488

Total 61 752 53 787 44 201 14 357

CVA RWA from CCR2 6 827

Total 21 184

LI1 LI2 LI2 OV1

CCR2: CVA CAPITAL CHARGE (BANKING OPERATIONS)

2016

EAD post-CRM

RmRWA

Rm

All portfolios subject to the standardised CVA capital charge 33 378 6 827 CCR1

Total subject to the CVA capital charge 33 378 6 827

CVA RWA 14 357 CCR1

Total CCR RWA 21 184 OV1


CCR3: STANDARDISED APPROACH – CCR EXPOSURES BY REGULATORY PORTFOLIO AND RISK WEIGHTS (BANKING OPERATIONS)

Risk weight 0% 10% 20% 50% 75% 100% 150% 225% 350% 650% 1 250% OthersTotal credit

exposure

Regulatory portfoliosCorporate 1 402 1 402SME corporate 200 200Public sector entities 5 5Local governments and municipalities 1 1Sovereign 610 610Banks 546 151 237 934Securities firms 210 34 244Retail exposure Retail mortgage advances Retail revolving credit SME retail Other retail Securitisation and resecuritisation exposure

Total 756 185 2 455 3 396

EAD 40 805

Total 44 201

The table on the following page provides information on all the relevant parameters used for the calculation of CCR capital requirements under the IRB approach. To note:

EAD post-CRM is the EAD as calculated under the applicable CCR approach and after applying CRM but gross of accounting provisions

number of obligors correspond to the number of individual PDs in a band

average PD and LGD are weighted by EAD

RWA density is total RWA to EAD post-CRM.


64

CCR4: IRB – CCR EXPOSURES BY PORTFOLIO AND PD SCALE (BANKING OPERATIONS)

Total (all portfolios)

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 27 975 0.06 74 39.28 1.60 5 819 0.210.15 to < 0.25 6 056 0.18 66 38.74 1.90 2 263 0.370.25 to < 0.50 4 382 0.39 171 35.66 1.80 1 870 0.430.50 to < 0.75 774 0.64 95 36.44 2.70 511 0.660.75 to < 2.50 1 179 1.28 156 44.73 1.70 1 075 0.912.50 to < 10.00 439 3.44 65 38.41 1.20 468 1.0710.00 to < 100.00100.00 (Default)

Subtotal 40 805 0.19 627 39.04 1.70 12 006

LI2

Corporate

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 410 0.08 17 34.35 1.10 61 0.150.15 to < 0.25 2 428 0.20 47 34.24 1.90 733 0.300.25 to < 0.50 3 385 0.40 157 35.28 1.50 1 337 0.390.50 to < 0.75 705 0.64 83 36.38 2.70 465 0.660.75 to < 2.50 336 1.32 117 38.55 1.60 281 0.842.50 to < 10.00 390 3.42 51 38.48 1.20 424 1.0910.00 to < 100.00100.00 (Default)

Subtotal 7 654 0.58 472 35.32 1.80 3 301 0.49

SME corporate

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 151 0.09 2 40.09 4.20 49 0.320.15 to < 0.25 258 0.16 3 40.27 1.20 70 0.270.25 to < 0.50 130 0.40 2 40.09 1.00 57 0.440.50 to < 0.75 56 0.64 7 34.73 3.60 37 0.660.75 to < 2.50 167 1.27 19 39.48 4.50 156 0.932.50 to < 10.00 43 3.62 9 39.49 1.00 39 0.9110.00 to < 100.00100.00 (Default)

Subtotal 805 0.64 42 39.62 2.60 408 0.51



Securities firms

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 8 011 0.07 10 40.42 1.60 1 891 0.240.15 to < 0.25 478 0.16 8 42.80 1.20 178 0.700.25 to < 0.50 285 0.32 4 40.09 1.00 143 0.500.50 to < 0.75 0.64 1 40.09 1.000.75 to < 2.50 1 1.81 4 40.09 1.00 1 1.002.50 to < 10.0010.00 to < 100.00100.00 (Default)

Subtotal 8 775 0.09 27 40.55 1.50 2 213 0.25

Sovereign

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 1 471 0.01 2 27.78 1.10 35 0.020.15 to < 0.25 517 0.23 1 32.77 4.90 281 0.540.25 to < 0.500.50 to < 0.750.75 to < 2.502.50 to < 10.0010.00 to < 100.00100.00 (Default)

Subtotal 1 988 0.07 3 29.07 2.10 316 0.16

Public sector entities

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.150.15 to < 0.25 33 0.23 4 26.29 3.70 12 0.360.25 to < 0.50 408 0.24 3 28.61 3.30 202 0.500.50 to < 0.750.75 to < 2.502.50 to < 10.00 6 3.62 1 26.29 1.00 5 0.8310.00 to < 100.00100.00 (Default)

Subtotal 447 0.45 8 28.41 3.30 219 0.49

66

Banks

PD scale

EAD post-CRM

Rm

Average PD%

Number of obligors

AverageLGD

%

Averagematurity

Year RWA

Rm

RWA density

%

0.00 to < 0.15 17 932 0.06 43 39.81 1.60 3 783 0.210.15 to < 0.25 2 342 0.16 3 43.89 1.50 989 0.420.25 to < 0.50 174 0.37 5 45.35 2.60 131 0.750.50 to < 0.75 13 0.64 4 47.04 1.00 9 0.690.75 to < 2.50 675 1.27 16 49.11 1.00 637 0.942.50 to < 10.00 3.31 4 51.85 1.00 1.3810.00 to < 100.00100.00 (Default)

Subtotal 21 136 0.11 75 40.61 1.60 5 549 0.26

CCR5: COMPOSITION OF COLLATERAL FOR CCR EXPOSURE1 (BANKING OPERATIONS)

Collateral used in derivatives transactions Collateral used in SFTs

Fair value of collateral received

Fair value of posted collateral Fair value

of collateral received

Rm

Fair valueof

posted collateral

RmSegregated

Rm

Un-segregated2

RmSegregated

Rm

Un-segregated2

Rm

Cash – domestic currency 6 478 2 220 31 455 15 215Cash – other currencies 2 172 9 863 108 695Domestic sovereign debt 2 022 1 8 853Other sovereign debt 53 990Government agency debt 850Corporate bonds 55 556 313Equity securities 576 11 030 8 152 Other collateral 5 807 13 234

Total 11 248 12 083 158 689 154 462

1 Per the requirement of the framework, collateral includes both cash and securities that are subject to the transaction. Collateral items are presented at fair value and gross of haircuts.

2 Unsegregated refers to collateral not held in a bankruptcy-remote manner.



The table that follows details the group’s exposure to derivatives.

CCR6: CREDIT DERIVATIVES EXPOSURES (BANKING OPERATIONS)

2016

Protectionbought

Rm

ProtectionsoldRm

NotionalsSingle-name credit default swaps 9 567 41 057Total return swaps 865 259Other credit derivatives 27 904 4 175

Total notionals 38 336 45 491

Fair valuesPositive fair value (asset) 3 456 199 Negative fair value (liability) 2 595 1 464

Securitisation achieves the following objectives for clients:

facilitating non-banks’ access to global markets in a disintermediated fashion generating fee income and generally minimising the requirement for bank capital

providing ancillary facilities, such as settlement and liquidity support, typically at the most senior positions in the special purpose vehicles (SPV) capital structure with minimal credit risk exposures

participating in the securitisation issuances, again in the most senior positions with minimal credit risk exposure

providing asset-related services such as back-up servicing in asset classes where SBSA has a significant skill base.

Securitisation achieves the following objectives for the group:

The group has originated a number of securitisations of its own home loan and vehicle and asset finance loan assets. All of these transactions comply with the securitisation regulation risk transfer requirements

SBSA has always retained the subordinated loans and, consequently, has never derecognised the full credit risk associated with the securitised assets (i.e. the transactions have not resulted in a reduction of the RWA associated with the loans)

The securitisation transactions are all aimed at raising funding from diversified sources beyond the group’s normal wholesale deposit base

Since 2014, the group also makes use of securitisation structures to provide collateral for the SARB committed liquidity facility aimed at meeting the new LCR requirements.

SecuritisationSecuritisation is a transaction whereby the credit risk associated with an exposure, or pool of exposures, is tranched and passed on to investors, typically through loan notes, and where payments to investors through the loan notes in the transaction are dependent upon the performance of the exposure or pool of exposures.

A traditional securitisation involves the transfer of the exposures being securitised to a structured entity (SE) which issues securities. In a synthetic securitisation, the tranching is achieved by the use of credit derivatives and the underlying exposures are not removed from the SOFP.

The group uses SEs to securitise customer loans and advances that it has originated to diversify its sources of funding for asset origination, for capital efficiency purposes and to reduce risk. In addition, the group plays a secondary role as an investor in certain third-party securitisation note issuances (SEs established by third parties).

The following SEs have been established by the group:

Blue Granite Investments No. 1 (RF) Limited (BG 1)




Siyakha Fund (RF) Limited (Siyakha)

Blue Titanium Conduit (RF) Limited (BTC).

68

BASEL: ROLES FULFILLED IN SECURITISING ASSETS

Securitisationtransactions Originator Investor Servicer

Liquidityprovider

Creditenhancement

providerSwap

counterparty

Traditional securitisationsBG 1BG 21

BG 31

BG 41

Siyakha

Asset-backed commercial paper programme

BTC

Third party transactions

1 During 2016, SBSA received approval from the SARB for the repurchase of the securitisation underlying assets.

SECURITISATION TRANSACTIONS

Asset typeYear

initiatedExpected

close

Assetssecuritised

Rbn

Assets outstanding

Notes outstanding1

Retained exposure1,2

2016Rbn

2015Rbn

2016Rbn

2015Rbn

2016Rbn

20155

Rbn

Traditional securitisations 17.9 2.5 7.8 2 8.5 2.2 5.4

BG 13 Retail mortgages 2005 2032 4.6 0.7 0.8 0.7 0.9 0.8 1BG 23 Retail mortgages 2006 2041 2.8 1.8 2 1.3BG 33 Retail mortgages 2006 2032 3 0.2 1.4 1.6 0.2 1.1BG 43 Retail mortgages 2007 2037 5.1 0.3 2.3 2.5 0.1 1.4Siyakha4 Retail mortgages 2007 2043 2.4 1.3 1.5 1.3 1.5 1.1 1.1

Asset-backed commercial paper programmeBTC4 Various 2002 N/A N/A 2.8 3.2 2.7 3.2 0.4 0.2

Total 17.9 5.3 11 4.7 11.7 2.6 5.6

1 Capital plus accrued interest.2 Includes notes, first and second loss subordinated and notes held by BTC.3 Rating agency: Moody’s.4 Rating agency: Global Credit Rating Co.5 Restated. Refer to page 133.



For local securitisations in South Africa, Moody’s Investor Services and/or Fitch act as rating agencies. R3.5 billion of securitisation activities took place during 2016 (2015: R3.9 billion) (relates to the facilitation of the securitisation of third party assets into an SE that is not consolidated by the group).

The transfer of assets by the group to an SE may give rise to the full or partial derecognition of the financial assets concerned. Only in the event that derecognition is achieved are sales and any resultant gains or losses on disposals recognised in the financial statements. Where the SEs are consolidated at group level, such gains or losses are eliminated.

Refer to the group’s accounting policies for more information.

SEC 1: SECURITISATION EXPOSURES IN THE BANKING BOOK (BANKING OPERATIONS)

a b c e f g i j k

Bank acts as originator Bank acts as sponsor Bank acts as investor

Tradi-tional

Rm

Syn-thetic

Rm

Sub-total

Rm

Tradi-tional

Rm

Syn-thetic

Rm

Sub-total

Rm

Tradi-tional

Rm

Syn-thetic

Rm

Sub-total

Rm

Retail (other) – of which: 19 099 4 492

Residential mortgages 19 099 3 562 Credit card Other retail exposures 204 Resecuritisation 726

Wholesale (total) – of which: 2 031

Loans to corporates Commercial mortgages Lease and receivables Other wholesale Resecuritisation 2 031

For originated and sponsored or administered securitisations consolidated under IFRS (that is, BG 1 – 4, Siyakha and BTC), intragroup exposures to and between these securitisations have been eliminated and the underlying assets consolidated in the relevant sections and classes (that is, primarily retail mortgages) of the risk disclosure. Only exposures to securitisations of assets originated by third parties are disclosed below. The approach applied in the calculation of RWA is dependent on the group’s approved model for the underlying assets and the existence of a rating from an eligible external credit assessment institution. To date, the group has applied the standardised approach, the ratings-based approach and the standard formula approach, where relevant, in the calculation of RWA.


SEC 3: SECURITISATION EXPOSURES IN THE BANKING BOOK AND ASSOCIATED REGULATORY CAPITAL REQUIREMENTS – BANK ACTING AS ORIGINATOR OR AS SPONSOR (BANKING OPERATIONS)

Exposure values(by risk-weight bands)

Exposure values(by regulatory approach)

RWA(by regulatory approach) Capital charge after cap

<=20% risk-

weight

<20%to 50%

risk-weight

<50%to 100%

risk-weight

<100%to

<1 250%risk-

weight

1 250%risk-

weight

IRB RBA1

(includingIAA2)

IRBSFA3

SA4/SSFA5 1 250%

IRBRBA1

(including IAA2)

IRBSFA3

SA4/SSFA5 1 250%

IRBRBA1

(includingIAA2)

IRBSFA3

SA4/SSFA5 1 250%

OV1 OV1Total exposures 4 094 10 387 881 3 610 228 450 24 47

Traditional securitisation 4 094 10 387 881 3 610 228 450 24 47

Of which securitisation 3 516 10 234 881 2 879 228 219 24 23 Of which retail underlying 3 516 10 234 881 2 879 228 219 24 23 Of which wholesale Of which resecuritisation 578 153 731 231 24 Of which senior 153 153 121 13 Of which non-senior 578 578 110 11

Synthetic securitisation Of which securitisation Of which retail underlying

1 Ratings-based approach.2 Internal assessment approach.3 Supervisory formula approach.4 Standardised approach.5 Simplified supervisory formula approach.


72

Non-performing loansNon-performing loans are those loans for which the group has identified objective evidence of default, such as a breach of a material loan covenant or condition, or instalments are due and unpaid for 90 days or more.

Non-performing but not specifically impaired loans are not specifically impaired due to the expected recoverability of the full carrying value when considering the recoverability of future cash flows, including collateral. Non-performing specifically impaired loans are those loans that are regarded as non-performing and for which there has been a measurable decrease in estimated future cash flows. Specifically impaired loans are further analysed into the following categories:

Substandard: items that show underlying well-defined weaknesses and are considered to be specifically impaired.

Doubtful: items that are not yet considered final losses due to some pending factors that may strengthen the quality of the items.

Loss: items that are considered to be uncollectible in whole or in part. The group provides fully for its anticipated loss, after taking collateral into account.

Credit impairment losses on loans and advancesLoans and advances are assessed for possible impairment at each reporting date. Before impairments are allocated to individual loans, consideration is first given to whether there is evidence of a decrease in expected cash flows from a portfolio of loans and advances. This will include estimations of the emergence period between the date of the occurrence of the loss event and the identification of that loss. Portfolio impairments are calculated for both performing and non-performing but not specifically impaired loans. Factors such as national- and industry-specific economic conditions, the extent of early arrears and any legislation that could affect recovery, are all considered when calculating the portfolio impairment charge.

For those NPL where there is objective evidence of default (such as a breach of a material loan covenant or instalments are due and unpaid for more than 90 days), specific impairments are calculated using methodologies that include inputs such as segmentation, modelled EL and PD. Estimates of future cash flows on individually impaired loans are based on historical loss experience for similar loans.

Credit portfolio characteristics and metrics in terms of IFRSAnalysis of loans and advancesThe tables on the pages that follow analyse the credit quality of loans and advances measured in terms of IFRS.

Maximum exposure to credit riskLoans and advances are analysed and categorised based on credit quality using the following definitions.

DefaultThe group defines a default as occurring at the earlier of:

when either, based on objective evidence, the counterparty is considered to be unlikely to pay amounts due on the due date or shortly thereafter without recourse to actions such as realisation of security; or

when the counterparty is past due for more than 90 days. The overdue period may be measured using a “days past due” or a “number of missed payments or part thereof” approach.

Performing loansPerforming loans are classified into two categories, namely:

Neither past due nor specifically impaired loans: these loans are current and fully compliant with all contractual terms and conditions. Normal monitoring loans within this category are generally rated 1 to 21, and close monitoring loans are generally rated 22 to 25 using the group’s master rating scale.

Early arrears but not specifically impaired loans: early arrears but not specifically impaired loans include those loans where the counterparty has failed to make contractual payments and payments are less than 90 days past due, but it is expected that the full carrying value will be recovered when considering future cash flows, including collateral. Ultimate loss is unlikely but could occur if the adverse conditions persist.



LOANS

Performing loans

Neither past due nor specifically impaired loans

(Rm)

20161 021 782

20151

1 026 087

Early arrears but not specifically impaired loans

(Rm)

201632 233

20151

38 582

Close monitoring

(Rm)

201617 784

20151

18 077

Non-performing loans

Loss(Rm)

20166 208

20151

6 292

Doubtful(Rm)

201619 248

20151

20 664

Substandard(Rm)

20167 544

20151

8 105

Specifically impaired loans

(Rm)

201633 000

20151

35 061

Non-performing but not specifically impaired loans

(Rm)

2016406

20151

67

Normal monitoring

(Rm)

20161 003 998

20151

1 008 010

Portfolio credit impairments Specific credit impairments



IFRS: MAXIMUM EXPOSURE TO CREDIT RISK BY CREDIT QUALITY (BANKING OPERATIONS)

Performing loans Non-performing loans

Total NPL Rm

NPL%

Loans and advances

Rm

Neither past due norspecifically impaired Not specifically impaired Specifically impaired loans

Normal monitoring

Rm

Close monitoring

Rm

Early arrears

Rm

Non-performing1

Rm

Sub-standard

RmDoubtful

RmLoss

RmTotal

Rm

Securitiesand

expectedrecoveries

onspecifically

impairedloans

Rm

Net aftersecurities

andexpected

recoverieson

specificallyimpaired

loansRm

Balancesheet

impairmentsfor non-

performingspecifically

impairedloans

Rm

Grossspecific

impairmentcoverage

%

2016Personal & Business Banking 644 668 569 053 15 718 32 051 6 371 16 008 5 467 27 846 16 079 11 767 11 767 42 27 846 4.3

Mortgage loans 336 451 294 000 8 047 19 839 3 700 10 335 530 14 565 10 925 3 640 3 640 25 14 565 4.3Vehicle and asset finance 81 035 71 663 1 811 4 491 470 1 378 1 222 3 070 1 660 1 410 1 410 46 3 070 3.8Card debtors 31 229 26 085 1 228 1 696 612 478 1 130 2 220 622 1 598 1 598 72 2 220 7.1Other loans and advances 195 953 177 305 4 632 6 025 1 589 3 817 2 585 7 991 2 872 5 119 5 119 64 7 991 4.1

Personal unsecured lending 53 152 43 042 1 927 3 322 453 3 375 1 033 4 861 1 268 3 593 3 593 74 4 861 9.1Business lending and other 142 801 134 263 2 705 2 703 1 136 442 1 552 3 130 1 604 1 526 1 526 49 3 130 2.2

Corporate & Investment Banking 506 034 498 227 2 066 182 406 1 173 3 240 740 5 153 2 263 2 890 2 890 56 5 559 1.1

Corporate loans 440 515 433 675 1 410 156 404 1 077 3 053 740 4 870 2 143 2 727 2 727 56 5 274 1.2Commercial property finance 65 519 64 552 656 26 2 96 187 283 120 163 163 58 285 0.4

Central and other (63 281) (63 282) 1 1 (1) 2 2 0 1

Gross loans and advances 1 087 421 1 003 998 17 784 32 233 406 7 544 19 248 6 208 33 000 18 341 14 659 14 659 44 33 406 3.1

Less: impairments for loans and advances (21 793)

Net loans and advances2 1 065 628

Add the following other banking activities exposures:Cash and balances with central banks 77 474Derivative assets 61 752Financial investments 154 630Trading assets 128 098Pledged assets 3 313Other financial assets 6 543

Total on-balance sheet exposure 1 497 438

Off-balance sheet exposureLetters of credit and bankers’ acceptances 12 607Guarantees 64 076Irrevocable unutilised facilities 97 573

Total exposure to credit risk 1 671 694

1 Includes non-performing loans of R359 million that are past due but not specifically impaired.2 Net loans, excluding Liberty’s loans and advances of R223 million.



IFRS: MAXIMUM EXPOSURE TO CREDIT RISK BY CREDIT QUALITY (BANKING OPERATIONS) CONTINUED

Performing loans Non-performing loans

Total NPL Rm

NPL%

Loans and advances

Rm

Neither past due norspecifically impaired Not specifically impaired Specifically impaired loans

Normalmonitoring

Rm

Closemonitoring

Rm

Earlyarrears

Rm

Non-performing1

Rm

Sub-standard

RmDoubtful

RmLoss

RmTotal

Rm

Securitiesand

expectedrecoveries

onspecifically

impairedloans

Rm

Net aftersecurities

andexpected

recoverieson

specificallyimpaired

loansRm

Balancesheet

impairmentsfor non-

performingspecifically

impairedloans

Rm

Grossspecific

impairmentcoverage

%

20152

Personal & Business Banking 645 475 564 911 16 396 36 482 6 735 15 890 5 061 27 686 15 921 11 765 11 765 42 27 686 4.3

Mortgage loans 325 867 280 713 8 203 22 163 4 257 10 066 465 14 788 10 896 3 892 3 892 26 14 788 4.5Vehicle and asset finance 80 278 69 825 2 337 5 008 557 1 437 1 114 3 108 1 547 1 561 1 561 50 3 108 3.9Card debtors 31 174 25 757 1 444 1 926 596 481 970 2 047 644 1 403 1 403 69 2 047 6.6Other loans and advances 208 156 188 616 4 412 7 385 1 325 3 906 2 512 7 743 2 834 4 909 4 909 63 7 743 3.7

Personal unsecured lending 56 194 44 883 2 218 4 323 441 3 381 948 4 770 1 265 3 505 3 505 73 4 770 8.5Business lending and other 151 962 143 733 2 194 3 062 884 525 1 564 2 973 1 569 1 404 1 404 47 2 973 2.0

Corporate & Investment Banking 526 333 515 112 1 681 2 100 67 1 370 4 774 1 229 7 373 3 278 4 095 4 095 56 7 440 1.4

Corporate loans 470 283 459 349 1 681 2 100 57 1 310 4 570 1 216 7 096 3 166 3 930 3 930 55 7 153 1.5Commercial property finance 56 050 55 763 10 60 204 13 277 112 165 165 60 287 0.5

Central and other (72 011) (72 013) 2 2 2 2 2

Gross loans and advances 1 099 797 1 008 010 18 077 38 582 67 8 105 20 664 6 292 35 061 19 199 15 862 15 862 45 35 128 3.2


Net loans and advances3 1 077 145

Add the following other banking activities exposures:Cash and balances with central banks 75 112Derivative assets 102 094Financial investments 157 855Trading assets 84 587Pledged assets 15 204Other financial assets 7 407

Total on-balance sheet exposure 1 519 404

Off-balance sheet exposureLetters of credit and bankers’ acceptances 11 437Guarantees 67 161Irrevocable unutilised facilities 99 255Commodities and securities lending transactions 2 123

Total exposure to credit risk 1 699 380

1 Includes non-performing loans of R57 million that are past due but not specifically impaired.2 Restated. Refer to page 133. 3 Excluding Liberty’s loans and advances of R228 million.


78

IFRS: AGEING OF LOANS AND ADVANCES PAST DUE BUT NOT SPECIFICALLY IMPAIRED (BANKING OPERATIONS)

Less than 31 days

Rm

31 to 60 days

Rm

61 to 90 days

Rm

91 to 180 days

Rm

More than 180 days

RmTotal

Rm

2016Personal & Business Banking 19 238 8 094 4 719 32 051

Mortgage loans 11 092 5 484 3 263 19 839Vehicle and asset finance 2 883 1 140 468 4 491Card debtors 998 408 290 1 696Other loans and advances 4 265 1 062 698 6 025

Personal unsecured lending 2 271 584 467 3 322Business term lending and other 1 994 478 231 2 703

Corporate & Investment Banking 19 164 359 542

Corporate loans 13 144 359 516Commercial property finance 6 20 26

Total 19 238 8 113 4 883 359 32 593

2015Personal & Business Banking 22 859 8 820 4 803 36 482

Mortgage loans 13 172 5 818 3 172 22 162Vehicle and asset finance 3 364 1 135 510 5 009Card debtors 1 100 488 338 1 926Other loans and advances 5 223 1 379 783 7 385

Personal unsecured lending 2 946 827 550 4 323Business term lending and other 2 277 552 233 3 062

Corporate & Investment Banking 915 1 179 6 37 20 2 157

Corporate loans 915 1 179 6 37 20 2 157Commercial property finance

Total 23 774 9 999 4 809 37 20 38 639



IFRS: INDUSTRY SEGMENTAL ANALYSIS OF GROSS LOANS AND ADVANCES (BANKING OPERATIONS)

2016Rm

2015Rm

Agriculture 18 022 30 058Construction 21 615 24 670Electricity 15 005 13 803Finance, real estate and other business services 348 708 357 174Individuals 443 727 439 900Manufacturing 63 666 56 621Mining 31 149 43 596Transport 26 052 21 276Wholesale 28 942 25 986Other services 90 535 86 713

Gross loans and advances 1 087 421 1 099 797

IFRS: GEOGRAPHIC SEGMENTAL ANALYSIS OF GROSS LOANS AND ADVANCES (BANKING OPERATIONS)

2016 2015

% Rm % Rm

South Africa 79 863 243 77 843 724Africa Regions 15 158 142 16 175 092Standard Bank International 6 66 036 7 80 981

Gross loans and advances 1 087 421 100 1 099 797

IFRS: INDUSTRY SEGMENTAL ANALYSIS OF SPECIFIC CREDIT IMPAIRMENTS (BANKING OPERATIONS)

2016Rm

2015Rm

Agriculture 246 409Construction 288 441Electricity 153 377Finance, real estate and other business services 1 095 905Individuals 9 180 9 113Manufacturing 447 370Mining 713 1 502Transport 192 521Wholesale 441 1 748Other services 1 904 476

Total 14 659 15 862

IFRS: GEOGRAPHIC SEGMENTAL ANALYSIS OF SPECIFIC CREDIT IMPAIRMENTS (BANKING OPERATIONS)

2016 2015

% Rm % Rm

South Africa 85 12 404 78 12 413Africa Regions 15 2 253 22 3 448Standard Bank International 2 1

Gross loans and advances 100 14 659 100 15 862

80

Restructured (or renegotiated) loans and advancesRestructured loans and advances are exposures that, on meeting certain eligibility criteria, have been rescheduled, rolled over or otherwise modified following weaknesses in the counterparty’s financial position, and where it has been judged that contractual repayment under the revised conditions will likely continue after the restructure. All restructured exposures are assessed for impairment at the time of the restructure and continue to be assessed for impairment thereafter in accordance with the group’s accounting policies.

The adherence by renegotiated (or restructured) exposures to the revised terms and conditions is closely monitored. The performance monitoring period is the greater of three months, the in-country regulatory requirement (where applicable) or the minimum period deemed appropriate by the relevant credit function. The minimum monitoring period for the group’s South African banking operations is six months as stipulated by the SARB directive 7 of 2015.

Exposures are required to perform against the revised terms and conditions for the minimum performance monitoring period prior to reclassification from an arrears to a performing status. Subsequently, these exposures, together with all other exposures, continue to be monitored to assess whether they are either past due or impaired, with impairments recognised in accordance with the group’s accounting policies. In addition, the group monitors the effectiveness of its restructure policies through, for example, monitoring the re-default rates of restructured exposure.

RESTRUCTURED EXPOSURES SPLIT BETWEEN IMPAIRED AND NOT IMPAIRED (BANKING OPERATIONS)1

Not impairedRm

ImpairedRm

2016Advances 5 148 737

Total 5 148 737

1 This represents quarterly activity.

CollateralThe table on the following page shows the financial effect that collateral has on the group’s maximum exposure to credit risk. The table is presented according to Basel asset categories and includes collateral that may not be eligible for recognition under Basel but that management takes into consideration in the management of the group’s exposures to credit risk. All on- and off-balance sheet exposures that are exposed to credit risk, including NPL, have been included.

Collateral includes:

financial securities that have a tradable market, such as shares and other securities

physical items, such as property, plant and equipment

financial guarantees, suretyships and intangible assets.

Netting agreements, which do not qualify for offset under IFRS but which are nevertheless enforceable, are included as part of the group’s collateral for risk management purposes. All exposures are presented before the effect of any impairment provisions. In the retail portfolio, 55% (2015: 57%) is fully collateralised. The R4.3 billion (2015: R5.7 billion) of retail accounts that lie within the 0% to 50% range of collateral coverage mainly comprise accounts which are either in default or legal. The total average collateral coverage for all retail mortgage exposures in the 50% to 100% collateral coverage category is 95% (2015: 94%).

Of the group’s total exposure, 45% is unsecured and mainly reflects exposures to well-rated corporate counterparties, bank counterparties and sovereign entities.

The group does not currently trade commodities that could give rise to physical commodity inventory or collateral exposure with the exception of precious metals. In the normal course of its precious metal trading operations the group does not hold allocated physical metal; however, this may occur from time-to-time. Where this does occur, appropriate risk and business approval is required to ensure that the minimum requirements are satisfied, including but not limited to approval of risk limits and insurance cover.



IFRS: COLLATERAL (BANKING OPERATIONS)

Totalexposure

(a+b)Rm

Un-secured

(a)Rm

Secured(b)

Rm

Nettingagree-ments

(c)Rm

Securedexposure

afternetting

(b–c)Rm

Collateral coverage –total collateral

1% – 50%

Rm

50% – 100%

Rm>100%

Rm

2016Corporate 656 732 389 047 267 685 16 757 250 928 10 298 183 850 56 780Sovereign 163 629 144 484 19 145 4 037 15 108 1 035 8 152 5 921Bank 230 754 70 523 160 231 39 523 120 708 1 158 46 549 73 001Retail 551 936 110 185 441 751 243 441 508 4 336 130 943 306 229

Retail mortgage 343 437 366 343 071 343 071 426 44 914 297 731Other retail 208 499 109 819 98 680 243 98 437 3 910 86 029 8 498

Total 1 603 051 714 239 888 812 60 560 828 252 16 827 369 494 441 931

Add: financial assets not exposed to credit risk 90 346


Less: unrecognised off-balance sheet items (174 256)

Total exposure 1 497 348

Cash and balances with central banks 77 474

Derivative assets 61 752Trading assets 128 098Pledged assets 3 313Financial investments 154 630Loans and advances 1 065 628Other financial assets 6 543

Total 1 497 438

82

IFRS: COLLATERAL (BANKING OPERATIONS) CONTINUED

Totalexposure

(a+b)Rm

Un-secured

(a)Rm

Secured(b)

Rm

Nettingagree-ments

(c)Rm

Securedexposure

afternetting

(b–c)Rm

Collateral coverage –total collateral

1% – 50%

Rm

50% – 100%

Rm>100%

Rm

2015Corporate 643 631 335 555 308 076 31 493 276 583 65 191 157 033 54 359 Sovereign 218 697 206 603 12 094 900 11 194 1 645 2 162 7 387 Bank 237 769 53 461 184 308 66 383 117 925 28 422 32 227 57 276 Retail 536 193 111 051 425 142 243 424 899 5 687 116 344 302 868

Retail mortgage 334 121 1 262 332 859 332 859 1 126 40 774 290 959 Other retail 202 072 109 789 92 283 243 92 040 4 561 75 570 11 909

Total 1 636 291 706 991 929 620 99 019 830 601 100 945 307 766 421 890

Add: financial assets not exposed to credit risk 85 741


Less: unrecognised off-balance sheet items (179 976)

Total 1 519 404

Cash and balances with

central banks 75 112 Derivative assets 102 094 Trading assets 84 587 Pledged assets 15 204 Financial investments 157 855 Loans and advances 1 077 145 Other financial assets 7 407

Total 1 519 404




Liberty is exposed to CCR in respect of investment reinsurance policies, as well as the underlying debt instruments supporting the valuation of the policy.

Credit exposure to debt instrumentsVarious debt instruments are entered into by Liberty in order to match policyholder liabilities and invest surplus shareholder funds. Liberty is primarily exposed to the credit-standing of the counterparties that issued these instruments in terms of both default and spread risk.

The table on the following page provides information regarding the aggregated credit risk exposure of Liberty to debt instruments categorised by credit ratings, if available, as at 31 December 2016.

INSURANCE OPERATIONS

Consolidated mutual fundsLiberty invests in mutual funds through which it is also exposed to the credit risk of the underlying assets in which the mutual funds are invested. Liberty’s exposure to mutual funds is classified at fund level and not at the underlying asset level and, although mutual funds are not rated, fund managers are required to invest in credit assets within the defined parameters stipulated in the fund’s mandate. These rules limit the extent to which fund managers can invest in unlisted and/or unrated credit assets and generally restrict funds to the acquisition of investment grade assets.

IFRS: EXPOSURE TO CREDIT RISK1

A- and above

RmBBB+

RmBBBRm

BBB-Rm BB+ BB

BB- and

belowRm

Not rated

Rm

Pooled funds

Rm

Total carrying

valueRm

2016Debt instruments 8 049 19 869 46 520 27 927 5 306 4 598 3 326 2 140 117 735Investment policies 6 591 10 108 1 363 8 072Prepayments insurance

and other receivables 386 92 92 446 2 4 282 5 300Mutual funds – interest-

bearing instruments 22 660 22 660Reinsurance assets 1 240 19 153 9 170 83 1 674Derivatives and

collateral deposits receivable 1 922 427 5 047 1 186 27 8 609

Cash and cash equivalents 3 219 748 6 212 4 431 10 118 256 14 994

Total assets bearing credit risk 14 816 21 155 64 615 33 990 5 315 4 618 3 724 8 151 22 660 179 044

2015Debt instruments 10 139 496 39 662 35 883 11 562 5 609 5 664 6 480 115 495Investment policies 6 364 17 101 1 574 8 056Prepayments insurance

and other receivables 342 151 13 3 854 4 360Reinsurance assets 1 181 33 444 1 658Mutual funds – interest-

bearing instruments 25 595 25 595Derivatives and

collateral deposits 3 660 894 2 593 4 606 137 11 890Cash and cash

equivalents 5 150 2 579 9 531 47 1 163 833 2 19 305

Total assets bearing credit risk 20 472 1 574 44 834 56 397 11 562 5 673 6 928 13 322 25 597 186 359

1 As reported by Liberty. Refer to Liberty’s annual financial statements.

84

ReinsuranceReinsurance is used to manage insurance risk and consequently, in the liability valuation process, reinsurance assets are raised for expected recoveries on projected claims. This does not, however, discharge Liberty’s liability as primary insurer. In addition, reinsurance debtors are raised for specific recoveries on claims recognised.

A detailed credit analysis is conducted prior to the appointment of reinsurers. Cognisance is also taken of the potential future claims on reinsurers in the assessment process. Financial position strength, performance, track record, relative size, ranking within the industry and credit ratings of reinsurers are taken into account when determining the allocation of business to reinsurers. In addition, efforts are made to appropriately diversify exposure by using several reinsurers. A review of these reinsurers is done at least annually.

ImpairmentsLoans, comprising policyholder loans, are impaired when the amount of the loan exceeds the policyholder’s investment balance. The fair value of loans is R1.2 billion (2015: R1.1 billion). The loans are recoverable through offset against policyholders’ investment balances at policy maturity dates.

The impairment loss is determined on an incurred loss approach as the difference between the instrument’s carrying value and the present value of the asset’s estimated future cash flows, including any recoverable collateral, discounted at the instrument’s original effective interest rate. To provide for latent losses in a portfolio of loans where the loans have not yet been individually identified as impaired, impairment for incurred but not reported losses are recognised based on historic loss patterns and estimated emergence periods. The table below indicates the impairments raised by Liberty against financial assets. SIL has no recognised impairments.

FINANCIAL ASSETS IMPAIRED1

2016Rm

2015Rm

LoansGross carrying value 1 279 1 243Less: accumulated

impairment (37) (33)

Net carrying value 1 242 1 210


RISK AND CAPITAL MANAGEMENT REPORT Credit risk Insurance operations continued


compliance executives to report on the status of compliance risk management in the group to the GCCO, who escalates significant matters to group management, executive and independent board committees. These matters relate to key regulatory interaction and legislative developments, as well as significant compliance initiatives, current and developing compliance risks and exposures.

Attention to the group’s technological capability and coverage in all jurisdictions continues to support both regulatory requirements and supervisory and client expectations.

The relationship with our primary regulator, the SARB, is based on mutual trust with an emphasis on regular and transparent communication.

Approach to conduct riskThe group seeks to create long-term sustainable returns for all stakeholders. This value depends substantially on the way in which the group conducts its business with both clients and supervisors, and has a key co-dependency on third-party relationships. The group aspires to the highest standards of conduct, and has implemented a culture and conduct strategy of continued focus on client outcomes and market integrity.

As part of this strategy, the group has expanded culture and conduct governance at group and business unit level, and is further embedding the group values and code of ethics through a structured programme of training, communication, and personal commitment. This process of embedding conduct in strategy, decision-making, and operational processes (including remuneration) will support mitigating future conduct risk.

DEFINITION

Compliance risk is the risk of legal or regulatory sanction, financial loss or damage to reputation that the group may suffer as a result of its failure to comply with laws, regulations, codes of conduct and standards of good practice applicable to its financial services activities.

APPROACH TO MANAGING COMPLIANCE RISK

General approachIn terms of its mandate, the compliance function operates independently of business as a second line of defence function. The mandate is approved annually by the GAC and is drawn primarily from regulation 49 of the Banks Act.

The group’s proactive approach to managing compliance risk is standardised across the group and is premised on internationally accepted principles of compliance risk management for financial service providers and supervisory expectations.

Compliance risk management is a core risk management activity overseen by the GCCO. The GCCO has unrestricted access to the group chief executives and the chairman of the GAC, thereby supporting the function’s independence. The GCCO is a member of the group management committee, the group executive committee and GROC.

A comprehensive risk management reporting and escalation procedure requires business unit and functional area

85 Definition

85 Approach to managing compliance risk

85 – General approach

85 – Approach to conduct risk

86 – Approach to managing money laundering and terrorist financing

86 – Approach to sanctions management

86 – Approach to managing regulatory change

86 – Approach to safety, health and environmental risk management

86 Governance

Compliance risk

86

The group’s regulatory advocacy and regulatory impact and strategy units assess the impact that emerging policy and regulation will have on the group and its stakeholder relationships. The group’s approach to regulatory advocacy is to engage with government policy makers, legislators, regulators and standard and policy setters in a proactive and constructive manner.

The businesses impacted by new regulatory developments identify business model changes that will ensure the most efficient and effective approach to adoption and continued excellence in customer service. An integrated regulatory change management strategy ensures agility in a dynamic business and regulatory environment across multiple jurisdictions.

Approach to safety, health and environmental risk managementAny risks to the health and safety of employees and stakeholders resulting from hazards in the workplace and/or potential exposure to occupational illness are managed by the safety, health and environmental risk management team and are supported by executive management accountability structures.

GOVERNANCE

The primary management level governance committee overseeing compliance risk is the group compliance committee. It is chaired by the GCCO and is a subcommittee of GROC. Compliance is also represented on, and submits reports to, various group management and board committees, all of which facilitate awareness of compliance risk-related matters. The principal governance document is the group compliance risk governance standard, supported by the compliance risk management framework which underpins accountability and control frameworks.

Approach to managing money laundering and terrorist financingLegislation pertaining to money laundering and TFC imposes significant requirements in terms of client due diligence, record keeping, staff training and the obligation to detect, prevent and report suspected money laundering and terrorist financing. Additional requirements are anticipated with the implementation of the Financial Intelligence Centre Amendment Bill. These obligations will include the requirement to be able to quantify, understand and mitigate the anti-money laundering and combating the financing of terrorism risks inherent to the customer base. The group subscribes to the principles of the Financial Action Task Force, an international standards setting body that develops and promotes recommendations and guidance in relation to measures to combat money laundering and terrorist financing. An integrated systems approach is key to our approach in meeting our surveillance and reporting responsibilities.

Approach to sanctions managementThe group actively manages the legal, regulatory and reputational risk presented by persons and entities subject to embargoes or sanctions imposed by competent authorities. The sanctions surveillance capability continues to be enhanced to meet supervisory expectations. The group sanctions review committee, supported by the group sanctions desk, is responsible for providing advice and decisions on sanctions-related matters in a fluid sanctions environment.

Approach to managing regulatory changeThe group operates in a highly regulated industry across multiple jurisdictions and is increasingly subject to international legislation with extra-territorial reach.

The group aims to embed regulatory best-practice in its operations in a way that balances the interests of various stakeholders, while supporting the group’s strategic intent in the markets where it has a presence.

RISK AND CAPITAL MANAGEMENT REPORT Compliance risk Approach to managing compliance risk continued

Main heading


Country risk is mitigated through a number of methods, including:

political and commercial risk insurance

co-financing with multilateral institutions

structures to mitigate transfer and convertibility risk such as collection, collateral and margining deposits outside the jurisdiction in question.

GOVERNANCE

The primary management level governance committee overseeing this risk type is the group country risk management committee. It is chaired by the group CRO and is a subcommittee of GROC.

The principal governance document is the country risk governance standard.

APPROVED REGULATORY CAPITAL APPROACHES

There are no regulatory capital requirements for country risk. Country risk is, however, incorporated into regulatory capital for credit in the IRB approaches through the jurisdiction risk and transfer and convertibility risk ratings’ impact on credit grades.

DEFINITION

Country risk, also referred to as cross-border country risk, is the uncertainty that obligors (including the relevant sovereign, and the group’s branches and subsidiaries in a country) will be able to fulfil obligations due to the group given political or economic conditions in the host country.

APPROACH TO MANAGING COUNTRY RISK

All countries to which the group is exposed are reviewed at least annually. Internal rating models are employed to determine ratings for jurisdiction, sovereign and transfer and convertibility risk. In determining the ratings, extensive use is made of the group’s network of operations, country visits and external information sources. These ratings are also a key input into the group’s credit rating models.

The model inputs are continuously updated to reflect economic and political changes in countries. The model outputs are internal risk grades that are calibrated to a jurisdiction risk grade from aaa to d, as well as sovereign risk grade, and transfer and convertibility risk grade (SB) from SB01 to SB25. Countries with sovereign/jurisdiction risk ratings of SB07/a and weaker, referred to as medium- and high-risk countries, are subject to more detailed analysis and monitoring.

87 Definition

87 Approach to managing country risk

87 Governance

87 Approved regulatory capital approaches

88 Country risk portfolio characteristics and metrics

Country risk

88

RISK AND CAPITAL MANAGEMENT REPORT Country risk continued

COUNTRY RISK PORTFOLIO CHARACTERISTICS AND METRICS

The risk distribution of cross-border country risk exposures is weighted towards European, Asian and North American low-risk countries, as well as sub-Saharan African medium- and high-risk countries.

COUNTRY RISK EXPOSURE BY REGION AND RISK GRADE

Europe%

Asia%

NorthAmerica

%

Sub-Saharan

Africa%

LatinAmerica

%

Middle Eastand

North Africa%

Australasia%

2016Risk gradeSB01 – SB07 17.28 23.39 4.33 0.70 1.79 0.98SB08 – SB11 0.25 17.15 1.01SB12 – SB14 8.05 0.10SB15 – SB17 18.93SB18 – SB21 0.49 4.06 0.70SB22+ 0.79

20151

Risk gradeSB01 – SB07 27.84 11.72 8.67 0.60 0.92 1.61SB08 – SB11 0.26 0.34 14.18 2.32 0.01SB12 – SB14 0.48 7.39 0.50SB15 – SB17 0.39 20.72SB18 – SB21 0.34SB22+ 0.69 1.02


25

20

15

10

5

Asia Sub-Saharan Africa Latin America

Medium- and high-risk country exposure by region (%)1

SB08 – SB11 SB12 – SB14 SB15 – SB17 SB18 – SB21 SB22+



Exposure to the top five medium- and high-risk countries is shown together with comparatives in the graph below. These exposures are in line with the group’s growth strategy, which is focused on Africa.

1 800

1 600

1 400

1 200

1 000

800

600

400

200

2016 2015

Top five medium- and high-risk country risk EAD (USDm)1

Ghana Zambia MozambiqueKenyaNigeria


35

30

25

20

15

10

5

2016 2015

Medium- and high-risk country EAD concentration by country ceiling (%)1

SB08 SB09 SB10 SB11 SB12 SB13 SB14 SB15 SB16 SB17 SB18 SB19 SB20 SB21 SB22+


90

Approach to managing liquidity riskThe nature of the group’s banking and trading activities gives rise to continuous exposure to liquidity risk. Liquidity risk may arise where counterparties, who provide the group with short-term funding, withdraw or do not roll over that funding, or normally liquid assets become illiquid as a result of a generalised disruption in asset markets.

The group manages liquidity in accordance with applicable regulations and within the group’s risk appetite framework. The group’s liquidity risk management governance framework supports the measurement and management of liquidity across both the corporate and retail sectors to ensure that payment obligations can be met by the group’s legal entities, under both normal and stressed conditions. Liquidity risk management ensures that the group has the appropriate amount, diversification and tenor of funding and liquidity to support its asset base at all times.

The group manages liquidity risk as three interrelated pillars, which are aligned to the Basel III liquidity requirements.

DEFINITION

Liquidity risk is defined as the risk that an entity, although solvent, cannot maintain or generate sufficient cash resources to meet its payment obligations in full as they fall due, or can only do so at materially disadvantageous terms.

BANKING OPERATIONS

The group’s liquidity risk governance standard is designed to ensure the comprehensive management of liquidity risks within the group in all geographies and that regulatory, prudential, as well as internal minimum requirements are met at all times. This is achieved through a combination of maintaining adequate liquidity buffers to ensure that cash flow requirements can be met and ensuring that the group’s SOFP is structurally sound and supportive of the group’s strategy. Liquidity risk is managed on a consistent basis across the group’s banking subsidiaries, allowing for local requirements.

Information relating to the year ended 31 December 2016 is based on Basel III principles, including behavioural profiling methods and assumptions, as well as phasing-in requirements where applicable.


90 Definition


90 – Approach to managing liquidity risk

92 – Governance

92 – Liquidity characteristics and metrics

98 – The group’s credit ratings

98 – Conduits


99 – Long-term insurance

101 – Short-term insurance

Funding and liquidity risk


LIQUIDITY MANAGEMENT CATEGORIES

TACTICAL (SHORT-TERM) LIQUIDITY RISK MANAGEMENT

STRUCTURAL (LONG-TERM) LIQUIDITY RISK MANAGEMENT

CONTINGENCY LIQUIDITY RISK MANAGEMENT

manage intra-day liquidity positions

monitor interbank and repo shortage levels

monitor daily cash flow requirements

manage short-term cash flows

manage daily foreign currency liquidity

set deposit rates in accordance with structural and contingent liquidity requirements as informed by ALCO.

ensure a structurally sound SOFP

identify and manage structural liquidity mismatches

determine and apply behavioural profiling

manage long-term cash flows

preserve a diversified funding base

inform term funding requirements

assess foreign currency liquidity exposures

establish liquidity risk appetite

ensure appropriate transfer pricing of liquidity costs

ensure Basel III NSFR readiness by January 2018.

monitor and manage early warning liquidity indicators

establish and maintain contingency funding plans

undertake regular liquidity stress testing and scenario analysis

convene liquidity crisis management committees, if needed

set liquidity buffer levels in accordance with anticipated stress events

advise on the diversification of liquidity buffer portfolios

ensure compliance with Basel III LCR.

The group will continue to focus on balance sheet optimisation and mix in conjunction with Basel III NSFR compliance by January 2018. In August 2016, the SARB issued a final directive confirming that the funding received from financial corporates, excluding banks, maturing within six months receives an available stable funding factor of 35%.

The group, together with the local banking industry, continues to engage through BASA with the SARB to explore further market-based solutions to ensure that the NSFR framework aligns to local industry conditions and requirements.

The LCR is a metric introduced by the BCBS to measure a bank’s ability to manage a sustained outflow of customer funds in an acute stress event over a 30-day period. The ratio is calculated by taking the group’s high-quality liquid assets (HQLA) and dividing it by net cash outflows. The minimum regulatory LCR requirement for 2016 was 70%, increasing by 10% annually to reach 100% by 1 January 2019.

The group exceeded the 70% minimum phase-in requirement for 2016.

From 2018, the group will also be required to comply with the Basel III NSFR. This is a metric designed to ensure that the majority of term assets are funded by stable sources, such as capital, term borrowings or other stable funds.

BASEL III IMPLEMENTATION TIMELINE (MINIMUM STANDARD)

2016 2017 2018 2019

Liquidity

LCR 70% 80% 90% 100%

NSFR 100% 100%

92

GovernanceThe primary governance committee overseeing liquidity risk is the group ALCO, which is chaired by the group financial director and is a subcommittee of GROC. ALCOs have been established in each of the group’s banking subsidiaries and manage in-country liquidity risk.

The principal governance documents are the liquidity risk governance standard and model risk governance framework.

Liquidity characteristics and metrics

OVERVIEW OF LIQUIDITY AND FUNDING METRICS

2016 2015

Total contingent liquidity (Rbn) 335.9 312.7

Eligible Basel III LCR HQLA 220.4 172.7Managed liquidity 115.5 140.0

Total contingent liquidity as a % of funding-related liabilities (%) 26.9 25.5Single depositor (%) 2.4 1.5Top 10 depositors (%) 9.5 8.4Basel III LCR (quarterly average %) 117.1 93.7Minimum regulatory LCR requirement (%) 70.0 60.0

RISK AND CAPITAL MANAGEMENT REPORT Funding and liquidity risk Banking operations continued

Contingency liquidity risk managementContingency funding plansContingency funding plans are designed to protect stakeholder interests and maintain market confidence in the event of a liquidity crisis. The plans incorporate an early warning indicator process supported by clear crisis response strategies. Early warning indicators cover bank-specific and systemic crises and are monitored according to assigned frequencies and tolerance levels.

Crisis response strategies are formulated for the relevant crisis management structures and address internal and external communications and escalation processes, liquidity generation management actions and operations, and heightened and supplementary information requirements to address the crisis event. The updating of contingency funding plans while considering budget forecasting continues to be a focus area for the asset liability management teams across the group.

The group, in line with the SARB’s requirements, updates and submits its recovery and resolution plans to the SARB on an annual basis. The group’s recovery plan incorporates the contingent liquidity funding plan in addition to the focus given to capital planning and business continuity planning.

Liquidity stress testing and scenario analysisStress testing and scenario analysis are based on both hypothetical as well as historical events. These are conducted on the group’s funding profiles and liquidity positions. The crisis impact is typically measured over a 30 calendar-day period as this is considered the most crucial time horizon for a liquidity event. This measurement period is also consistent with the Basel III LCR requirements.

Anticipated on- and off-balance sheet cash flows are subjected to a variety of bank-specific and systemic stresses and scenarios to evaluate the impact of unlikely but plausible events on liquidity positions. The results are assessed against the liquidity buffer and contingency funding plans to provide assurance as to the group’s ability to maintain sufficient liquidity under adverse conditions.

Internal stress testing metrics are supplemented with the regulatory Basel III LCR in monitoring the group’s ability to survive severe stress scenarios.

The Basel III LCR analysis that follows includes banking and/or deposit taking entities and represents an aggregation of the relevant individual net cash outflows and HQLA portfolios. These results reflect the simple average for the three months ended 31 December 2016 and 31 December 2015.


LIQUIDITY COVERAGE RATIO

20161 20152

Totalunweighted3

value(average)

Rm

Totalweighted4

value(average)

Rm

Totalunweighted3

value(average)

Rm

Totalweighted4

value(average)

Rm

HQLATotal HQLA 208 656 160 476

Cash outflows 1 319 414 362 115 1 097 962 319 939

Retail deposits and deposits from small business customers, of which: 345 433 29 263 338 202 29 434

Stable deposits5

Less-stable deposits 345 433 29 263 338 202 29 434

Unsecured wholesale funding, of which: 555 618 293 451 488 888 247 249

Operational deposits (all counterparties) and deposits in networks of cooperative banks 152 696 38 174 144 786 41 626

Non-operational deposits (all counterparties) 402 822 255 177 343 274 204 795Unsecured debt 100 100 828 828

Secured wholesale funding 11 12 789Additional requirements 115 915 24 234 94 386 19 821

Outflows related to derivative exposures and other collateral requirements 26 307 12 448 9 405 8 324

Outflows related to loss of funding on debt products 2 995 2 995 2 694 2 694Credit and liquidity facilities 86 613 8 791 82 287 8 803

Other contractual funding obligations 4 228 4 228 3 625 3 625Other contingent funding obligations 298 220 10 928 172 861 7 021

Cash inflows 227 530 183 984 190 561 148 692

Secured lending 41 428 32 444 32 150 28 556Inflows from fully performing exposures 161 855 134 955 140 435 110 422Other cash inflows 24 247 16 585 17 976 9 714

Total adjusted value6

Rm2016

Totaladjusted value6

Rm2015

Total HQLA 208 656 160 476

Total net cash outflows 178 131 171 247

Liquidity coverage ratio (%) 117.1% 93.7%

1 The simple average of the month-end values at 31 October 2016, 30 November 2016 and 31 December 2016.2 The simple average of the month-end values at 31 October 2015, 30 November 2015 and 31 December 2015.3 Unweighted value represents the outstanding balances maturing or callable within 30 days (for inflows and outflows).4 Total weighted value is calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows).5 Restated. Refer to page 134.6 Adjusted value calculated after the application of both (i) haircuts and inflow and outflow rates and (ii) any applicable caps (i.e. cap on level 2B and level 2

assets for HQLA and cap on inflows).

94

Structural liquidity mismatchMaturity analysis of financial liabilities using behavioural profilingWith actual cash flows typically varying significantly from the contractual position, behavioural profiling is applied to assets, liabilities and off-balance sheet commitments, as well as to certain liquid assets. Behavioural profiling assigns probable maturities based on historical customer behaviour. This is used to identify significant additional sources of structural liquidity in the form of core deposits, such as current and savings accounts, which exhibit stable behaviour despite being repayable on demand or at short notice.

In order to highlight potential risks within the group’s defined liquidity risk thresholds, structural liquidity mismatch analyses are performed regularly to anticipate the mismatch between payment profiles of SOFP items.

The graph on the following page shows the group’s cumulative maturity mismatch between assets and liabilities for the 0 to 12 months maturity bucket, after applying behavioural profiling. The cumulative maturity is expressed as a percentage of the group’s total funding-related liabilities.

Expected aggregate cash outflows are subtracted from expected aggregate cash inflows. These mismatches are monitored on a regular basis with active management intervention, if potential breaches outside risk appetite are evidenced. Liquidity transfer restrictions across the group are considered as part of the prudent liquidity risk management assumptions that are followed.

The group’s cumulative liquidity mismatch remains within liquidity risk appetite and is well-positioned for NSFR compliance by January 2018.

While following a consistent approach to liquidity risk management in respect of the foreign currency component of the SOFP, specific indicators are observed in order to monitor changes in market liquidity, as well as the impacts on liquidity as a result of movements in exchange rates.

The group seeks to exceed the minimum LCR requirement with a sufficient buffer to allow for funding flow volatility as determined by its internal liquidity risk appetite. A buffer is maintained above the minimum regulatory requirement to cater for balance sheet and market volatility.

Total contingent liquidityPortfolios of highly marketable liquid instruments to meet prudential, regulatory and internal stress testing requirements are maintained as protection against unforeseen disruptions in cash flows. These portfolios are managed within ALCO-defined limits on the basis of diversification and liquidity.

The table below provides a breakdown of the group’s liquid and marketable instruments at the end of 2016 and 2015. Eligible Basel III LCR HQLA are defined according to the BCBS January 2013 LCR and liquidity risk monitoring tools framework. Managed liquidity represents unencumbered marketable instruments other than eligible Basel III LCR HQLA (excluding trading assets) which would be able to provide significant sources of liquidity in a stress scenario.

TOTAL CONTINGENT LIQUIDITY

2016Rbn

20151

Rbn

Eligible LCR HQLA2 comprising: 220.4 172.7

Notes and coins 19.6 20.0Balances with central banks 38.1 33.1Government bonds and bills 146.0 103.0Other eligible assets 16.7 16.6

Managed liquidity 115.5 140.0

Total contingent liquidity 335.9 312.7

Total contingent liquidity as a % of funding-related liabilities 26.9% 25.5%

1 Restated. Refer to page 134.2 Eligible LCR HQLA considers any liquid transfer restrictions that will

inhibit the transfer across jurisdictions.

Liquid assets held remain adequate to meet all internal stress testing, prudential and regulatory requirements.



10

8

6

4

2

0

(2)

(4)

(6)

2016 2015

Behaviourally adjusted cumulative liquidity mismatch(% of funding-related liabilities)

0 – 1month

0 – 7days

0 – 12months

0 – 3months

0 – 6months

Maturity analysis of financial liabilities by contractual maturityThe table on the following page analyses cash flows on a contractual, undiscounted basis based on the earliest date on which the group can be required to pay (except for trading liabilities and derivative liabilities, which are presented as redeemable on demand) and will, therefore, not agree directly to the balances disclosed in the consolidated SOFP.

Derivative liabilities are included in the maturity analysis on a contractual, undiscounted basis when contractual maturities are essential for an understanding of the derivatives’ future cash flows. Management considers only contractual maturities to be essential for understanding the future cash flows of derivative liabilities that are designated as hedging instruments in effective hedge accounting relationships. All other derivative liabilities, together with trading liabilities, are treated as trading and are included at fair value in the redeemable on demand bucket since these positions are typically held for short periods of time.

The table also includes contractual cash flows with respect to off-balance sheet items which have not yet been recorded on-balance sheet. Where cash flows are exchanged simultaneously, the net amounts have been reflected.

96

MATURITY ANALYSIS OF FINANCIAL LIABILITIES BY CONTRACTUAL MATURITY

Redeemableon demand

Rm

Maturingwithin

1 monthRm

Maturingbetween

1 – 6months

Rm

Maturingbetween

6 – 12months

Rm

Maturingafter

12 monthsRm

TotalRm

2016Financial liabilitiesDerivative financial instruments 68 037 236 34 142 8 68 457

Instruments settled on a net basis 43 389 198 19 142 8 43 756

Instruments settled on a gross basis 24 648 38 15 24 701

Trading liabilities 48 109 48 109Deposits and debt funding 767 341 100 447 122 196 102 458 130 862 1 223 304Subordinated debt 65 534 838 22 161 23 598Other 17 181 17 181

Total 883 487 117 929 122 764 103 438 153 031 1 380 649

Unrecognised financial instrumentsLetters of credit and bankers’

acceptances 12 607 12 607Guarantees 64 076 64 076Irrevocable unutilised facilities 97 573 97 573

Total 174 256 174 256

2015Financial liabilitiesDerivative financial instruments 120 232 298 546 1 081 375 122 532

Instruments settled on a net basis 75 592 304 591 1 084 375 77 946

Instruments settled on a gross basis 44 640 (6) (45) (3) 44 586

Trading liabilities 43 809 43 809Deposits and debt funding 741 207 101 521 151 105 71 810 150 957 1 216 600Subordinated debt 50 51 720 4 118 21 277 26 216Other 19 096 19 096

Total 905 298 120 966 152 371 77 009 172 609 1 428 253

Unrecognised financial instrumentsLetters of credit and bankers’

acceptances 11 437 11 437Guarantees 67 161 67 161Irrevocable unutilised facilities 99 225 99 225

Total 177 823 177 823



FUNDING-RELATED LIABILITIES COMPOSITION1

2016Rbn

20152

Rbn

Corporate funding 387 385Retail deposits3 321 332Institutional funding 286 227Deposits from banks 78 95Government and parastatals 66 65Senior debt 49 49Term loan funding 41 42Subordinated debt issued 22 24Other liabilities to the public 1 7

Total funding-related liabilities 1 251 1 226

1 Composition aligned to Basel III liquidity classifications.2 Restated. Refer to page 134.3 Comprises individual and small business customers.

Concentration risk limits are used within the group to ensure that funding diversification is maintained across products, sectors, geographic regions and counterparties.

DEPOSITOR CONCENTRATION

2016%

2015%

Single depositor (limit 10%) 2.4 1.5Top 10 depositors (limit 20%) 9.5 8.4

A component of the group’s funding strategy is to ensure that sufficient contractual term funding is raised in support of term lending and to ensure adherence to the structural mismatch tolerance limits and appetite guidelines.

The group successfully accessed the longer-term funding market during 2016, raising R27.2 billion (2015: R32.1 billion) in the form of senior and subordinated debt, as well as syndicated loans. SBSA issued R1.7 billion Basel III compliant tier II capital instruments in 2016 (2015: R3.6 billion).

The graph on the next page is a representation of the market cost of liquidity, which is measured as the spread paid on the negotiable certificates of deposits (NCDs) relative to the prevailing swap curve for that tenor. The graph is based on actively-issued money market instruments by banks, namely 12- and 60-month NCDs. For the period under review, market cost of liquidity widened further, driven by continued investor uncertainty in the local market. Some stabilisation was seen in the second half of the year as credit conditions improved.

Funding activitiesFunding markets are evaluated on an ongoing basis to ensure appropriate group funding strategies are executed depending on the market, competitive and regulatory environment. The group continues to focus on building its deposit base as a key component of the group’s funding mix. Deposits sourced from South Africa and other major jurisdictions in the Africa Regions, Isle of Man and Jersey provide diversity of stable funding sources for the group.

Primary funding sources are in the form of deposits across a spectrum of retail and wholesale clients, as well as loan and debt capital markets across the group. Total funding-related liabilities grew from R1 226 billion in 2015 to R1 251 billion in 2016.

Funding diversification by product (%)

1

2

3

4

5

2016 2015

1 Call deposits 24 24

2 Term deposits 19 20

3 Current accounts 16 17

4 Cash management deposits 13 11

5 Deposits from banks and central banks 10 11

6 Negotiable certificates of deposits 10 9

7 Senior and subordinated debt 6 6

8 Savings accounts 2 2

6

7 8

98

Credit ratings for SBSA are dependent on multiple factors, including the South African sovereign rating, capital adequacy levels, quality of earnings, credit exposure, the credit risk governance framework and funding diversification. These parameters and their possible impact on the borrowing entity’s credit rating are monitored closely and incorporated into the group’s liquidity risk management and contingency planning considerations.

A downgrade in these ratings could have an adverse effect on the group’s access to liquidity sources and funding costs and may trigger collateral calls. The group has implemented certain mitigation strategies to address the risks identified. Notwithstanding this mitigation, a ratings downgrade could have an impact on the cost and availability of foreign currency funding for the group.

A rating downgrade would reduce the thresholds above which collateral must be posted with counterparties to cover the group’s negative mark-to-market on derivative contracts. These are managed within the liquidity management pillar. The potential cumulative impact on additional collateral requirements is as follows.

1, 2 AND 3 NOTCH RATING DOWNGRADES

2016Rm

2015Rm

Impact on the group’s liquidity of a collateral call linked to downgrading by1 notch 398 1652 notch 535 3313 notch 535 331

ConduitsThe group provides standby liquidity facilities to two conduits, namely BTC and Thekwini Warehouse Conduit. These facilities, which totalled R5.6 billion in 2016 (2015: R5.7 billion), had not been drawn on.

The liquidity risk associated with these facilities is managed in accordance with the group’s overall liquidity position and represents less than 2% of the group’s total liquidity (2015: 2%). The liquidity facilities are included in both the group’s structural liquidity mismatch, as well as in liquidity risk stress testing.

200

160

120

80

40

SBSA 12- and 60-month liquidity spread (bps)1

Dec2010

Dec2016

Dec2011

Dec2014

Dec2015

— 12-month NCD2 — 60-month NCD2

Dec2012

Dec2013

1 Basis points (bps).2 Negotiable certificates of deposit (NCD).

The group’s credit ratingsThe group’s ability to access funding at cost-effective levels is dependent on maintaining or improving the borrowing entity’s credit rating.

The following table provides a summary of the major credit ratings for the group and its principal operating subsidiary, SBSA, as at 31 December 2016.

CREDIT RATINGS

LONG-TERM FITCH

Group foreign currency issuer default rating BBB-

SBSA foreign currency issuer default rating BBB-

South African sovereign foreign currency issuer default rating

BBB-

MOODY’S

Group foreign currency issuer rating Baa3

SBSA foreign currency deposit rating Baa2

South African sovereign foreign currency rating Baa2



Liquidity profile of assetsGiven the quantum of investments held and managed by Liberty relative to the volumes of trading within the relevant exchanges and counterparty transactions, a substantial short-term liquidation may result in current values not being realised due to demand/supply principles. Furthermore, Liberty has consciously invested in certain illiquid asset classes, such as direct property and unlisted credit, in order to better duration match the long-term liabilities on its books, as well as for diversification and return enhancement purposes.

Certain of these asset classes are available for investment by policyholders. To the extent that Liberty’s liability profile changes or policyholders choose to disinvest in these asset classes, Liberty may choose to use its own balance sheet, through the shareholder investment portfolio, to avoid the need to sell these illiquid assets under pressure. Accordingly, Liberty’s risk management function ensures that Liberty retains a conservative liquid asset coverage ratio backed by investments in high-quality liquid assets.

Maturity profiles of financial instrumentsPolicyholder liabilities under investment contracts, investment contracts with discretionary participation features (DPF) and insurance contracts are managed according to stressed expected cash flows (stressed for lapse, mortality and morbidity catastrophes, as well as financial market shocks). Liquidity requirements arising from collateral and margin calls relating to derivative transactions used to hedge asset/liability matching risks are also managed according to stressed expected cash flows (stressed for financial market shocks).

Liquidity risks arising from the property assets have been reduced with effect from December 2016 through the listing of the Liberty Two Degrees Real Estate Investment Trust (REIT). More specifically, the put option built into the REIT enables Liberty to put physical property into the REIT in exchange for either cash or REIT units.


The principal risk relating to the group’s long-term insurance operations is a function of policyholder behaviour. For the group’s short-term insurance operations it is a function of the variation in actual claims and expenses from expected claims and expenses. Liquidity requirements are monitored on an ongoing basis as part of the group’s normal operating activities and formally reviewed on a monthly basis.

Long-term insuranceFINANCIAL PROPERTY AND INSURANCE ASSET LIQUIDITY1

2016 20152

% Rm % Rm

Liquid3 76 317 321 78 331 645Medium4 14 58 962 12 49 879Illiquid5 10 42 816 10 42 558

Total 100 419 099 100 424 082

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Restated. Refer to page 134.3 Liquid assets are those that are considered to be realisable within

one month (for example, cash, listed equities and term deposits).4 Medium assets are those that are considered to be realisable within

six months (for example, unlisted equities and certain unlisted term deposits).

5 Illiquid assets are those that are considered to be realisable in excess of six months (for example, investment properties and policyholder assets).

100

MATURITY PROFILE OF FINANCIAL INSTRUMENT LIABILITIES – CONTRACTUAL CASH FLOWS1

0 – 3months2

Rm

4 – 12 months

Rm

1 – 5 years

Rm

6 – 10 years

RmVariable

RmTotal

Rm

2016Subordinated notes3

Senior secured term facility at fair value 112 281 4 439 1 107 5 939Redeemable preference shares3, 4 5 5Third-party financial liabilities arising

on consolidation of mutual funds 44 046 44 046Repurchase agreements liabilities 5 602 811 723 7 136Collateral deposits received 4 684 4 684Insurance and other payables 10 951 209 50 3 11 213

Total 65 395 1 301 5 212 1 110 5 73 023

2015Subordinated notes3 96 194 3 739 546 4 575Senior secured term facility at fair value 6 20 414 440Redeemable preference shares3, 4 5 5Third-party financial liabilities arising

on consolidation of mutual funds 46 329 46 329Repurchase agreements liabilities 8 384 680 1 175 10 239Collateral deposits received 5 920 5 920Insurance and other payables 9 567 399 72 3 10 041

Total 70 302 1 293 5 400 549 5 77 549

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 0 – 3 months are either due within the timeframe or are payable on demand.3 Contractual cash flows are at amortised cost.4 No fixed maturity date; however, redeemable with a two-year notice period at the instance of the company or the holder.

Policyholders’ liabilities under investment contracts, investment contracts with DPFs and insurance contracts are managed according to expected and not contractual cash flows, and hence are reflected on the table on the following page.

Liquidity risks arising from long-term insurance businessThe tables that follow provide an indication of liquidity needs in respect of cash flows required to meet obligations arising under insurance contracts, investment contracts with DPF and investment contracts.

Undiscounted cash flows are shown and the effect of discounting is taken into account to reconcile to total policyholder contract values under insurance contracts, investment contracts and investment contracts with DPF in the SOFP.

RISK AND CAPITAL MANAGEMENT REPORT Funding and liquidity risk Insurance operations continued


EXPECTED CASH FLOWS – LONG-TERM INSURANCE CONTRACTS1

Within1 year

Rm

1 – 5years

Rm

6 – 10 years

Rm

11 – 20 years

Rm

Over20 years

Rm

Effect ofdiscounting

cash flowsRm

TotalRm

2016Investment contracts 4 715 9 683 10 663 19 277 48 584 (1 309) 91 613 Investment contracts

with DPF 369 57 1 146 2 002 7 888 11 462 Insurance contracts 22 687 79 088 27 808 61 074 100 051 (86 553) 204 155

Total 27 771 88 828 39 617 82 353 156 523 (87 862) 307 230

20152

Investment contracts 4 172 8 261 9 276 18 053 50 212 (1 515) 88 459 Investment contracts

with DPF 276 (158) 974 2 912 7 246 11 250 Insurance contracts 19 216 78 156 25 432 64 412 105 751 (87 482) 205 485

Total 23 664 86 259 35 682 85 377 163 209 (88 997) 305 194

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Restated. Refer to page 134.

CASH SURRENDER VALUE FOR POLICYHOLDERS’ LIABILITIES1

2016 20152

Carryingvalue

Rm

Surrendervalue

Rm

Carryingvalue

Rm

Surrendervalue

Rm

Investment contracts 91 613 91 247 88 459 87 489Investment contracts with DPF 11 462 11 576 11 250 11 073Insurance contracts 196 044 170 246 198 523 172 310

Total long-term policyholders’ liabilities 299 119 273 069 298 232 270 872

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Restated. Refer to page 134.

The amount payable on surrender, of contracts which provide a surrender value is closely related to the carrying value. For the majority of unit-linked contracts the surrender value adjusts to the respective realisation values as surrender instructions are executed. Therefore, the impact of market risk adjustments on surrender lies largely with the policyholder.

Short-term insuranceSIL’s investments are made considering the nature, term and uncertainty of its liabilities. SIL manages its liquidity risk in accordance with its risk appetite statement. This covers monitoring available liquid assets against immediate expenses such as operational expenses, technical provisions for claims outstanding and any outstanding reinsurance premium. SIL also includes the impact of unexpected losses from several catastrophic events in its liquidity risk management. SIL manages liquidity risk on a stand-alone basis such that no reliance is placed on the group to provide contingent funding to the insurance entity.

102

BANKING OPERATIONS

GovernanceThe governance management level committees overseeing market risk are group ALCO, which is chaired by the group financial director, and the group equity risk committee, which is chaired by the CIB CRO. Both are subcommittees of GROC.

The principal governance documents are the market risk governance standard and the model risk governance framework.

Approved regulatory capital approachesThe group has approval from the SARB to adopt the internal models approach for most asset classes and across most market variables in SBSA with the balance on the standardised model.

For material equity portfolios, the group has approval from the SARB to adopt either the market-based or PD/LGD approach.

There are no regulatory capital requirements for IRRBB, structural foreign exchange exposures or own equity-linked transactions. The group does not apply the incremental risk charge or comprehensive risk capital charge approach.

DEFINITION

Market risk is the risk of a change in the market value, actual or effective earnings, or future cash flows of a portfolio of financial instruments, including commodities, caused by adverse movements in market variables such as equity, bond and commodity prices, currency exchange and interest rates, credit spreads, recovery rates, correlations and implied volatilities in all of these variables.

The group’s key market risks are:

trading book market risk

IRRBB

equity risk in the banking book

foreign currency risk

own equity-linked transactions

post-employment obligation risk.


102 Definition


102 – Governance

102 – Approved regulatory capital approaches

103 – Trading book market risk

108 – Interest rate risk in the banking book

109 – Equity risk in the banking book

110 – Foreign currency risk

111 – Own equity-linked transactions

112 – Post-employment obligation risk


112 – Long-term insurance

120 – Short-term insurance

Market risk


Trading book market riskDefinitionTrading book market risk is represented by financial instruments, including commodities, held in the trading book, arising out of normal global markets’ trading activity.

MR1: MARKET RISK UNDER THE STANDARDISED APPROACH

2016RWA

Rm

Outright products 20 124

Interest rate risk (general and specific) 18 809Equity risk (general and specific) 65Foreign exchange risk 1 199Commodity risk 51

Options 1 287

Delta-plus method 1 287

Total 21 411

OV1

MR2: RWA FLOW STATEMENTS OF MARKET RISK EXPOSURES UNDER IMA

VaRRm

SVaRRm

TotalRm

2015 RWA 6 849 8 294 15 143Movement in risk levels 1 714 1 123 2 837Model updates/changes 47 6 53

2016 RWA 8 610 9 423 18 033

OV1

104

SVaR uses a similar methodology to VaR, but is based on a 251-day period of financial stress which is reviewed quarterly and assumes a ten-day holding period and a worst case loss. The ten-day period is based on the average expected time to reduce positions. The period of stress for SBSA is currently the 2008/2009 financial crises while, for other markets, more recent stress periods are used.

Where the group has received internal model approval, the market risk regulatory capital requirement is based on VaR and SVaR, both of which use a confidence level of 99% and a ten-day holding period.

Limitations of historical VaR are acknowledged globally and include:

the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature

the use of a one-day holding period assumes that all positions can be liquidated or the risk offset in one day. This will usually not fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or hedge all positions fully

the use of a 95% confidence level, by definition, does not take into account losses that might occur beyond this level of confidence.

VaR is calculated on the basis of exposures outstanding at the close of business and, therefore, does not necessarily reflect intra-day exposures. VaR is unlikely to reflect loss potential on exposures that only arise under significant market movements.

Trading book credit riskCredit issuer risk is assumed in the trading book by virtue of normal trading activity, and managed according to the group’s market risk governance standard. These exposures arise from, among others, trading in debt securities issued by corporate and government entities, as well as trading derivative transactions with other banks and corporate clients.

The credit spread risk is incorporated into the daily price movements used to compute VaR and SVaR mentioned above.

The VaR models used for credit risk are only intended to capture the risk presented by historical day-to-day market movements, and, therefore, do not take into account instantaneous or jump to default risk. Issuer risk is incorporated in the standardised approach interest rate risk charge for SBSA.

Approach to managing market risk in the trading bookThe group’s policy is that all trading activities are undertaken within the group’s global markets’ operations.

The market risk functions are independent of the group’s trading operations and are accountable to the relevant legal entity ALCOs. ALCOs have a reporting line into group ALCO, a subcommittee of GROC.

All VaR and SVaR limits require prior approval from the respective entity ALCOs. The market risk functions have the authority to set these limits at a lower level.

Market risk teams are responsible for identifying, measuring, managing, monitoring and reporting market risk as outlined in the market risk governance standard.

Exposures and excesses are monitored and reported daily. Where breaches in limits and triggers occur, actions are taken by market risk functions to bring exposures back in line with approved market risk appetite, with such breaches being reported to management and entity ALCOs.

MeasurementThe techniques used to measure and control trading book market risk and trading volatility include VaR and SVaR, stop-loss triggers, stress tests, backtesting and specific business unit and product controls.

VaR and SVaRThe group uses the historical VaR and SVaR approach to quantify market risk under normal and stressed conditions.

For risk management purposes VaR is based on 251 days of unweighted recent historical data updated at least monthly, a holding period of one day and a confidence level of 95%. The historical VaR results are calculated in four steps:

calculate 250 daily market price movements based on 251 days’ historical data. Absolute movements are used for interest rates and volatility movements; relative for spot, equities, credit spreads, and commodity prices

calculate hypothetical daily profit or loss for each day using these daily market price movements

aggregate all hypothetical profits or losses for day one across all positions, giving daily hypothetical profit or loss, and then repeat for all other days

VaR is the 95th percentile selected from the 250 days of daily hypothetical total profit or loss.

Daily losses exceeding the VaR are likely to occur, on average, 13 times in every 250 days.

RISK AND CAPITAL MANAGEMENT REPORT Market risk Banking operations continued


Backtesting compares the daily hypothetical profits and losses under the one-day buy and hold assumption to the prior day’s calculated VaR. In addition, VaR is tested by changing various model parameters, such as confidence intervals and observation periods to test the effectiveness of hedges and risk-mitigation instruments.

Refer to the graph below for the results of the group’s backtesting for the year ended 31 December 2016. The volatility in hypothetical profit in June 2016 is largely as a result of the devaluation of the Nigerian naira and Brexit and in July and August 2016 due to further devaluation of the Nigerian naira and the Zambian kwacha.

Regulators categorise a VaR model as green, amber or red and assign regulatory capital multipliers based on this categorisation. A green model is consistent with a satisfactory VaR model and is achieved for models that have four or less backtesting exceptions in a 12-month period at 99% VaR. All of the group’s approved models were assigned green status for the period under review (2015: green). Nine exceptions occurred during 2016 (2015: 7) for 95% VaR and one exception (2015: zero) for 99% VaR.

Stop-loss triggersStop-loss triggers are used to protect the profitability of the trading desks, and are monitored by market risk on a daily basis. The triggers constrain cumulative or daily trading losses through acting as prompt to a review or close-out positions.

Stress testsStress testing provides an indication of the potential losses that could occur under extreme but plausible market conditions, including where longer holding periods may be required to exit positions. Stress tests comprise individual market risk factor testing, combinations of market factors per trading desk and combinations of trading desks using a range of historical, hypothetical and Monte Carlo simulations. Daily losses experienced during the period ended 31 December 2016, did not exceed the maximum tolerable losses as represented by the group’s stress scenario limits.

BacktestingThe group backtests its VaR models to verify the predictive ability of the VaR calculations and ensure the appropriateness of the models within the inherent limitations of VaR.

300

250

200

150

100

50

0

(50)

(100)

MR4: comparison of VaR estimates with gains/losses

January 2016

Hypothetical income — 95% VaR (including diversification benefits) — 99% VaR (including diversification benefits)

December 2016

Rm

106

Specific business unit and product controlsOther market risk limits and controls specific to individual business units include permissible instruments, concentration of exposures, gap limits, maximum tenor, stop-loss triggers, price validation and balance sheet substantiation.

Trading book portfolio characteristicsVaR for the year under reviewTrading book market risk exposures arise mainly from residual exposures from client transactions and limited trading for the group’s own account. In general, the group’s trading desks have run similar levels of market risk throughout the year when compared to 2015 aggregate normal VaR, and reduced levels when compared to aggregate SVaR.

TRADING BOOK NORMAL VaR ANALYSIS BY MARKET VARIABLE

Normal VaR

Maximum1

RmMinimum1

RmAverage

RmClosing

Rm

2016Commodities risk 0.8 0.04 0.2 0.1Foreign exchange risk 36 17 23 36Equity position risk 19 4 9 9Debt securities 32 11 19 13Diversification benefits2 (21) (20)

Aggregate 48 23 31 38

2015Commodities risk 17 1Foreign exchange risk 36 13 21 22Equity position risk 25 4 9 12Debt securities 39 17 27 27Diversification benefits2 (24) (23)

Aggregate 52 24 35 37

1 The maximum and minimum VaR figures reported for each market variable do not necessarily occur on the same day. As a result, the aggregate VaR will not equal the sum of the individual market VaR values, and it is inappropriate to ascribe a diversification effect to VaR when these values may occur on different days.

2 Diversification benefit is the benefit of measuring the VaR of the trading portfolio as a whole, that is, the difference between the sum of the individual VaRs and the VaR of the whole trading portfolio.

TRADING BOOK STRESSED VaR ANALYSIS BY MARKET VARIABLE

SVaR

MaximumRm

MinimumRm

AverageRm

ClosingRm

2016Pre-diversification 389 338

Aggregate 507 178 294 291

2015Pre-diversification 542 616

Aggregate 517 245 381 440



Analysis of trading profitThe graph below shows the distribution of daily trading income for the year. It captures trading volatility and shows the number of days in which the group’s trading-related revenues fell within particular ranges. The distribution is skewed favourably to the profit side.

For 2016, trading profit was positive for 242 out of 260 days (2015: 254 out of 260 days) on an aggregated global basis.

MR3: IMA VALUES FOR TRADING PORTFOLIOS

ValueRm

VaR (ten-day 99%) Maximum value 314Average value 147Minimum value 742016 262

SVaR (ten-day 99%)Maximum value 361Average value 187Minimum value 982016 275

140

120

100

80

60

40

20

2016 2015

Distribution of daily trading income (Rm)

Fre

qu

ency

of

day

s

(30) to 0<(30) 60 to 900 to 30 30 to 60 >90

108

Desired changes to a particular interest rate risk profile are achieved through the restructuring of on-balance sheet repricing or maturity profiles, or through derivative overlays.

LimitsInterest rate risk limits are set in relation to changes in forecasted banking book earnings and the economic value of equity. The economic value of equity sensitivity is calculated as the net present value of aggregate asset cash flows less the net present value of aggregate liability cash flows.

All assets, liabilities and derivative instruments are allocated to gap intervals based on either their repricing or maturity characteristics. Assets and liabilities for which no identifiable contractual repricing or maturity dates exist are allocated to gap intervals based on behavioural profiling.

Hedging of endowment riskIRRBB is predominantly the consequence of endowment exposures, being the net exposure of non-rate sensitive liabilities and equity less non-rate sensitive assets.

The endowment risk is hedged using liquid instruments as and when it is considered opportune. Following meetings of the monetary policy committees, or notable market developments, the interest rate view is formulated through ALCO processes. Where permissible, hedge accounting (in terms of IFRS) is adopted using the derivatives designated as hedging instruments.

Non-endowment IRRBB (repricing, yield curve, basis and optionality) is managed within the treasury and the global markets’ portfolios.

Banking book interest rate exposure characteristicsThe table on the following page indicates the rand equivalent sensitivity of the group’s banking book earnings (net interest income and banking book mark-to-market profit or loss) and other comprehensive income (OCI) given a parallel yield curve shock. A floor of 0% is applied to all interest rates under the decreasing interest rate scenario resulting in asymmetric rate shocks in low-rate environments. Hedging transactions are taken into account while other variables are kept constant.

Assuming no management intervention, a downward 100 basis point parallel interest rate shock across all foreign currency yield curves and a 200 basis point parallel interest rate shock across rand yield curves would, based on the 31 December 2016 SOFP, decrease the forecast 12-month net interest income by R2.9 billion (2015: R3.4 billion).

Interest rate risk in the banking bookDefinitionThis risk results from the different repricing characteristics of banking book assets and liabilities.

IRRBB is further divided into the following sub-risk types:

repricing risk: timing differences in the maturity (fixed rate) and repricing (floating rate) of assets and liabilities

yield curve risk: shifts in the yield curve that have an adverse impact on the group’s income or underlying economic value

basis risk: hedge price not moving in line with the price of the hedged position. Examples include bonds/swap basis, futures/underlying basis and prime/Johannesburg Interbank Agreed Rate (JIBAR) basis

optionality risk: options embedded in bank asset and liability portfolios, providing the holder with the right, but not the obligation, to buy, sell, or in some manner alter the cash flow of an instrument or financial contract

endowment risk: exposure arising from the net differential between interest rate insensitive assets such as non-interest earning assets and interest rate insensitive liabilities such as non-interest paying liabilities and equity.

Approach to managing IRRBBBanking book-related market risk exposure principally involves managing the potential adverse effect of interest rate movements on banking book earnings (net interest income and banking book mark-to-market profit or loss) and the economic value of equity.

The group’s approach to managing IRRBB is governed by applicable regulations and is influenced by the competitive environment in which the group operates. The group’s treasury and capital management team monitors banking book interest rate risk on a monthly basis operating under the oversight of group ALCO.

MeasurementThe analytical techniques used to quantify IRRBB include both earnings- and valuation-based measures. The analysis takes into account embedded optionality such as loan prepayments and accounts where the account behaviour differs from the contractual position.

The results obtained from forward-looking dynamic scenario analyses, as well as Monte Carlo simulations, assist in developing optimal hedging strategies on a risk-adjusted return basis.



INTEREST RATE SENSITIVITY ANALYSIS1

ZAR USD GBP Euro Other Total

2016Increase in basis points 200 100 100 100 100Sensitivity of annual net interest income Rm 2 202 260 6 (29) 251 2 690Sensitivity of OCI Rm 11 (6) (5) (237) (237)Decrease in basis points 200 100 100 100 100Sensitivity of annual net interest income Rm (2 297) (325) (3) (275) (2 900)Sensitivity of OCI Rm (11) 6 2 237 234

2015Increase in basis points 200 100 100 100 100Sensitivity of annual net interest income Rm 2 604 335 5 (25) 383 3 302Sensitivity of OCI Rm (3) (51) (136) (190)Decrease in basis points 200 100 100 100 100Sensitivity of annual net interest income Rm (2 673) (245) (4) (429) (3 351)Sensitivity of OCI Rm 3 32 136 171

1 Before tax.

Equity risk in the banking bookDefinitionEquity risk is defined as the risk of loss arising from a decline in the value of an equity or equity-type instrument held on the banking book, whether caused by deterioration in the underlying operating asset performance, net asset value (NAV), enterprise value of the issuing entity, or by a decline in the market price of the equity or instrument itself.

Though issuer risk in respect of tradable equity instruments constitutes equity risk, such traded issuer risk is managed under the trading book market risk framework.

Approach to managing equity risk in the banking bookEquity risk relates to all transactions and investments subject to approval by the group ERC, in terms of that committee’s mandate, and includes debt, quasi-debt and other instruments that are considered to be of an equity nature.

For the avoidance of doubt, equity risk in the banking book excludes strategic investments in the group’s subsidiaries, associates and joint ventures deployed in delivering the group’s business and service offerings unless the group financial director and group CRO deem such investments to be subject to the consideration and approval by the group ERC.

GovernanceThe group ERC is constituted as a subcommittee of GROC and operates under delegated authority from that committee, with additional reporting accountability to the CIB equity governance committee.

GROC grants the group ERC authority to approve equity risk transactions to be held on the banking book and to manage such equity risk. This includes the authority to:

exercise such powers as are necessary to discharge its responsibilities in terms of this mandate

seek independent advice at the group’s expense, and investigate matters within its mandate

delegate authority to a combination of group ERC voting members based on the investment size.

To the extent equity exposures approved by the group ERC are held on the banking book, they are substantively managed and reviewed according to the credit risk governance standard.

Equity banking book price risk sensitivity analysisThe table on the next page illustrates the market risk sensitivity for all non-trading equity investments assuming a 10% shift in the fair value. The analysis is shown before tax.

110

Foreign currency riskDefinitionThe group’s primary non-trading-related exposures to foreign currency risk arise as a result of the translation effect on the group’s net assets in foreign operations, intragroup foreign-denominated debt and foreign-denominated cash exposures and accruals.

Approach to managing foreign currency riskThe group foreign currency management committee, a subcommittee of the group capital management committee, manages the risk according to existing legislation, South African exchange control regulations and accounting parameters. It takes into account naturally offsetting risk positions and manages the group’s residual risk by means of forward exchange contracts, currency swaps and option contracts.

Hedging is undertaken in such a way that it does not constrain normal operating activities. In particular, for banking entities outside of the South African common monetary area, the need for capital to fluctuate with risk-weighted assets is taken into account.

The repositioning of the group’s NAV by currency, which is managed at a group level, is a controlled process based on underlying economic views and forecasts of the relative strength of currencies. The group does not ordinarily hold open exposures of any significance with respect to its banking book.

Gains or losses on derivatives that have been designated as either net investment or cash flow hedging relationships in terms of IFRS, are reported directly in OCI, with all other gains and losses on derivatives being reported in profit or loss.

Foreign currency risk sensitivity analysisThe table that follows reflects the expected financial impact, in rand equivalent, resulting from a 10% shock to foreign currency risk exposures, against ZAR. The sensitivity analysis is based on net open foreign currency exposures arising from designated net investment hedges, other derivative financial instruments, foreign-denominated cash balances and accruals and intragroup foreign-denominated debt. The sensitivity analysis reflects the sensitivity to OCI and profit or loss on the group’s foreign denominated exposures other than those trading positions for which sensitivity has been included in the trading book VaR analysis.

MARKET RISK SENSITIVITY OF NON-TRADING EQUITY INVESTMENTS

10% reduction

Rm

Fair value

Rm

10% increase

Rm

2016Equity securities

listed and unlisted 4 908 5 453 5 998Impact on profit

or loss (541) 541Impact on OCI (4) 4

20151

Equity securities listed and unlisted 2 657 2 952 3 247

Impact on profit or loss (293) 293

Impact on OCI (2) 2


BANKING BOOK EQUITY PORTFOLIO CHARACTERISTICS

2016Rm

2015Rm

Fair valueListed 2 487 147Unlisted 2 966 2 805

Total 5 453 2 952

CR10: IRB EQUITIES UNDER THE SIMPLE RISK-WEIGHT METHOD

Categories

On- balance

sheet amount

Rm

Off-balance

sheet amount

Rm

Riskweight

%RWA

Rm

Exchange-traded equity exposures 300

Private equity exposures 1 454 400 6 167

Other equity exposures 250

Total 1 454 6 167

LI2 OV1



FOREIGN CURRENCY RISK SENSITIVITY

USD Euro GBP NGN Other Total

2016Total net long/(short) position Rm 637 15 1 (335) 318Sensitivity (ZAR depreciation) % 10 10 10 10 10

Impact on OCI Rm 33 33Impact on profit or loss Rm (64) (2) (0.14) (0.02) (31) (97)

20151

Total net long/(short) position Rm 895 5 7 (243) (1 274) (610)Sensitivity (ZAR depreciation) % 15 15 15 15 15

Impact on OCI Rm 37 189 226Impact on profit or loss Rm (134) (1) (1) 3 (133)

1 At the end of 2015 the group applied 15% sensitivity given the unprecedented volatility in exchange rates.

Own equity-linked transactionsDefinitionThe group has exposure to changes in its share price arising from its equity-linked remuneration contractual commitments.

Depending on the nature of the group’s equity-linked share schemes, the group is exposed to either income statement risk or NAV risk through equity due to changes in its own share price as follows:

Income statement risk arises as a result of losses being recognised in the group’s income statement as a result of

increases in the group’s share price on cash-settled share schemes above the award grant price

NAV risk arises as a result of the group settling an equity-linked share incentive scheme at a higher price than the price at which the share incentive was granted to the group’s employees.

The following table summarises the group’s most material share schemes together with an explanation of which risk (where applicable) the share scheme exposes the group to, and why, and an indication as to whether the share schemes are hedged.

SHARE SCHEME RISK TO THE GROUP EXPLANATION HEDGED

Equity growth scheme (EGS)

N/A The EGS is an equity-settled share scheme that is settled through the issuance of new shares. Accordingly, the group does not incur any cash flow in settling the share schemes and hence is not exposed to any risk as a result of changes in its own share price.

No

Quanto stock unit scheme (Quanto)

Income statement risk The Quanto is a cash-settled share scheme. Increases in the group’s share price result in losses being recognised in the income statement.

Yes

Equity-settled deferred bonus scheme (DBS) and performance reward plan (PRP)

NAV risk The DBS and PRP that are equity-settled are settled through the purchase of shares from the external market. Accordingly, for these equity-settled share schemes, increases in the group’s share price above the grant price will result in losses being recognised in the group’s equity.

Yes

Cash-settled DBS and PRP

Income statement risk The DBS and PRP that are cash-settled result in losses being recognised in the income statement as a result of increases in the group’s share price.

No1

1 These awards are not hedged as the exposure is deemed to be insignificant.

112


Long-term insuranceFor management purposes, Liberty’s market risk is split into the following three categories:

market risks to which Liberty wishes to maintain exposure on a long-term strategic basis: these include market risks arising from assets within the shareholder investment portfolio which is managed by Liberty Financial Solutions (LibFin) Investments

market risks to which Liberty does not wish to maintain exposure on a long-term strategic basis as these are not expected to provide an adequate return on economic capital over time: this includes the asset-liability mismatch risk arising from Liberty’s interest rate exposure to annuity and guarantee investment plan business, the mismatch risk arising from market-related guarantees and options embedded in policy terms (embedded derivatives), mismatch risk arising from guaranteed index trackers, as well as the market risk arising from negative rand reserves. In aggregate, this is referred to as the asset liability management portfolio and is managed by LibFin

market risks to which Liberty does not wish to maintain exposure but where Liberty is unable to adequately and/or economically mitigate these risks through hedging: in certain instances, these market risks are second order risks resulting from, for example, liquidity risks or reputational risks. While these risks cannot necessarily be hedged, they are identified, measured and monitored as far as possible.

Liberty’s shareholders are exposed to the categories of market risk noted above, arising from the following main areas:

the policyholder asset/liability mismatch risk. This occurs if Liberty’s property and financial assets do not move in the same direction or by the same magnitude as the obligations arising under its insurance and investment contracts despite the controls and hedging strategies employed

exposure to management fee revenues not already recognised in the negative rand reserves

financial assets and liabilities utilised to form Liberty’s capital base (also referred to as shareholder equity), including currency risks on capital invested outside South Africa

financial assets held to back liabilities other than long-term policyholder liabilities.

Approach to managing own equity-linked transactionsThe ALCOs of the respective group entities that issue the equity-linked transactions approve hedges of the group’s share price risk with quarterly reporting to group ALCO which is chaired by the group financial director. Hedging is undertaken taking into account a number of considerations which include:

expected share price levels based on investment analyst reports

the value of the issued share scheme awards

the cost of hedging

the ability to hedge taking into account the nature of the share scheme and applicable legislative requirements.

Hedging instruments typically include equity forwards and equity options. Hedge accounting in terms of IFRS is applied to the extent that the hedge accounting requirements are complied with.

In terms of the JSE Listings Requirements, hedges are only permitted to be transacted outside of the group’s closed periods which are in effect from 1 January and 1 July to the publication of the group’s year end and interim results respectively and where the group is trading under a cautionary announcement.

Post-employment obligation riskThe group operates both defined contribution plans and defined benefit plans, with the majority of its employees participating in defined contribution plans. The group’s defined benefit pension and healthcare provider schemes for past and certain current employees create post-employment obligations. Post-employment obligation risk arises from the requirement to contribute as an employer to an under- funded defined benefit plan.

The group mitigates these risks through independent asset managers and independent asset and liability management advisors for material funds. Potential residual risks which may impact the group are managed within the group asset and liability management process. Refer to note 47 in the annual financial statements for more detail on the group’s post-employment obligation risk.



The decision to hedge these risks is based on the following factors:

continuing to assume that these market risks may result in Liberty operating outside of its risk appetite

there is a liquid and tradable market in which to hedge these market risks

these market risks are capital intensive and over time have the potential to reduce shareholders’ returns on capital unless actively managed

some of the risks (for instance, those which arise from selling investment guarantees) are asymmetric in nature, and could compromise Liberty’s solvency in severe market conditions. This is because current regulatory capital rules require available capital to be impaired for such mark-to-market changes.

The exposures which are included in this hedging programme include the following:

embedded derivatives provided in contracted policies, for example, minimum investment return guarantees and guaranteed annuity options

the interest rate exposure from writing guaranteed immediate annuities, deferred annuities and guaranteed investment plans. Credit risk on the backing assets is, however, not hedged and serves as a diversified source of revenue for Liberty

guaranteed index trackers

negative rand reserves.

The net market risk impact of these exposures is managed by LibFin using hedging instruments available in the market.

The nature of the existing business results in certain risks being difficult to hedge (e.g. long-dated volatility, long-dated interest rates and correlations). It is not possible to entirely hedge these risks and, therefore, some residual unhedged risks and associated volatility remain. The hedging programme can only remove those market risks from Liberty’s financial position where appropriate matching assets exist. As the risk appetite limits cover different dimensions, hedging activity may in certain cases mitigate risk in one dimension while causing increased risk in others. Therefore, the impact of hedging decisions is assessed across all dimensions prior to transacting. Post-transacting, the hedge effectiveness is monitored closely by Liberty’s market risk team.

The market risk associated with assets backing long-term policyholder investment-linked liabilities, including discretionary participation features (DPF) is largely borne by the policyholders. Poor performance on policyholder funds can lead to reputational damage and subsequently, to increased policyholder withdrawals and a reduction in new business volumes. This investment performance risk is managed by the client fund control committee through the monitoring of asset managers and through the setting of appropriate policyholder fund mandates.

Shareholder investment portfolioLiberty recognises the importance of investing its capital base, namely the shareholder funds, in a diversified portfolio of financial assets.

The Liberty board approves the long-term asset mix of this investment portfolio by considering the strategic asset allocation methodology with a long-term investment horizon. LibFin has the responsibility to implement the investment strategy and monitor its performance with oversight from Liberty risk functions and ultimately, the Liberty board.

The typical asset classes included in this portfolio are equities, fixed income securities, property and cash, both in local and foreign currency. Hence, there is exposure to currency movements, as well as local market movements in the underlying asset classes. LibFin Investments also makes small allocations to alternative asset classes in search of yield and diversification benefits. STANLIB and other asset managers are mandated by LibFin Investments to manage the underlying assets in this portfolio.

Tactical asset allocation is performed by STANLIB within a mandate approved by the Liberty board. This is similar to the way in which an asset manager would invest on behalf of a customer with a long-term investment horizon. On a through-the-cycle basis, this conservative, diversified portfolio is constructed to protect capital while maximising after-tax returns for a level of risk consistent with the Liberty risk appetite statement and taking into account the risk capacity already utilised by Liberty’s core business activities.

In the short-term, market movements will contribute to some earnings volatility. The diversified nature of the portfolio should, however, reduce earnings volatility.

Asset liability management portfolioLiberty has chosen to mitigate a number of market risk exposures, arising from asset/liability mismatches, to which it does not wish to be exposed on a long-term strategic basis, through a dedicated ongoing hedging programme.

114

Exposure to financial, property and insurance assetsThe table below summarises Liberty’s exposure to financial, property and insurance assets. This exposure has been split into the relevant market risk categories and then attributed to the effective holders of the risk.

SUMMARY OF LIBERTY ASSETS SUBJECT TO MARKET RISK1, 2

Totalfinancial,property

andinsurance

assetsRm

Attributable to

Long-termpolicyholderinvestment-

linked(including

DPF)liabilities

Rm

Otherpolicy-holder

liabilities3

Rm

Third partyfinancial

liabilities asreported on

consolidationof mutual

fundsRm

Non-controlling

interestsRm

Residualliabilities

and share-holders’interest

Rm

2016Assets subject to market risk 232 741 197 440 (8 082) 27 797 5 971 9 615

Equity price 141 712 120 771 (4 506) 22 866 2 581Property price4 38 100 24 976 (420) 4 068 5 971 3 505Mixed portfolios, excluding

investment policies5 52 929 51 693 (3 156) 863 3 529

Assets subject to market and credit risk 179 044 80 474 37 953 16 249 1 359 43 009

Interest rate 167 340 70 444 36 601 16 249 1 359 42 687Investment policies in mixed portfolios 8 072 8 072Reinsurance assets6 1 674 1 352 322Equity derivatives 1 958 1 958

Long-term policyholder assets 7 314 7 314Other assets 2 791 2 791

Total 421 890 277 914 29 871 44 046 7 330 62 729

Percentage (%) 65.9 7.1 10.4 1.7 14.9

1 The group has an IFRS effective interest in Liberty of 55% and, therefore, shares 55% of this exposure.2 As reported by Liberty. Refer to Liberty’s annual financial statements.3 Negative exposure to the various risk categories can occur in “other policyholder liabilities” since the present value of future charges can exceed the present

value of future benefits and expenses resulting in a negative liability. The group offsets these negative liabilities against policyholders’ investment-linked liabilities. The policyholders’ market risk exposure, however, remains unchanged. Hence, shareholders bear all the risks of shorting assets backing the policyholder investment-linked liabilities by the amount of these negative liabilities.

4 Equity price and interest rate risk are included in property price risk where the invested entity only has exposure to investment properties.5 Mixed portfolios are subject to a combination of equity price, interest rate and property price risks depending on each portfolio’s construction. A substantial

portion of the mixed portfolios will be subject to equity price and interest rate risk. The exact proportion is practically difficult to accurately calculate given the number of mutual funds and hedge funds contained in the group’s portfolios.

6 Reinsurance assets are claims against reinsurers outstanding at the reporting date. They are not subject to market risk other than time value of money (interest rate) for the periods to settlement.

RISK AND CAPITAL MANAGEMENT REPORT Market risk Insurance operations continued


SUMMARY OF LIBERTY ASSETS SUBJECT TO MARKET RISK1, 2 CONTINUED

Totalfinancial,property

andinsurance

assetsRm

Attributable to

Long-termpolicyholderinvestment-

linked(including

DPF)liabilities

Rm

Otherpolicy-holder

liabilities3

Rm

Third partyfinancial

liabilities asreported on

consolidationof mutual

fundsRm

Non-controlling

interestsRm

Residualliabilities

and share-holders’interest

Rm

20154

Assets subject to market risk 230 144 194 478 (9 880) 31 475 3 799 10 272

Equity price 149 378 129 867 (6 053) 23 335 2 229Property price5 38 989 30 469 (536) 2 615 3 799 2 642Mixed portfolios, excluding

investment policies6 41 777 34 142 (3 291) 5 525 5 401

Assets subject to market and credit risk 186 359 85 168 36 045 14 854 455 49 837

Interest rate 175 297 75 764 34 728 14 854 455 49 496Investment policies in mixed portfolios 8 056 8 056Reinsurance assets7 1 658 1 317 341Equity derivatives 1 348 1 348

Long-term policyholder assets 7 579 7 579Other assets 2 815 2 815

Total 426 897 279 646 26 165 46 329 4 254 70 503

Percentage (%) 65.5 6.1 10.9 1.0 16.5

1 The group has an IFRS effective interest in Liberty of 55% and, therefore, shares 55% of this exposure.2 As reported by Liberty. Refer to Liberty’s annual financial statements.3 Negative exposure to the various risk categories can occur in “other policyholder liabilities” since the present value of future charges can exceed the present

value of future benefits and expenses resulting in a negative liability. The group offsets these negative liabilities against policyholders’ investment-linked liabilities. The policyholders’ market risk exposure, however, remains unchanged. Hence, shareholders bear all the risks of shorting assets backing the policyholder investment-linked liabilities by the amount of these negative liabilities.

4 Restated. Refer to page 134.5 Equity price and interest rate risk are included in property price risk where the invested entity only has exposure to investment properties.6 Mixed portfolios are subject to a combination of equity price, interest rate and property price risks depending on each portfolio’s construction. A substantial

portion of the mixed portfolios will be subject to equity price and interest rate risk. The exact proportion is practically difficult to accurately calculate given the number of mutual funds and hedge funds contained in the group’s portfolios.

7 Reinsurance assets are claims against reinsurers outstanding at the reporting date. They are not subject to market risk other than time value of money (interest rate) for the periods to settlement.

116

Foreign currency riskOffshore assets are held in policyholders’ portfolios to match the corresponding liabilities. Liberty is exposed to currency risk through minimum investment return guarantees issued on contracts invested in offshore portfolios and related mismatches, as well as through the 90/10 fee exposure and management fees. In addition, some of the shareholder capital base is invested in offshore assets, including subsidiaries in the Africa Regions.

Investment guarantees have not been offered on new business invested in offshore portfolios since 2005. The rand-denominated value of management fees derived from these contracts is subject to currency risk. Strengthening of the rand against the offshore currencies reduces the rand value of management fees on offshore portfolios and increases the liability in respect of rand-denominated minimum investment return guarantees on this business. The weakening of the rand will have the opposite effect.

The gross exposure to foreign-denominated financial instruments expressed in rand (converted at closing rates) as at 31 December 2016, is R77.7 billion (2015: R81.9 billion), excluding investments held by foreign subsidiaries. It is not practical to isolate accurately any detailed currency risk contained in investments in mutual funds and investment policies which are priced in rand and are not subsidiaries. The table which follows segregates the currency exposure (excluding that held by all foreign subsidiaries) by major currency as at 31 December 2016.

Interest rate riskThe table below provides additional detail on financial instrument assets and liabilities and their specific interest rate exposure. Due to practical considerations, interest rate risk details contained in investments in non-subsidiary mutual funds are not provided. Accounts receivable and accounts payable, where settlement is expected within 90 days, are not included in the analysis. The effect of interest rate risk on these balances is not considered significant given the short-term duration of the underlying cash flows.

INTEREST RATE EXPOSURE1

2016Rm

2015Rm

Financial instruments liabilities2

Carrying value 16 344 20 068

Exposed to cash flow interest rate risk 12 858 16 994

Exposed to fair value interest rate risk 3 486 3 074

Financial instruments assets3

Carrying value 134 718 138 879

Exposed to cash flow interest rate risk 78 118 81 795

Exposed to fair value interest rate risk 56 600 57 084

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Senior secured term facility, repurchase agreements liabilities, collateral

deposits payable and subordinated debt.3 Debt instrument, collateral deposits callable, cash and cash equivalents.



CURRENCY EXPOSURE BY MAJOR CURRENCY1,2

GBP USD Euro

2016Million

2015Million

2016Million

2015Million

2016Million

2015Million

Foreign currency risk ZAR4 082 ZAR4 749 ZAR55 809 ZAR56 849 ZAR6 064 ZAR6 922Gross exposure in foreign currency 241 207 4 078 3 668 420 411Derivative protection in foreign currency 29 (26) (1 016) (1 204) (8) (20)

Net exposure in foreign currency 270 181 3 062 2 464 412 391

JPY HKD CAD Other

2016Million

2015Million

2016Million

2015Million

2016Million

2015Million

2016Million

2015Million

Foreign currency risk ZAR2 604 ZAR2 900 ZAR1 527 ZAR3 596 ZAR533 ZAR4 126 ZAR7 034 ZAR2 727Gross exposure

in foreign currency 22 254 22 516 865 1 799 52 369Derivative protection

in foreign currency 2 043 3 273 2 (3)

Net exposure in foreign currency 24 297 25 789 867 1 799 49 369

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 All amounts are denoted in the respective foreign currency unless stated as ZAR.

118


Property market riskLiberty is exposed to tenant default, depressed rental markets and unlet space within its investment property portfolio affecting property values and rental income. The managed diversity of the property portfolio and the existence of multi-tenanted buildings significantly reduce the exposure to this risk. As at 31 December 2016, the proportion of unlet space in the property portfolio was 5% (2015: 6%).

Property market risk also arises with respect to shareholder exposures to investment guarantees and negative rand reserves. Liberty’s exposure to property market risk is shown below.

PROPERTY MARKET RISK1

2016Rm

2015Rm

Investment properties 32 342 31 781Owner-occupied properties 1 486 1 540

Gross direct exposure 33 828 33 321Mutual funds with >80% property exposure 2 012 2 939Indirect exposure through debt and equity shareholdings 5 493 5 583Attributable to non-controlling interests (6 887) (3 799)

Net exposure 34 446 38 044

Concentration use risk within directly held properties is summarised below: Shopping malls 27 551 26 389Office buildings 2 582 2 719Hotels 635 1 100Other property 3 060 3 113

Total 33 828 33 321



Sensitivity analysisThe table below provides a description of the sensitivities provided on market risk assumptions. Sensitivities on expected taxation and on long-term expense inflation assumptions have not been provided.

The equity price and rand currency sensitivities are applied as an instantaneous event at the financial position date with no change to long-term market assumptions used in the measurement of policyholder contract values. In other words, the assets are instantaneously impacted by the sensitivity on the financial position date. The new asset levels are applied to the measurement of policyholder contract values, where applicable, but no changes are made to the prospective assumptions used in the measurement of policyholder contract values. The interest rate yield curve and implied option volatility sensitivities are applied similarly but the assumptions used in the measurement of policyholder contract values that are dependent on interest rate yield curves and implied option volatilities are updated.

The market sensitivities are applied to all assets held by Liberty (and not just assets backing the policyholder contract values). Each sensitivity is applied in isolation with all other assumptions left unchanged.

Derivative financial instruments and risk mitigationCertain Liberty entities are party to contracts for derivative financial instruments, mainly entered into as part of the dynamic hedging strategy used to manage asset-liability mismatches and to facilitate investment portfolio optimisation. The dynamic hedging programme is managed daily by LibFin which aims to manage the risks through the use of best-practice market risk management techniques and within Liberty’s agreed risk appetite framework. These instruments are used to mitigate equity, interest rate and currency risk and include vanilla futures, options, swaps, swaptions and forward exchange contracts. Derivative financial instruments do inevitably give rise to credit default and operational risk both of which are managed appropriately.

Derivative financial instruments are either traded on a regulated exchange, for example, the South African Futures Exchange (SAFEX), or negotiated over-the-counter (OTC) as a direct arrangement between two counterparties. Instruments traded on SAFEX are margined and SAFEX is the counterparty to each and every trade. OTC instruments are only entered into with appropriately approved counterparties and are entered into in terms of signed ISDA and collateral support agreements with each counterparty.

MARKET VALUE DESCRIPTION OF SENSITIVITY

Interest rate yield curve A parallel shift in the interest rate yield curve

Implied option volatilities A change in the implied short-term equity, property and interest rate option volatility assumptions

Equity prices A change in the local and foreign equity prices

Rand exchange rates A change in the ZAR exchange rate to all applicable currencies

120


The table below summarises the impact of the change in the aforementioned risk variables on policyholders’ contract values and on ordinary shareholders’ equity and attributable profit after taxation.

SENSITIVITY ANALYSIS OF RISK VARIABLES1

2016 2015

Change invariable

%

Gross impact of

reinsuranceon policy-

holders’contract

valuesRm

Net impact ofreinsurance

on policy-holders’

liabilitiesRm

Impact onordinary

shareholders’equity and

attributableprofit after

taxationRm

Change invariable

%

Net impact ofreinsurance

on policy-holders’contract

valuesRm

Impact on ordinary



taxationRm

Market assumptionsInterest rate yield curve 12 (4 937) (4 905) (221) 12 (4 182) (211)

(12) 6 185 6 159 108 (12) 5 161 54

Option price volatilities 20 27 27 (19) 20 (18) 13(20) (7) (7) 5 (20) 47 (34)

Equity prices 15 21 632 21 631 1 686 15 20 730 1 286(15) (20 978) (20 977) (1 472) (15) (20 595) (1 265)

Rand exchange rates 122 (4 906) (4 906) (737) 122 (5 409) (639)(12)3 4 923 4 923 734 (12)3 5 455 640

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Strengthening of the rand.3 Weakening of the rand.

Short-term insuranceMarket risk arises from investments in cash, corporate money market and collective investment schemes. It is not as material for the short-term insurance business as it is in the group context due to the nature of SIL’s liabilities, where larger portions of investments are in cash and bond-type investments.

Management of the investment portfolio is outsourced to investment managers within the group, with target returns, portfolio limits and capital preservation requirements specified in the mandate. The mandate and performance of investments relative to the insurance entity’s budget and risk appetite is reviewed and monitored by the insurance entity’s investment committee.

Main heading


DEFINITION

Insurance risk is the risk that actual future underwriting, policyholder behaviour and expense experience will differ from that assumed in measuring policyholder contract values and assets, and in pricing products. Insurance risk arises due to uncertainty regarding the timing and amount of future cash flows from insurance contracts.

Insurance risk applies to long-term insurance operations housed in Liberty and the short-term insurance operations housed in Liberty Africa and SIL.

LONG-TERM INSURANCE RISK

OverviewThe management and staff in all business units accepting insurance risk are responsible for the day-to-day identification, monitoring and treatment of insurance risk. It is also management’s responsibility to report any material insurance risks, risk events and issues identified to senior management through certain predefined escalation procedures.

Liberty’s statutory actuaries, the group insurance risk department and the heads of risk in the business units provide independent oversight of compliance with Liberty’s risk management policies and procedures, and the effectiveness of Liberty’s insurance risk management processes.

Approach to managing long-term insurance risksRisk management takes place prior to the acceptance of risks through product development, pricing processes and at the point of sale. Risks continue to be managed through the measurement, monitoring and treatment of risks once the risks are contracted.

Risk management through product development, pricing and at the point of saleThe product development and pricing process defines the terms and conditions on which the group is willing to accept risks. Once a policy has been sold, the group is placed on risk for the duration of the contract and the group cannot unilaterally change the terms and conditions of the policy except where the policy allows for rate reviews. It is for these reasons that risks need to be carefully assessed and appropriately mitigated before a product is launched and before new policies are accepted onto the group’s balance sheet. In order to manage these risks, new products need to comply with the groupwide product development risk policy. The product development and approval process ensures that:

risks inherent in new products are identified and quantified

sensitivity tests are performed to enhance the understanding of the risks and appropriateness of mitigating actions

pricing is adequate for the risk undertaken

product design takes account of various factors, including the size and timing of fees and charges, appropriate levels of minimum premiums, commission structures and policy terms and conditions

121 Definition

121 Long-term insurance risk

121 – Overview

121 – Approach to managing long-term insurance risks

122 – Long-term insurance risk subtypes

124 – Sensitivity analysis

125 Short-term insurance risk

125 – Overview

125 – Approach to managing short-term insurance risk

125 – Short-term insurance risk types

Insurance risk

122

Policyholders’ behaviour risk includes a consideration of comparable risks in the asset management business. The business has continued to focus on a broad programme of initiatives to manage persistency risk and withdrawal rates on major product lines.

Underwriting risksThe primary purpose of underwriting is to ensure that an appropriate premium is charged for each risk and that cover is not offered for uninsurable risks. Underwriting risks are the risks that future demographic or claims incidence experience will exceed the allowance for expected demographic or claims incidence experience, as determined through provisions, pricing, risk measures and value measures. Underwriting risks include, among others, mortality and morbidity risks, longevity risks and non-life (short-term insurance) risks.

Mortality and morbidity riskMortality risk is the risk of an adverse financial impact due to actual mortality (death) claims being higher than anticipated. Morbidity risk is the risk of an adverse financial impact due to policyholder health-related (disablement and dread disease) claims being higher than expected.

Liberty has a range of standard processes and procedures in place to manage mortality and morbidity risk, including differentiating by the individual characteristics, right of review of premiums, underwriting at inception, medical tests, and use of experienced reinsurers and claims assessors.

Liberty views mortality and morbidity risks as risks that are core to its business. These risks will generally be retained. Mortality and morbidity risk give rise to significant economic capital requirements in particular due to potential catastrophic events. Since it is difficult to obtain reinsurance for certain catastrophic events on reasonable terms, the mortality and morbidity economic capital requirements are likely to remain significant.

the group makes use of reinsurance to reduce its exposures to some insurance risks

customers’ needs and expectations will be met by the product

post-implementation reviews are performed to ensure that intended outcomes are realised and to determine if any further action is required.

Risk management post-implementation of products and of in-force policiesThe ongoing management of insurance risk, once the risk has been contracted, includes the management of costs, premium adjustments where permitted and appropriate, and management strategies to encourage customers to retain their contracts.

Experience investigations are conducted at least annually on all significant insurance risks to ascertain the extent of deviations from assumptions and their financial impacts. If the investigations indicate that these deviations are likely to persist in future, the assumptions will be adjusted accordingly for the subsequent measurement of policyholder contract values and assets. Furthermore, any deviations that are likely to persist are also used to inform the product development and pricing of new and existing products.

Insurance risks are assessed and reviewed against the group’s risk appetite and risk target. Mitigating actions are developed for any risks that fall outside of management’s assessment of risk appetite in order to reduce the level of risk to within the approved tolerance limits.

Long-term insurance risk subtypesPolicyholder behaviour riskPolicyholder behaviour risk is the risk of adverse financial impact caused by actual policyholders’ behaviour deviating from expected policyholders’ behaviour, mainly due to:

regulatory and law changes (including taxation)

changes in economic conditions

sales practices

competitor behaviour

policy conditions and practices

policyholders’ perceptions.

RISK AND CAPITAL MANAGEMENT REPORT Insurance risk Long-term insurance risk continued


PROFILE FOR AMOUNTS AT RISK FOR INDIVIDUAL AND GROUP BUSINESS – RETAIL AND CORPORATE1

Before reinsurance After reinsurance

Rm % Rm %

Sum assured at risk band 20160 – 1 499 999 641 917 43 615 110 471 500 000 – 2 999 999 306 094 20 281 536 213 000 000 – 7 499 999 346 845 23 306 108 237 500 000 and above 215 491 14 117 131 9

Total 1 510 347 100 1 319 885 100

20150 – 1 499 999 634 674 44 604 340 481 500 000 – 2 999 999 290 425 20 264 338 213 000 000 – 7 499 999 326 682 23 283 166 237 500 000 and above 189 034 13 103 142 8

Total 1 440 815 100 1 254 986 100


The table above demonstrates that the sums assured are spread over many lives in terms of amounts at risk, and that the exposure to individual lives has been reduced by means of reinsurance arrangements. Given the large number of assured lives, the random fluctuation in mortality claims is expected to be small, as the larger the portfolio of uncorrelated insurance risks, the smaller the relative variability around the expected outcome becomes.

CORPORATE BUSINESS BY INDUSTRY CLASS1

2016%

2015%

Administrative/professional 37 36Retail 26 24Light manufacturing 22 22Heavy manufacturing 13 15Heavy industrial and other high risk 2 3

Total 100 100


Longevity riskLongevity risk is the risk of an adverse financial impact due to actual annuitant mortality being lower than anticipated, that is, annuitants living longer than expected. For life annuities, the loss arises as a result of the group having undertaken to make regular payments to policyholders for their remaining lives, and possibly to the policyholders’ spouses for their remaining lives.

The most significant risks on these liabilities are continued medical advances and improvements in social conditions that lead to longevity improvements being better than initially expected.

Liberty manages the longevity risk by:

annually monitoring the actual longevity experience and identifying trends over time

making allowance for future mortality rates falling in the pricing of new business and the measurement of policyholder contract values. This allowance will be based on the trends identified in experience investigations and external data.

Expense expectation and new business riskExpense expectation risk is the risk of an adverse financial impact due to the timing or amount of administration expenses incurred, or both, differing from those expected, e.g. the actual cost per policy differs from that assumed in the pricing or valuation basis.

124

Sensitivity analysisThe table below provides a description of the sensitivities that are provided on insurance risk assumptions.

INSURANCE RISK VARIABLE DESCRIPTION OF SENSITIVITY

Assurance mortality

A level percentage change in the expected future mortality rates on assurance contracts

Annuitant longevity

A level percentage change in the expected future mortality rates on annuity contracts

Morbidity A level percentage change in the expected future morbidity rates

Withdrawal A level percentage change in the expected future withdrawal rates

Expense per policy

A level percentage change in the expected maintenance expenses

Insurance risk sensitivities are applied as a proportional percentage change to the assumptions made in measuring policyholder contract values. The table on the next page summarises the impact of the change in the above risk variables on policyholder contract values and assets, and ordinary shareholders’ equity and attributable profit after taxation.

New business risk is the risk of an adverse financial impact due to the actual volume, mix and/or quality of new business deviating from that expected in calculating expected financial outcomes. New business strain is included in this risk type.

Allowance is made for expected future maintenance expenses in the measurement of long-term contract policyholder contract values and assets using a cost per policy methodology. These expected expenses are dependent on estimates of the number of in-force and new business policies. As a result, the risk of expense loss arises due to expenses increasing by more than expected, as well as from the number of in-force and/or new business policies being less than expected.

Liberty manages the expense and new business risk by:

regularly monitoring actual expenses against the budgeted expenses

regularly monitoring new business volumes and mix

regularly monitoring withdrawal rates, including lapses

implementing cost control measures in the event of expenses exceeding budget or of significant unplanned reductions in the number of in-force policies.

Even though expense risk does not give rise to large capital requirements, the management of expense risk is core to the business. The expenses that the group expects to incur on policies are allowed for in product pricing. If the expenses expected to be incurred are considerably higher than those of other insurers offering competing products, the ability of the group to sell business on a profitable basis will be impaired. This not only has capital implications, but can also affect the group’s ability to function as a going concern in the long term.

RISK AND CAPITAL MANAGEMENT REPORT Insurance risk Long-term insurance risk continued


SENSITIVITY ANALYSIS OF RISK VARIABLES1

2016 2015

Change invariable

%

Gross impact of

policy-holders’

liabilitiesRm

Net impacton policy-

holders’liabilities

Rm

Impact onordinary



taxationRm

Change invariable

%

Impacton policy-

holders’liabilities

Rm

Impact on ordinary



taxationRm

Insurance assumptionsMortalityAssured lives 2 404 342 (246) 2 302 (218)

(2) (406) (343) 247 (2) (306) 221Annuitant longevity 42 384 384 (276) 42 316 (228)

(4)3 (368) (368) 265 (4)3 (303) 218

Morbidity 5 606 521 (375) 5 431 (310)(5) (606) (521) 375 (5) (431) 310

Withdrawals 8 478 461 (331) 8 444 (320)(8) (517) (498) 358 (8) (484) 349

Expense per policy 5 384 384 (279) 5 334 (240)(5) (384) (384) 278 (5) (334) 240

1 As reported by Liberty. Refer to Liberty’s annual financial statements.2 Annuitant life expectancy increases, i.e. annuitant mortality reduces.3 Annuitant life expectancy decreases, i.e. annuitant mortality increases.

SHORT-TERM INSURANCE RISK

OverviewSIL writes mainly property, motor, accident and health insurance on a countrywide basis within South Africa. Approximately 70% of the total gross written premium is property insurance which indemnifies, subject to any limits or excesses, the policyholder against loss or damage to their own property and business interruption arising from this damage.

Liberty Africa writes mainly property and motor business through Liberty Kenya Holdings Limited, and medical expense business through Total Health Trust Limited subsidiaries of Nigeria.

Approach to managing short-term insurance riskShort-term insurance risk is managed through various control processes, including risk rating pricing, underwriting conditions, product design, efficient and effective claims management processes, fraud risk management and reinsurance controls.

The principal governance document governing short-term insurance risk is the group’s short-term insurance risk governance standard. The insurance entity manages risk through the consideration of trigger conditions that result in the review of its risk strategy. This considers the nature, scale and complexity of the entity’s risks. Risk appetite metrics and stress/scenario testing form part of risk management practices to better understand and manage the threats and opportunities the business faces.

Short-term insurance risk typesThe underwriting strategy seeks diversity to ensure a balanced portfolio and is based on a large portfolio of similar risks over a large geographical area. This strategy is cascaded down to individual underwriters through detailed underwriting authorities that set out the limits that any one underwriter can write by line size, class of business, territory and industry in order to enforce appropriate risk selection within the portfolio.

The key risks associated with this product are underwriting risk, competitor risk and claims experience risk (including the variable incidence of natural disasters). Property is subject to a number of risks, including theft, fire, business interruptions and weather.

126

Short-term insurance operations are impacted by adverse economic conditions which could lead to lower new business take-up rates, higher than budgeted cancellation rates and fraud. The potential for fraudulent behaviour is also very high. New business and lapse rates are budgeted each year and monitored on a monthly basis. These rates are reported and compared to budget figures.

Catastrophe riskThe risk of adverse financial impact due to a single event or series of events of major magnitude, usually over a short period (often 72 hours), leads to a significant deviation in actual claims from the total expected claims.

Claims incidence riskThis is the risk of loss in excess of what has been priced for, arising from accident, fire and theft on short-term insurance business.

On certain types of business, for example, third-party liability claims, the claim distribution is longer tailed. This means that the final cost of the claim is only known many years into the future. The risk here is that the group reserves inadequately for this ultimate claims cost.

Expense riskThis is the risk of an adverse financial impact due to the timing and/or amount of expenses incurred, or both differing from those expected in administering policies, e.g. assumed in the pricing basis or actual cost per policy.

The expenses that the group is expected to incur on policies are allowed for in product pricing. If the expenses expected to be incurred are considerably higher than those of insurers offering competing products, the group’s ability to sell business on a profitable basis will be restricted. This does not only have capital implications, but can also affect the group’s ability to function as a going concern in the long term.

New business riskThis is the risk of an adverse financial impact due to the actual volume and/or quality of new business deviating from the expected volume and/or quality.

For property classes of business there is a significant geographical concentration of risk so that external factors such as adverse weather conditions may adversely impact upon a large proportion of a particular geographical portion of the company’s property risks. Claim inducing perils such as storms, floods, subsidence, fires, explosions and rising crime levels will occur on a regional basis, meaning that SIL has to manage its geographical risk dispersion carefully.

The greatest likelihood of significant losses to the group arises from catastrophic events such as flood, storm or earthquake damage. To mitigate this risk, the insurance entity buys reinsurance across a diversified panel of multiple third-party reinsurers, each participating on different structures according to their own risk tolerance. Reinsurance protects the insurance entity from downside risk from individual large claims, several accumulations of claims and catastrophic claims such as hail damage and earthquakes.

Risk and catastrophe reinsuranceThe business reinsures a portion of the risks it underwrites in order to control its exposure to losses and protect capital resources. For example, excess of loss reinsurance and catastrophe reinsurance protect against major losses on high sums insured and major natural disasters respectively. The key natural disasters affecting the business includes hail and water damage, which has impacted South Africa more regularly over the last few years, as well as the potential of earthquake damage, which is, however, a more remote risk.

Policyholder behaviour riskPolicyholder behaviour risk is the risk of loss arising due to actual policyholders discontinuing their insurance policies earlier or more frequently than expected. This may arise due to a change in economic conditions and/or inconsistent policy practices, regulatory and tax changes, selling practices and policyholder perceptions.

The primary policyholder behaviour risk is persistency risk, which arises due to policyholders discontinuing insurance on short-term insurance business, where the policyholder cancels cover. This could lead to a reduction in premium income, an increase in the expense ratio (i.e. overheads and more fixed type costs are covered by less income volumes) and a reduction on the return on capital.

RISK AND CAPITAL MANAGEMENT REPORT Insurance risk Short-term insurance risk continued

Main heading


APPROACH TO MANAGING OPERATIONAL RISK

Operational risk exists in the natural course of business activity. The group operational risk governance standard sets out the minimum standards for operational risk management adopted across the group. The governance standard seeks to ensure adequate and consistent governance, identification, assessment, monitoring, managing and reporting of operational risk to support the group’s business areas. In addition, it ensures that the relevant regulatory criteria can be met by those banking entities adopting the AMA or the standardised approach for regulatory capital purposes.

It is not an objective to eliminate all exposure to operational risk as this would be neither commercially viable nor possible. The group’s approach to managing operational risk is to adopt fit-for-purpose operational risk practices that assist business line management in understanding their inherent risk and reducing their risk profile while maximising their operational performance and efficiency.

The operational risk management function is independent from business line management and is part of the second line of defence reporting to the group CRO.

DEFINITION

Operational risk is defined as the risk of loss suffered as a result of the inadequacy of, or failure in, internal processes, people and/or systems or from external events.

Operational risk subtypes are managed and overseen by specialist functions. These subtypes include:

model risk

tax risk

legal risk

environmental and social risk

IT risk

information risk (including cyberrisk)

compliance risk (more information on page 85)

financial crime risk.

The following risk types are part of the extended operational risk taxonomy and are necessary for capital allocation purposes in the ICAAP process:

physical assets risk

human capital risk

accounting and financial risk.

127 Definition

127 Approach to managing operational risk

128 – Insurance cover

128 Governance

128 Approved regulatory capital approach

128 Operational risk subtypes

128 – Model risk

129 – Tax risk

129 – Legal risk

129 – Environmental and social risk

129 – IT risk

130 – Information risk (including cyberrisk)

130 – Financial crime risk

Operational risk

128

RISK AND CAPITAL MANAGEMENT REPORT Operational risk Approach to managing operational risk continued

The core capabilities of operational risk ensure alignment and integration across:

developing and maintaining the operational risk governance framework

facilitating the business’s adoption of the framework

regulatory oversight

monitoring and assurance

reporting

challenging the risk profile.

The operational risk management team proactively analyses root causes, trends and emerging threats, advises on the remediation of potential control weaknesses and recommends best-practice solutions. Through the use of self-assessments and risk-focused reviews, an independent monitoring and assurance team provides objective monitoring and assessment of the adequacy and effectiveness encompassing the implementation of the operational risk governance framework. To ensure regulatory compliance, the team also provides an assessment of regulatory requirements which are to be implemented within embedded operational risk management functions.

Individual teams are dedicated to each business line and report to the business unit CRO with a functional reporting line to the group head of operational risk management. The IOR function provides dedicated teams to corporate functions such as finance, IT and human capital. These teams work alongside their business areas and facilitate the adoption of the operational risk governance framework. As part of the second line of defence, they also monitor and challenge the business units’ and corporate functions’ management in respect of their operational risk profile.

Business continuity management is a process that identifies potential operational disruptions and provides a basis for planning for the mitigation of the negative impact from such disruptions. In addition, it promotes operational resilience and ensures an effective response that safeguards the interests of both the group and its stakeholders. The group’s business continuity management framework encompasses emergency response preparedness and crisis management capabilities to manage the business through a crisis to full recovery. The group’s business continuity capabilities are evaluated by testing business continuity plans and conducting crisis simulations.

Insurance coverThe group buys insurance to mitigate operational risk. This cover is reviewed on an annual basis. The group insurance committee oversees a substantial insurance programme designed to protect the group against loss resulting from its business activities.

The principal insurance policies in place are the group crime, professional indemnity, and group directors’ and officers’ liability policies. In addition, the group has fixed assets and liabilities coverage in respect of office premises and business contents, third-party liability for visitors to the group’s premises, and employer’s liability. The group’s business travel policy provides cover for group staff while travelling on behalf of the group.

GOVERNANCE

The primary management level governance committees overseeing operational risk are GROC and the group operational risk committee. The primary governance documents are the operational risk governance standard and the operational risk governance framework.

Operational risk subtypes report to various governance committees and have various governance documents applicable to each risk subtype.

APPROVED REGULATORY CAPITAL APPROACH

The group has approval from the SARB to use the AMA for SBSA and the standardised approach for all other legal entities.

OPERATIONAL RISK SUBTYPES

Model riskModel risk arises from potential weaknesses in a model that is used in the measurement, pricing and management of risk. These weaknesses include incorrect assumptions, incomplete information, inaccurate implementation, limited model understanding, inappropriate use or inappropriate methodologies leading to incorrect conclusions by the user.

Model risk is mitigated through the following principles:

fit-for-purpose governance

maintaining a pool of skilled and experienced technical specialists

robust model-related processes.

To give effect to these principles, model risk is governed by the model risk governance framework. This framework defines model risk, the scope of models, documentation needs, model materiality considerations, high-level model development requirements, validation requirements, usage and monitoring requirements, the governance and approval


direct risk: these include our direct environmental and social impact, such as our waste management and the use of energy and water within group facilities.

The environmental and social risk team, and the finance team are responsible for the identification, management, monitoring and reporting of financing risks. The group policy, advocacy and sustainability team is responsible for policy development, sustainability reporting and stakeholder engagement.

The group has an environmental and social risk management policy and subscribes to a number of international norms and codes, such as those of the United Nations Environment Programme Finance Initiative, the Equator Principles and the BASA’s code of conduct for banks. In support of these policy commitments, it has developed guidance to bankers, screening tools to assist in categorising environmental and social risk and various training programmes to assist credit evaluators, dealmakers and other key individuals.

IT riskIT risk encompasses both IT risk and IT change risk. The group’s IT risk refers to the risk associated with the use, ownership, operation, involvement, influence and adoption of IT within the group. It consists of IT-related events and conditions that could potentially impact the business. IT change risk refers to the risk arising from changes, updates or alterations made to the IT infrastructure, systems or applications that could affect service reliability and availability.

The advancement of IT has brought about rapid changes in the way businesses and operations are being conducted in the financial industry. IT is a key enabler for business strategies, including reaching out to external customers and meeting their needs. As technology becomes increasingly important and integrated into business processes, the need for adequate and effective governance and management of IT resources, risks and any constraints becomes imperative.

The board is responsible for ensuring that prudent and reasonable steps have been taken with respect to fulfilling its responsibilities for IT governance. To assist the board to fulfil this obligation, the group IT committee has been delegated the authority to ensure the implementation of the IT governance framework. It delegates this responsibility to management. The group IT executive committee provides assurance that management has implemented an effective IT governance framework. The group IT architecture governance committee and a group IT risk and compliance committee assists the group IT executive committee in the fulfilment of its architecture and risk obligations.

IT, as it relates to financial reporting and the going concern aspects of the organisation, is the responsibility of the GAC.

processes, and the roles and responsibilities across the three lines of defence. Model risk leverages the operational risk framework.

Tax riskTax risk is the possibility of suffering unexpected loss, financial or otherwise, as a result of the application of tax systems, whether in legislative systems, rulings or practices, applicable to the entire spectrum of taxes and other fiscal imposts to which the group is subject.

The group’s approach to tax risk is governed by the GAC-approved tax risk control framework which, in turn, is supported by policies dealing with specific aspects of tax risk such as, for example, transfer pricing, indirect taxes, withholding taxes and remuneration-related taxes.

Legal riskLegal risk is defined as the exposure to adverse consequences, attendant upon non-compliance with legal or statutory responsibilities and/or inaccurately drafted contracts and their execution, as well as the absence of written agreements or inadequate agreements. This includes the exposure to new laws, as well as changes in interpretations of existing laws by appropriate authorities and exceeding authority as contained in the contract. This applies to the full scope of group activities and may also include others acting on behalf of the group.

The group has processes and controls in place to identify, manage and mitigate its legal risks.

Environmental and social riskEnvironmental risk is described as a measure of the potential threats to the environment that lending or financial services activities may have. It combines the probability that events will cause or lead to the degradation of the environment and the magnitude of the degradation. Environmental risk includes risks related to or resulting from climate change, human activities or from natural processes that are disturbed by changes in natural cycles.

Social risk is described as risks to people, their livelihoods, health and welfare, socioeconomic development, social cohesion and the ability to adapt to changing circumstances.

Environmental and social risk assessment and management deals with two aspects:

indirect risk: the environmental and social risks which occur as a result of our lending or financial services activities

130

the reasons for the denial of access were:

• 12 were for information that either did not exist or related to third parties and consent was denied/ not obtained to release the information

• 16 were denied based on no feedback received from the requestors when asked for additional follow-up information

• 26 were denied as there was no PAIA request or needed no PAIA intervention

• 13 were denied as the requestors did not submit the request using the prescribed forms in terms of section 53 of the PAIA.

Cyberrisk may arise as a result of the disclosure, modification, destruction or theft of information stored, or transmitted on systems or networks, or from the unavailability of the transaction site, systems or networks. The cybersecurity operations centre, within group IT security, continues to manage this risk by proactively identifying malicious activity that poses a risk to the confidentiality, integrity and availability of the group’s information assets.

Financial crime riskFinancial crime risk is defined as the risk of economic loss, reputational risk and regulatory sanction arising from any type of financial crime against the group. Financial crime includes fraud, money laundering, violent crime and misconduct by staff, customers, suppliers, business partners, stakeholders and third parties.

The group’s main IT risks include the failure or interruption of critical systems, cybercrime, unauthorised access to systems and the inability to serve its customers’ needs in a timely manner. These risks are mitigated through various controls which are implemented and closely monitored by management. The group continuously reviews and invests in its security systems and processes to ensure that its customers are well-protected. Actions to reduce the likelihood of risks materialising are identified and accountabilities for remediation are allocated to management.

Information risk (including cyberrisk)Information risk is the risk of accidental or intentional unauthorised use, modification, disclosure or destruction of information resources, which would compromise the confidentiality, integrity or availability of information assets and personal information.

The Promotion of Access to Information Act 2 of 2000 (PAIA) gives effect to the constitutional right of access to information that is held by a private or public body. The group privacy office has adopted a process in terms of this act to manage requests for access to information.

The following information was disclosed in terms of applicable regulations:

during 2016, the group processed 99 (2015: 18) requests for access to information, of which 19 were granted, 67 were denied and 13 are still in progress

RISK AND CAPITAL MANAGEMENT REPORT Operational risk Operational risk subtypes continued


the application of new product processes per business line through which the risks and mitigating controls for new and amended products and services are evaluated

stakeholder management to ensure favourable outcomes from external factors beyond the group’s control

monitoring the profitability of product lines and customer segments

maintaining tight control over the group’s cost base, including the management of its cost-to-income ratio, which allows for early intervention and management action to reduce costs

being alert and responsive to changes in market forces

a strong focus in the budgeting process on achieving headline earnings growth while containing cost growth; and building contingency plans into the budget that allow for costs to be significantly reduced in the event that expected revenues do not materialise

increasing the ratio of variable costs to fixed costs which creates flexibility to reduce costs during an economic downturn.

The primary governance committee for overseeing this risk is the group ALCO.

Business risk is the risk of earnings variability, resulting in operating revenues not covering operating costs after excluding the effects of market risk, credit risk, structural interest rate risk and operational risk.

Business risk is, therefore, not directly attributable to internal operational failures or external market price events, but nevertheless covers a host of internal and external factors.

Business risk includes strategic risk. Strategic risk is the risk that the group’s future business plans and strategies may be inadequate to prevent financial loss or protect the group’s competitive position and shareholder returns. The group’s business plans and strategies are discussed and approved by executive management and the board and, where appropriate, subjected to stress tests.

Business risk is usually caused by the following:

inflexible cost structures

market-driven pressures, such as decreased demand, increased competition or cost increases

group-specific causes, such as a poor choice of strategy, reputational damage or the decision to absorb costs or losses to preserve reputation.

The group mitigates business risk in a number of ways, including:

performing extensive due diligence during the investment appraisal process, in particular for new acquisitions and joint ventures

detailed analysis of the business case for, and financial, operational and reputational risk associated with, disposals

Business risk

132

Reputational risk is the risk of potential or actual damage to the group’s image which may impair the profitability and/or sustainability of its business.

Such damage may result from a breakdown of trust, confidence or business relationships on the part of customers, counterparties, shareholders, investors or regulators that can adversely affect the group’s ability to maintain existing business or generate new business relationships and continued access to sources of funding. The breakdown may arise from a number of factors or incidents such as a poor business model, continued losses and failures in risk management.

Safeguarding the group’s reputation is of paramount importance. There is growing emphasis on reputational risks arising from compliance breaches, as well as from ethical considerations linked to countries, clients and sectors, and environmental considerations.

The breakdown may be triggered by an event or may occur gradually over time. The group’s crisis management processes are designed to minimise the reputational impact of such events or developments. Crisis management teams are in place both at executive and business line level. This includes ensuring that the group’s perspective is fairly represented in the media.

The principal governance document is the reputational risk governance standard and the group’s qualitative RAS includes a statement on reputation.

The group’s code of ethics is an important reference point for all staff. The group ethics officer and group chief executives are the formal custodians of the code of ethics.


Reputational risk


TOTAL ASSETS VS LEVERAGE RATIO, LEVERAGE RATIO COMMON DISCLOSURE TABLE AND RECONCILIATION WITH ANNUAL FINANCIAL STATEMENTS

The total assets as per the published financial statements were restated for the change in presentation policy as fully explained on page 199 in the annual financial statements.

Refer to pages 22 to 23.

ECONOMIC CAPITAL

The restatement to the credit risk economic capital relates to the revised quantification of issuer risk in corporate portfolios in the Africa Regions.

Refer to page 23.

SECURITISATION TRANSACTIONS

The previously reported results were restated to include Liberty’s exposure to the securitisation vehicles.

Refer to page 68.

MAXIMUM EXPOSURE TO CREDIT RISK AND COLLATERAL

For financial periods up to the end of December 2015, the group normalised its results to reflect the group’s view of the economics of its black economic empowerment ownership initiative (Tutuwa) initiative and the group’s share exposure entered into to facilitate client trading activities for the benefit of Liberty policyholders that are deemed to be treasury shares. The group’s comparative financial results have been restated and presented on an IFRS basis.

Refer to pages 73, 76 and 82.

COUNTRY RISK

The group’s previously reported results were prepared by country risk rating. These results have been restated to be disclosed on a country ceiling basis, which is a proxy for transfer and convertibility risk. This aligns with the disclosure in the current year.

Refer to page 88 and 89.

Restatements

134

RISK AND CAPITAL MANAGEMENT REPORT Restatements continued

LCR (AVERAGE)

The previously reported stable deposits and total cash outflows have been restated as the result of an incorrect classification of stable deposits. These deposits have now been included in less stable deposits.

Refer to page 93.

TOTAL CONTINGENT LIQUIDITY

The previously reported results have been restated for an internal stress methodology change, which aligns to the current year’s methodology and disclosure.

Refer to page 94.

FUNDING-RELATED LIABILITIES COMPOSITION

Certain amounts in the comparative period have been reclassified in order to align with the classification of funding-related liabilities in the current period.

Refer to page 97.

LIBERTY

The previous year’s results have been restated as a result of the change in presentation policy as fully explained on page 199 of the annual financial statements.

The tables affected by this restatement are as follows:

liquidity risk:

• financial, property and insurance asset liquidity• expected cash flows – long-term insurance contracts• cash surrender value for policyholders’ liabilities

market risk:

• summary of Liberty assets subject to market risk.

Refer to pages 99, 101 and 115.

MARKET RISK SENSITIVITY OF NON-TRADING EQUITY INSTRUMENTS

The previously reported results were restated to exclude entities that are accounted for as subsidiaries, associates and joint ventures which are not measured at fair value in the financial statements.

Refer to page 110.


The impact of new regulatory standards that have been developed by international standard setting bodies and regulators in the wake of the global financial crisis is significant for financial institutions. Different regulatory regimes apply in the countries in which the group operates, but there is commonality in many of the focus areas.

The group continues to take a strategic approach to its internal regulatory response in order to efficiently and effectively deal with the breadth and complexity of emerging regulations. This ensures that the group entities are appropriately positioned within the context of the new regulations and are able to deliver the best client outcomes.

Annexure ARegulatory and legislative developments impacting the group

Regulations developed over the past number of years can be classified into three main categories: conduct and culture, resolvability and those generally focused on financial sustainability. In line with the international regulatory agenda, South Africa is adopting Twin Peaks in the form of the Financial Sector Regulation Bill, which establishes two new regulatory authorities, namely the Prudential Authority and the Financial Sector Conduct Authority, with the SARB playing the role of the Resolution Authority. The diagram below provides a view of the three regulatory changes.

SUSTAINABLE BUSINESS MODEL

Conduct and culture(Financial Sector Conduct Authority)

Resolvability (Resolution Authority)

Financial sustainability(Prudential Authority)

Conduct and culture

Focus on: • customer fairness • market integrity • consumer empowerment • executive and board accountability • bias and conflicts of interest • fees • transparency • transformation.

Resolvability

• meet all legislative requirements for resolution

• credible and effective recovery and other contingency planning

• facilitate resolution planning by the authorities

• legal and operational structure • continuity of critical economic

functions and of the services that support them

• sufficient loss absorbing capacity.

Profitability

• ROE more than covers the cost of equity • profitable business lines • cost control.

Enabling policy and legislation

• Financial Sector Regulation Bill • Insurance Bill • Conduct of Financial Institutions Bill • RDR • treating customers fairly.

Enabling regulations

• higher loss absorbing capacity requirements (D-SIB), total loss absorbing capacity

• recovery and resolution plans • South African resolution framework • resolvability assessments • structural reforms.

Capital and liquidity

• meet all regulatory capital leverage and liquidity requirements

• meet internally assessed capital and liquidity requirements

• capital and liquidity planning • ability to access equity and additional

funding as and when required.

Enabling regulations

• capital quality and buffers • range of risks assessed: IRRBB,

fundamental review of the trading book (FRTB), securitisations and CVA

• LCR and NSFR • leverage ratio • SAM • OTC derivatives.

136

During November 2014, the BCBS issued its work programme aimed at addressing excessive variability in banks’ regulatory capital ratios.

These reforms were expected to be finalised by the end of 2016, but this has now been delayed due to the debates relating to the capital floors and the appropriate calibration levels.

Refer to the diagram below for the key aspects under consideration by the BCBS.

RISK AND CAPITAL MANAGEMENT REPORT Annexure A Regulatory and legislative developments impacting the group continued

The key regulations that have been finalised over the past year, as well as the regulations that are expected to be finalised in the short term are outlined below.

BASEL

In response to the financial crisis, the BCBS introduced a range of reforms which were designed to enhance the resilience of the banking system against shocks.

Coherence and calibration • assessing the interaction, coherence and overall calibration of the reform policies.

Expected to be finalised during 2017

CVA • aiming to make CVA more risk sensitive by aligning drivers of CVA risk and hedges with the FRTB methodology expected to be finalised during 2017.

Sovereign risk • reviewing the regulatory treatment of sovereign risk expected to be finalised during 2017.

Leverage ratioBased on tier I capital with current BCBS minimum level of 3%

• denominator of leverage ratio being revised • revising calibration and level for G-SIBs.

Expected to be finalised during 2017

Enhanced disclosureImprovement of existing disclosures, as well as additional requirements

• phase one: new changes to overview of risk management and RWA credit risk, counterparty credit risk, securitisation, market risk and linkages

• phase two: additional requirements, including dashboard of key regulatory metrics, hypothetical RWA, total loss-absorbing capacity, operational risk and amendments to market risk.

Phase one finalised & phase two expected to be finalised during 2017

• standardised approach: introduction of sensitivities-based methodology

• internal models: new definitions of trading and banking book, changes in the way risk models are calibrated, as well as replacing VaR with expected shortfall as new measure.

Revised standards for minimum capital requirements issued in January 2016

Market risk – FRTB

• use of external ratings, in a non-mechanistic manner, with alternative approaches for jurisdictions that do not allow external ratings for regulatory purposes.

Second consultation published in March 2016

Capital floors • replacement of Basel II transitional floor with permanent floor based on the new standardised approaches.

• new standardised measurement approach to replace existing approaches.

Second consultation published in March 2016

ADDRESSING EXCESSIVE VARIABILITY IN BANKS’ REGULATORY CAPITAL REQUIREMENTS

Credit risk – standardised approach

• applying parameter floors – PD and LGD – to the AIRB and FIRB and moving low-default portfolios, i.e. banks and other financial institutions, large corporates and equities to the standardised approach or FIRB.

First consultation published in March 2016

Credit risk –IRB

Operational risk


The standardised approaches will form the basis of the capital floor calculation for banks. The impact of the floor is dependent on the finalisation of the standardised frameworks. The calibration of the floor is currently the topic of discussion and much debate by international standard setting bodies and regulators. The final calibration of the capital floor will be vital in determining the overall impact for banks both locally and internationally.

The group has played an active role in conjunction with both international and local industry forums to ensure that emerging market risks and unintended consequences are outlined for further consideration. The group has also participated in many quantitative impact studies to inform the calibration of the final proposals.

In addition to the reforms that are currently being developed, many regulatory standards have been finalised over the past three years. Some of the finalised reforms that are not fully implemented as yet are noted in the table below. The group is well-positioned to meet these requirements on or before the stipulated implementation date.

AREANEW STANDARDS DESCRIPTION REGULATOR STATUS

ADOPTION DATE

Capital reform

New Basel III instruments and buffer

banks began phasing in higher minimum capital requirements in January 2013, with these Basel III standards fully effective January 2019.

BCBS Final 2019

Banks’ equity investments in funds

the objective is to develop an appropriately risk-sensitive and consistently applied risk-based capital regime for the calculation of capital requirements for banks’ equity investment in funds.

BCBS Final 2017

Securitisation revisions to the calculation of RWA

reduced minimum capital requirements for securitisations that comply with a set of simple, transparent and comparable criteria

criteria for identifying simple, transparent and comparable securitisations.

BCBS Final 2018

IRRBB increased governance and enhanced disclosure requirements

additional rules on how to profile assets and liabilities.

BCBS Final 2018

Liquidity reform

LCR metric which measures a bank’s ability to manage a sustained outflow of customer funds in an acute stress event over a 30-day period

rule requires banks to hold more HQLA

LCR finalised in January 2013, 70% compliant by 2016, increasing by 10% each year.

BCBS Final 2015 – 2019

NSFR metric designed to ensure that the majority of term assets are funded by stable sources, such as capital, term borrowing or other stable funds

the intention is to better match their assets and liabilities and reduce liquidity mismatches.

BCBS Final 2018

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RISK AND CAPITAL MANAGEMENT REPORT Annexure A Basel continued

AREANEW STANDARDS DESCRIPTION REGULATOR STATUS

ADOPTION DATE

Trading book reform

FRTB changes to the way risk models are calibrated

clear definitions of the trading book versus the banking book

aims to tighten rules related to diversification and hedging

reviewing standardised methods and their relationship with internal models.

BCBS Final 2019

Margin requirements for non-centrally cleared derivatives

margin requirements for uncleared OTC derivatives

initial and variation margin that must be exchanged when trading in uncleared OTC derivatives with certain entities.

BCBS Final TBC

Exposures to CCPs

regulators incentivise banks to make use of clearing (creates transparency in OTC derivatives markets)

no CVA capital charge for cleared trades.

BCBS Final 2017

SA-CCR SA-CCR is more risk aware and risk sensitive than the current exposure method (CEM), better reflecting the effects of diversification, hedges and margining.

BCBS Final 2017

OTC DERIVATIVES

The Financial Markets Act (FMA) FMA regulatory reform framework for OTC derivatives (FMA regulations) is yet to be finalised by our national regulators. Local banks, including SBSA, are working closely with the National Treasury (NT), the SARB and the local FSB to ensure that the FMA regulations meet the objectives set by the Group of Twenty leaders, are harmonised in so far as is possible with the frameworks being implemented in other Group of Twenty countries, and does not impede on the ability of local counterparts to continue to hedge risk effectively and efficiently with local and/or offshore counterparts. It is expected that the FMA regulations will introduce a

requirement for some OTC derivatives transactions to be cleared through a CCP, and for non-cleared transactions to become subject to a risk mitigation requirement that ultimately provide additional protection to end users of OTC derivatives products. The group will work closely with its clients and counterparts to ensure that the implementation of requirements imposed by the FMA regulations does not disrupt its current and/or ongoing financial market activities. The global markets derivative reform programme has been set up to analyse the impacts of the FMA regulations on the global markets business, and to implement the necessary changes to ensure compliance and minimise disruption. It is expected that the FMA regulations should be finalised during the course of 2017/2018, and that the new requirements will be implemented in a phased-in approach from 2017 onwards.


RECOVERY AND RESOLUTION PLANNING

Recovery and resolution planning topics under discussion by the global Financial Stability Board (FSB) are listed in the diagram below.

Operational continuity

Funding in resolution

Internal loss absorbing capacity

Operationalising bail-in

Valuation in resolution

SA is in the process of adopting the global FSB standards for the effective management of institutions under severe circumstances that could affect the stability of the financial system. These guidelines require the development of recovery and resolution plans, another form of proactive planning within the risk management framework and is described in the diagram below.

Recovery

The group’s approach

The group’s integrated recovery plan was developed to provide a valuable tool to management and the board to manage the implications of severe stress and proactively addresses potential hurdles in effecting these actions. The group is obtaining similar benefits from planning for the stability of its subsidiaries under severe conditions and through the rollout of the development of subsidiary recovery plans.

The recovery plans for systemically important institutions proactively identify management actions which can

be adopted during periods of severe stress to restore their financial strength and viability.

LEVELS OF STRESS

Resolution

The group’s approach

NT and regulatory authorities are in the process of defining the resolution framework for South Africa. The South African resolution framework will address the global topics of resolution authority mandate, tools available under resolution such as bail-in, creditor hierarchy and approaches for cross-border cooperation with other regulators.

In the event that these actions prove unsuccessful, the resolution plan sets out the approach to resolve the entity

in an orderly manner while minimising the impact on its stakeholders.

PO

INT

OF

RE

SO

LUT

ION

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RISK AND CAPITAL MANAGEMENT REPORT Annexure A

IFRS 9

BackgroundIn July 2014, the International Accounting Standards Board (IASB) issued the final IFRS 9 standard which will replace International Accounting Standards 39 Financial Instruments: Recognition and Measurement (IAS 39), the existing standard dealing with the accounting treatment for financial instruments. IFRS 9 consists of the following key areas which represent changes from that of IAS 39:

classification and measurement of financial assets

recognition of changes in fair value due to changes in own credit risk

hedge accounting

expected credit loss (ECL) impairment model.

IFRS 9 is required to be adopted prospectively from 1 January 2018, with the exception of the IFRS 9 hedge accounting requirements where the group is permitted to continue with IAS 39 hedge accounting requirements until the IASB issues a standard on macro hedge accounting. The difference between the previous (IAS 39) and new (IFRS 9) carrying values will be recognised in the group’s opening retained earnings.

IFRS 9 permits an entity to either restate comparative financial results, subject to there being no hindsight, or to adopt the requirements prospectively from 1 January 2018. Consistent with other South African and international banking groups, the group’s default approach will be to not restate the comparative financial statements.

While the group is preparing for the adoption for all aspects of IFRS 9, the most material expected component thereof, both quantitatively and qualitatively, is expected to be that of IFRS 9’s ECL model. Accordingly, the remainder of this section discusses the ECL only.

The IASB developed the IFRS 9 ECL impairment model with the objective of transitioning from an incurred loss approach to an expected loss approach which will require entities to book impairment losses in advance of an exposure having objective evidence of impairment, thereby resulting in greater levels of impairments.

IFRS 9’s expected loss model will have an impact on the group’s financial results, risk metrics and regulatory capital requirements. Other key risk parameters such as economic capital, the group’s funding and liquidity and stressed earnings are also expected to be impacted as a result of the greater earning’s volatility.

IFRS 9’s impairment requirementsThe following diagram sets out the key differences between IAS 39’s incurred loss model and IFRS 9’s expected loss model:

IAS 39 – INCURRED LOSS APPROACH (CURRENT VIEW)

PERFORMING BOOK AND EARLY ARREARS NON PERFORMING BOOK

Credit impairment

provision

Performing portfolio provision

Incurred but not reported

losses

Credit impairment

Specific provision

incurred loss (loss event)

The incurred but not reported impairment provision includes the application of emergence periods that are determined

for each portfolio and, in terms of the group’s current policies, generally range from three to 12 months for retail

portfolios and 12 months for corporate exposures.

Specific credit impairments are recognised for exposures for which

there is objective evidence of impairment.

ON-BALANCE SHEET

EXPOSURES

Incurred credit loss model


IFRS 9 – EXPECTED LOSS APPROACH (FUTURE VIEW)

STAGE ONE STAGE TWO STAGE THREE

No significant deterioration in credit risk since origination

OR low credit risk at reporting date

Significant deterioration in credit risk since origination

Incurred loss (default event) similar to that of IAS 39

12-month EL, being the lifetime ECL that is expected to result

from default events in the next 12 months

Lifetime ECL, being the ECL that results from all possible default events over the expected life of the financial asset

ON- AND OFF-BALANCE

SHEET EXPOSURES

EL impairment model

Key components of IFRS 9’s ECL modelSignificant increase in credit risk or low credit riskThe assessment of “significant increase in credit risk” for the group’s retail exposures will be based on changes in a customer’s credit score and for the group’s corporate exposures on changes in internal credit ratings, together with the expected outlook for the specific sector and industry and other relevant available information. For both the group’s retail and corporate exposures, the determination will be set to identify deterioration in credit risk before the exposure reaches a past due status of 30 days.

Exposures for which there is a significant increase in credit risk but for which the credit risk is low remain in stage one. Exposures are generally considered to have a low credit risk where there is a low risk of default, the exposure has a strong capacity to meet its contractual cash flow obligations and adverse changes in economic and business conditions may not necessarily reduce the exposure’s ability to fulfil its contractual obligations.

Forward-looking informationIn determining whether there has been a significant increase in credit risk and in determining the expected loss calculation, IFRS 9 requires the consideration of forward-looking information. The determination of “significant increase in credit risk” is required to include consideration of all reasonable and supportable information available without undue cost or effort.

This information will typically include forward-looking information based on expected macroeconomic conditions and specific factors that are expected to impact individual portfolios.

The incorporation of forward-looking information represents a significant change from existing accounting requirements which are based on observable events. The use of such forward-looking information will increase the use of management judgement and is expected to increase the volatility of impairment as a result of continuous changes in future expectations. The development of a forward-looking framework will be based on the group’s economic expectations, industry and sub-sector-specific expectations, as well as expert management judgement.

DefaultWhile default is not specifically defined by IFRS 9, the group is seeking to align the determination of default with its existing internal credit risk management definitions and approaches.

Approach to model developmentThe group has approached the development of its IFRS 9 ECL models by leveraging wherever possible off its existing IAS 39 impairment and Basel capital models.

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RISK AND CAPITAL MANAGEMENT REPORT Annexure A IFRS 9 continued

Project governanceThe group has structured its IFRS 9 project in such a way as to effectively enable the delivery of the IFRS 9 requirements across the group.

Business unit subcommittees have been established and are responsible for the detailed work required in order to transition to IFRS 9. These subcommittees report to the project’s steering committee which is responsible for providing overall direction to the project, as well as to effectively deal with project-related issues. IFRS 9 steering committees have been established in the Africa Regions to drive their local IFRS 9 implementation.

The IFRS 9 project board, to which both the IFRS 9 steering committee and Africa Regions’ steering committees report, provides strategic direction to the project, monitors the project’s progress, and identifies required interventions and project interdependencies with other group initiatives.

In order to ensure appropriate board oversight, the IFRS 9 board reports on the project’s activities, status and outcomes to the GAC.

Key milestones and progressDuring 2016, the group’s IFRS 9 project focused on the implementation of key data, modelling and process milestones.

The group has completed the development of its ECL models which include the determination of significant increase in credit risk and forward-looking methodologies.

During 2017, the group has planned to run IFRS 9 impairment calculations alongside that of IAS 39 (referred to as the group’s parallel run). This parallel run aims to provide results that will be used to finalise and/or update methodologies, and to refine and approve the ECL models. It will further allow communication of likely business impacts and volatility throughout the group and assist in the audit of the group’s transition to IFRS 9.

Other considerationsImpact on key risk dimensionsWhile the group has conducted several internal quantitative impact analyses, the results are subject to the finalisation, validation and audit of the IFRS 9 ECL models.

The following table summarises the group’s expectations in terms of how IFRS 9 will affect the group:

IFRS 9 DRIVER REASON

Stage one – 12-month expected loss

PBB’s existing emergence period is three to six months and for CIB is 12 months

IFRS 9’s stage one requirement lends itself to require greater impairment provisions for PBB and a less significant change for CIB.

Stage two – lifetime expected loss for items for which there is a significant increase in credit risk

IFRS 9 will require a lifetime loss to be recognised for items for which there has been a deterioration in credit risk

it is likely that this will increase both PBB and CIB’s impairments.

Stage three – lifetime expected loss for exposures in default

similar requirements to that of existing accounting requirements.

Off-balance sheet exposures IFRS 9 requirement for impairments for off-balance sheet facilities lends itself to requiring additional impairments.

Forward-looking information will require significant management judgement

the inclusion of such information is expected to initially increase the impairment provision, but thereafter may either increase or decrease the impairment provision and will vary depending on the expected future economic outcomes. The incorporation of forward-looking information is expected to result in additional volatility in reported impairments.

IFRS 9 will also affect the group’s regulatory capital requirements. The BCBS is currently considering how the IFRS 9 transition impact will be dealt with from a capital perspective.


LEASES

In January 2016, the IASB issued IFRS 16: Leases (IFRS 16), which is the replacement of IAS 17: Leases (IAS 17), as well as related interpretations. The effective date of IFRS 16 is 1 January 2019.

The objective of IFRS 16 is to set out the principles for the recognition, measurement, presentation and disclosure of lease contracts for both lessors and lessees. While the lessor accounting requirements have not changed substantially, IFRS 16 includes significant changes for the lessee’s accounting treatment. These changes will require the lessee to account for all leases similar to how finance leases were accounted for under IAS 17 and not to distinguish whether the leases are operating or finance leases as is required by IAS 17. In terms of the lessee accounting treatment, IFRS 16 will require a right of use (ROU) asset together with a liability for the future payments to be recognised for all leases with a term of more than 12 months, unless the underlying asset is of low value.

The impact on other regulatory requirements, including the group’s capital, reserving, NSFR and liquid assets is being assessed.

INSURANCE CONTRACTS

The IASB’s exposure draft on insurance contracts proposes a comprehensive measurement approach for all types of insurance contracts that are issued by entities (and reinsurance contracts held by entities) with a modified approach for some short-duration contracts.

The comprehensive measurement approach is based on the principle that insurance contracts create a variety of rights and obligations that work together to generate a package of cash inflows (premiums) and outflows (benefits and claims). The proposals state that an insurer applies a measurement approach utilising building blocks to this package of cash flows. The proposals and effective date are both yet to be finalised; however, it is expected to be effective from 1 January 2021.

SOUTH AFRICA

Twin Peaks regulatory frameworkThe Financial Sector Regulation Bill was tabled in Parliament in November 2015, and is in the final stages of being passed. It is expected to be signed in the second half of 2017. The Twin Peaks system will consist of a Prudential Authority focused on the safety and soundness of financial institutions, and a Financial Sector Conduct Authority focused on the manner in which financial institutions conduct their business, market integrity, the fair treatment of customers and financial education. Once enacted, the Bill will be adopted in two phases:

phase one: establishes the two regulatory authorities to harmonise the various sub-sectoral legislationphase two: aligns prudential and market conduct standards across the sector.

In line with the Bill, the discussion document (recovery planning: strengthening South Africa’s resolution framework for financial institutions) was released in August 2015 and outlines steps to strengthen financial stability and crisis resolution in financial institutions. The SARB is developing the framework, to which the group is providing input.

Market conductThe market conduct policy framework sets out proposals to reform the regulatory system for the financial sector. The new Financial Sector Conduct Authority, which will come into effect when the Financial Sector Regulation Bill is passed, will streamline the supervision and regulation of conduct, including the system of licensing, supervision, enforcement, customer complaints, appeal mechanism and customer advice and education. The underpinning legislation for the conduct authority, the draft Conduct of Financial Institutions (COFI) Bill, is expected to be released for comment in 2017.

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RISK AND CAPITAL MANAGEMENT REPORT Annexure A South Africa continued

The regulatory reform process will take between 7 – 10 years to consolidate various pieces of current legislation that deal with conduct issues. Implementation will be done in three phases:

phase one: changes to existing legislation and regulation will be undertaken to align with the new conduct policy framework

phase two: the Financial Sector Regulation Bill makes provision of the new conduct authority to issue conduct standards as subordinate legislation

phase three: longer-term structural changes will be implemented once the COFI Bill is in effect.

In line with this strategy, the SARB’s review of the National Payment System Act will result in, among other outcomes, the incorporation of conduct reforms that will be applicable to payment service providers. It is expected that a framework will be developed for the regulation of payment service providers in order to ensure that the functions of the SARB, the National Payment System Department and the Financial Sector Conduct Authority do not overlap.

Consumer creditThe National Credit Amendment Act (NCAA) is likely to be updated this year. The Parliamentary Committee of Trade and Industry has issued a proposal to legislate activities to assist over-indebted customers through debt relief measures, and mechanisms to allow the National Credit Regulator to penalise reckless lenders more directly. The group has set up a steerco to manage engagements on the amendments.

Consumer life insuranceThe final credit life insurance regulations were published by the Minister of Trade and Industry in February 2017. The draft regulations were initially published in November 2015, and set caps on the total cost of credit life insurance. They also prescribe minimum benefits that these policies must offer and set out the type of exclusions permissible. Affordable housing mortgage agreements have been separated from other mortgage agreements in the final regulations. This is beneficial because credit life insurance plays an important risk management role and enables us to continue offering this product on a sustainable basis, without restricting access to housing credit in this segment.

The retail distribution reviewThe RDR was initiated to ensure that customers receive fair outcomes when purchasing financial products. The RDR puts forward specific regulatory proposals, to be implemented in phases, under three main headings:

phase one: services provided by intermediaries

phase two: product supplier and intermediary relationships

phase three: remuneration.

Consultation on the various instruments comprising the phase one proposals started in 2016. Consultation on Financial Advisory and Intermediary Services fit and proper requirements are already underway and dependencies on the broader Twin Peaks legislative timetable remain – particularly for phase three proposals.

InsuranceThe draft Insurance BillThe industry is awaiting the passing of the Insurance Bill, which replaces parts of the current Long-term Insurance Act and the Short-term Insurance Act. The framework will be supervised under the Twin Peaks model of financial regulation in South Africa. The draft Bill was tabled in Parliament on 27 January 2016.

The second draft of the Insurance Bill was released for public comment in December 2016. The draft Bill includes enhanced prudential supervision requirements, gives effect to the SAM regime, and brings prudential regulation under the Prudential Authority (within the SARB). It also provides a framework for the establishment, regulation and supervision of the micro-insurance sector.

Solvency assessment and managementThe SAM implementation date will coincide with the effective date of the Insurance Bill which is now anticipated to be July 2017.

Supervisory focus for SAM in 2017 will be on:

quality of capital resources

management actions.

Reinsurance regulatory reviewThe reinsurance regulatory review commenced in 2012 as part of the overhaul of the supervisory landscape for insurers. This project falls within the ambit of the SAM regime. It was initiated with a regulatory review survey which was sent out to the industry.


Subsequent to consultations with the industry, the final proposals were published by the local FSB in a position paper on 8 September 2016, which also gives an indication of how these reforms will be implemented. A draft notice on the determination of equivalent foreign jurisdictions was simultaneously released. The proposals will be given effect through the Insurance Bill.

Retirement reformOn 9 December 2016, National Treasury published a second draft of the retirement funds default regulations, made in terms of section 36 of the Pension Funds Act (No. 24 of 1956), for further and final public comment.

The latest draft achieves a better balance between principles and rules and covers the following aspects:

clarification of the default investment portfolio regulation

clarification of members’ pot(s) with respect to the default preservation fund

introduction of an annuity strategy to address concerns raised about the implications of automatically defaulting members into annuity products that could be irreversible.

Consumer credit insuranceThe NT and the local FSB initiated a review of business practices in the consumer credit insurance (CCI) sector. The review looked at the regulatory framework and market structure for CCI policies that are sold with, or linked to, consumer credit with the aim to achieve better outcomes for the consumer.

Responses on the CCI information submitted in mid-March 2016 have been analysed and a report summarising key trends emerging from the responses is being finalised. This will inform possible supervisory interventions relating to CCI going forward. Some of the changes already captured in the draft legislation relate to commission scales on CCI.

Micro-insuranceThe local FSB indicated in November 2016 that a micro-insurance paper would be published soon providing an update on the proposed regulation and supervision of an “inclusive insurance market”, including setting out regulatory options for funeral parlours. This paper includes an overview of the work undertaken since NT’s micro-insurance policy document in July 2011, as well as the roadmap for implementing the framework (including the proposed timelines) and interim arrangements.

Demarcation regulationThe purpose of the regulation is to clearly demarcate between health insurance policies and medical schemes and assign the appropriate supervision.

The draft regulations allow insurers to continue to provide medical expense shortfall policies (gap cover plans) and non-medical expense cover as a result of hospitalisation policies (hospital cash plans) in a manner that complements medical schemes, subject to strict underwriting and marketing conditions.

The draft regulations do not allow insurers to continue to provide primary healthcare insurance policies. These types of benefits will, going forward, have to be provided in accordance with the Medical Schemes Act.

Existing health policies will be expected to align to the regulations as and when such contracts are varied or renewed after the regulations come into operation. Existing accident and health policies will be expected to align to the regulations by 1 January 2018.

Financial Intelligence Centre Act The South African president referred the Financial Intelligence Centre Amendment Bill back to Parliament for reconsideration on 28 November 2016. In his letter to Parliament, the president raised concerns over the constitutionality of provisions relating to warrantless searches and the potential infringement on the right to privacy. The Bill was drafted to encompass international standards for AML/CFT compliance, including the introduction of a risk-based approach. It was referred back to the Standing Committee on Finance which originally considered and passed the Bill. The Standing Committee on Finance deliberated on and approved amendments to the provision in the Bill relating to warrantless searches. The amendments essentially served to clarify the powers of inspectors and/or regulators in conducting warrantless searches. The amendment also clarifies the distinction between a private residence, an unlicensed residence or a licensed residence. The amendments were sent to the National Assembly for a vote and unanimously approved. The Bill has now been referred to the president who can choose to either sign it into law or refer it directly to the Constitutional Court to test its constitutional muster. The Financial Action Task Force has granted South Africa a three-month extension, to June 2017, in which it must enact the Bill to avoid being blacklisted on an AML/CFT compliance basis.

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RISK AND CAPITAL MANAGEMENT REPORT Annexure A

AFRICA REGIONS

The regulatory landscape in the group’s Africa Regions has continued to be dominated by a trend of diverse, transformative and at times contentious regulations. Regulators have taken a firm position across a wide range of issues, the impact of which has varied across jurisdictions. With continued focus around building financial institutions that positively impact the societies within which they operate, key regulatory themes that have emerged during 2016 have included:

reshaping the corporate culture of financial institutions and the impact on consumers

the improved detection and management of financial crime

cross-border transactions and the economic impact of such transactions (exchange control and taxation)

re-emphasis of localisation imperatives.

The protection of the economic interests of consumers has been one of the key themes across multiple jurisdictions, with focus predominantly on the capping of fees and interest charged to clients, interest paid on deposits, as well as fees that banks may charge consumers for banking products (Malawi, Kenya, Swaziland, Zimbabwe, Namibia, Lesotho and Tanzania). The rationale for the determination around fee and interest rate capping has centred around the view that such fees were unfair. In Malawi, the regulator expressed that, as funds maintained in these accounts were already used for intermediation and generation of revenue through interest income, any fees charged to consumers would be grossly unfair.

Similarly, in Kenya, the Banking Amendment Bill was signed into law, with the effect of capping interest charges that banks may charge. A statement released by the president of Kenya cited the changes were owing to growing frustration and disappointment around the cost of credit and the applicable interest rates on deposits.

In response to the emergence of evidence of currency pressures, inadequate controls around cross-border transactions and inaccurate reporting of such transactions by some major banks, regulators focused on enforcing and further strengthening requirements around Exchange Control-related regulations. In countries such as Zimbabwe and Nigeria, regulators have strongly emphasised the need to accurately and timeously report cross-border payments, including prioritisation of certain foreign payments.

Regulatory inspections to ensure banks comply with Exchange Control regulations increased across the jurisdictions, highlighting the need to ensure that focused interventions are in place to prevent instances of non-compliance. The group is committed to and has prioritised remedial actions where shortcomings have been reported by regulators.

Appropriate risk management requirements have been prescribed with regard to agency banking, particularly with regard to AML/CTF and data privacy processes required.

With ensuing country evaluations across a number of jurisdictions in 2016 focusing on the robustness of AML/CTF systems and legal frameworks against Financial Action Task Force recommendations, the upward trend towards refining and strengthening regulations in place has been widely expected.

Regulators across all regions reviewed their current AML requirements and issued regulations either updating current requirements or introducing more stringent ones in order to combat financial crime and to counter the financing of terrorism.

A combination of global standard-setting and investigations across the Africa Regions revealed that the main focus has been on governance, transparency and controls across multiple themes, strengthening accountability for non-compliance and effective oversight of banking activities.

UK, EU AND US

Global foreign exchange code of conductThe Bank for International Settlements commissioned a working group to establish a global code of conduct for the foreign exchange market and the first iteration of this code was released in May 2016. The intention behind this code is to have a single global code governing conduct across the entire wholesale foreign exchange market.

The code is based on the following six leading principles, which encourage responsible participation in the foreign exchange market:

ethics

governance

information sharing

execution

risk management and compliance

confirmation and settlement processes.


European Union benchmark regulationThis regulation will become effective in January 2018, establishing a legal basis for the International Organisation of Securities Commission’s principles for financial benchmarks. Once adopted, administration of benchmarks will become a regulated activity, requiring prior regulatory approval. Use of unregulated benchmarks will be prohibited, along with any third country benchmarks, not deemed equivalent to the proposed regulation. The regulation also introduces prescriptive requirements for contributors to benchmarks. In order for the continued use of South African benchmarks, such as JIBAR, in European Union (EU) jurisdictions, these benchmarks must either be considered equivalent or alternatively recognised or endorsed within the EU. The group is working closely with its regulators to develop a local benchmark framework that will be equivalent to the EU framework in order to continue referencing locally set benchmarks in our EU contracts. The group notes that under the EU rule, existing contracts referencing South African benchmarks will be grandfathered and no changes will be necessary. Only new contracts referencing non-EU benchmarks post 2018 will be within the scope of the EU benchmarking rule.

The group is currently tracking, and analysing the impact of a number of other regulations, including:

markets in financial instruments directive

the proposed EU financial transactions tax

EU capital markets union

EU market infrastructure regulation.

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Tables in this report have been labelled to identify content disclosed in terms of IFRS or Basel reporting frameworks.

The method of measurement in terms of Basel differs in certain aspects from the method of measurement in accordance with IFRS. The table that follows highlights the principle differences between the IFRS and Basel reporting frameworks. The IFRS requirements have been further analysed between that which is currently required and IFRS 9’s future requirements.

PRINCIPLE BASEL IAS 391 (CURRENT – 2017) IFRS 9 (2018 –)

CATEGORISATION AND CLASSIFICATION OF EXPOSURES

Categorisation of exposures/financial assets for credit risk-related disclosures

Exposures under the IRB approach are categorised into asset classes as prescribed by the regulator which are based on homogeneous risk characteristics. The regulator-defined categories are as follows:

corporate

sovereign

banks

retail*

equity.

Where classes are not prescribed by the regulator, the group determines categories at an appropriate level of granularity that consider the nature of the required disclosure, for example, industry- and geographical-related disclosures.

* Retail is analysed further between retail mortgages, QRRE and retail other.

Where applicable, financial instruments are categorised by class, taking into account the nature of the information to be disclosed and the characteristics of the underlying financial instruments.

These categories are typically provided in terms of the type of financial product, categories similar to that of Basel or type of industry.

While the categorisation of such disclosures is yet to be determined, it is expected that the disclosures will be categorised on a similar basis to that as currently provided in terms of IAS 39.

Classification of exposures/financial assets for credit risk-related disclosures

Exposures are classified per the regulator for both the IRB and standardised approach as follows:

on-balance sheet

off-balance sheet

securities financing transactions

derivative instruments.

These exposures are further analysed for disclosure purposes into the categories mentioned above.

The group has classified its financial assets on the SOFP into the following classifications:

derivative assets

trading assets

pledged assets

financial investments

loans and advances

other assets.

These financial asset categories are further analysed for disclosure purposes by category as explained above.

While the classification of such disclosures is yet to be fully determined, it is expected that the disclosures will be classified on a similar basis to that as currently provided in terms of IAS 39.

1 Refer to the group’s accounting policies (annexure E of the financial statements) for further information.

Annexure BIFRS and Basel reporting frameworks




VALIDATION OF EXPOSURES

Measurement (assets) Exposure values for non-derivatives are determined as the gross contractual exposure before the impact of netting, collateral or expected recoveries. The exposure includes the impact of potential drawdowns against unutilised facilities by using credit conversion factors.

Certain revolving facilities are, in terms of regulatory requirements, reported using monthly average balances.

Derivative instruments are measured at fair value.

All financial instruments are initially measured at fair value and are subsequently measured at either amortised cost or at fair value based on the instrument’s IFRS classification.

The IFRS classification is determined based on the nature, characteristics and contractual terms of the underlying financial instruments and are classified into one of the following categories:

loans and receivables

held-to-maturity

available-for-sale

designated to be measured at fair value through profit or loss (FVTPL)

held-for-trading.

All financial instruments are initially measured at fair value and are subsequently measured at either amortised cost or at fair value based on the instrument’s IFRS classification.

The IFRS classification will be based on the nature of the underlying business model within which the financial asset is held and the nature of the asset’s contractual cash flows and will be categorised into one of the following categories:

amortised cost

fair value through other comprehensive income (FVOCI) (equities)

FVOCI (debt instruments)

held-for-trading

FVTPL.

Own credit risk value adjustments

Fair value gains and losses attributable to own credit risk on financial liabilities are excluded when calculating regulatory capital.

All changes in the fair value of financial liabilities subsequently measured at fair value, due to changes in own credit risk, are recognised in the income statement.

Changes in the fair value of financial liabilities designated at FVTPL, due to changes in own credit risk, will be recognised in OCI provided that such recognition will not increase or give rise to an accounting mismatch.

Changes in fair value due to changes in own credit risk for all other financial liabilities that are subsequently measured at fair value will be recognised in the income statement.

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EXPECTED LOSS AND IMPAIRMENTS OF EXPOSURES

Scope Expected and unexpected credit impairment losses are calculated for all on- and off-balance sheet exposures.

Impairments for incurred credit loss events are calculated for all financial assets that are subsequently measured on an amortised cost basis, including exposures classified as available-for-sale.

Impairments for both incurred and expected credit loss events are calculated for all financial assets that are measured on an amortised cost basis, including debt instruments that are classified to be measured at FVOCI.

Impairments are also recognised for off-balance sheet financial assets.

Measurement Expected credit impairment losses are calculated based on through-the-cycle average loss levels for exposures with similar credit quality.

Unexpected losses are accounted for through holding regulatory capital in relation to the size and nature of the exposure held. Differences between Basel and IFRS are treated as follows:

Basel compared to IAS 39: the difference between the Basel and current IFRS credit impairment values produces a shortfall if the expected loss amount under Basel exceeds the total impairments determined in terms of IFRS. The shortfall, if any, is deducted from CET I capital (refer to CET 1 table on page 18 of this report). The excess, if any, is to be included in tier II capital subject to regulatory limits

Basel compared to IFRS 9: where the total expected losses as determined in terms of IFRS 9 will exceed that of Basel’s expected losses. The difference will be eligible to count as tier II capital resources up to a specified ceiling determined with reference to risk-weighted assets for both the standardised and IRB approach with the exception of specific provisions which do not qualify for inclusion in tier II capital under the standardised approach.1

On-balance sheet financial assets measured at amortised cost and debt instruments classified as available-for-sale are specifically impaired and the resulting loss recognised in the income statement where:

there is objective evidence of credit impairment resulting from one or more events that have occurred after the initial recognition of the asset

that event has an impact on the estimated future cash flows of the asset that can be reliably measured.

Examples of objective evidence of impairment include:

actual breach of contracts

observable data indicating that there is a measurable decrease in the estimated cash flows from a group of assets since their initial recognition due to:

• adverse changes in the payment status of the borrowers in the group; or

• a deterioration in national or local economic conditions that correlate with defaults on the assets in the group.

Impairments are accounted for all on-balance sheet exposures.

Impairments for incurred but not reported losses are recognised based on historic loss patterns and estimated emergence periods.

Impairments are recognised for both on- and off-balance sheet financial assets.

Impairments are recognised with reference to an expected loss credit impairment model which considers historical, current and forward-looking information. The measurement of credit losses is based on the extent to which there has been a change in the exposure’s credit risk, whether the credit risk is considered to be low and whether the exposure has defaulted.

RISK AND CAPITAL MANAGEMENT REPORT Annexure B IFRS and Basel reporting frameworks continued

1 Subject to change. During 2016 the BCBS published a consultative document and discussion on considerations related to the regulatory treatment of accounting provisions under the Basel III regulatory capital framework.



EXPECTED LOSS AND IMPAIRMENTS OF EXPOSURES continued

Default Defines default as the obligor being 90 days past due on the obligation.

The definition of default is not specifically defined by IFRS. The group defines non-performing loans as those loans for which:

the group has identified objective evidence of default such as a breach of a material loan covenant or condition; or

instalments are due and unpaid for 90 days or more.

Default is an indicator of impairment but is not the only criteria for a financial asset to have objective evidence of impairment for the determination of an impairment loss.

While the definition of default is not specifically defined by IFRS 9, the determination of default should be consistent with internal credit risk management definitions.

IFRS 9 includes a rebuttable assumption that default does not occur later than when a financial asset is more than 90 days past due. The assumption can be rebutted where an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.

EAD EAD is the expected exposure at the point of default and is determined using historic averages which include the impact of potential drawdowns against unutilised facilities by using credit conversion factors.

The EAD is the exposure’s gross carrying value at the reporting date in the SOFP. No account is taken of potential future drawdowns or other off-balance sheet exposures.

The EAD takes into account the exposure’s gross carrying value at the reporting date in the SOFP and off-balance sheet commitments which include certain unutilised loan facilities.

PD Under the IRB approach, exposures are internally rated and mapped to PDs. The group considers both through-the-cycle PDs and point-in-time PDs in measuring impairment against credit exposures.

Point-in-time PDs, including roll rate assumptions, are used to determine the probability that an exposure will default during the exposure’s lifetime.

The group will use lifetime PDs for all exposures for which there is a significant increase in credit risk (and where the credit risk is not low) or where the exposure has defaulted. 12-month PDs will be used for all other exposures.

The PDs will be determined by taking into account historical, current and forward-looking elements.

LGD LGDs are determined with reference to the nature of the exposure, its risk and level of collateralisation. Downturn LGDs are used which reflects the anticipated recovery rates in a downturn period. Discount rates are applied to the LGD and are based on the weighted average cost of capital or a risk-free rate based on a risk-adjusted rate.

LGDs are determined using historical and expected recovery rates and are discounted using the exposure’s effective interest rate.

As per IAS 39.

152


EXPECTED LOSS AND IMPAIRMENTS OF EXPOSURES continued

Measurement The expected loss provides a measure of the value of the credit losses that may reasonably be expected to occur during downturn conditions in the portfolio and the level of capital required to be held.

Expected losses are determined as follows:

standardised approach: calculated with reference to the exposure’s risk weighting (determined with reference to the exposure’s characteristics and where, applicable, the external credit agency’s credit rating) and the net counterparty exposures after recognising a limited set of qualifying collateral

IRB approach: expected losses are determined for the average estimate of defaults expected within the next 12 months and is determined with reference to the financial asset’s EAD, PD and LGD.

Impairment losses are measured as follows:

for financial assets measured on an amortised cost basis: the difference between the asset’s carrying amount and the present value of its estimated future cash flows discounted using the asset’s original effective interest rate is recognised in the income statement. Credit losses with respect to future events are excluded from the assessment

for available-for-sale financial assets: the cumulative loss that has been recognised in OCI, being the difference between the asset’s carrying value and its fair value, is reclassified to the income statement.

To provide for latent losses in a portfolio of loans where the loans have not yet been specifically identified as impaired, impairment for incurred but not reported losses is recognised based on historical loss patterns and estimated emergence periods.

For incurred but not reported losses the consideration period is determined separately for each asset class and instruments are segmented based on the incurred level of credit risk, in particular using days past due for retail portfolios and credit ratings for corporate portfolios.

Impairments are recognised with reference to the financial asset’s EAD, PD and LGD.

Impairment losses are measured with reference to a three-stage approach as follows with all impairments recognised in the income statement:

stage one financial assets generally comprise performing loan exposures for which there has not been a significant increase in credit risk or those assets for which there has been a significant increase in credit risk but for which the credit risk is considered to be low. A 12-month expected loss, being the lifetime expected credit loss that results from default events that are possible within the 12 months after the reporting date, is recognised

stage two financial assets consist of performing assets for which the credit risk has significantly deteriorated since initial recognition and for which the credit risk is not considered to be low. A lifetime expected credit loss is held for such exposures

stage three financial assets consist of all exposures that have defaulted. A lifetime expected credit loss is held for such exposures.

Impairments are recognised with reference to the financial asset’s EAD, PD and LGD.



REPORTING FRAMEWORK CONSOLIDATION DIFFERENCES

In accordance with IFRS, all entities, regardless of the nature of their underlying activities, are either consolidated or equity accounted based on the extent of control or influence that the group exerts over those entities. Basel differentiates entities based on the underlying activity of the entity combined with the extent of control or influence that the group exerts over those entities. The different treatments for entities for regulatory and accounting consolidation are explained in the table below.

SHARE-HOLDING

REGULATORY TREATMENT

IFRS TREATMENT2

BANKING, FINANCIAL ENTITY OR SECURITIES FIRM1

INSURANCE ENTITY

COMMERCIAL ENTITY

STANDARDISEDAPPROACH IRB APPROACH

<10% Aggregate of investments are compared to a threshold of 10% of the group’s CET I capital. Amounts above the threshold are deducted against the corresponding component of capital and amounts below the threshold are risk-weighted.

Risk weight at no less than 100%.

Risk weight up to a maximum of 1 250%.

Typically treated as a financial investment and is measured at fair value (cost in certain circumstances).

Where the group has significant influence over that investment, equity accounting is applied unless designated to be measured at FVTPL in terms of IFRS.

>10% but ≤20%

Apply the deduction method3

Aggregate of investments in tier I and tier II instruments are deducted against the corresponding component of capital.

>20% but ≤50%

Other significant shareholder: proportionately consolidate

No other significant shareholder: apply the deduction method2


Apply the deduction method3


Individual investments up to 15% of the group’s CET I, additional tier I and tier II: risk weight at no less than 100%

Individual investments in excess of 15% of the group’s CET I, additional tier I and tier II: risk weight at 1 250%

Aggregate of investments >60% of the group’s CET I, additional tier I and tier II: risk weight excess above 60% at 1 250%.

Individual investments up to 15% of the group’s CET I, additional tier I and tier II: risk weight at no less than 100%

Individual investments in excess of 15% of the group’s CET I, additional tier I and tier II: risk weight at 1 250%.

Equity accounting (unless designated to be measured at FVTPL in terms of IFRS) applied unless there is evidence of control in which case the group consolidates the investment into its results.

>50% Consolidated Consolidate unless there is evidence to indicate that the group does not have control over that investment in which case equity accounting will typically be applied unless designated to be measured at FVTPL in terms of IFRS.

1 For Basel purposes, financial entities other than financial entities acquired through realisation of security in respect of previously contracted debt (held temporarily) are subject to other materially different rules and regulations or non-consolidation as required by law.

2 Refer to the group’s accounting policies (on pages 330 to 377) for detailed information.3 Aggregate of investments compared to 10% of the group’s CET I capital and amounts above the 10% threshold are deducted against CET I capital. Amounts

not deducted are combined with mortgage servicing rights and deferred tax assets and compared to 15% of the group’s CET I capital. Amounts above the 15% threshold are deducted against CET I capital and amounts below are risk-weighted at 250%.

154

BASEL APPROACHES ADOPTED FOR REGULATORY CAPITAL PURPOSES

Basel provides various approaches for the calculation of regulatory capital to be held against credit, market and operational risk. In general, there are three approaches:

a basic approach

an intermediate approach

an advanced approach.

The regulators approve the approach adopted on a case-by-case basis, both at a solo-regulated entity and consolidated-regulated entity level. The group does not adopt advanced approaches for certain portfolios, either because these methods are not yet recognised in a particular jurisdiction or because the group has chosen, on a materiality basis, to adopt the intermediate or basic approaches. In these cases, the group nevertheless adopts practices similar to the advanced approach for its internal economic capital, risk measurement and management purposes where it is felt that these offer better information for managing risks.

The approaches per risk type approved by regulators are specified in the relevant credit, market and operational risk sections of this report.

RISK DISCLOSURE PRESENTATION FOR INTERCOMPANY TRANSACTIONS BETWEEN THE GROUP’S BANKING AND INSURANCE OPERATIONS

In the ordinary course of business, both the group’s banking operations and the insurance operations of its subsidiary, Liberty, enter into arm’s length transactions of one another. The risks arising from these transactions are managed independently within the group’s banking and insurance operations as part of each operation’s risk management framework. The group’s banking operations’ risk and capital management disclosures are predominantly regulated by both IFRS and Basel III, whereas Liberty’s insurance risk disclosures are influenced by both IFRS and the FSB’s planned implementation of the SAM framework with effect from 1 January 2017. The disclosure in this report is driven by the scope of these regulatory requirements and follow the manner in which the group’s risks are managed, resulting in separately presented disclosures for the group’s banking and insurance operations. Hence, all risk disclosures pertaining to Liberty are those that are reported by Liberty in its financial statements.

Intercompany transactions between Liberty and the group’s banking operations have not been eliminated for the purposes of separately reporting on the banking and insurance operations’ risk disclosures in this risk and capital management report.

The group controls 55% (2015: 54.5%) of the issued ordinary shares of Liberty Holdings Limited. The nature of the arm’s length transactions entered into between Liberty and the group’s banking operations include the following:

group ordinary shares: Liberty purchases the group’s ordinary shares for the risk and reward of its policyholders. From an IFRS perspective these shares are accounted for by the group as treasury shares and by Liberty as a financial investment

debt financial instruments: as part of its funding activities, the group’s banking operations issue debt financial instruments which include preference shares, term deposits, debt issued by consolidated structured entities, subordinated bonds and other deposits and debt funding arrangements. These debt instruments are accounted for by the group’s banking operations as liabilities within deposits and debt funding and subordinated debt as appropriate and are recognised by Liberty as financial investments. These intercompany transactions are eliminated by the group on consolidation. The intercompany debt financial instruments are typically measured by the group’s banking operations on an amortised cost basis and by the group’s insurance operations on a fair value basis. The effect of this measurement inconsistency is assessed and, where applicable, reversed on consolidation

derivative financial instruments: in order to hedge the market risk inherent in Liberty’s assets and liabilities, Liberty may enter into derivatives with the group’s banking operations. These derivatives are respectively accounted for as derivative assets and liabilities by the group’s banking and insurance operations on a fair value basis and are eliminated by the group on consolidation

reverse repurchase agreements: These lending arrangements are accounted for by the group’s banking operations within trading assets and loans and advances as appropriate. These intercompany transactions are eliminated by the group on consolidation.

The table that follows discloses the value of the above-mentioned transactions entered into between the group’s banking and insurance operations and IFRS risk disclosure tables within which such transactions have not been eliminated. The values on page 96, as included in the group’s banking operations’ liquidity analysis, have not been provided as they will not be able to be meaningfully compared to the fair value of the debt instruments as the liquidity risk disclosures are prepared on an undiscounted contractual cash flow basis.



Nature of instrument

Banking operations risk disclosure Insurance operations’ risk disclosures

Maturityanalysis

offinancialliabilities

by con-tractual

maturity

Tradingbook VaRand SVaR

analysis

Interest rate

sensi-tivity

Creditexposure

to debtinstru-ments

Financialasset

liquidity

Interestrate

exposure

Currencyexposureby majorcurrency

Maturity profiles

of the group’s

financial instru-ments

liabilities

Values

2016 2015

Ordinary shares

9 572 000ordinary shares

with a fair value of

R1.5 billion

10 501 000ordinary

shares with a fair

value of R1.2 billion X

Preference shares

R90 million fair value

R138 millionfair value X X X X X

Term deposits (including sub-ordinated bonds)

R11.9 billion fair value

R10.5 billion fair value X X X X X

Derivatives liabilities

R249 million fair value

R1 185 millionfair value X X X X X

Deposits and debt funding

R4.5 billion cash balance

R5.1 billion cash balance X X X X X

Reverse repurchase agreements R5 million R1 942 million X X

156

2016 Basel III

Rm

2015 Basel III

Rm Reference

CET I capital 114 401 112 099

Instruments and reserves CET I capital before regulatory adjustments 142 589 141 597

Directly issued qualifying common share capital plus related stock surplus 17 960 17 946 (c)Retained earnings 124 446 112 657 (d)Accumulated other comprehensive income (and other reserves) 183 10 994 (d)Directly issued capital subject to phase out from CET I

(only applicable to non-joint stock companies) Public sector capital injections grandfathered until 1 January 2018 Common share capital issued by subsidiaries and held by third parties

(amount allowed in group CET I) 4 488 5 896 (f)

Regulatory adjustments Less: total regulatory adjustments to CET I (32 676) (35 394)

Prudential valuation adjustments (40) Goodwill (net of related tax liability) (2 239) (4 152) (b)Other intangibles other than mortgage servicing rights

(net of related tax liability) (19 289) (17 773) (b)Deferred tax assets that rely on future profitability, excluding those arising

from temporary differences (net of related tax liability) (67) (399) (a)Cash flow hedge reserve 78 252 Shortfall of provisions to expected losses (2 118) (2 186) Securitisation gain on sale Gains and losses due to changes in own credit risk on fair valued liabilities (38) (179) Defined benefit pension fund net assets (461) (355) Investments in own shares (if not already netted of paid-in capital

on reported balance sheet) (70) (244) Reciprocal cross-holdings in common equity Investments in the capital of banking, financial and insurance entities that

are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold)

Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) (8 432) (10 358)

Mortgage servicing rights (amount above 10% threshold) Deferred tax assets arising from temporary differences (amount above

10% threshold, net of related tax liability) Amount exceeding the 15% threshold, relating to:

Significant investments in the common stock of financials Mortgage servicing rights Deferred tax assets arising from temporary differences

National-specific regulatory adjustments Regulatory adjustments applied to CET I in respect of amounts subject

to pre-Basel III treatment Regulatory adjustments applied to CET I due to insufficient additional

tier I and tier II to cover deductions

1 Disclosure based on prescribed SARB template. All blank line items are not applicable as at 31 December 2016 and 31 December 2015.

Annexure CComposition of capital1



2016 Basel III

Rm

2015 Basel III

Rm Reference

Additional tier I capital 3 619 4 139

Instruments Additional tier I capital before regulatory adjustments 3 619 4 139

Directly issued qualifying additional tier I instruments plus related stock surplus, classified as: 3 297 3 846 (e)

Equity under applicable accounting standards 3 297 3 846 (e)

Liabilities under applicable accounting standards Directly issued capital instruments subject to phase out

from additional tier I 5 495 5 495 (e)

Additional tier I instruments (and CET I instruments not included in common share capital) issued by subsidiaries and held by third parties (amount allowed in group additional tier I), including: 322 293

Instruments issued by subsidiaries subject to phase out

Regulatory adjustments Total regulatory adjustments to additional tier I capital

Investments in own additional tier I instruments Reciprocal cross-holdings in additional tier I instruments Investments in the capital of banking, financial and insurance entities

that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold)

Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

National-specific regulatory adjustments:

Regulatory adjustments applied to CET I in respect of amounts subject to pre-Basel III treatment

Regulatory adjustments applied to additional tier I due to insufficient additional tier I due to insufficient tier II to cover deductions

Tier I capital 118 020 116 238

158

RISK AND CAPITAL MANAGEMENT REPORT Annexure C Composition of capital continued

2016 Basel III

Rm

2015 Basel III

Rm Reference

Capital and provisions Tier II capital before regulatory adjustments 20 130 22 288

Directly issued qualifying tier II instruments plus related stock surplus

Directly issued capital instruments subject to phase out from tier II

Tier II instruments (and CET I and additional tier I instruments not included in common share capital and additional tier I instruments) issued by subsidiaries and held by third parties (amount allowed in group tier II), including: 17 773 20 118

Instruments issued by subsidiaries subject to phase out 12 610 15 457 (g)

Provisions 2 357 2 170

Regulatory adjustments Total regulatory adjustments to tier II capital Investments in own tier II instruments Reciprocal cross-holdings in tier II instruments Investments in the capital of banking, financial and insurance entities

that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold)

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

National-specific regulatory adjustments Regulatory adjustments applied to tier II in respect of amounts

subject to pre-Basel III treatment

Tier II capital 20 130 22 288

Total capital 138 150 138 526

Total RWA 883 179 944 039

RWA in respect of amounts subject to pre-Basel III treatment

Capital ratios and buffers CET I (as a percentage of RWA) 13.0 11.9 Tier I (as a percentage of RWA) 13.4 12.3 Total capital (as a percentage of RWA) 15.6 14.7 Institution-specific buffer requirement (minimum CET I requirement

plus capital conservation buffer plus countercyclical buffer requirements plus G-SIBs buffer requirement, expressed as a percentage of RWA) 6.9 6.5

Capital conservation buffer requirement 0.6 Bank-specific countercyclical buffer requirement 0.0 G-SIBs buffer requirement

Common equity tier I available to meet buffers (as a percentage of RWA) 6.1 5.3


2016 Basel III

Rm

2015 Basel III

Rm

National minima (if different from Basel III) National CET I minimum ratio (if different from Basel III minimum)

– excluding individual capital requirement (ICR) and domestic systemically important banks (D-SIB) % 6.9 6.5

National tier I minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB % 8.1 8.0

National total capital minimum ratio (if different from Basel III minimum) – excluding ICR and D-SIB % 10.4 10.0

Amounts below the threshold for deductions (before risk weighting) Non-significant investments in the capital of other financials 235 423Significant investments in the common stock of financials 12 283 12 246Mortgage servicing rights (net of related tax liability) Deferred tax assets arising from temporary differences (net of related tax liability) 3 257 2 432

Applicable caps on the inclusion of provisions in tier II Provisions eligible for inclusion in tier II in respect of exposures subject to

standardised approach (prior to application of cap) 2 357 2 170Cap on inclusion of provisions in tier II under standardised approach 2 922 3 410Provisions eligible for inclusion in tier II in respect of exposures subject to internal

ratings-based approach (prior to application of cap) Cap for inclusion of provisions in tier II under internal ratings-based approach 2 298 2 432

Capital instruments subject to phase-out arrangements (only applicable between 1 January 2018 and 1 January 2022) Current cap on CET I instruments subject to phase-out arrangements Amount excluded from CET I due to cap (excess over cap after redemptions

and maturities) Current cap on additional tier I instruments subject to phase-out arrangements Amount excluded from additional tier I due to cap (excess over cap after redemptions

and maturities) Current cap on tier II instruments subject to phase-out arrangements Amount excluded from tier II due to cap (excess over cap after redemptions

and maturities)



Ordinary share capital (including

share premium)Subordinated bond – SBK9

Subordinated bond – SBK14










31 December 2016 Issuer SBSA SBSA SBSA SBSA SBSA SBSA SBSA SBSA SBSA SBSA SBSA SBSA

Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) ZAG000029687 ZAG000091018 ZAG000092339 ZAG000093741 ZAG000097619 ZAG000100827 ZAG000100835 ZAG00121781 ZAG000123258 ZAG000126442 ZAG000126434

Governing law(s) of the instrument South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa

Regulatory treatment Transitional Basel III rules CET I Tier II Tier II Tier II Tier II Tier II Tier II Tier II N/A N/A N/A N/A

Post-transitional Basel III rules CET I Tier II Tier II Tier II Tier II Tier II Tier II Tier II Tier II Tier II Tier II Tier II

Eligible at solo/group/group & solo Solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo Group & solo

Instrument type (types to be specified by each jurisdiction)

Ordinary share capital and

premiumSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debt

Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) ZAR41 198 ZAR900 ZAR1 068 ZAR732 ZAR1 200 ZAR1 200 ZAR2 100 ZAR300 ZAR2 250 ZAR750 ZAR1 000 ZAR1 000

Par value of instrument ZAR1 ZAR1 500 ZAR1 780 ZAR1 220 ZAR2 000 ZAR2 000 ZAR3 500 ZAR500 ZAR2 250 ZAR750 ZAR1 000 ZAR1 000

Accounting classification

Equity attributable to ordinary

shareholderSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debt

Original date of issuance Ongoing 2006/04/10 2011/12/01 2012/01/23 2012/03/15 2012/07/30 2012/10/24 2012/10/24 2014/12/02 2015/01/28 2015/05/28 2015/05/28

Perpetual or dated Perpetual Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated

Original maturity date N/A 2023/04/10 2022/12/01 2022/01/23 2023/03/15 2024/07/30 2025/10/24 2024/10/24 2024/12/02 2025/01/28 2025/05/28 2027/05/28

Issuer call subject to prior supervisory approval No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Optional call date, contingent call dates and redemption amount (currency in Rm) N/A

2018/04/10 ZAR1 500

2017/12/01 ZAR1 780

2017/01/23 ZAR1 220

2018/03/15 ZAR2 000

2019/07/30 ZAR2 000

2020/10/24 ZAR3 500

2019/10/24 ZAR500

2019/12/02 ZAR2 250

2020/01/28 ZAR750

2020/05/28 ZAR1 000

2022/05/28 ZAR1 000

Subsequent call dates, if applicable N/A

2018/04/10or any

subsequent interest

payment date

2017/12/01 or any

subsequent interest

payment date

2017/01/23 or any

subsequent interest

payment date

2018/03/15 or any

subsequent interest

payment date

2019/07/30 or any

subsequent interest

payment date

2020/10/24 or any

subsequent interest

payment date

2019/10/24 or any

subsequent interest

payment date

2019/12/02 or any interest payment date

thereafter


thereafter


thereafter


thereafter

Coupons/dividends Fixed or floating dividend/coupon N/A Fixed Fixed Floating Floating Floating Floating Floating Floating Floating Floating Fixed

Coupon rate and any related index N/A8.40%

semi-annual9.66%

semi-annual JIBAR + 200 JIBAR + 210 JIBAR + 220 JIBAR + 235 JIBAR + 220 JIBAR + 350 JIBAR + 330 JIBAR + 35011.56%

semi-annual

Existence of a dividend stopper No No No No No No No No No No No No

Fully discretionary, partially discretionary or mandatory Full discretionary Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory

Existence of step up or other incentive to redeem No Yes No No No No No No No No No No

Non-cumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative

Convertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

If convertible, conversion trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, fully or partially N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, conversion rate N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, mandatory or optional conversion N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify instrument type convertible into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify issuer of instrument it converts into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Write-down feature N/A N/A N/A N/A N/A N/A N/A N/A Yes Yes Yes Yes

If write-down, write-down trigger(s) N/A N/A N/A N/A N/A N/A N/A N/APoint of

non-viabilityPoint of



non-viability

If write-down, full or partial N/A N/A N/A N/A N/A N/A N/A N/ARegulatory discretion

Regulatory discretion



If write-down, permanent or temporary N/A N/A N/A N/A N/A N/A N/A N/A Permanent Permanent Permanent Permanent

If temporary write-down, description of write-up mechanism N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Most subordinated Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured

Non-compliant transitioned features No Yes Yes Yes Yes Yes Yes Yes No No No No

If yes, specify non-compliant features N/A

Regulation 38(12)(a)(i)

Regulation 38(12)(a)(iv)(D)

Regulation 38(12)(a)(iv)(H)(ii)





Regulation 38(12) (a)(i)





Regulation 38(12) (a)(iv)(H)(ii)


Regulation 38(12) (a)(iv)(H)(ii) N/A N/A N/A N/A

Annexure DMain features disclosure template


RISK AND CAPITAL MANAGEMENT REPORT Annexure D Main features disclosure template continued




Ordinary share capital

(including sharepremium)

Cumulative preference

share capital

Non- cumulative preference

share capital

Subordinated bond –

Standard Bank Swaziland1


Stanbic Bank Botswana


Standard Bank Mozambique

Subordinatedbond –






31 December 2016

Issuer SBSA SBSA SBSA SBG SBG SBGStandard Bank

Swaziland LimitedStanbic Bank

Botswana LimitedStandard Bank

MozambiqueStandard Bank



MozambiqueUnique identifier (e.g. CUSIP, ISIN or Bloomberg identifier

for private placement) ZAG000130584 ZAG000135781 ZAG000135799SBK ZAE

000109815SBKP

ZAE000038881 SBPP ZAE000056339 SZD000551465 SBBL057 MZSTB0OC07S6 MZSTB0OC1516 MZSTB0OC1524 MZSTBOC1532Governing law(s) of the instrument South Africa South Africa South Africa South Africa South Africa South Africa Swaziland Botswana Mozambique Mozambique Mozambique MozambiqueRegulatory treatment Transitional Basel III rules N/A N/A N/A CET I Tier II Additional tier I N/A Tier II Tier II N/A N/A N/APost-transitional Basel III rules Tier II Tier II Tier II CET I Tier II Additional tier I N/A Tier II Tier II N/A N/A N/AEligible at solo/group/group & solo Group & solo Group & solo Group & solo Group Group Group Solo Group & Solo Group & Solo Solo Solo Solo

Instrument type (types to be specified by each jurisdiction)Subordinated

debtSubordinated

debtSubordinated

debt

Ordinary share capital and

premium

Preference share capital and

share premium


share premiumSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

bond Subordinated

bond Subordinated

bond Amount recognised in regulatory capital (currency in Rm, as of most

recent reporting date) ZAR880 ZAR1 200 ZAR500 ZAR17 960 ZAR4.8 ZAR3 297 E50ZAR62BWP80

ZAR8MT260 MT300 MT381 MT320

Par value of instrument ZAR880 ZAR1 200 ZAR500 10c ZAR1 1c E50ZAR103BWP80

ZAR51MT260 MT300 MT381 MT320

Accounting classificationSubordinated

debtSubordinated

debtSubordinated

debt

Equity attributable to ordinary

shareholders


share premium


share premiumSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

bond Subordinated

bond Subordinated

bond

Original date of issuance 2015/10/19 2016/04/25 2016/04/25 Ongoing 1969/11/25

2004/07/07, 2006/05/23, 2006/08/12 2014/12/14 2012/05/23 2007/06/29 2015/08/07 2015/09/04 2015/10/29

Perpetual or dated Dated Dated Dated Perpetual Perpetual Perpetual Dated Dated Dated Dated Dated DatedOriginal maturity date 2025/10/19 2026/04/25 2026/04/25 N/A N/A N/A 2024/12/14 2022/05/23 2017/06/29 2025/09/04 2025/09/04 2025/10/29Issuer call subject to prior supervisory approval Yes Yes Yes No No No Yes Yes Yes Yes Yes YesOptional call date, contingent call dates and redemption amount

(currency in Rm)2020/10/19

ZAR8802021/04/25

ZAR1 2002021/04/25

ZAR500 N/A N/A N/A2019/12/14

E502017/05/23

BWP80 N/A2020/09/04

MT3002020/09/04

MT3812020/10/29

MT320

Subsequent call dates, if applicable


thereafter


thereafter


thereafter N/A N/A N/A

15 December 2019 or any

interest payment date thereafter

On or after 23 May 2017 N/A

4 September 2020 or any


4 September 2020 or any


29 October 2020 or any


Coupons/dividends

Fixed or floating dividend/coupon Floating Floating Fixed N/A Fixed Floating Fixed

Fixed margin linked

to a floating base rate

Fixed margin linked


First coupon fixed rate,

thereafter fixed margin linked








Coupon rate and any related index JIBAR + 350 JIBAR + 40012.25%

semi-annual N/A 6.50%77% of prime interest rate 8.75%

91 Day BoBC + 150bps WA + 50bps

12%SLF + 450bps

12%SLF + 450bps

12%SLF + 450bps

Existence of a dividend stopper No No No No No No No No No No No NoFully discretionary, partially discretionary or mandatory Mandatory Mandatory Mandatory Full discretionary Full discretionary Full discretionary Mandatory Mandatory Mandatory Mandatory Mandatory MandatoryExistence of step up or other incentive to redeem No No No No No No Yes Yes Yes Yes Yes NoNon-cumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulativeConvertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertibleIf convertible, conversion trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AIf convertible, fully or partially N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AIf convertible, conversion rate N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AIf convertible, mandatory or optional conversion N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AIf convertible, specify instrument type convertible into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AIf convertible, specify issuer of instrument it converts into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AWrite-down feature Yes Yes Yes N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, write-down trigger(s)Point of



non-viability N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, full or partialRegulatory discretion


Regulatory discretion N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, permanent or temporary Permanent Permanent Permanent N/A N/A N/A N/A N/A N/A N/A N/A N/AIf temporary write-down, description of write-up mechanism N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/APosition in subordination hierarchy in liquidation (specify instrument

type immediately senior to instrument) Senior unsecured Senior unsecured Senior unsecuredNon-cumulative

preference sharesSubordinated

debtCumulative

preference shares Senior unsecured Senior unsecured Senior unsecured Senior debt Senior debt Senior debtNon-compliant transitioned features No No No No Yes Yes N/A Yes Yes N/A N/A N/A

If yes, specify non-compliant features N/A N/A N/A N/ARegulation 38(11)

(b)(i)Regulation 38(11)

(b)(i)


Regulation 38(12) (a)(iv)(D)







Stanbic Bank Kenya


Stanbic Bank Ghana1

Subordinated loan –

Standard Bank Mauritius


Standard Bank Angola


Stanbic Bank IBTC


Standard Bank Zambia


Stanbic Bank DRC


Stanbic BankIBTC


Standard Bank Namibia

Subordinatedloan –

Stanbic BankBotswana


Stanbic BankZambia


Standard BankNamibia

31 December 2016

IssuerStanbic

Bank KenyaStanbic Bank

Ghana LimitedStandard Bank

MauritiusStandard Bank

AngolaStanbic Bank

IBTCStandard Bank

ZambiaStanbic Bank

DRCStanbic Bank

IBTCStandard Bank

NamibiaStanbic Bank

BotswanaStanbic Bank

ZambiaStandard Bank

Namibia

Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) KE4000002438 SBG001 SBSA SBSA SBSA SBSA SBSA NGSB20245181 NA000A1ZRK11 SBSA ZM2000000272 SBSA

Governing law(s) of the instrument Kenya Ghana Mauritius Angola Nigeria Zambia DRC Congo Nigeria Namibia Botswana Zambia Namibia

Regulatory treatment Transitional Basel III rules N/A Tier II Tier II N/A N/A Tier II N/A N/A N/A N/A N/A N/A

Post-transitional Basel III rules N/A Tier II Tier II N/A N/A Tier II N/A N/A N/A N/A N/A N/A

Eligible at solo/group/group & solo Solo Group & solo Solo Solo Solo Solo Solo Solo Solo Solo Solo Solo


debtSubordinated

debtSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

debtSubordinated

debtSubordinated

loanSubordinated

debtSubordinated

loan

Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) KES4 000

ZAR17GHS7 USD25 AOA4 973 NGN12 576 ZMK148 CDF3 496 NGN15 440 NAD100 BWP300 ZMK36.7 NAD100

Par value of instrument KES4 000ZAR28GHS7 USD25 AOA4 973 NGN12 576 ZMK148 CDF3 496 NGN15 440 NAD100 BWP300 ZMK36.7 NAD100


debtSubordinated

debtSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

debtSubordinated

debtSubordinated

loanSubordinated

debtSubordinated

loan

Original date of issuance 2014/12/15 2012/01/23 2012/12/03 2013/05/23 2013/04/30 2016/12/13 2014/05/20 2014/09/30 2014/10/23 2014/11/28 2014/10/31 2015/04/30

Perpetual or dated Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated

Original maturity date 2021/12/08 2022/01/23 2022/12/04 2023/05/23 2025/05/31 2026/12/13 2024/05/20 2024/09/30 2024/10/23 2024/11/28 2024/10/31 2025/04/30

Issuer call subject to prior supervisory approval Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Optional call date, contingent call dates and redemption amount (currency in Rm)

June 2020KES4 000

2017/01/23GHS7

2017/12/04 USD25

2018/05/23 AOA4 973

2020/05/31NGN12 576

2021/12/13ZMK148

2019/05/20 CDF3 496

2019/10/01NGN15 440

2019/10/24NAD100

2019/11/28BWP300

2019/11/01ZMK36.7

2020/04/30NAD100


June 2020 or any


23 January 2017 or any


5 December 2017 or any


23 May 2018 or any interest

payment date thereafter

31 May 2020 or any interest payment date

thereafter

13 December2021 or any

interest paymentdate thereafter


thereafter


interest paymentdate thereafter



29 November or any interest payment date

thereafter

1 November 2019 or any



thereafter

Coupons/dividends

Fixed or floating dividend/coupon Fixed

Fixed margin linked to a

floating base rate

Fixed marginlinked to a

floatingbase rate


floatingbase rate


floating base rate


floating base rate


floatingbase rate Fixed Fixed Fixed


floatingbase rate


floatingbase rate

Coupon rate and any related index 12.95%365

T-Bill + 350bps LIBOR + 300bps LIBOR + 360bps LIBOR + 360bps LIBOR + 532bps LIBOR + 975bps 13.25% 9.00% 10.25%182-day

t-bill + 275 bps JIBAR + 350bps

Existence of a dividend stopper No No No No No No No No No No No No

Fully discretionary, partially discretionary or mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory

Existence of step up or other incentive to redeem No Yes Yes Yes Yes Yes Yes No Yes No No Yes

Non-cumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative

Convertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

If convertible, conversion trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, fully or partially N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, conversion rate N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, mandatory or optional conversion N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify instrument type convertible into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify issuer of instrument it converts into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Write-down feature N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, write-down trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, full or partial N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, permanent or temporary N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If temporary write-down, description of write-up mechanism N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Senior unsecured Senior unsecured Senior debt Senior debt Senior debt Senior debt Senior debt Senior unsecured Senior unsecured Senior debt Senior unsecured Senior debt

Non-compliant transitioned features N/A Yes Yes N/A N/A Yes N/A N/A N/A N/A N/A N/A

If yes, specify non-compliant features













Standard BankLesotho


Stanbic BankGhana


Stanbic BankUganda


Stanbic BankGhana


Standard BankOffshore Group











31 December 2016

IssuerStandard Bank

LesothoStanbic Bank

GhanaStanbic Bank

UgandaStanbic Bank

GhanaStandard Bank

Offshore GroupStandard Bank





Offshore Group

Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) SBSA SBSA SBSA SBSA

Standard Bank Offshore Group

Standard Bank Offshore Group SBSA

Standard BankGroup

International LtdStandard Bank


Offshore Group

Governing law(s) of the instrument Lesotho Ghana Uganda Ghana IOM Ltd IOM Ltd Jersey Jersey Jersey Jersey

Regulatory treatment Transitional Basel III rules N/A N/A N/A N/A Tier II Tier II Tier II Tier II Tier II Tier II

Post-transitional Basel III rules N/A N/A N/A N/A Tier II Tier II Tier II Tier II Tier II Tier II

Eligible at solo/group/group & solo Solo Solo Solo Solo Solo Solo Solo Solo Solo Solo


loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debt

Amount recognised in regulatory capital (currency in Rm, as of most recent reporting date) LES50 GHS54 UGX72 087 GHS64 GBP8 GBP3 GBP10 GBP6 GBP10 GBP11

Par value of instrument LES50 GHS54 UGX72 087 GHS64 GBP8 GBP3 GBP10 GBP6 GBP10 GBP11


loanSubordinated

loanSubordinated

loanSubordinated

loanSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debtSubordinated

debt

Original date of issuance 2015/08/03 2015/11/17 2016/03/31 2016/11/28 2011/06/09 2011/06/09 2010/06/10 2011/06/15 2011/06/15 2011/06/29

Perpetual or dated Dated Dated Dated Dated Dated Dated Dated Dated Dated Dated

Original maturity date 2025/08/03 2025/11/17 2026/03/31 2026/11/28 2021/06/30 2025/06/30 2025/06/30 2021/06/30 2025/06/30 2021/06/30

Issuer call subject to prior supervisory approval Yes Yes Yes Yes N/A N/A N/A N/A N/A N/A

Optional call date, contingent call dates and redemption amount (currency in Rm)

2020/08/03LES50

2020/11/18GHS54

2021/04/01UGX72 087

2021/11/28GHS64 N/A N/A N/A N/A N/A N/A


4 August 2020or any interest payment date

thereafter

18 November 2020 or any


1 April 2021 or any interest payment date

thereafter

29 November2021 or any

interest payment date thereafter N/A N/A N/A N/A N/A N/A

Coupons/dividends

Fixed or floating dividend/coupon Fixed


floatingbase rate


floatingbase rate


floating base rate Floating Floating Floating Floating Floating Floating

Coupon rate and any related index 11.89% LIBOR + 430bps LIBOR + 590bps LIBOR + 532bps

25bps over LIBOR,

payable 6 monthly

25bpsover LIBOR,

payable 3 monthly

390bpsover LIBOR,

payable 3 monthly

25bpsover LIBOR,

payable 3 monthly

LIBOR + 390bps,

payable 3 monthly

25bpsover LIBOR,

payable3 monthly

Existence of a dividend stopper No No No No No No No No No No

Fully discretionary, partially discretionary or mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory

Existence of step up or other incentive to redeem Yes Yes Yes Yes No No No No No No

Non-cumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative

Convertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

If convertible, conversion trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, fully or partially N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, conversion rate N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, mandatory or optional conversion N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify instrument type convertible into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If convertible, specify issuer of instrument it converts into N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Write-down feature N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, write-down trigger(s) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, full or partial N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If write-down, permanent or temporary N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

If temporary write-down, description of write-up mechanism N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Senior debt Senior debt Senior debt Senior debt Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured

Non-compliant transitioned features N/A N/A N/A N/A Yes Yes Yes Yes Yes Yes

If yes, specify non-compliant features Regulation 38(12)

(a)(i)Regulation 38(12)





(a)(i)




Annexure EPillar 3 disclosure guide

OV1 LI1 LI2 General AFS

Table description Row/column descriptionOverviewof RWA

Differences between accounting and regulatory

scopes of consolidation and mapping of

financial statementswith regulatory risk categories

Main sources of differences between regulatory exposure

amounts and carrying values in

financial statementsOther tables

that cross linkLink to SOFP

13 27 28

AFS SOFP Balance sheet notes LI1

Carrying value per published financial statements LI2 Impairments SOFP Impairments

CR5 Standardised approach – exposures by asset classes and risk weights Total credit exposures amount – post-CCF LI2Standardised approach CR4

RWA on- and-off balance sheet post-CCF

CR6 IRB – credit risk exposures by portfolio and PD range RWA on- and-off balance sheet pre-CCF OV1 Credit risk of which IRB LI2

EAD post-CRM and post-CCF

CR8CR7

RWAActual RWA

CR1 Credit quality of assets

Defaulted exposure CR2Defaulted loans and debt securities

Total exposureCRB (e)

Total gross exposure

CR2 Changes in stock of defaulted loans and debt securities Defaulted loans and debt securities CR1 Defaulted exposures

CRB (e)

Exposures by type of asset and industryExposures by type of asset and geographic regionExposures by contractual maturity

RWA on- and-off balance sheet pre-CCF total gross exposure LI2

Off-balance sheet exposure CR1 Total exposure SOFP

Specific credit impairments and impaired exposures

CR3 CRM techniques – overviewLoans Debt securities CR1 Net value (on/Bs)

CR7 IRB – Effect on RWA of credit derivatives used as CRM techniques Actual RWA OV1 Credit risk of which IRB

CR8 CR6

RWA RWA

CR4 Standardised approach – credit risk exposure and CRM effectsRWARWA on- and-off balance sheet pre-CCF OV1

Credit risk of which standardised approach LI2

Standardised approach CR5

Total credit exposures amount

CR8 RWA flow statements of credit risk exposures under IRB RWA OV1 Credit risk of which IRB

CR7 CR6

Actual RWA RWA

CCR1 Analysis of CCR exposure by approach

PFE Replacement costRWA OV1 RWACCR

LI1 Derivative assetsLI2 CCR framework

CCR2 RWA

CCR2 CVA capital charge RWA OV1 RWACCR CCR1 RWA

CCR3 Standardised approach of CCR exposures by regulatory portfolio and risk weights Total credit exposures amount LI2 SA – CCR CCR1 RWA

CCR4 IRB – CCR exposures by portfolio and PD scale EAD Post CRM LI2 CCR – IRB approach CCR1 EAD post CRM

SEC1 Securitisation exposures in the banking book SOFPSecuritisation exposure

SEC3Securitisation exposures in the banking book and associated regulatory capital requirements – bank acting as originator or as sponsor

IRB RBA RWA OV1 Securitisation of which RBA

IRB SFA RWA OV1 Securitisation of which SFA

MR1 Market risk under the standardised approach OV1

Market risk of which standardised approach

MR2 RWA flow statements of market risk exposures under IMA VaR and SVaR RWA OV1 Market risk of which IMM

CR10 IRB (equities under the simple risk weight method) RWA OV1 Equity positions in banking book LI2 Equity risk – IRB


Annual financial statements

The consolidated and separate annual financial statements were audited in terms of the Companies Act 71 of 2008.

The preparation of the group’s and separate annual financial statements were supervised by the group financial director, Arno Daehnke BSc, MSc, PhD, MBA, AMP.

A summary of these results was made publicly available on 2 March 2017.


172 Directors’ responsibility for financial reporting

172 Group secretary’s certification

173 Report of the group audit committee

176 Directors’ report

179 Independent auditors’ report

190 Statement of financial position

191 Income statement

192 Statement of other comprehensive income

193 Statement of cash flows

194 Statement of changes in equity

198 Accounting policy elections

201 Key management assumptions

209 Notes to the annual financial statements

281 Standard Bank Group Limited – company annual financial statements

290 Annexure A – subsidiaries, consolidated and unconsolidated structured entities

306 Annexure B – associates and joint ventures

311 Annexure C – group share incentive schemes

316 Annexure D – emoluments and share incentives of directors and prescribed officers

330 Annexure E – detailed accounting policies

378 Annexure F – six-year review

384 Annexure G – third-party funds under management

172


In accordance with the Companies Act 71 of 2008 (Companies Act), the directors are responsible for the preparation of the annual financial statements. These annual financial statements conform to IFRS as issued by the International Accounting Standards Board (IASB), and fairly present the affairs of Standard Bank Group Limited and Standard Bank Group as at 31 December 2016, and the net income and cash flows for the year then ended.

The directors are ultimately responsible for the internal controls of the company and the group. Management enables the directors to meet these responsibilities. Standards and systems of internal controls are designed, implemented and monitored by management to provide reasonable assurance of the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability for shareholder investments and company and group assets. Systems and controls include the proper delegation of responsibilities within a clearly defined framework, effective accounting procedures and adequate segregation of duties.

It is the responsibility of the independent auditors to report on the fair presentation of the financial statements.

Based on the information and explanations provided by management and the group’s internal auditors, the directors are of the opinion that the internal financial controls are adequate and that the financial records may be relied upon for preparing the financial statements in accordance with IFRS and to maintain accountability for the company and the

group’s assets and liabilities. Nothing has come to the attention of the directors to indicate that a breakdown in the functioning of these controls, resulting in material loss to the company and the group, has occurred during the year and up to the date of this report.

The directors have a reasonable expectation that the company and the group will have adequate resources to continue in operational existence and as a going concern in the financial year ahead. The 2016 annual financial statements which appear on pages 190 to 377 and specified sections of the risk and capital management report were approved by the board on 1 March 2017 and signed on its behalf by:

Thulani GcabasheChairman1 March 2017

Ben Kruger Sim TshabalalaGroup chief executive Group chief executive1 March 2017 1 March 2017

Directors’ responsibility for financial reporting

Compliance with the Companies ActIn terms of the Companies Act and for the year ended 31 December 2016, I certify that the company has filed all returns and notices required by the Companies Act with the Companies and Intellectual Property Commission and that all such returns and notices are true, correct and up to date.

Zola StephenGroup secretary1 March 2017

Group secretary’s certification


This report is provided by the group audit committee, in respect of the 2016 financial year of Standard Bank Group Limited, in compliance with section 94 of the Companies Act, as amended from time-to-time, and in terms of the JSE Listings Requirements. The committee’s operation is guided by a detailed mandate that is informed by the Companies Act, the Banks Act and the King Code of Governance Principles and is approved by the board. Section 94(2) of the Companies Act determines that, at each annual general meeting, a public company must elect an audit committee comprising at least three members. In view of the exemption granted in section 94(1), this section does not apply to the group audit committee and, accordingly, the appointment of its members is approved annually by the board. Information on the membership and composition of the audit committee, its terms of reference and its activities is provided in greater detail in the corporate governance statement within the governance and remuneration report.

Execution of functionsThe audit committee has executed its duties and responsibilities during the financial year in accordance with its mandate as it relates to the group’s accounting, internal auditing, internal control and financial reporting practices.

During the year under review, the committee, among other matters, considered the following:

In respect of the external auditors and the external audit:

• considered and recommended the reappointment of KPMG Inc. and PricewaterhouseCoopers Inc. as joint external auditors for the financial year ended 31 December 2016, in accordance with all applicable legal requirements

• approved the external auditors’ terms of engagement, the audit plan and budgeted audit fees payable

• reviewed the audit process and evaluated the effectiveness of the audit, taking into consideration the results of an external audit assessment performed by the finance function

• assessed and obtained assurance from the external auditors that their independence was not impaired

• reviewed and approved the annual renewal of the group’s Use of Joint Group Auditors for Non-Audit Services policy

• through the chairman, approved proposed contracts with the external auditors for the provision of non-audit services and pre-approved proposed contracts with the external auditors for the provision of non-audit services above an agreed threshold amount

• considered the nature and extent of all non-audit services provided by the external auditors

• monitored that the non-audit service fees for the year ended 31 December 2016 were within the threshold set by the group audit committee for such engagements

• confirmed that no reportable irregularities were identified and reported by the external auditors in terms of the Auditing Profession Act 26 of 2005

• considered reports from subsidiary audit committees and from management through the group’s governance structures on the activities of subsidiary entities.

In respect of the financial statements:

• confirmed the going concern basis for the preparation of the interim and annual financial statements

• examined and reviewed the interim and annual financial statements prior to submission and approval by the board

• reviewed reports on the adequacy of provisions for performing and non-performing loans and impairment of other assets and considered feedback from the external auditors concerning any changes that were made to the models applied by management in determining charges for and levels of impairment of performing loans

• ensured that the annual financial statements fairly present the financial position of the company and of the group as at the end of the financial year and the results of operations and cash flows for the financial year and considered the basis on which the group was determined to be a going concern

• ensured that the annual financial statements conform with IFRS

• considered accounting treatments, significant unusual transactions and accounting judgements

• considered the appropriateness of the accounting policies adopted and changes thereto

• considered and made recommendations to the board on the interim and final dividend payments to shareholders

• noted that there were no material reports or complaints received concerning accounting practices, internal audit, internal financial controls, content of annual financial statements, internal controls and related matters

• reviewed and discussed the independent auditors’ report.

In accordance with revised International Standards on Auditing, independent auditors’ reports for financial years ending on or after 15 December 2016 are required to incorporate the reporting of key audit matters. When reviewing the external audit plan for the financial year ending 31 December 2016, the group audit committee considered a

Report of the group audit committee

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ANNUAL FINANCIAL STATEMENTS Report of the group audit committee continued

• over the course of the year, met with the chief audit officer, the group chief compliance officer, the head of financial crime control, the group financial director, management and the external auditors

• considered quarterly reports from the group’s internal financial controls’ committee

• reviewed any significant legal and tax matters that could have a material impact on the financial statements.

In respect of legal, regulatory and compliance requirements:

• reviewed and approved the annual compliance mandate and compliance plan

• reviewed, with management, matters that could have a material impact on the group

• monitored compliance with the Companies Act, the Banks Act, other applicable legislation and governance codes and reviewed reports from internal audit, external auditors and compliance detailing the extent of this

• noted that no complaints were received through the group’s ethics and fraud hotline concerning accounting matters, internal audit, internal financial controls, contents of financial statements, potential violations of the law and questionable accounting or auditing matters.

In respect of risk management and information technology:

• considered and reviewed reports from management on risk management, including fraud and information technology risks as they pertain to financial reporting and the going concern assessment

• considered updates on key internal and external audit findings in relation to the IT control environment, significant IT programmes and IT intangible assets

• the chairman is a member of and attended the risk and capital management committee and the group IT committee meetings held during the year under review

• Peter Sullivan, an independent non-executive board member and member of the group audit committee was the chairman of the group IT committee during 2016. With effect from 30 November 2016, John Vice, who is also a member of the group audit committee, was appointed as chairman of the group IT committee.

In respect of the coordination of assurance activities, the committee:

• reviewed the plans and work outputs of the external and internal auditors, as well as compliance and financial crime control, and concluded that these were adequate to address all significant financial risks facing the business

preliminary view by the external auditors of key audit matters that might arise during the course of the audit, which in their judgement, were of significance to the audit of the financial statements. As part of the group audit committee’s responsibilities, notably its review of financial results, reports from internal and external audit, finance and internal financial control reports, the group’s accounting policies, as well as the annual financial statements, the audit committee concluded that it had adequately considered the key audit matters as reported in the independent auditors’ report.

In respect of the annual integrated report:• recommended the annual integrated report to the board

for approval• evaluated management’s judgements and reporting

decisions in relation to the annual integrated report and ensured that all material disclosures are included

• reviewed forward-looking statements, financial and sustainability information.

In respect of internal control, internal audit and financial crime control:• reviewed and approved the annual internal audit charter

and audit plan and evaluated the independence, effectiveness and performance of the internal audit department and compliance with its charter

• considered reports of the internal and external auditors on the group and company’s systems of internal control, including internal financial controls, and maintenance of effective internal control systems

• reviewed significant issues raised by the internal audit processes and the adequacy of corrective action in response to such findings

• noted that there were no significant differences of opinion between the internal audit function and management

• assessed the independence and effectiveness of the internal audit function and adequacy of the available internal audit resources and found them to be satisfactory

• considered the routine independent quality assurance review of audit execution, the results of which confirmed that internal audit had generally conformed with the International Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing

• based on the above, the committee formed the opinion that, at the date of this report, there were no material breakdowns in internal control, including internal financial controls, resulting in any material loss to the group

• reviewed and approved the mandate of financial crime as an independent risk function

• discussed significant financial crime matters and control weaknesses identified


• considered the expertise, resources and experience of the finance function and the senior members of management responsible for this function and concluded that these were appropriate

• considered the appropriateness of the experience and expertise of the group financial director and concluded that these were appropriate.

Independence of the external auditors The audit committee is satisfied that KPMG Inc. and PricewaterhouseCoopers Inc. are independent of the group and company. This conclusion was arrived at, inter alia, after taking into account the following factors:

the representations made by KPMG Inc. and PricewaterhouseCoopers Inc. to the audit committee

the auditors do not, except as external auditors or in rendering permitted non-audit services, receive any remuneration or other benefits from the group

the auditors’ independence was not impaired by any consultancy, advisory or other work undertaken by the auditors

the auditors’ independence was not prejudiced as a result of any previous appointment as auditor

the criteria specified for independence by the Independent Regulatory Board for Auditors and international regulatory bodies were met.

In conclusion, the audit committee has complied with its legal, regulatory and governance responsibilities as set out in its mandate.

On behalf of the group audit committeeg p

Richard DunneChairman, group audit committee28 February 2017

176


Nature of businessStandard Bank Group Limited is the ultimate holding company for the group’s interests and is a leading African financial services group with South African roots. The group is South Africa’s largest banking group by assets and currently operates in 20 countries in sub-Saharan Africa. Our strategic position enables us to connect Africa to other selected emerging markets and pools of capital in developed markets.

Headquartered in Johannesburg, South Africa, the group’s primary listing is on the JSE and its secondary listing is on the Namibian Stock Exchange (NSX). Other subsidiary entities are listed on exchanges in Kenya, Malawi, Nigeria and Uganda.

A simplified group organogram with principal subsidiaries is shown in annexure A.

Group resultsGroup headline earnings and headline earnings per share increased by 4% to R23 009 million and 4% to 1 440.1 cents respectively. Net asset value per share increased to 9 442 cents (2015: 9 433 cents) and group return on equity decreased slightly to 15.3% (2015: 15.6%). A final dividend of 440 cents per share has been declared bringing the total dividend declared for the year to 780 cents per share (2015: 674 cents per share).

Share capitalOrdinary sharesDuring the year, 2 646 456 ordinary shares (2015: 3 813 706 ordinary shares) were issued in terms of equity compensation. Surplus capital was used to repurchase 2 477 472 ordinary shares (2015: 3 923 373 ordinary shares) to counteract the dilutive impact of the shares issued under the equity compensation plans.

Registered officeThe address of the registered office is, 9th Floor, Standard Bank Centre, 5 Simmonds Street, Johannesburg 2001.

InsuranceThe group protects itself against financial loss by maintaining banker’s comprehensive crime and professional indemnity cover. The insurance terms and conditions are reviewed by the group insurance committee annually to ensure they are ‘fit-for-purpose’ against the group’s risk exposures.

Shareholder analysisShareholders at the close of the financial year, holding beneficial interests in excess of 5% of the company’s issued share capital, determined from the share register and investigations conducted on our behalf, were as follows:

% held

2016 2015

Ordinary sharesIndustrial and Commercial Bank

of China Limited (ICBC) 20.1 20.1Government Employees Pension

Fund (PIC) 11.8 12.56.5% preference sharesOld Sillery Proprietary Limited 9.1 9.1L Lombard 8.9 8.8DJ Saks 7.5 7.5Estate Late G Spitz 7.9 6.8DF Foster 5.2 5.2MT Goulding 6.1 4.6

Events during 2016Foreign currency translation reserve (FCTR)During the year ended 31 December 2016, the group’s share of FCTR decreased by R11.4 billion (2015: increase of R2.9 billion). This decrease was partly attributable to the weakening of the Nigerian naira (79%), Mozambican metical (69%), and pound sterling (35%) against the South African rand which resulted in an FCTR loss of R3.6 billion, R1.4 billion and R1.7 billion respectively.

Impairment of Stanbic IBTC Holdings PLC (SIBTC Holdings) (Nigeria)The group’s goodwill materially comprises of goodwill relating to the group’s investment in SIBTC Holdings which is denominated in Nigerian naira. The group, in terms of IFRS, reviewed its investment in Nigeria for impairment due to the weakening of the Nigerian naira which resulted in an impairment to the group’s investment in SIBTC Holdings of R482 million (2015: R333 million).

Japan fraud incident As announced by the group on 23 May 2016 on SENS, the group’s South African banking operations were the victim of a sophisticated, coordinated fraud incident that involved the withdrawal of cash using a number of fictitious cards at various ATMs in Japan. There was no financial loss to the

Directors’ reportfor the year ended 31 December 2016


allegations surrounding material misstatements of its 2013 and 2014 financial statements (as referred to in the group’s announcements on SENS dated 30 October 2015 and 4 November 2015) and the associated legal proceedings, it would be unable to complete its 2015 audit and issue its 2015 annual report before 31 March 2016.

In November 2016, SIBTC Holdings reached a settlement agreement with the FRC and the National Office for Technology Acquisition and Promotion. This agreement entailed the FRC removing any restriction on the external auditors from issuing their opinion on the financial statements of the entities within the SIBTC group and a mutual modification of SIBTC Holdings’ legal applications to the court. The FRC has approved all financial statements prepared by the SIBTC group and the audited 2015 SIBTC Holdings financial statements were released to the market on 21 December 2016.

Post balance sheet eventICBCS capital injectionOn 13 January 2017, Standard Bank London Holdings Limited (SBLH), a wholly owned subsidiary of Standard Bank Group Limited (SBG) and ICBC jointly and pro rata to their shareholdings in ICBC Standard Bank Plc (ICBCS) injected additional regulatory capital in the form of ordinary equity into ICBCS. SBLH’s pro rata portion of this capital injection amounted to USD106 million (R1.44 billion).

This capital was provided in terms of the obligations of ICBC and SBLH under the shareholders’ agreement of ICBCS pursuant to increasing regulatory capital requirements relating to ICBCS and was provided after the receipt by both of ICBCS’ shareholders of the requisite approvals for such capital to be provided.

group’s customers. Swift action was taken to contain the matter and the gross loss (prior to any potential recoveries) was R300 million. The internal investigation has been concluded and remediation is underway to strengthen current controls.

Liberty Two DegreesLiberty Group Limited (LGL) holds and invests, on behalf of policyholders and shareholders, investments in properties in a ring-fenced on-balance sheet asset portfolio, Liberty Property Portfolio (LPP). Liberty Two Degrees (L2D), a Real Estate Investment Trust (REIT), was listed on the JSE on 6 December 2016, raising R3.8 billion. L2D provided a solution to address the group’s policyholders’ requirement to trade in and out of Liberty’s property exposure thereby creating flexibility and liquidity.

In terms of the transaction, Liberty sold undivided shares in each individual property that were held in the LPP to L2D. Liberty is currently the most significant investor in L2D, with a 67% economic interest as at 31 December 2016. At both a Liberty and group level, L2D is required to be consolidated. As a result of consolidating L2D, the group continues to recognise the fair value of L2D’s underlying assets. As the group’s policyholder liabilities are now linked to L2D’s units, the policyholder liability valuation is calculated as the aggregate unit value of L2D rather than the fair value of its underlying assets. On 31 December 2016, L2D traded at a premium to its net asset value which resulted in a negative headline earnings impact of R167 million (post tax and non-controlling shareholders’ interest) at a group level.

Stanbic IBTC Holdings PLC financial statementsSIBTC Holdings advised its shareholders through the Nigerian Stock Exchange (NSE) on 24 March 2016 that, due to the Financial Reporting Council of Nigeria’s (FRC)

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ANNUAL FINANCIAL STATEMENTS Directors’ report continued

DISTRIBUTIONS

Ordinary shares

6.5% cumulative preference shares

(first preference shares)

Non-redeemable, non-cumulative,

non-participating preference shares

(second preference shares)

Interim2015Dividend per share (cents) 303,00 3,25 353,202016Dividend number 94 94 24Dividend per share (cents) 340,00 3,25 396,13Record date in respect of the

cash dividendFriday, 16 September

2016Friday, 9 September

2016Friday, 9 September

2016Dividend cheques posted and

CSDP1/broker accounts credited/updated (payment date)

Monday, 19 September2016



Final2015Dividend per share (cents) 371,00 3,25 369,762016Dividend number 95 95 25Dividend per share (cents) 440,00 3,25 407,57Record date in respect of the

cash dividendFriday, 31 March

2017Friday, 24 March

2017Friday, 24 March

2017Dividend cheques posted and

CSDP1/broker accounts credited/updated (payment date)

Monday, 3 April2017

Monday, 27 March2017

Monday, 27 March2017

1 Central Securities Depository Participant.

Change in group directorateThe following changes in directorate took place during the 2016 financial year end up to 1 March 2017:

APPOINTMENTS

Dr ML Oduor-Otieno As director 1 January 2016

Dr A Daehnke As financial director 1 May 2016

JH Maree As deputy chairman 21 November 2016

GJ Fraser-Moleketi As director 21 November 2016

GMB Kennealy As director 21 November 2016

NNA Matyumza As director 21 November 2016

JM Vice As director 21 November 2016

RETIREMENTS

SP Ridley As financial director 30 April 2016


To the shareholders of Standard Bank Group Limited Report on the audit of the consolidated and separate financial statementsOur opinionThe Standard Bank Group Limited’s group (“consolidated”) and company’s (“separate”) financial statements, set out on pages 190 to 377, comprise:

the consolidated and separate statements of financial position as at 31 December 2016

the consolidated and separate income statements and statements of comprehensive income for the year then ended

the consolidated and separate statements of changes in equity for the year then ended

the consolidated and separate statements of cash flows for the year then ended

the accounting policy elections, key management assumptions and notes to the consolidated and separate financial statements, which include a summary of significant accounting policies

annexures A to E.

Certain required disclosures have been presented in the risk and capital management report which has been identified as audited.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects the consolidated and separate financial position of Standard Bank Group Limited (the company) and its subsidiaries (together the group) as at 31 December 2016, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.

Basis of opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ responsibilities for the audit of the consolidated and separate financial statements section of our report.

We are independent of the group and company in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B).

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independent auditors’ report

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ANNUAL FINANCIAL STATEMENTS Independent auditors’ report continued

Key audit mattersKey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated and separate financial statements. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

LEVEL KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE MATTER

Group – consolidated financial statements

CREDIT IMPAIRMENT LOSSES ON LOANS AND ADVANCES

(Refer to the key management assumptions note, note 6 loans and advances, note 36 credit impairment charges in the annual financial statements and the credit risk section of the risk and capital management report.)

Credit impairments relating to loans and advances, disclosed in note 6 loans and advances, represent management’s best estimate of the losses incurred within the loan portfolios at the balance sheet date. Credit impairments are calculated on a portfolio basis for loans of a similar nature and on an individual basis for significant loans.

The key management assumptions note in the financial statements sets out the basis, including the related judgements, for the calculation of portfolio and specific loan impairments. The impairment calculations are considered separately for Corporate and Investment Banking and Personal and Business Banking, as described further below.

These impairment provisions are material to the group in terms of the value, subjective nature of the impairment calculations and the effect of these on risk management processes and operations of the group. This has resulted in this matter being identified as a matter of most significance in the current year audit of the consolidated financial statements.

Our audit included considering the appropriateness of accounting policies and assessed the loan impairment methodologies across the group in order to compare these with the requirements of IAS 39 Financial Instruments: Recognition and Measurement (IAS 39).

Corporate and Investment Banking (Specific loan impairments) In Corporate and Investment Banking, a significant portion of the loans are assessed on an individual basis. Significant judgements, estimates and assumptions have been made by management in respect of:

determining if the loan is impaired adequacy and recoverability of collateral expected cash flows to be collected timing of the future cash flows.

Corporate and Investment Banking (Specific loan impairments)We have obtained an understanding and tested the relevant controls relating to the approval of credit facilities, the subsequent monitoring and remediation of exposures including collateral management and the evaluation of credit risk ratings.

We inspected legal agreements and supporting documentation to confirm the existence and legal right to collateral. We assessed collateral valuation techniques against the group’s valuation guidelines.

We have assessed management’s process for identifying specific impairment based on IAS 39 guidelines relating to impairment indicators, the current macro-economic and global environment, industry factors and client specific factors identified from the review of credit records.

Where specific impairments have been raised, we have considered the impairment indicators, uncertainties and assumptions made by management in their assessment of the recoverability of the exposure. For a sample of impaired loans, we have independently recalculated the impairment losses based on our assessment of the expected cash flows and recoverability of collateral.

We also selected a sample of loans and advances that had not been identified as impaired and formed an independent view about the appropriateness of the conclusions reached, including using external evidence to substantiate our views.




Personal and Business BankingFor Personal and Business Banking a significant portion of the impairment is calculated on a portfolio basis.

Portfolio impairment provisions are predominantly determined using statistical models which incorporate observable data, assumptions and estimates. The models will approximate the impact of current economic and credit conditions on the portfolio of loans. Management applies judgement in designing the models, analysing the observable data, determining appropriate assumptions and formulating estimates. Management also evaluates the overall portfolio provisions calculated by the model and may, in certain instances, recognise additional portfolio provisions (overlays) where there is uncertainty over the ability of the models to address specific emerging trends or conditions.

Specific emphasis is placed on the treatment of cured and renegotiated loans, accounts under debt review and post write-off recoveries.

Significant judgements, estimates and assumptions have been made by management in respect of:

the probability of default

the loss given default

the emergence periods between the impairment event occurring and an individual or collective impairment being recognised.

Personal and Business BankingWe have obtained an understanding and tested the relevant controls relating to the credit origination processes, the credit monitoring processes and credit remediation processes.

For model-based portfolio impairments which considers the performing (which includes normal monitoring, close monitoring and early arrears exposures) and non-performing book:

We have considered the design and implementation of the models, with the involvement of valuation experts on our audit team, including significant assumptions and the quality of the observable data used to derive model parameters in relation to our understanding of industry norms.

We assessed the current business practice and data outputs in terms of collection strategy, write-off and rehabilitation against policy as well as industry norms.

Our valuation experts assessed the reasonableness of the impairment model methodology used to determine the probability of default, loss given default and economic and parameter override estimates (together the “modelled parameters”) used to compute the performing portfolio provision in relation to their knowledge of the client and the industry.

Our valuation experts also assessed the reasonableness of the loss rates estimated for the non-performing book allowing for the ageing of defaulted assets, the type of collection process followed as well as the impact of the treatment of renegotiated and cured loans in the impairment model in the light of the South African Reserve Bank (SARB) directive dealing with distressed credit in relation to their knowledge of the client and the industry.

We assessed the appropriateness of management’s central overlays, as well as parameter overrides, in the light of recent economic events and circumstances.

In addition, our valuation experts assessed the final reasonableness of the portfolio provision by assessing the difference in portfolio provisions in relation to an independent model. This model independently estimates the modelled parameters using the same modelling data as that of the group.

182



IMPAIRMENT OF COMPUTER SOFTWARE INTANGIBLE ASSETS

(Refer to the key management assumptions note, note 12 goodwill and other intangible assets and note 38 non-trading and capital related items in the annual financial statements.)

The group has a substantial investment in recognised computer software intangible assets relating to various computer software that is currently being developed and/or has been brought into use.

As disclosed in note 12 goodwill and other intangible assets in the financial statements, additional amounts were capitalised during the year as a result of further developments to a number of these systems. Furthermore, certain previously recognised intangible assets were impaired to reflect management’s current outlook relating to the components of the software and its estimated utilisation.

The key management assumptions note in the financial statements sets out the basis, including the related judgements, for the impairment of computer software intangible assets where impairment indicators have been identified. Significant judgements, estimates and assumptions have been made by management in respect of:

assessing the future economic benefits associated with additional costs capitalised

identifying appropriate cash-generating units

determining the recoverable amount of the recognised asset or cash-generating unit, where indicators of impairment exist.

The recoverable amount of the group’s computer software intangible assets or cash-generating units is based on complex value in use calculations. The significant estimates and assumptions made by management in determining the recoverable amount include:

expected future cash flows to be derived from these assets and the related timing of the expected future cash flows

determining the appropriate discount rate to utilise in the impairment calculation.

The extent of management’s judgement relating to the capitalisation and impairment of computer software intangible assets and the magnitude of this balance resulted in this matter being identified as a matter of most significance in the current year audit of the consolidated financial statements.

As part of our audit, we have inspected the group’s capitalisation policy in terms of the requirements IAS 38 Intangible Assets.

We have obtained an understanding and tested the design and implementation of the relevant management controls relating to the monitoring of cost capitalisation of computer software intangible assets.

These processes include controls over the approval and recognition of new computer software intangible assets, ongoing monitoring and review of estimated and actual spend relating to system development, review and sign off of impairment assessments and the approval of transfer of assets from “under construction” to “in use”.

We also selected a sample of supporting documentation for costs capitalised to ensure these are in line with the group’s capitalisation policy.

We inspected the cash projections used in the value in use calculations to ensure that they reflect the most recently approved management budgets and represent management’s best estimate of future performance. We assessed the reasonableness of the key assumptions used in the calculation in light of our current understanding of the business and the economic conditions that are expected to exist over the remaining operational life of the computer software intangible asset or cash-generating unit. We have also assessed the process followed to identify cash-generating units.

We have recalculated the value in use, which supported management’s valuation of a positive net present value for each significant project. Our valuation experts on our audit team evaluated the significant assumptions used in determining the value in use which included an independent comparison to industry norms and evaluation of the discount rates applied.





RECOGNITION OF TAXATION EXPENSES AND LIABILITIES

(Refer to the key management assumptions note and note 19 provisions and other liabilities in the annual financial statements.)

Through its diverse financial services offerings and operations across multiple jurisdictions, the group is exposed to a wide range of taxation laws. These laws are constantly changing and are also subject to interpretation by management.

Management’s judgement is applied in determining the appropriate tax accruals and, in some instances, estimates of possible consequences where there is subjectivity in the application of tax rules, which can have a material impact on the financial statements.

Due to the significance of judgements applied by management, this has been identified as a matter of most significance in the current year audit of the consolidated financial statements.

As part of our audit, and using our tax specialists, we have evaluated whether the group’s tax risk management control framework is adequate with reference to its ability to identify tax issues and we have evaluated tax considerations applied to new or significant products and transactions.

We have assessed the competence of the group’s internal tax experts involved in the interpretation of taxation laws.

We have examined correspondence between the group and the relevant tax authorities and considered matters in dispute to evaluate whether the provision made by management is adequate, in the context of any uncertainty. We have further assessed the inputs and calculation of the tax computation for the group, taking into account relevant tax legislation and the requirements of International Financial Reporting Standards.


VALUATION OF LEVEL 3 FINANCIAL INSTRUMENTS

(Refer to the key management assumptions note, note 2 derivative instruments, note 3 trading assets, note 4 pledged assets, note 5 financial investments, note 15 trading liabilities, note 21 fair value disclosures, note 30 trading revenue in the financial statements and the market risk section of the risk and capital management report.)

The fair value of financial instruments significantly affects the measurement of profit and loss and disclosures of financial risks in the financial statements. Fair value calculations are dependent on various sources of external and internal data and on sophisticated modelling techniques used to value financial instruments disclosed as level 3 in the financial statements, which are evolving as markets become more sophisticated.

Furthermore, certain unlisted financial instruments require greater judgement and estimation in determining appropriate valuation techniques and obtaining relevant and reliable inputs. This relates specifically, in the case of structured derivative trades, to credit and debit valuation adjustments where credit risk factors are not observable in the local market.

Due to the magnitude of financial instruments measured at fair value and the significant judgements applied by management in their valuation, these have been identified as areas of most significance in the current year audit of the consolidated financial statements.

Our audit included obtaining an understanding and testing of the relevant controls put in place to ensure that there is appropriate governance over valuation model development and changes. We also tested that correct sources of external and internal data are used in the models’ calculations.

In conjunction with our valuation experts, we independently sourced inputs and assessed the judgements and estimates applied in relation to our knowledge of current market practice and conditions.

In particular, we assessed key assumptions and modelling approaches in estimating credit and debit value adjustments against the current market practice. We recalculated gains or losses on significant settled deals to assess calibration of mark-to-model values. We specifically considered the disclosure of illiquid positions in terms of International Financial Reporting Standards.

184



IMPAIRMENT OF GOODWILL

(Refer to key management assumptions note and note 12 goodwill and other intangible assets in the annual financial statements.)

The group has material investments in subsidiaries and goodwill relating to these investments that have arisen from a number of historic acquisitions, which is required to be tested for impairment annually. Goodwill relating to subsidiaries based in Nigeria and Kenya is material to the group’s financial statements.

Note 12 goodwill and other intangible assets and the key management assumptions note in the financial statements sets out the basis, including the related judgements, for the determination of the impairment of goodwill. Significant judgements, estimates and assumptions have been made by management in respect of:

management’s estimated expected cash flow forecasts from these investments and the expected market conditions that could be sustainably generated over the forecast period

inputs used in the equity pricing models that are utilised to determine the discount rate to be applied in the value in use calculation

the estimation of terminal growth rates that are used to determine future cash flows after the forecast period.

The extent of judgement applied in the value in use calculation to determine the recoverable amount resulted in this matter being identified as an area of most significance in the current year audit of the consolidated financial statements.

As part of our audit, we have evaluated management’s processes for identifying and assessing investments for impairment and the related calculation methodologies in order to compare these with the requirements of IAS 36 Impairment of Assets.

In conjunction with our valuation experts we have independently evaluated the reasonability of expected cash flows, discount rate and terminal growth rates used in the value in use calculation to determine the recoverable amount of the cash-generating units.

In doing this we evaluated the reasonableness of the terminal growth rates applied to the forecasted cash flows by benchmarking these against published sector growth rates, taking into account the country-specific growth rates, financial services industry benchmarks, regulatory reforms and landscape, political landscape and inflationary prospects in which the subsidiaries operate.

We inspected the cash flow forecasts to ensure that they reflect the most recently approved management budgets and represent management’s best estimate of future performance as approved by the board of directors. In addition, the current and previous years’ forecasts were reviewed against actual performance.

For both the prior year and current year, we independently assessed the inputs used to determine the risk-weighted asset to total assets ratios and the capital adequacy ratios used in the goodwill impairment calculation. We recalculated these ratios in accordance with local regulations.

In conjunction with our valuation experts, we independently calculated the value in use and related impairment losses for the goodwill.




Group – consolidated financial statements (Liberty related)

VALUATION AND ANALYSIS OF MOVEMENTS IN LONG-TERM POLICYHOLDER LIABILITIES – INSURANCE CONTRACTS

(Refer to key management assumptions note, note 7 policyholders’ contracts in the annual financial statements and the funding and liquidity risk, market risk and insurance risk sections of the risk and capital management report.)

Liberty Group Limited (LGL), a subsidiary of Standard Bank Group Limited, holds the group’s long-term insurance business. In the group’s financial statements, the long-term policyholder liabilities related to LGL’s insurance business, are a significant liability of the group.

The valuation of these policyholder liabilities is based on complex and subjective judgments involving the forecasting of future events, policyholder behaviour and economic conditions. Management also applied numerous assumptions in determining the value of the policyholder liabilities and changes to these assumptions may result in a material adjustment to the valuation and the results of the group.

In addition, in the current year there was a voluntary change in presentation policy for policyholder liabilities to provide more relevant and useful information to the user of the financial statements. This is disclosed in the group’s accounting policy elections.

Due to the magnitude of the policyholder liabilities and the significant judgements applied by management in their valuation, this has been identified as an area of most significance in the current year audit of the consolidated financial statements.

Our audit included testing the valuation of the policyholder liabilities by using our actuarial experts on our audit team to perform the following procedures:

considered LGL’s actuarial control environment and governance including the functioning of the actuarial committee, which approves the methodology and assumption changes against industry practice and regulatory requirements

attended management meetings where valuation principles were agreed; we performed tests on a sample basis to corroborate that these principles were applied in the valuation model as approved

compared valuation methodology changes against industry practice

compared the assumptions applied by management against recent actual long-term experience, industry trends and economic market trends.

To test the underlying data used in the valuations, on a sample basis we:

tested the classification of expenses between maintenance and acquisition and how they are capitalised in the valuation by considering the nature of the expenses and inspecting the source document of the expense

traced the policyholder valuation input data, such as premiums, claims and expense data used in the valuation model back to information contained in the administration and accounting systems.

To test the changes in assumptions as it relates to policyholder behaviour (expected future withdrawals), we performed the following procedures:

understood management’s view of the drivers of the withdrawal experience and assessed the effectiveness of management actions to address the withdrawal experience

examined management’s investigation into actual withdrawals experience and the long-term trends in the experience as it impacts the withdrawal assumption and compared it with recent long-term experience and industry trends

examined the proposed basis changes against actual experience, taking into account management’s view of the potential impact of management actions on future withdrawal rates.

Our accounting specialists assessed the voluntary change in accounting policy presentation against the requirements of IFRS 4 Insurance Contracts and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

186


Group – consolidated financial statements (Liberty related)

VALUATION OF INVESTMENT PROPERTIES

(Refer to key management assumptions note and note 10 investment property in the financial statements.)

LGL holds significant investment property investment through its ring-fenced direct property portfolio and investments in the Liberty Two Degrees Real Estate Investment Trust (REIT) in order to match insurance policy obligations and shareholder obligations.

Investment properties are carried at fair value in the consolidated financial statements. Management applied significant judgement and assumptions in determining the fair value of these properties. The most significant judgements and assumptions include future rental values, discount rates, exit capitalisation rates and the application of minority discounts to fractional ownership in certain instances.

The significance of the investment properties to the consolidated financial statements and the extent of judgement applied in the valuation of these properties, resulted in this matter being identified as an area of most significance in the current year audit of the consolidated financial statements.

As part of our audit, we obtained an understanding of and tested the relevant controls related to:

entering and amending of leases in support of contractual rental income

setting and approval of budgets

detailed analysis of forecast and trends against actual results that informs management of the business

approval of the external valuations obtained.

Management engaged independent, qualified real estate appraisers (the appraisers) to calculate the fair values of the investment properties which we relied on during the course of the audit. We considered the objectivity, independence and expertise of the appraisers by:

inspecting the appraisers’ valuation reports for a statement of independence and compliance with valuation standards

confirming the appraisers affiliation with the South African Council for the Property Valuers Profession.

Using our internal property valuation experts, we assessed the appropriateness of the valuation methodology and assumptions including, amongst others, market related rents, discount rates and capitalisation rates by agreeing the assumptions against external data sources. In addition, we calculated our own independent range for the fair value of a representative sample of properties and compared these to management’s valuations.




Company – seperate financial statements

IMPAIRMENTS OF INVESTMENT IN INVESTEE COMPANIES

(Refer to note 49 interest in subsidiaries, note 50 interest in associates, annexure A subsidiaries, consolidated and unconsolidated structured entities and annexure B associates and joint ventures in the annual financial statement.)

The company has material investments in subsidiaries and associates (investee companies). Subsidiaries are carried in the company’s separate financial statements at cost less accumulated impairment losses and associates are carried at equity accounted value less accumulated impairment losses.

Note 49 in the financial statements sets out the basis, including the related judgements, for the impairment of investee companies where impairment indicators have been identified. Significant judgements, estimates and assumptions have been made by management in determining whether the investee company is impaired and the related recoverable amount where this is based on complex value in use calculations. The significant estimates and assumptions made by management in determining the value in use include:

the future expected cash flows, including the growth rate applied, to be derived from the investee company and the related timing of these cash flows

determining the appropriate discount rate to utilise in the impairment calculation.

The extent of judgement applied in the determination of the recoverable amount and the substantial investments in investee companies resulted in this matter being identified as an area of most significance in the current year audit of the separate financial statements.

As part of our audit, we have evaluated management’s processes for identifying and assessing investments for impairment and the related calculation methodologies in order to compare these with the requirements of IAS 36 Impairment of Assets.

Where there were indicators of impairment, we evaluated the reasonability of expected cash flows and the discount rate used in the determination of the value in use as set out below. We independently calculated the value in use and related impairment losses.

In conjunction with our valuation experts we have:

assessed the reasonableness of management’s discount rate in comparison to third party data available in the market

recalculated the discount rate used in the discounting of the cash flows.

We inspected the cash projections to ensure that they reflect the most recent approved management budgets and represent management’s best estimate of future performance. We assessed the reasonableness of the key assumptions used in the calculation in the light of our understanding of the business and the economic conditions that are expected to exist over the remaining operational life of the investee company. We have evaluated the reasonableness of the growth rate applied to the forecast cash flows by benchmarking these against published sector growth rates taking into account the country-specific growth rates, political landscape and inflationary prospects in which the investee company operates.

188

Other informationThe directors are responsible for the other information. The other information comprises the directors’ report, the report of the group audit committee and the group secretary’s certification as required by the Companies act of South Africa, directors’ responsibility for financial reporting, the governance report, annexure G third – party funds under management, the group’s results announcement and the annual integrated report for the year ended 31 December 2016 which was obtained prior to the date of this auditors’ report and the unaudited sections of the risk and capital management report and the governance and remuneration report and annexure F – six-year review which is expected to be made available to us after that date. Other information does not include the consolidated and separate financial statements and our auditors’ report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the directors for the consolidated and separate financial statements The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group and the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group and/or company or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the consolidated and separate financial statements Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group and company’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group and company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the group and/or the company to cease to continue as a going concern.



Report on other legal and regulatory requirementsIn terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that, based on available statutory records, KPMG Inc. and PricewaterhouseCoopers Inc. have been the joint auditors of Standard Bank Group Limited for 54 years.

KPMG Inc. PricewaterhouseCoopers Inc.Registered Auditor Registered Auditor

Director: Heather Berrange Director: John BennettChartered Accountant (SA) Chartered Accountant (SA) Registered Auditor Registered Auditor1 March 2017 1 March 2017

85 Empire Road 2 Eglin RoadParktown Sunninghill2193 2157

Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

190

Note

GROUP

2016 Rm

20151

Rm 20141

Rm

Assets Cash and balances with central banks 1 77 474 75 112 64 302Derivative assets 2 68 620 111 089 61 633Trading assets 3 129 845 86 219 72 040Pledged assets 4 18 777 34 429 14 185Financial investments 5 483 774 486 704 450 921Current tax assets 479 534 498Loans and advances 6 1 065 405 1 076 917 928 241Non-current assets held for sale2 219 958Policyholders' assets 7 7 314 7 579 6 507Other assets 8 21 547 24 552 20 691Interest in associates and joint ventures 9 8 196 9 703 3 727Investment property 10 31 155 30 508 27 022Property and equipment 11 16 041 17 670 16 737Goodwill and other intangible assets 12 23 675 24 031 21 175Deferred tax assets 16 1 988 1 881 1 715

Total assets 1 954 290 1 986 928 1 909 352

Equity and liabilitiesEquity 179 359 178 908 161 634

Equity attributable to ordinary shareholders 150 757 151 069 136 985

Ordinary share capital 13 162 162 162 Ordinary share premium 13 17 798 17 784 17 905 Reserves 132 797 133 123 118 918

Preference share capital and premium 13 5 503 5 503 5 503 Non-controlling interests 23 099 22 336 19 146

Liabilities 1 774 931 1 808 020 1 747 718

Derivative liabilities 2 75 083 133 958 72 281 Trading liabilities 15 47 867 43 304 43 761 Current tax liabilities 5 522 4 304 4 505 Deposits and debt funding 17 1 213 621 1 186 514 1 047 212 Non-current liabilities held for sale2 182 069 Policyholders' liabilities 7 307 230 305 194 293 617 Subordinated debt 18 25 997 27 141 25 521 Provisions and other liabilities 19 96 816 102 511 74 277 Deferred tax liabilities 16 2 795 5 094 4 475

Total equity and liabilities 1 954 290 1 986 928 1 909 352

1 Refer to the accounting policy elections regarding detail on the change in presentation policy.2 The group’s controlling interests in Standard Bank Plc (SB Plc) (now ICBCS) and Standard de Investimentos S.A.’s (now ICBCS Argentina) total assets

and liabilities are presented as non-current assets and liabilities held for sale in 2014. Both were disposed of during 2015.


Statement of financial positionas at 31 December 2016


Note

GROUP

2016Rm

2015Rm

Continuing operationsIncome from banking activities 99 857 91 113

Net interest income 56 892 49 310

Interest income 26 108 060 91 535Interest expense 27 (51 168) (42 225)

Non-interest revenue 42 965 41 803

Net fee and commission revenue 29 012 26 920

Fee and commission revenue 28 33 923 31 397Fee and commission expense 29 (4 911) (4 477)

Trading revenue 30 10 988 11 016Other revenue 31 2 965 3 867

Income from investment management and life insurance activities 21 365 23 997

Insurance premiums received 32 39 366 37 572Insurance benefits and claims paid 33 (37 616) (36 884)Investment management and service fee income and gains 34 22 887 36 791Fair value adjustments to investment management liabilities and third-party

fund interests 35 (3 272) (13 482)

Total income 121 222 115 110Credit impairment charges 36 (9 533) (9 371)

Net income after credit impairment charges 111 689 105 739Operating expenses in banking activities 37 (56 235) (51 434)Operating expenses in insurance activities 37 (17 374) (16 184)

Net income before non-trading and capital related items 38 080 38 121Non-trading and capital related items 38 (1 123) (1 512)Share of post tax profit/(loss) from associates 9 187 (323)

Net income before indirect taxation 37 144 36 286Indirect taxation 40 (2 418) (2 739)

Profit before direct taxation 34 726 33 547Direct taxation 40 (8 932) (8 187)

Profit for the year from continuing operations 25 794 25 360Profit from discontinued operation 39 2 741

Profit for the year 25 794 28 101

Attributable to ordinary shareholders 22 206 23 754Attributable to preference shareholders 406 377Attributable to non-controlling interests 3 182 3 970

Earnings per share from continuing operations and discontinued operationBasic earnings per ordinary share (cents) 41 1 389,8 1 487,0Diluted earnings per ordinary share (cents) 41 1 371,2 1 474,0Earnings per share from continuing operationsBasic earnings per ordinary share (cents) 41 1 389,8 1 315,5Diluted earnings per ordinary share (cents) 41 1 371,2 1 303,9

Income statementfor the year ended 31 December 2016

192

GROUP

2016Rm

2015Rm

Profit for the year 25 794 28 101Other comprehensive (loss)/income after tax for the year1 (14 647) 3 009

Items that may be reclassified subsequently to profit and loss (14 773) 3 109

Movements in the cash flow hedging reserve 227 (903)

Net change in fair value of cash flow hedges (1 122) 1 551Realised fair value adjustments of cash flow hedges transferred to profit or loss 1 349 (2 454)

Movements in the available-for-sale revaluation reserve (123) 234

Net change in fair value of available-for-sale financial assets 12 117Realised fair value adjustments on available-for-sale financial assets transferred

to profit or loss (135) 117

Exchange differences on translating foreign operations (14 680) 4 103Net change on hedges of net investments in foreign operations (197) (325)

Items that may not be reclassified to profit and loss 126 (100)

Defined benefit fund remeasurements 128 (121)Other (losses)/gains (2) 21

Total comprehensive income for the year 11 147 31 110

Attributable to ordinary shareholders 10 882 25 506Attributable to preference shareholders 406 377Attributable to non-controlling interests (141) 5 227

1 Income tax relating to each component of other comprehensive income is disclosed in note 40.

Statement of other comprehensive incomefor the year ended 31 December 2016



Note

GROUP

2016Rm

2015Rm

Net cash flows from operating activities 40 255 35 504

Net income before non-trading and capital related items 38 080 38 121Adjusted for non-cash items and other adjustments included in the

income statement 44.1 (58 240) (44 062)Increase in income-earning assets 44.2 (100 768) (108 259)Increase in deposits, trading and other liabilities 44.3 96 246 98 021Dividends received 3 904 6 063Interest paid (52 476) (43 476)Interest received 122 741 101 846Direct taxation paid (9 232) (8 012)Cash flows used in operating activities of discontinued operation (4 738)

Net cash flows used in investing activities (13 377) (31 828)

Capital expenditure on property and equipment (3 620) (4 267)Proceeds from sale of property and equipment 436 685Capital expenditure on intangible assets (3 917) (5 260)Investment in investment properties (343) (2 125)Increase in investments by insurance operations (6 012) (16 307)Cash flow resulting from the disposal of subsidiaries 44.4 (4 554)Acquisition and disposals of associates and joint ventures 79

Net cash flows used in financing activities (12 030) (11 509)

Cash outflow of share buy-backs net of proceeds of issue of share capital (252) (641)Non-controlling interests’ acquisition of Liberty Two Degrees1 3 000Cash flow from equity transactions with non-controlling interests2 (1 425) (1 118)Cash proceeds from settlement of Black Economic Empowerment transaction 95 1 317Subordinated debt issued 44.5 2 694 4 005Subordinated debt redeemed 44.5 (3 175) (3 127)Dividends paid (12 967) (11 945)

Effect of exchange rate changes on cash and cash equivalents (12 486) 2 066

Net increase in cash and cash equivalents 2 362 (5 767)Cash and cash equivalents at the beginning of the year 75 112 80 879

Cash and cash equivalents at the end of the year 77 474 75 112

1 LGL holds and invests, on behalf of policyholders and shareholders, in property investments in a ring-fenced on-balance sheet asset portfolio LPP. Liberty sold undivided shares in each individual property that were held in the LPP to L2D, a REIT, that was listed on the JSE on 6 December 2016. The cash flow is a result of the proceeds from the sale of units in L2D by LGL to external third-party investors.

2 Materially comprises the purchase of an additional interest of 17.65% by Stanbic IBTC Holdings Plc in its subsidiary Stanbic IBTC Pensions Managers Limited (SIPML) during December 2016.

Statement of cash flowsfor the year ended 31 December 2016


Ordinary share

capital and

premiumRm

Empower-ment

reserveRm

Treasury shares

Rm

Foreign currency

translation reserve

Rm

Foreign currency

hedgeof net

investment reserve

Rm

Cash flow hedging reserve

Rm

Statutory credit risk

reserveRm

Available-for-sale

revaluation reserve

Rm

Share-based

payment reserve

Rm

Otherreserves

Rm

Retained earnings

Rm

Ordinary share-

holders’ equity

Rm

Preference share

capital and

premiumRm

Non-controlling

interestsRm

Total equity

Rm

Balance at 1 January 2016 17 946 (448) (624) 10 223 (740) (384) 2 779 222 (289) 255 122 129 151 069 5 503 22 336 178 908Total comprehensive income

for the year (11 412) (197) 154 (16) (2) 22 355 10 882 406 (141) 11 147

Profit for the year 22 206 22 206 406 3 182 25 794Other comprehensive (loss)/income

for the year (11 412) (197) 154 (16) (2) 149 (11 324) (3 323) (14 647)

Increase in statutory credit risk reserve 294 (294)Unincorporated property partnerships’

capital reductions and distributions (219) (219)Transactions with shareholders,

recorded directly in equity 14 95 356 (83) (11 576) (11 194) (406) 1 123 (10 477)

Equity-settled share-based payment transactions1 767 (641) 126 48 174

Transfer of vested equity options (850) 850Issue of share capital and share premium

and capitalisation of reserves 333 (266) 67 67Share buy-back (319) (319) (319)Deferred tax on share-based payment

transactions 207 207 207Transactions with non-controlling

shareholders (6) (642) (648) 2 105 1 457Net decrease in treasury shares 362 379 741 68 809Redemption of preference shares 95 95 95Net dividends paid (11 463) (11 463) (406) (1 098) (12 967)

Dividends paid to equity holders (11 510) (11 510) (406) (1 215) (13 131)Dividends received from Tutuwa

initiative and policyholders’ deemed treasury shares 47 47 117 164

Balance at 31 December 2016 17 960 (353) (268) (1 189) (937) (230) 3 073 206 (372) 253 132 614 150 757 5 503 23 099 179 359

1 Includes hedges of the group’s equity-settled share incentive schemes.

Statement of changes in equityfor the year ended 31 December 2016



Ordinary share

capital and

premiumRm

Empower-ment

reserveRm

Treasury shares

Rm

Foreign currency

translation reserve

Rm

Foreign currency

hedgeof net

investment reserve

Rm


Rm

Statutory credit risk

reserveRm

Available-for-sale

revaluation reserve

Rm

Share-based

payment reserve

Rm

Otherreserves

Rm

Retained earnings

Rm

Ordinary share-

holders' equity

Rm

Preference share

capital and

premiumRm

Non-controlling

interestsRm

Total equity

Rm

Balance at 1 January 2015 18 067 (1 934) (636) 7 359 (415) 467 2 105 62 1 172 234 110 504 136 985 5 503 19 146 161 634Total comprehensive income/(loss)

for the year 2 864 (325) (851) 160 21 23 637 25 506 377 5 227 31 110

Profit for the year 23 754 23 754 377 3 970 28 101Other comprehensive income/(loss)

for the year 2 864 (325) (851) 160 21 (117) 1 752 1 257 3 009

Increase in statutory credit risk reserve 674 (674)Unincorporated property partnerships’

capital reductions and distributions (144) (144)Transactions with shareholders,

recorded directly in equity (121) 1 486 12 (1 461) (11 338) (11 422) (377) (1 893) (13 692)

Equity-settled share-based payment transactions1 (690) (702) (1 392) 73 (1 319)

Transfer of vested equity options (771) 771Issue of share capital and share premium

and capitalisation of reserves 520 (520)Share buy-back (641) (641) (641)Deferred tax on share-based payment

transactions (72) (72) (72)Transactions with non-controlling

shareholders (3) (366) (369) (778) (1 147)Net decrease in treasury shares 15 51 66 49 115Redemption of preference shares 1 317 1 317 1 317Net dividends paid 169 (10 500) (10 331) (377) (1 237) (11 945)

Dividends paid to equity holders 169 (10 565) (10 396) (377) (1 512) (12 285)Dividends received from Tutuwa

initiative and policyholders’ deemed treasury shares 65 65 275 340

Balance at 31 December 2015 17 946 (448) (624) 10 223 (740) (384) 2 779 222 (289) 255 122 129 151 069 5 503 22 336 178 908

1 Includes hedges of the group’s equity-settled share incentive schemes.

All balances are stated net of tax, where applicable.

Refer to annexure E for the accounting policies relating to the reserves.

Statement of changes in equity continuedfor the year ended 31 December 2016


198

Accounting policy elections


The principal accounting policies applied in the presentation of the group and company’s annual financial statements are set out below.

Basis of preparationThe group’s consolidated and company’s separate annual financial statements (annual financial statements) are prepared in accordance with IFRS as issued by the IASB, its interpretations adopted by the IASB, the South African Institute of Chartered Accountants’ (SAICA) Financial Reporting Guides as issued by the Accounting Practices Committee, the JSE Listings Requirements, and the South African Companies Act. The annual financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

available-for-sale financial assets, financial assets and liabilities classified at fair value through profit or loss, investment property, liabilities for cash-settled share-based payment arrangements and interests in mutual funds, policyholder investment contract liabilities and third-party financial liabilities arising on the consolidation of mutual funds that are measured at fair value

policyholder insurance contract liabilities and related reinsurance assets that are measured in terms of the Financial Soundness Valuation (FSV) basis as set out in accounting policy 13 – Policyholder insurance and investment contracts

post-employment benefit obligations that are measured in terms of the projected unit credit method.

The following principal accounting policy elections in terms of IFRS have been made, with reference to the detailed accounting policies shown in brackets:

purchases and sales of financial assets under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned are recognised and derecognised using trade date accounting (accounting policy 3)

cumulative gains and losses recognised in OCI in terms of a cash flow hedge relationship are transferred from OCI and included in the initial measurement of the non-financial asset or liability (accounting policy 3)

commodities acquired principally for the purpose of selling in the near future or generating a profit from fluctuation in price or broker-traders’ margin are measured at fair value less cost to sell (accounting policy 3)

investment property is accounted for using the fair value model (accounting policy 6)

mutual fund investments held by investment-linked insurance funds, that do not meet the definition of a subsidiary, are designated on initial recognition as at fair value through profit or loss (accounting policy 2)

intangible assets and property and equipment are accounted for at cost less accumulated amortisation and impairment (accounting policy 6)

intercompany transactions between the group’s continuing operations and discontinued operation are not eliminated but presented as part of the group’s respective continuing operations and discontinued operation’s results (accounting policy 10)

the portfolio exception to measure the fair value of certain groups of financial assets and financial liabilities on a net basis (accounting policy 4)

investment in associates and joint ventures are initially measured at cost and subsequently accounted for using the equity method in the separate financial statements (accounting policy 2).

Functional and presentation currencyThe annual financial statements are presented in South African rand, which is the functional and presentation currency of the group and the company. All amounts are stated in millions of rand (Rm), unless indicated otherwise.

Changes in accounting policiesThe accounting policies are consistent with those reported in the previous year except as required in terms of the adoption of the following:

Adoption of new and amended standards effective for the current financial periodThe accounting policies are consistent with those reported in the previous year except as required in terms of the adoption of the following amendments effective for the current period:

Amendment to IFRS 11 Joint Arrangements (IFRS 11): amendments specify the appropriate accounting treatment for acquisitions of interests in joint operations in which the activities of the joint operation constitute a business

SAICA Headline Earnings Circular (Circular 2/2015): changes relate largely to amendments made to IFRS since 2013, and specifically IFRS 9 Financial Instruments (IFRS 9)

Amendments to IAS 27 Separate Financial Statements (IAS 27): amendment which allows entities preparing separate financial statements to utilise the equity method to account for investments in subsidiaries, joint ventures and associates. The amendments have been applied retrospectively. The group has elected to change its accounting policy for its separate financial statements to account for investments in associates and joint ventures using the equity method. Refer to note 50 for related disclosure


The abovementioned amendments to the IFRS standards and circular, adopted on 1 January 2016, did not have any effect on the group’s previously reported financial results or disclosures and had no material impact on the group’s accounting policies. However, the group has elected to change the accounting policy for investments in associates and joint ventures only to Standard Bank Group Limited’s separate financial statements as a result of the IAS 27 amendment from the cost method to the equity accounting method.

Early adoption of revised standards:

Amendment to IAS 7 Statement of Cash Flows (IAS 7): amendments require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. Refer to note 44.5 for this additional disclosure

Amendment to IAS 12 Income Taxes (IAS 12): amendments clarify various accounting requirements with respect to the recognition of deferred tax assets for unrealised losses.

The amendment has been applied retrospectively, with the following effect on the previously disclosed financial information:

Description

2015 2014

As previouslypresented

Rm

After adoption of

amendmentRm


Rm

After adoption of

amendmentRm

Investment in associates1 142 672 313 796Retained earnings2 44 415 44 945 42 238 42 721Equity accounted earnings3 164 * *Dividend income4 12 104 12 029 * *Gains on disposal of group companies5 129 87 * *

1 Increase as a result of equity accounting the associates.2 Increase as a result of equity accounting the associates offset by not accounting for dividend income from associates and lower gain on disposal as a result of

a higher equity accounted carrying value.3 Equity accounted earnings for the period.4 Lower dividend income as a result of not accounting for dividend income from associates.5 Lower gain on disposal as a result of a higher equity accounted carrying value. * Not required to be reported in terms of IFRS.

Change in presentation policy for policyholders’ assets and liabilitiesReinsurance liabilities were previously included within the aggregate policyholder liabilities for insurance contracts. To provide more relevant and useful information, these reinsurance liabilities have now been included within the group’s provisions and other liabilities. Within the provisions and other liabilities note the reinsurance liabilities have been disclosed separately as this class of liabilities represents the effect of management’s risk mitigation action on policyholder contracts.

In addition, certain individual pure risk contracts, where the present value of expected future inflows exceeded the

present value of expected future outflows at a portfolio level, were previously included as negative liability amounts (policyholder assets) within the aggregate policyholder liabilities for insurance contracts. A change in presentation was adopted for the year ended 31 December 2016 to disclose portfolio level negative policyholder liabilities as policyholder assets.

The group is of the opinion that the change in presentation policy provides more reliable and meaningful information. The change brings the treatment of insurance contracts in line with the reporting requirements expected under the new accounting standard on insurance contracts, which is moving towards the unit of account being on a portfolio basis of accounting for insurance contracts.

200

The financial impact of this change is:

Description

2015 2014


Rm(Liability)

Revisedpresentation

RmAsset/

(liability)


Rm(Liability)

Revisedpresentation

RmAsset/

(liability)

Policyholders’ assets 7 579 6 507Policyholders’ liabilities (298 232) (305 194) (287 516) (293 617)Provisions and other liabilities1 (101 894) (102 511) (73 871) (74 277)

1 Reinsurance liabilities of R617 million in 2015 and R406 million in 2014 were previously disclosed within policyholders’ liabilities and are now included within the provisions and other liabilities line item.

The following primary statements and notes have been impacted by this change:

Annual financial statements Statement of financial position

Note 7 – Policyholders’ contracts

Note 19 – Provisions and other liabilities

Note 20 – Classification of assets and liabilities

Note 21 – Fair value disclosures

Note 47 – Segment reporting

Annexure F – Six-year review

Risk management Liquidity risk:

• Expected cash flows – Long-term insurance contracts• Cash surrender value for policyholders’ liabilities• Financial property and insurance asset liquidity

Market risk:

• Exposure to financial, property and insurance assets by risk category

ANNUAL FINANCIAL STATEMENTS Accounting policy elections continued


updated on a regular basis to incorporate actual write-off experience. The sensitivity to changing conditions is evaluated and specific sensitivity testing is done if and when required.

A key input into the determination of the group’s portfolio impairment provisions is the emergence period. The loss ratios applied to loan balances in the portfolio are based on the estimated loss emergence period. At year end, the group applied an average loss emergence period of a minimum of three months (2015: three months) for Personal & Business Banking and 12 months (2015: 12 months) for Corporate & Investment Banking loans and advances. Where required, these emergence periods are assessed by determining the sensitivity of the impairment by applying both longer and shorter emergence periods and comparing the sensitivity results with the incurred loss experience.

Specific loan impairmentsNon-performing loans include those loans for which the group has identified objective evidence of default, such as a breach of a material loan covenant or condition, as well as those loans for which instalments are due and unpaid for 90 days or more.

The methodology used in determining the specific loan impairment includes modelling with various inputs such as segmentation, levels of loss expectation, recoverability of collateral, potential cash flows and probability of default. Management’s estimates of future cash flows on individually impaired loans are based on historical loss experience for assets with similar credit risk characteristics. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

In preparing the financial statements, estimates and assumptions are made that could materially affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on factors such as historical experience and current best estimates of uncertain future events that are believed to be reasonable under the circumstances. Unless otherwise stated, no material changes to assumptions have occurred during the year. The following represents the most material key management assumptions applied in preparing these financial statements.

Credit impairment losses on loans and advancesPortfolio loan impairmentsThe group assesses its loan portfolios for impairment at each reporting date. In determining whether an impairment loss should be recorded in profit or loss, the group makes judgements as to whether there is observable data indicating a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be allocated to an individual loan in that portfolio. Estimates are made of the duration between the occurrence of a loss event and the identification of a loss on an individual basis.

The impairment for performing and non-performing but not specifically impaired loans is calculated on a portfolio basis, based on historical loss patterns, adjusted for national- and industry-specific economic conditions and other indicators present at the reporting date that correlate with defaults on the portfolio. These include early arrears, notices of accounts under debt review, renegotiated loans, post write-off recoveries, watch list exposures and changes in macro-economic conditions and legislation affecting credit recovery. The impairments are monitored on a monthly basis, with back-testing performed between actual write-off experience and that estimated by the group’s models. The models are

Key management assumptions

202

Refer to note 6 loans and advances, for the carrying amounts of loans and advances and to the credit risk section of the risk and capital management report for the group’s assessment of the risk of loss arising out of the failure of counterparties to meet their financial or contractual obligations when due.

Impairment of available-for-sale investmentsThe group determines that available-for-sale investments are impaired and recognised as such in profit or loss when there has been a significant or prolonged decline in the fair value below its cost. The determination of what is significant or prolonged requires judgement. In making this judgement, the group evaluates, among other factors, the normal volatility in the instruments’ fair value. In addition, impairment may be appropriate when there is evidence of a deterioration in the financial health of the investee, industry or sector, or operational and financing cash flows or significant changes in technology.

Fair value Financial instruments In terms of IFRS, the group is either required to or elects to measure a number of its financial assets and financial liabilities at fair value, being the price that would, respectively, be received to sell an asset or paid to

ANNUAL FINANCIAL STATEMENTS Key management assumptions continued

transfer a liability in an orderly transaction in the principal (or most advantageous) market between market participants at the measurement date. Regardless of the measurement basis, the fair value is required to be disclosed, with some exceptions, for all financial assets and financial liabilities. Fair value is a market-based measurement and uses the assumptions that market participants would use when pricing an asset or liability under current market conditions.

When determining fair value it is presumed that the entity is a going concern and is not an amount that represents a forced transaction, involuntary liquidation or a distressed sale. Information obtained from the valuation of financial instruments is used to assess the performance of the group and, in particular, provides assurance that the risk and return measures that the group has taken are accurate and complete.

The group’s valuation control framework governs internal control standards, methodologies, and procedures over its valuation processes, which include:

Prices quoted in an active market: The existence of quoted prices in an active market represents the best evidence of fair value. Where such prices exist, they are used in determining the fair value of financial assets and financial liabilities.

Expected time to recover cash and collateral and recoveries of individual specifically impaired loans as a percentage of the outstanding balances are estimated as follows:

Expected timeto recovery

Expected recoveries as a percentage of impaired loans

2016Months

2015Months

2016%

2015%

Personal & Business Banking 8 – 15 10 – 15 58 58

Mortgage loans 15 15 75 74Instalment sale and finance releases 9 10 54 50Card debtors1 8 15 28 31Other lending 13 14 36 37

Corporate & Investment Banking 21 – 24 22 – 24 44 44

South Africa 21 22 32 36Africa Regions 24 24 66 57

1 The methodology has been enhanced to more accurately reflect the time to completion for accounts in the card portfolio. The reason for the decrease in the average time to recovery is due to and enhancement in the methodology used in calculating the period of recovery. The period of recovery incorporates the average time to write-off, as well as the average time it takes an account to cure. This is expected to more accurately reflect the outcome of an account.


Validation and control: All financial instruments carried at fair value, regardless of classification, and for which there are no quoted market prices for that instrument, are fair valued using models that conform to international best practice and established financial theory. These models are validated independently by the group’s model validation unit and formally reviewed and approved by the market risk methodologies committee. This control applies to both off-the-shelf models, as well as those developed internally by the group. Further, all inputs into the valuation models are subject to independent price validation procedures carried out by the group’s market risk unit. Such price validation is performed on at least a monthly basis, but daily where possible given the availability of the underlying price inputs. Independent valuation comparisons are also performed and any significant variances noted are appropriately investigated. Less liquid risk drivers, which are typically used to mark level 3 assets and liabilities to model, are carefully validated and tabled at the monthly price validation forum to ensure that these are reasonable and used consistently across all entities in the group. Sensitivities arising from exposures to such drivers are similarly scrutinised, together with movements in level 3 fair values. They are also disclosed on a monthly basis at the market risk and asset and liability committees.

Portfolio exception: The group has, on meeting certain qualifying criteria, elected the portfolio exception to measure the fair value of certain groups of financial assets and financial liabilities on a net basis.

The total amount of the change in fair value estimated using valuation techniques not based on observable market data that was recognised in profit or loss for the year ended 31 December 2016 was a net gain of R4 350 million (2015: R4 304 million net loss). Other financial instruments are utilised to mitigate the risk of these changes in fair value.

Refer to note 21 for the fair value disclosures.

Investment propertyInvestment property is measured at fair value taking into account the characteristics of the properties that market participants would consider when pricing the property at measurement date. These include various inputs relating to existing tenant terms, location, vacancy levels and restrictions, if any, on the sale or use of the asset. The group makes judgements regarding the unit of account, i.e. whether it should be valued as a stand-alone property or as a group of properties. The properties have been valued on a discounted cash flow basis. In the majority of cases, discounted cash flows have been used and summed together with the capitalised and discounted value of the projected income to give a present value as at 31 December 2016.

Valuation techniques: Where quoted market prices are unavailable, the group establishes fair value using valuation techniques that incorporate observable inputs, either directly, such as quoted prices, or indirectly, such as those derived from quoted prices, for such assets and liabilities. Parameter inputs are obtained directly from the market, consensus pricing services or recent transactions in active markets, whenever possible. Where such inputs are not available, the group makes use of theoretical inputs in establishing fair value (unobservable inputs). Such inputs are based on other relevant input sources of information and incorporate assumptions that include prices for similar transactions, historic data, economic fundamentals, and research information, with appropriate adjustment to reflect the terms of the actual instrument being valued and current market conditions. Changes in these assumptions would affect the reported fair values of these financial instruments. Valuation techniques used for financial instruments include the use of financial models that are populated using market parameters that are corroborated by reference to independent market data, where possible, or alternative sources, such as, third-party quotes, recent transaction prices or suitable proxies. The fair value of certain financial instruments is determined using industry standard models such as, discounted cash flow analysis and standard option pricing models. These models are generally used to estimate future cash flows and discount these back to the valuation date. For complex or unique instruments, more sophisticated modelling techniques may be required, which require assumptions or more complex parameters such as correlations, prepayment spreads, default rates and loss severity.

Valuation adjustments: Valuation adjustments are an integral part of the valuation process. Adjustments include, but are not limited to:

Credit spreads on illiquid issuers

Implied volatilities on thinly traded stocks

Correlation between risk factors

Prepayment rates

And other illiquid risk drivers.

In making appropriate valuation adjustments, the group applies methodologies that consider factors such as bid-offer spreads, liquidity, counterparty and own credit risk. Exposure to such illiquid risk drivers is typically managed by:

Using bid-offer spreads that are reflective of the relatively low liquidity of the underlying risk driver

Raising day one profit provisions in accordance with IFRS

Quantifying and reporting the sensitivity to each risk driver

Limiting exposure to such risk drivers and analysing the exposure on a regular basis.

204

In order to determine the reversionary rental income on lease expiry, renewal or review, a market gross rental income (basic rental plus operating cost rental) has been applied to provide a market-related rental value for each property as at 31 December 2016. Market rental growth has been determined based on the individual property, property market trends and economic forecasts. Vacancies have been considered based on historic and current vacancy factors as well as the nature, location, size and popularity of each building.

Appropriate discount rates have been applied to the cash flows for each property to reflect the relative investment risk associated with the particular building, tenant, covenant and the projected income flow. Exit capitalisation rates generally range from 6.8% to 10.5% (2015: 6.8% to 10.5%). This compares to the ten-year government yield of 8.93% (2015: 9.73%). The non-observable adjustments included in the valuation can therefore be referenced to the variance to the ten-year government rate.

On the basis that turnover or profit rental income has a greater degree of uncertainty and risk than the contractual base rental, a risk premium of between 1% and 6% (2015: 1% and 6%) has been added to the discount rate and to the exit capitalisation rate, to reflect the greater investment risk associated with the variable rental element on a property-by-property basis.

Refer to note 10 for investment property disclosures.

Consolidation of entitiesThe group controls and consolidates an entity where the group has power over the entity’s relevant activities; is exposed to variable returns from its involvement with the investee; and has the ability to affect the returns through its power over the entity, including SEs. Determining whether the group controls another entity requires judgement by identifying an entity’s relevant activities, being those activities that significantly affect the investee’s returns, and whether the group controls those relevant activities by considering the rights attached to both current and potential voting rights, de facto control and other contractual rights, including whether such rights are substantive.

Interests in unconsolidated SEs that are not considered to be a typical customer-supplier relationship are required to be identified and disclosed. An interest would be a typical customer-supplier relationship where the level of risk inherent in that interest in the SE exposes the group to a similar risk profile to that found in standard market-related transactions. The group sponsors an SE where it provides financial support to the SE when not contractually required


to do so. Financial support may be provided by the group to an SE for events such as litigation, tax and operational difficulties.

Refer to annexure A for detail on the group’s subsidiaries, consolidated and unconsolidated structured entities.

Significant influence – investment fundsThe group accounts for its interests in investment funds as associates where the group is the fund manager, for which there is an irrevocable fund management agreement, and the group has a monetary interest in the particular fund. Such associates are equity accounted unless designated to be measured at fair value through profit or loss.

Refer to annexure B for detail on associates and joint ventures.

Computer software intangible assetsThe group reviews assets under construction and assets brought into use for impairment at each reporting date and tests the carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount (or components of the carrying amount) may not be recoverable. These circumstances include, but are not limited to, new technological developments, obsolescence, changes in the manner in which the software is used or is expected to be used, changes in discount rates or changes in estimates of related future cash benefits. The impairment tests are performed by comparing an asset’s recoverable amounts to their carrying amounts. The review and testing of assets for impairment inherently requires significant management judgement as it requires management to derive the estimates of the identified assets’ future cash flows in order to derive the asset’s recoverable amount.

The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. The value in use is calculated by estimating future cash benefits that will result from each asset and discounting those cash benefits at an appropriate discount rate. These impairments are excluded from the group’s headline earnings.

During the 2016 financial year, certain ring-fenced components of the group’s computer software assets were identified as being redundant, obsolete or unusable. Accordingly, the recoverable values for these identified components were determined to be nil and their carrying values were fully impaired.

Refer to note 12 for intangible asset disclosure, as well as annexure E for more detail on the accounting policy relating to computer software, the capitalisation thereof, as well as amortisation and impairment policies.


The following table summarises the impairment test methodology applied and the key inputs used in testing the group’s goodwill relating to Stanbic IBTC Holdings PLC and Stanbic Holdings Plc (previously CFC Stanbic Holdings).

Stanbic IBTC Holdings PLCValue in use

Stanbic Holdings PlcValue in use

2016 2015 2016 2015

MethodologyDiscount rate (nominal) (%) 22.6 19.0 17.9 17.6Terminal growth rate (nominal) (%) 10.5 10.0 8.0 10.4Forecast period (years)1 10 10 8 8

1 In the instance where we value group subsidiaries where the long-term strategy is to hold and grow the investment, the preferred approach is to value future cash flows over a longer period in order to avoid placing too much reliance on a short period of cash flows, and therefore, placing too much value on the terminal cash flow period.

Note 12 summarises the group’s impairment test results and the main components of goodwill.

sustainably generated over such a period. A forecast period of greater than five years has been used in order to take into account the level of development in these markets. The cash flows from the final discrete cash flow period are extrapolated into perpetuity to reflect the long-term plans for the entity. It is common valuation methodology to avoid placing too high a proportion of the total value on the perpetuity value.

Discount rates – the cost of equity (COE) discount rates utilised in the equity pricing models are deemed appropriate based on the entities under review. The risk-free rate used to determine the COE has been derived from the respective local ten-year government bonds adjusted for inflation differential and country risk yield. The future cash flows are discounted using the COE assigned to the appropriate CGUs and by nature can have a significant impact on their valuations.

Goodwill impairmentIn terms of IFRS, the group is required on an annual basis to test its recognised goodwill for impairment. The impairment tests are performed by comparing the cash-generating units’ (CGU) recoverable amounts to the carrying amounts in the functional currency of the CGU being assessed for impairment. The recoverable amount is defined as the higher of the entity’s fair value less costs to sell and its value in use. The review and testing of goodwill for impairment inherently requires significant management judgement as management needs to estimate the identified CGU’s future cash flows. The principal assumptions considered in determining an entity’s value in use include:

Future cash flows – the forecast periods adopted reflect a set of cash flows which, based on management’s judgement and expected market conditions, could be

Current and deferred taxationThe group is subject to direct and indirect taxation in a number of jurisdictions. There may be transactions and calculations for which the ultimate tax determination has an element of uncertainty in the ordinary course of business. Where the final tax determination is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions, disclosed in note 40 and note 16, respectively, in the period in which such determination is made.

Uncertain tax positions, which do not meet the probability criteria defined within IFRS, are not provided for but are rather disclosed as contingent liabilities or assets as appropriate. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

The most significant management assumptions are the forecasts used to support the probability assessment that sufficient taxable profits will be generated by the entities in the group in order to utilise the deferred tax assets.

Post-employment benefitsThe group’s post-employment benefits consist of both post-employment retirement funds and healthcare benefits for South African operations which have been deemed to be most material. The measurement of the group’s obligations to fund these benefits are derived from actuarial valuations performed by the appointed actuaries taking into account various assumptions. The funds are subject to a statutory financial review by the group’s independent actuaries at intervals of not more than three years.

206

The principal assumptions used in the determination of the group’s obligations include the following:

Retirement fund Post-employment medical aid fund

2016 2015 2016 2015

Discount rate Nominal government

bond yield curve

Nominal government

bond yield curve

Nominal government

bond yield curve

Nominal government

bond yield curve

Return on investments (discount rate of term equal to discounted mean term of liabilities)

10.01% – 10.33% 10.01% – 10.68% Unfunded liabilityand therefore,

there is no asset-backing portfolio

Unfunded liabilityand therefore,

there is no asset-backing portfolio

Salary/benefit inflation Future salaryincreases based

on inflation curveplus 1% – 2% pa

to each point on the curve

Future salaryincreases based

on inflation curve plus 1% – 2% pa

to each point on the curve

Not applicable to fund


Medical cost inflation (applicable to members who retired before 1 January 2013)1

Not applicableto fund


Inflation curveadjusted by 1%

Inflation curveadjusted by 1%

Medical cost inflation (applicable to all other members)



Difference betweennominal and index-

linked bond yieldcurves plus 0% – 1.5%


linked bond yieldcurves plus

0% – 1.5%

Consumer price index (CPI)inflation


linked bond yield curves







Pension increase in allowance Inflation rates Inflation rates Not applicableto fund


Remaining service life of employees (years)

10.68 11.62 Not applicable to fund


1 This relates to members within the employment of Liberty.

Refer to note 46 for further details regarding the group’s post-employment benefits.


Long-term insurance contractsPolicyholder liabilities under insurance contracts and reinsurance assets are derived from actual claims submitted which are not settled at the reporting date, and estimates of the net present value of future claims and benefits under existing contracts, offset by probable future premiums to be received or paid (net of expected service costs). The key assumptions applied and analysis of their sensitivity have been detailed in the insurance risk and sensitivity analysis components of the risk and capital management report.

Process used to decide on assumptions and changes in assumptionsMortalityAn appropriate base table of standard mortality is chosen depending on the type of contract and class of business. Industry standard tables are used for smaller classes of business and company-specific tables are used for larger classes. In setting the assumptions, provision is made for the expected impact of Aids-related claims consistent with the requirements of Advisory Practice Note (APN) 105 issued by the Actuarial Society of South Africa (ASSA).


is above 8.5%. At risk-free rates between 6.5% and 8.5% the inflation rate is interpolated to ensure a smooth transition between the two methodologies. This results in a best estimate inflation assumption of 7.37% at 31 December 2016 (2015: 6.97%). The expense inflation assumption is set taking into consideration the expected future development of the number of in-force policies, as well as the expected future profile of maintenance expenses.

TaxationTaxation rates consistent with that position, and the likely future changes in that position, are allowed for. In respect of capital gains taxation (CGT), taxation is allowed for at the full CGT rate. Deferred taxation liabilities include a provision for CGT on unrealised gains/(losses) at the valuation date, at the full undiscounted value. Allowance is also made for dividend withholding tax at the applicable rate.

CorrelationsNo correlations between assumptions are allowed for.

Contribution increasesIn the valuation of the liabilities, voluntary premium increases that give rise to expected profits are not allowed for. However, compulsory increases, and increases that give rise to expected losses are allowed for. This is consistent with the requirements of Standard of Actuarial Practice (SAP) 104.

Embedded investment derivative assumptionsThe assumptions used to value embedded derivatives in respect of policyholder contracts are set in accordance with APN 110. Account is taken of the yield curve at the valuation date. Both implied market volatility and historical volatility are taken into account when setting volatility assumptions. Correlations between asset classes are set based on historical data. Over 160 000 simulations are performed in calculating the liability.

MorbidityThe incidence of disability claims is derived from the risk premium rates determined from annual investigations. The incidence rates are reviewed on an annual basis, based on medical claims experience. The adjusted rates are intended to reflect future expected experience.

WithdrawalThe withdrawal assumptions are based on the most recent withdrawal investigations taking into account past, as well as expected future trends. The withdrawal rates are analysed by product type and policy duration.

Investment returnFuture investment returns are set for the main asset classes as follows:

Bond rate – the derived yield from the bond yield curve, at a duration of ten years at the reporting date, 9.12% (2015: 9.97%)

Equity rate – bond rate plus 3.5 percentage points as an adjustment for risk, 12.62% (2015: 13.47%)

Property rate – bond rate plus 1 percentage point as an adjustment for risk, 10.12% (2015: 10.97%)

Cash – bond rate less 1.5 percentage points, 7.62% (2015: 8.47%).

The overall investment return for a block of business is based on the investment return assumptions allowing for the current mix of assets supporting the liabilities. The pre-taxation discount rate is set at the same rate. For life annuity and guaranteed endowments, discount rates are set at risk-free rates consistent with the duration and type of the liabilities allowing for an average illiquidity premium on the backing assets and reduced by an allowance for investment expenses and the relevant prescribed margin.

ExpensesAn expense analysis is performed on the actual expenses incurred in the calendar year preceding the statement of financial position date. This analysis is used to calculate the acquisition costs incurred and to set the maintenance expense assumption which is based on the budget approved by the board.

Expense inflationThe inflation rate is set at 72% of the risk-free rate when the risk-free rate is below 6.5%. The inflation rate is set at the risk-free rate less 1.75% (2015: 3%) when the risk-free rate

208

Using the simulated investment returns the prices and implied volatilities of the following instruments are:

Instrument

Price Volatility

2016%

2015%

2016%

2015%

A one-year at-the-money (spot) put on the FTSE1/JSE Top 40 index 6.07 5.46 21.17 19.69

A one-year put on the FTSE/JSE Top 40 index, with a strike price equal to 80% of spot 1.63 1.43 25.51 24.54

A one-year at-the-money (forward) put on the FTSE/JSE Top 40 index 7.86 7.23 20.31 18.68

A five-year at-the-money (spot) put on the FTSE/JSE Top 40 index 7.97 6.44 23.17 23.37

A five-year put on the FTSE/JSE Top 40 index, with a strike price equal to 1.045# of spot 14.45 11.78 22.20 22.25

A five-year (forward) put on the FTSE/JSE Top 40 index 16.85 16.68 21.95 21.63A five-year put with a strike price equal to 1.045# of spot

on an underlying index constructed as 60% FTSE/JSE Top 40 and 40% All Bond Index (ALBI), with rebalancing of the underlying index back to these weights taking place annually 6.22 4.49

Not applicable

to volatility

Not applicable

to volatilityA 20-year at-the-money (spot) put on the FTSE/JSE

Top 40 index 3.85 2.52 28.30 30.15A 20-year put on the FTSE/JSE Top 40 index, with a strike

price equal to 1.0420# of spot 16.91 11.50 29.66 31.83A 20-year at-the-money (forward) put on the FTSE/JSE

Top 40 index 28.67 31.79 30.33 33.51A 20-year put option based on an interest rate with a

strike equal to the present five-year forward rate as at maturity of the put option, which pays out if the five-year interest rate at the time of maturity (in 20 years) is lower than the strike price 0.53 0.50

Not applicable

to volatility

Not applicable

to volatility

1 Financial Times Stock Exchange.# Exponent.

Refer to note 7 for disclosures on policyholders’ contracts.


Process used to decide on assumptions and changes in assumptions for non-South African life companies’ changes in assumptionsModelling and other assumption changes were made to realign valuation assumptions with expected future experience. These changes resulted in a net increase in long-term policyholder liabilities of R689 million in 2016 compared to a net increase of R275 million in 2015.

ProvisionsThe principal assumptions taken into account in determining the value at which provisions are recorded at include determining whether there is an obligation, as well as

assumptions about the probability of the outflow of resources and the estimate of the amount and timing for the settlement of the obligation. For legal provisions, management assesses the probability of the outflow of resources by taking into account historical data and the status of the claim in consultation with the group’s legal counsel. In determining the amount and timing of the obligation once it has been assessed to exist, management exercises its judgement by taking into account all available information, including that arising after the balance sheet date up to the date of the approval of the financial statements.

Refer to note 24.4 for details regarding the group’s legal proceedings defended.


1. Cash and balances with central banks

2016Rm

2015Rm

Coins and bank notes 19 594 20 060Balances with central banks 57 880 55 052

Total 77 474 75 112

Cash and balances with central banks include R41 755 million (2015: R40 059 million) that is not available for use by the group. These balances primarily comprise of reserving requirements held with central banks within the countries of operation.

2. Derivative instruments All derivatives are classified either as held-for-trading or held-for-hedging. A summary of the total derivative assets and

liabilities is shown in the table below.

Fair value of assets Fair value of liabilities

2016Rm

2015Rm

2016Rm

2015Rm

Total derivative assets/(liabilities) held-for-trading 68 080 107 831 (72 998) (127 582)Total derivative assets/(liabilities) held-for-hedging 540 3 258 (2 085) (6 376)

Total derivative assets/(liabilities) 68 620 111 089 (75 083) (133 958)

2.1 Use and measurement of derivative instruments In the normal course of business, the group enters into a variety of derivative transactions for both trading and hedging

purposes. Derivative financial instruments are entered into for trading purposes and for hedging foreign exchange, interest rate, inflation, credit, commodity and equity exposures. Derivative instruments used by the group in both trading and hedging activities include swaps, options, forwards, futures and other similar types of instruments based on foreign exchange rates, credit risk, inflation risk, interest rates and the prices of commodities and equities.

The risks associated with derivative instruments are monitored in the same manner as for the underlying instruments. Risks are also measured across the product range in order to take into account possible correlations.

2.2 Derivatives held-for-trading

Fair value of assets

Fair value of liabilities

Contract/notional1 amount

2016Rm

2015Rm

2016Rm

2015Rm

2016Rm

2015Rm

Foreign exchange derivatives 32 577 45 258 (27 515) (46 356) 1 768 250 1 568 566Interest rate derivatives 27 453 53 304 (38 482) (70 483) 6 914 730 5 596 482Commodity derivatives 305 1 404 (270) (1 208) 4 818 14 083Credit derivatives 3 302 4 320 (3 942) (6 345) 94 991 67 867Equity derivatives 4 443 3 545 (2 789) (3 190) 655 138 241 130

Total 68 080 107 831 (72 998) (127 582) 9 437 927 7 488 128

1 The notional amount is the sum of the absolute value of all bought and sold contracts for both derivative assets and liabilities. The amount cannot be used to assess the market risk associated with the positions held and should be used only as a means of assessing the group’s participation in derivative contracts.

Notes to the annual financial statementsfor the year ended 31 December 2016

ANNUAL FINANCIAL STATEMENTS Notes to the annual financial statements continued

210

2. Derivative instruments continued2.3 Derivatives held-for-hedging The group enters into derivative transactions, which are designated and qualify as either fair value, cash flow, or net

investment hedges for recognised financial assets or liabilities, highly probable forecast transactions and net investments in foreign operations. Derivatives designated as hedging instruments consist of the following:

Fair value of assets

Fair value of liabilities

Notionalamount1

2016Rm

2015Rm

2016Rm

2015Rm

2016Rm

2015Rm

Derivatives designated as fair value hedges 515 763 (1 233) (2 285) 72 189 79 464

Interest rate swaps 515 763 (1 233) (2 285) 72 189 79 464

Derivatives designated as cash flow hedges 25 2 457 (799) (3 979) 4 474 11 397

Currency forwards and swaps 17 2 460 (799) (3 979) 3 374 9 620Equity forwards (3) 1 777Interest rate swaps 8 1 100

Derivatives designated as hedges of net investments in foreign operations 38 (53) (112) 511 1 385

Forward exchange contracts 38 (53) (112) 511 1 385

Total 540 3 258 (2 085) (6 376) 77 174 92 246

1 The notional amount is the sum of the absolute value of all bought and sold contracts for both derivative assets and liabilities. The amount cannot be used to assess the market risk associated with the positions held and should be used only as a means of assessing the group’s participation in derivative contracts.

2.3.1 Derivatives designated in fair value relationships Gains or losses arising from fair value hedges The group’s fair value hedges principally consist of currency swaps and interest rate swaps that are used to mitigate

the risk of changes in market interest rates and currencies. The group also uses interest rate swaps for the portfolio hedge of interest rate risk.

2016Rm

2015Rm

Gains/(losses)on hedging instruments 958 (1 274)on the hedged items attributable to the hedged risk (954) 1 427


2. Derivative instruments continued2.3 Derivatives held-for-hedging continued2.3.2 Derivatives designated in cash flow hedge relationships The group uses currency forwards, swaps and options to mitigate against the risk of changes in future cash flows on

its foreign-denominated exposures. Interest rate swaps are primarily used to hedge, by major currency, variable rate financial assets and liabilities with the objective to mitigate against changes in future interest cash flows resulting from the impact of changes in market interest rates, and reinvestment or reborrowing of current balances.

The group uses currency forwards to mitigate against the changes in cash flows arising from changes in foreign currency rates on the forecasted placement of funds between group entities. The group applies hedge accounting where the forecasted intragroup placement of funds is both denominated in a currency other than the functional currency of the entity providing the funds and where the placement of funds will affect consolidated profit or loss in the future.

The forecasted timing of the release of net cash flows before tax from the cash flow hedging reserve into profit or loss at 31 December is as follows:

3 months or less

Rm

More than 3 months

but less than 1 year

Rm

More than1 year

but less than5 years

Rm

More than5 years

Rm

2016Net cash (outflow)/inflow (16) 6 (15) (252)

2015Net cash outflow (17) (270) (465)

Reconciliation of movements in the cash flow hedging reserve

2016Rm

2015Rm

Balance at the beginning of the year (384) 467Amounts recognised directly in OCI before tax (1 743) 2 216Add/(less): amounts released to profit or loss before tax 2 051 (3 432)

Total income 1 994 (2 715)Other operating expenses 57 (717)

(Less)/add: deferred tax (81) 314Non-controlling interests (73) 51

Balance at the end of the year (230) (384)

No gain or loss was recognised in profit or loss due to ineffectiveness arising from cash flow hedges in the current or prior year. There were no transactions for which cash flow hedge accounting had to be discontinued during 2016 or 2015 as a result of highly probable cash flows no longer being expected to occur.

2.3.3 Derivatives designated as hedges of net investments in foreign operations The objective of the hedges of net investments in foreign operations is to limit the risk of a decline in the net asset value

of the group’s investments in foreign operations brought about by changes in exchange rates. To limit this risk, the group enters into forward exchange contracts where considered appropriate. No ineffectiveness was recognised in profit or loss for the current and prior year that arose from hedges of net investments in foreign operations.


212

2. Derivative instruments continued2.4 Day one profit or loss – derivatives held-for-trading and held-for-hedging The table below sets out the aggregate net day one profits to be recognised in profit or loss at the beginning and end of

the year with a reconciliation of changes in the balance during the year:

2016Rm

2015Rm

Unrecognised net profit at the beginning of the year 295 61Additional net profit on new transactions 2 346Recognised in profit or loss during the year (16) (159)Exchange differences (120) 47

Unrecognised net profit at the end of the year 161 295

3. Trading assets 3.1 Classification

2016Rm

2015Rm

Government, municipality, utility bonds and treasury bills 37 811 20 268Corporate bonds and floating rate notes 3 870 7 968Listed equities 26 670 20 974Collateral 5 881 4 374Reverse repurchase and other collateralised agreements 46 629 21 958Other instruments 8 984 10 677

Total 129 845 86 219

3.2 Day one profit or loss – trading assets The table below sets out the aggregate net day one profits to be recognised in profit or loss at the beginning and end of

the year with a reconciliation of changes in the balance during the year:

2016Rm

2015Rm

Unrecognised net profit at the beginning of the year 582 418Additional net profit on new transactions 137 268Recognised in profit and loss for the year (131) (104)

Unrecognised net profit at the end of the year 588 582


4. Pledged assets

2016Rm

2015Rm

Financial assets that may be repledged or resold by counterparties in the absence of defaultGovernment, municipality and utility bonds 10 509 22 881Corporate bonds 202 1 033Listed equities 8 066 8 391Commodities 2 124

Total 18 777 34 429

4.1 Total assets pledged The total amount of financial assets that have been pledged as collateral for liabilities and contingent liabilities was

R28 066 million (2015: R44 498 million).

The assets pledged by the group are strictly for the purpose of providing collateral to the counterparty. To the extent that the counterparty is permitted to sell or repledge the assets in the absence of default, they are classified in the statement of financial position as pledged assets.

These transactions are conducted under terms that are usual and customary to repurchase securities and lending activities.

4.2 Collateral accepted as security for assets As part of the reverse repurchase and securities borrowing agreements, the group has received securities which are not

recorded on the statement of financial position that it is allowed to sell or repledge. The fair value of the financial assets accepted as collateral that the group is permitted to sell or repledge in the absence of default is R143 139 million (2015: R115 202 million).

The fair value of financial assets accepted as collateral and commodities received through commodity leases that have been sold, repledged or leased in terms of repurchase agreements or leasing transactions is R33 056 million (2015: R19 625 million).

These transactions are conducted under terms that are usual and customary to reverse repurchase and securities borrowing activities.


214

4. Pledged assets continued4.3 Assets transferred not derecognised Securitisations The group enters into transactions in the normal course of business by which it transfers recognised financial assets

directly to third parties or structured entities. These transfers may give rise to full derecognition of the financial assets concerned.

Full derecognition occurs when the group transfers substantially all the risks and rewards of ownership and its contractual right to receive cash flows from the financial assets or retains the contractual rights to receive the cash flows of the financial assets but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets IFRS’ derecognition requirements. The risks include interest rate, currency, prepayment and other price risks. However, where the group has retained substantially all of the credit risk associated with the transferred assets, it continues to recognise these assets.

For more detail on the derecognition requirements refer to the accounting policy on financial instruments included in annexure E.

The following table analyses the cumulative carrying amount of securitised financial assets that did not qualify for derecognition, and the associated liabilities:

Carrying amount of

transferred assets

Rm

Carrying amount of associated

liabilities1,2

Rm

Fair value of

transferred assets

Rm

Fair value of

associated liabilities1,2

Rm

Net fair value

Rm

Nature of transaction2016Mortgage loans 18 602 348 18 537 348 18 189

2015Mortgage loans 23 912 4 114 23 172 4 120 19 052

1 The associated liabilities relating to the transferred assets only include external funding for the assets. The transferred assets are also funded by intercompany funding, which has been eliminated at a group level.

2 During 2016, the underlying mortgage assets have been bought back by the group and the cash received was used to settle the associated liabilities.

The interests and rights to the mortgage loans have been ceded as security for the associated liabilities, which have recourse only to the transferred assets.

The cash flows from the transferred assets are required to service the associated liabilities.


4. Pledged assets continued4.3 Assets transferred not derecognised continued Other assets transferred not derecognised The majority of other financial assets that do not qualify for derecognition are debt securities held by counterparties as

collateral under repurchase agreements, listed equities held as collateral under scrip lending transactions and financial assets leased out to third parties. Risks to which the group remains exposed include credit and interest rate risk.

The following table presents details of other financial assets which have been sold or otherwise transferred, but which have not been derecognised in their entirety, and their associated liabilities where applicable. This table does not disclose the total risk exposure in terms of these transactions, instead it provides disclosures as required by IFRS.

Carrying amount of transferred

assetsRm

Carrying amount of associated

liabilitiesRm

Fair value of

transferred assets1

Rm

Fair value of

associated liabilities1

Rm

Net fair value1

Rm

2016Bonds 10 711 4 802 10 714 4 862 5 852Listed equities2 8 066 8 066 8 066

Pledged assets 18 777 4 802 18 780 4 862 13 918Financial investments 8 868 8 860 8 868 8 858 10

Total 27 645 13 662 27 648 13 720 13 928

2015Bonds2 23 914 16 977 23 914 16 792 7 122Listed equities 8 391 8 391 8 391Commodities 2 124 2 124 2 124

Pledged assets 34 429 16 977 34 429 16 792 17 637Financial investments 11 615 11 548 11 615 11 548 67

Total 46 044 28 525 46 044 28 340 17 704

1 Where the counterparty has recourse to the transferred asset.2 During 2015, the carrying amount and fair value of liabilities of certain bonds were erroneously allocated. Consequently, the amounts presented at

31 December 2015 have been restated. The restatement did not affect the group’s statement of financial position.

During the current year, there were no instances of financial assets that were sold or otherwise transferred, but which were partially derecognised. Further, there were no instances of financial assets transferred and derecognised for which the group had continuing involvement.


216

5. Financial investments

2016Rm

2015Rm

Financial investments held in banking activities (note 5.1) 154 630 157 855Financial investments held by investment management and life insurance activities

(note 5.2) 316 149 311 899Interest in associates and joint ventures held at fair value (annexure B) 12 995 16 950

Total 483 774 486 704

5.1 Financial investments held in banking activities comprising:

2016Rm

2015Rm

Government, municipality, utility bonds and treasury bills 136 917 141 461Corporate bonds 6 398 7 002Listed equities 3 435 372Unlisted equities 2 984 2 850Mutual funds and unit-linked investments 2 851 3 975Other instruments 2 045 2 195

Total 154 630 157 855

5.2 Financial investments held by investment management and life insurance activities comprising:

2016Rm

20151

Rm

Equity instruments 120 244 119 980

Listed 117 274 118 555Unlisted 2 970 1 425

Debt instruments 97 444 92 176

Listed preference shares 667 1 113Unlisted preference shares 511 537Listed term deposits 37 675 38 675Unlisted term deposits 21 620 19 185Listed government, municipality and utility bonds 36 953 32 666Unlisted government, municipality and utility bonds 18

Mutual funds 78 635 76 276

Listed 12 903 13 656Unlisted 65 732 62 620

Other 19 826 23 467

Investment policies 8 072 8 056Mortgages and loans 1 242 1 210Cash held with banks outside the group by investment management and life

insurance activities 10 512 14 201

Total 316 149 311 899

1 The note disclosure (including 2015) has been expanded for a better analysis of the balance.


6. Loans and advances6.1 Loans and advances net of impairments

2016Rm

20151

Rm

Loans and advances to banks 143 788 165 156Loans and advances to customers 921 617 911 761

Gross loans and advances to customers 943 410 934 413

Mortgage loans 336 451 325 867Vehicle and asset finance (note 6.2) 82 855 82 075Card debtors 31 229 31 174Overdrafts and other demand loans 79 000 88 158Other term loans 323 624 324 741Loans granted under resale agreements 14 148 16 555Commercial property finance 76 103 65 843

Credit impairments for loans and advances (note 6.3) (21 793) (22 652)

Specific credit impairments (14 659) (15 862)Portfolio credit impairments (7 134) (6 790)

Net loans and advances 1 065 405 1 076 917

1 A balance of R19 836 million was reclassified from loans and advances to customers to loans and advances to banks in order to align the counterparty to the underlying lending arrangement and to conform with the basis of disclosure in the current financial period, the carrying values have been restated accordingly.

6.2 Vehicle and asset finance The maturity analysis is based on the remaining periods to contractual maturity from year end.

2016 2015

Gross advances

Rm

Unearned finance charges

Rm

Net advances

Rm

Gross advances

Rm

Unearned finance charges

Rm

Net advances

Rm

Receivable within one year 28 891 (5 853) 23 038 28 997 (5 897) 23 100Receivable between one

and five years 70 166 (10 731) 59 435 68 487 (9 880) 58 607Receivable after five years 470 (88) 382 407 (39) 368

Total 99 527 (16 672) 82 855 97 891 (15 816) 82 075

Leases entered into are at market-related terms. Under the terms of the lease agreements, no contingent rentals are payable.

Moveable assets are leased or sold to customers under finance leases and instalment sale agreements for periods varying between 12 and 84 months. Depending on the terms of the agreement, the lessee may have the option to purchase the asset at the end of the lease term.


218

6. Loans and advances continued6.3 Credit impairments for loans and advances Total impairments A summary of the allowance for impairment losses for loans and advances, by class:

Mortgage loans

Rm

Vehicle and

asset finance

Rm

Card debtors

Rm

Personal unsecured

lendingRm

Business lending

and other

Rm

Corporate lending

Rm

Com-mercial

property finance

RmTotal

Rm

2016Specific impairmentsBalance at the

beginning of the year 3 892 1 561 1 403 3 505 1 406 3 930 165 15 862

Net impairments raised1 2 052 1 205 1 527 2 660 1 041 817 11 9 313

Impaired accounts written off (1 901) (1 085) (1 280) (2 106) (613) (1 231) (13) (8 229)

Discount element recognised in interest income (363) (114) (19) (239) (77) (170) (982)

Exchange and other movements (40) (157) (33) (227) (229) (619) (1 305)

Balance at the end of the year 3 640 1 410 1 598 3 593 1 528 2 727 163 14 659

Portfolio impairmentsBalance at the

beginning of the year 1 094 802 654 1 365 1 451 1 327 97 6 790

Net impairments raised1 54 23 56 152 55 811 1 151

Exchange and other movements (11) (24) (59) (200) (74) (439) (807)

Balance at the end of the year 1 137 801 651 1 317 1 432 1 699 97 7 134

Total specific and portfolio impairments 4 777 2 211 2 249 4 910 2 960 4 426 260 21 793

Refer to page 219 for footnotes.


6. Loans and advances continued6.3 Credit impairments for loans and advances continued Total impairments continued A summary of the allowance for impairment losses for loans and advances, by class:

Mortgage loans

Rm

Vehicle and

asset finance

Rm

Card debtors

Rm

Personal unsecured

lendingRm

Business lending

and other

Rm

Corporate lending

Rm

Com-mercial

property finance

RmTotal

Rm

2015Specific impairmentsBalance at the

beginning of the year 3 545 1 435 1 030 2 911 1 330 3 004 137 13 392

Net impairments raised1 2 017 1 253 1 523 2 689 836 788 47 9 153

Impaired accounts written off (1 299) (1 112) (1 118) (1 908) (745) (719) (19) (6 920)

Discount element recognised in interest income (400) (70) (43) (253) (93) (10) (869)

Exchange and other movements 29 55 11 66 78 867 1 106

Balance at the end of the year 3 892 1 561 1 403 3 505 1 406 3 930 165 15 862

Portfolio impairmentsBalance at the

beginning of the year 804 625 577 1 390 1 085 737 97 5 315

Net impairments raised/(released)1 281 167 74 (50) 329 472 1 273

Exchange and other movements 9 10 3 25 37 118 202

Balance at the end of the year 1 094 802 654 1 365 1 451 1 327 97 6 790

Total specific and portfolio impairments 4 986 2 363 2 057 4 870 2 857 5 257 262 22 652

1 Net impairments raised/(released) less recoveries of amounts written off in previous years, as well as credit recovery on off-balance sheet exposure, equals income statement impairment charges (note 36).


220

7. Policyholders’ contracts

2016 20151

Policyholders’assets

Rm

Policyholders’ liabilities

Rm


Rm

Policyholders’ liabilities

Rm

Policyholders’ liabilities under insurance contracts 7 314 (215 617) 7 579 (216 735)

Insurance contracts (note 7.1) 7 314 (204 155) 7 579 (205 485)Investment contracts with DPF (note 7.1) (11 462) (11 250)

Policyholders’ liabilities under investment contracts (note 7.2) (91 613) (88 459)

Total 7 314 (307 230) 7 579 (305 194)

1 Refer to the accounting policy elections for details on the change in presentation policy.


7. Policyholders’ contracts continued7.1 Policyholders’ and reinsurance assets and liabilities

2016

Insurance contracts


Rm

Policyholders’liabilities

Rm

Reinsuranceassets and

liabilities1

Rm

Investmentcontracts with DPF2

Rm

Balance at the beginning of the year 7 579 (205 485) 700 (11 250)

Reinsurance assets 1 317 Reinsurance liabilities (617)

Inflows (7 320) (42 698) 1 353 (2 398)

Insurance premiums (7 319) (29 868) 1 353 (2 048)Investment returns (1) (12 808) (350)Fee revenue (22)

Outflows 6 401 43 065 (1 275) 1 936

Claims and policyholders’ benefits 3 445 33 306 (1 204) 1 673Acquisition costs associated with

insurance contracts 1 399 2 174 (24) 91General marketing and administration expenses 1 515 4 215 (35) 156Profit share allocations 30 953Finance costs 244 1 151Taxation (232) 1 266 (12) 16

Net income from insurance operations 654 798 25 58

Changes in estimates (61) (634) 6Planned margins and other variances 991 2 536 (11) 81New business (22) (426) 35Shareholder taxation on transfer of net income (254) (678) (5) (23)

Exchange differences 165 (6) 192

Balance at the end of the year 7 314 (204 155) 797 (11 462)


Liquidity profile Current 2 486 (22 687) 150 (369)Non-current 4 828 (181 468) 647 (11 093)


1 Long-term reinsurance assets are included in note 8 other assets and reinsurance liabilities are included in note 19 provisions and other liabilities.2 The group cannot reliably measure the fair value of investment contracts with DPF. The DPF is a contractual right that provides investors in these

contracts the right to receive supplementary discretionary returns through participation in the surplus arising from the assets held in the investment DPF fund. These supplementary returns are subject to the group’s discretion.


222

7. Policyholders’ contracts continued7.1 Policyholders’ and reinsurance assets and liabilities continued

2015

Insurance contracts


Rm

Policyholders’liabilities

Rm

Reinsuranceassets and

liabilities1

Rm

Investmentcontracts with DPF2

Rm

Balance at the beginning of the year 6 507 (201 457) 896 (10 177)


Inflows (6 731) (42 736) 1 183 (3 157)

Insurance premiums (6 667) (28 452) 1 209 (2 413)Investment returns (64) (14 277) (26) (744)Fee revenue (7)

Outflows 6 282 38 005 (1 150) 1 164

Claims and policyholders’ benefits 2 949 28 345 (998) 960Acquisition costs associated with

insurance contracts 1 582 2 080 (17) 92General marketing and administration expenses 1 433 4 047 (28) 99Profit share allocations 24 872Finance costs 154 937Taxation 140 1 724 (107) 13

Switches between investment contracts with DPF and investment contracts without DPF 1 132

Net income from insurance operations 1 521 900 (234) 59

Changes in estimates 386 (375) (286)Planned margins and other variances 1 438 2 636 (69) 84New business 294 (493) 28Shareholder taxation on transfer of net income (597) (868) 93 (25)

Exchange differences (197) 5 (271)



Liquidity profile Current 2 333 (19 215) 103 (276)Non-current 5 246 (186 270) 597 (10 974)

Total 7 579 (205 485) 700 (11 250)

1 Long-term reinsurance assets are included in note 8 other assets and reinsurance liabilities are included in note 19 provisions and other liabilities.2 The group cannot reliably measure the fair value of investment contracts with DPF. The DPF is a contractual right that provides investors in these

contracts the right to receive supplementary discretionary returns through participation in the surplus arising from the assets held in the investment DPF fund. These supplementary returns are subject to the group’s discretion.


7. Policyholders’ contracts continued7.2 Policyholders’ liabilities under investment contracts

2016Rm

2015Rm

Balance at the beginning of the year (88 459) (81 983)Fund inflows from investment contracts (excluding switches) (17 157) (16 348)Net fair value adjustment (3 891) (6 181)Fund outflows from investment contracts (excluding switches) 16 700 16 013Switches between investments with DPF and investments without DPF (1 132)Service fee income 1 194 1 172

Balance at the end of the year (91 613) (88 459)

Liquidity profile Current (4 715) (4 172)Non-current (86 898) (84 287)

Balance at the end of the year (91 613) (88 459)

Net income from investment contracts1 (54) (25)

Service fee income (1 194) (1 172)Expenses 1 140 1 147

Property expenses applied to investment returns (385) (378)Shareholder taxation on transfer of net income 20 9Acquisition costs 496 471General marketing and administration expenses 992 964Finance costs 17 81

1 Prior to deferred acquisition costs (DAC) and deferred revenue liability (DRL) adjustments.

8. Other assets

2016Rm

20151

Rm

Trading settlement assets 4 690 8 001Items in the course of collection 985 947Operating leases accrued income (note 10) 1 187 1 273Deferred acquisition costs 713 673Retirement funds (note 46) 1 498 1 461Reinsurance assets2 1 674 1 658Investment debtors 422 651Property debtors 577 688Insurance prepayments 3 498 3 432Accounts receivable 599 422Prepayments 2 848 3 070Properties in possession 172 219Property developments 102 135Other debtors 2 582 1 922

Total 21 547 24 552

1 The note disclosure (including 2015) has been expanded for a better analysis of the balance.2 Reinsurance assets include short-term reinsurance assets of R322 million (2015: R341 million).


224

9. Interest in associates and joint ventures

2016Rm

2015Rm

Equity accounted associates and joint venturesCarrying value at the beginning of the year 9 703 3 727Share of profits/(losses) – continuing operations 187 (323)Impairments of associates and joint ventures1 (10) (105)Acquisitions2 2 5 427Disposal of associate – carrying value (256)

Gain on disposal of associates 19 3Disposal of associate – fair value (19) (259)

Share of OCI movements (1 360) 1 366

FCTR (1 264) 1 311Other (96) 55

Distribution of profit (326) (133)

Carrying value at the end of the year 8 196 9 703Comprising:Cost of investments 8 049 8 047Share of reserves 930 2 429Cumulative impairment (783) (773)

1 During the reporting period, an impairment loss of R10 million was recognised on the group’s investment in SBV Services (SBV). The events and circumstances that led to the recognition of the impairment was that the recoverable amount (being the fair value less cost to sell, which was assessed to be nil) of the group’s investment in SBV was less than the carrying value.

2 The group disposed of 60% of Standard Bank Plc (SB Plc) to ICBC on 1 February 2015. The final cash proceeds on this 60% disposal, which was based on a discount to the 31 January 2015 net asset value amounted to USD675 million. The group retained a 40% interest in ICBC Standard Bank Plc, with this interest being recognised as investment in an associate from 1 February 2015.

There are no significant restrictions on the ability of associates and joint ventures to transfer funds to the group in the form of cash dividends or in the repayment of loans or advances.

Refer to annexure B for further information.


10. Investment property

2016Rm

2015Rm

Fair value at the beginning of the year 30 508 27 022Revaluations net of lease straight-lining 328 1 257Additions – capitalised subsequent expenditure and acquisitions 822 2 418Disposals (469) (239)Transfers (to)/from owner occupied properties (6) 16Exchange movements (28) 34

Fair value at the end of the year 31 155 30 508

Investment property and related operating lease balances comprise the following:Investment properties at fair value 31 155 30 508Operating leases – accrued income (note 8) 1 187 1 273

Total investment property 32 342 31 781

Amount recognised in profit and lossRental income earned, excluding straight-lining operating leases 2 603 2 322Direct operating expenses 945 821

Most of the investment property comprises shopping malls located in South Africa.

The South African located investment properties were independently valued as at 31 December 2016 by registered professional valuers with the South African Council for the Property Valuers Profession as well as members of the Institute of Valuers of South Africa. The method of valuation is consistent with that described in the key management assumptions section. The Kenyan and Nigerian located properties were independently valued as at 31 December 2016 by various registered professional valuers in each territory.

Refer to the key management assumptions for details regarding the valuation of investment property.


226

11. Property and equipment

Property Equipment

Freehold Rm

LeaseholdRm

Computer equipment

Rm

Furniture and fittings

Rm

Office equipment

Rm

Motor vehicles

RmTotal

Rm

Net book value at 1 January 2015 6 696 1 951 3 723 3 337 762 268 16 737

Movements 176 94 337 282 23 21 933

Additions 307 631 2 008 951 231 139 4 267Disposals (92) (245) (199) (85) (77) (35) (733)Depreciation (149) (504) (1 577) (620) (175) (94) (3 119)Exchange movements 126 212 105 36 44 11 534Transfer to

investment property1 (16) (16)

Net book value at 31 December 2015 6 872 2 045 4 060 3 619 785 289 17 670

Cost 7 686 4 234 11 672 7 467 1 693 662 33 414Accumulated

depreciation and impairment (814) (2 189) (7 612) (3 848) (908) (373) (15 744)

Movements (297) (619) (304) (263) (101) (45) (1 629)

Additions 484 366 1 736 706 212 116 3 620Disposals (144) (39) (122) (125) (32) (31) (493)Depreciation (166) (454) (1 526) (620) (175) (92) (3 033)Exchange movements (477) (492) (392) (224) (106) (38) (1 729)Transfer from

investment property1 6 6

Net book value at 31 December 2016 6 575 1 426 3 756 3 356 684 244 16 041

Cost 7 503 3 613 10 526 6 826 1 508 592 30 568Accumulated

depreciation and impairment (928) (2 187) (6 770) (3 470) (824) (348) (14 527)

1 Refer to note 10.

Property and equipment includes work in progress of R345 million (2015: R963 million) for which depreciation has not yet commenced.

There is no significant property or equipment for which title is restricted or which is pledged as security for liabilities.

11.1 Valuation The fair value of completed freehold property, based on valuations undertaken for the period 2013 to 2015, was

estimated at R9 682 million (2015: R8 808 million). Registers of freehold property are available for inspection by members, or their authorised agents, at the registered office of the company and its subsidiaries. Valuations were generally in terms of the investment method whereby net income is capitalised having regard to tenancy, location and the physical nature of the property.


12. Goodwill and other intangible assets

Goodwill Rm

Computer software

Rm

Present value of

in-force life insurance

Rm

Other intangible

assetsRm

TotalRm

Net book value at 1 January 2015 3 752 17 125 126 172 21 175

Cost 5 314 22 298 1 691 789 30 092Accumulated amortisation and impairment (1 562) (5 173) (1 565) (617) (8 917)

Movements 449 2 550 (60) (83) 2856

Additions 5 334 5 334Disposals (74) (74)Amortisation (1 450) (64) (50) (1 564)Exchange movements 782 29 4 8 823Impairments (333) (1 289) (41) (1 663)

Net book value at 1 January 2016 4 201 19 675 66 89 24 031


Movements (1 862) 1 554 (23) (25) (356)

Additions 63 3 874 40 3 977Disposals (60) (60)Amortisation (2 026) (21) (25) (2 072)Exchange movements (1 443) 420 (2) (40) (1 065)Impairments (482) (654) (1 136)

Net book value at 31 December 2016 2 339 21 229 43 64 23 675


During 2016, R284 million (2015: R354 million) of interest was capitalised.

Intangible assets include work in progress of R3 619 million (2015: R6 239 million) for which amortisation has not yet commenced.

No intangible assets are pledged as security for liabilities.

12.1 Goodwill

2016 2015

Gross goodwill

Rm

Accu-mulated

impairmentRm

Net goodwill

Rm

Gross goodwill

Rm

Accu-mulated

impairmentRm

Net goodwill

Rm

Stanbic IBTC Holdings PLC 2 314 (1 221) 1 093 4 151 (1 325) 2 826Stanbic Holdings Plc 989 989 1 126 1 126Other 1 511 (1 254) 257 1 501 (1 252) 249

Total 4 814 (2 475) 2 339 6 778 (2 577) 4 201


228

12. Goodwill and other intangible assets continued12.1 Goodwill continued Stanbic IBTC Holdings PLC Based on the impairment testing performed, an impairment of R482 million (2015: R333 million) was recognised in the

CIB CGU which was based on a recoverable amount of R2 339 million.

Stanbic Holdings Plc Based on the impairment test performed, no impairment was identified in either 2016 or 2015.

Goodwill relating to other entities The remaining aggregated carrying amount of the goodwill of R257 million (2015: R249 million) has been allocated to

CGUs that are not considered to be individually significant. Based on the impairment testing performed, no impairment (2015: Rnil) was recognised.

13. Share capital13.1 Authorised

2016Rm

2015Rm

2 billion (2015: 2 billion) ordinary shares1 200 2008 million (2015: 8 million) first preference shares2 8 81 billion (2015: 1 billion) second preference shares3 10 10

Total 218 218

13.2 IssuedOrdinary shares 17 960 17 946

Ordinary share capital 162 162Ordinary share premium 17 798 17 784

Preference share capital and premium 5 503 5 503

First preference share capital 8 8Second preference share capital 1 1Second preference share premium 5 494 5 494

Total 23 463 23 449

1 Ordinary shares comprise shares of 10 cents each traded on the JSE under the symbol SBK.2 First preference shares comprise 6.5% first cumulative non-redeemable preference shares of R1 each traded on the JSE under the symbol SBKP.3 Second preference shares comprise non-redeemable, non-cumulative, non-participating preference shares of 1 cent each traded on the JSE under

the symbol SBPP. The non-redeemable, non-cumulative, non-participating preference shares are entitled to an annual dividend, if declared, payable in two semi-annual instalments of not less than 77% of the prime interest rate multiplied by the subscription price of R100 per share.


13. Share capital continued13.2 Issued continued

Number of ordinary shares

Reconciliation of shares issuedShares in issue at 1 January 2015 1 618 361 849Shares issued during 2015 in terms of the group's equity compensation plans 3 813 706Share buy-back (3 923 373)

Shares in issue at 31 December 2015 1 618 252 182

Net shares held in terms of the group's Tutuwa initiative 5 750 291Shares held by entities within the group 11 084 016Shares held by other shareholders 1 601 417 875

Shares issued during 2016 in terms of the group's equity compensation plans 2 646 456Share buy-back (2 477 472)

Shares in issue at 31 December 2016 1 618 421 166

Net shares held in terms of the group’s Tutuwa initiative 5 750 291Shares held by entities within the group 16 086 916Shares held by other shareholders 1 596 583 959

All issued shares are fully paid up. There has been no movement in the first and second preference shares during the year. The number of shares in issue for first and second preference shares are 8 000 000 and 52 982 248 respectively.

13.3 Unissued shares

2016Number

of shares

2015Number

of shares

Ordinary unissued shares 252 840 615 250 363 143Ordinary shares reserved to meet the requirements of the equity

growth scheme (EGS) and the group share incentive scheme (GSIS) 128 738 219 131 384 675

Ordinary shares reserved in terms of the rules of EGS and GSIS as approved by members’ resolution dated 27 May 2010 155 825 715 155 825 715

Less: issued to date of the above resolution for the EGS and GSIS schemes (27 087 496) (24 441 040)

Unissued ordinary shares 381 578 834 381 747 818Unissued second preference shares 947 017 752 947 017 752

There are no unissued first preference shares.

At the end of the year, the group would need to issue 5 306 247 (2015: 5 767 801) SBG ordinary shares to settle the outstanding options in the group share incentive scheme and rights in the equity growth scheme awarded to participants historically.


230

13. Share capital continued13.4 Interest of directors in the capital of the company

Direct beneficial1 Indirect beneficial1

2016Number

of shares

2015Number

of shares

2016Number

of shares

2015Number

of shares

Ordinary sharesA Daehnke2 30 652 68 148RMW Dunne 6 000 14 000 14 000 14 000GJ Fraser Moleketi3 1 890 1 675TS Gcabashe4 100 000 100 000BJ Kruger 275 000 275 000JH Maree 92 152KD Moroka4 515 515 66 636 66 636ANA Peterside CON 100 000 100 000SP Ridley5 88 536 60 145MJD Ruck 100 000 140 000BS Tshabalala 426 426SK Tshabalala4 92 006 81 140 418 814 418 814EM Woods 52 450 52 450

Total 739 201 623 250 769 699 699 876

Direct beneficial1

2016Number

of shares

2015Number

of shares

Second preference sharesBJ Kruger 26 791 26 791SP Ridley5 16 668

Total 43 459 26 791

2016Number

of shares

2015Number

of shares

Shares as at 31 DecemberShare incentives6 2 938 071 2 762 036

1 As per JSE Listings Requirements.2 Appointed as director on 1 May 2016.3 Appointed as director on 21 November 2016.4 Represents rights to shares as a beneficiary of the Tutuwa Managers’ Trust. At 31 December 2016, the debt per share was R58.26 (2015: R56.82).5 Retired as director on 30 April 2016.6 Refer to annexure D for further details regarding directors’ share incentive scheme rights.

There have been no changes to directors’ interests between 1 January 2017 and 2 March 2017.


13. Share capital continued13.5 General authority of directors to issue shares1

2016Number

of shares

2015Number

of shares

Ordinary shares 40 456 305 80 892 206Preference shares 947 017 752 947 017 752

1 The general authority expires at the annual general meeting on 26 May 2017.

All first preference shares are in issue.

13.6 Treasury shares

2016Number

of shares

2015Number

of shares

Purchased during the year1 71 571 219 58 629 786Total treasury shares held at end of year 16 086 916 11 084 016Ordinary shares delisted and reinstated to authorised 2 477 472 3 923 373

1 The average share price for the shares purchased during the year was R133.16 (2015: R150.08).

13.7 Shareholder analysis

2016 2015

Number of shares

(million) % holding

Number of shares

(million) % holding

Spread of ordinary shareholdersPublic1 1 074.5 66.4 1 056.0 65.2Non-public1 543.9 33.6 562.3 34.8

Directors and prescribed officers of Standard Bank Group, and its subsidiaries2 0.8 1.3 0.1

ICBC 325.0 20.1 325.0 20.1Government Employees Pension Fund

(investment managed by PIC) 191.0 11.8 202.0 12.5Standard Bank Group retirement fund 2.8 0.2 2.0 0.1Tutuwa participants3 24.2 1.5 31.9 2.0Associates of directors 0.1 0.1

Total 1 618.4 100.0 1 618.3 100.0

Refer to footnotes on page 232.


232

13. Share capital continued13.7 Shareholder analysis continued

2016 2015

Number of shares

(million) % holding

Number of shares

(million) % holding

Spread of first preference shareholdersPublic1 8 000 000 100.0 8 000 000 100.0

Spread of second preference shareholdersPublic1 52 936 998 99.9 52 931 957 99.9Non-public1 45 250 0.1 50 291 0.1

Directors and prescribed officers of Standard Bank Group, and its subsidiaries2 45 250 0.1 50 291 0.1

Total 52 982 248 100.0 52 982 248 100

1 As per the JSE Listings Requirements.2 Excludes indirect holdings of strategic partners, which are included in Tutuwa participants.3 Includes Tutuwa Strategic Holdings 1 and 2, Tutuwa Staff Holdings 1, 2 and 3, Tutuwa Community and General Staff Share Trust.

14. Empowerment reserve SBG and Liberty entered into a series of transactions in 2004 whereby investments were made in cumulative

redeemable preference shares issued by Black Economic Empowerment (BEE) entities which are SEs. The initial investments made by SBG and Liberty totalled R4 017 million and R1 251 million respectively. The proceeds received were used by the BEE entities to purchase 99 190 197 ordinary shares of SBG. All participants were subject to a ten-year lock-in period which expired on 31 December 2014.

The preference shares owned by the group do not meet the definition of a financial asset in terms of IFRS and are therefore, treated as a negative empowerment reserve within the statement of changes in equity. The empowerment reserve represents SBG and Liberty shares held by the SEs that are deemed to be treasury shares in terms of IFRS.

Refer to annexure E for further details.

The investment in the cumulative redeemable preference shares of the BEE entities, accounted for by the group as a negative empowerment reserve, is set out below:

2016Rm

2015Rm

Number ofSBG shares

Standard Bank Group1 274 274 5 750 291Liberty (after non-controlling interest) 79 174

Outstanding shares issued through Tutuwa initiative 353 448 5 750 291

1 Comprises the Black Managers’ Trust – Tutuwa Staff Holdings 1-3 Proprietary Limited and the Community Trust – Tutuwa Community Holdings Proprietary Limited.

For the purposes of the earnings per share calculation, the weighted average number of the company’s shares in issue is reduced by the number of shares held by the BEE entities bought with the proceeds received from the preference shares (note 41).


15. Trading liabilities

2016Rm

2015Rm

Government, municipality and utility bonds 9 216 5 018Listed equities 19 360 18 056Collateral 437 367Repurchase and other collateralised agreements 6 741 10 446Credit-linked notes 5 778 3 828Other instruments 6 335 5 589

Total 47 867 43 304

16. Deferred taxation16.1 Deferred tax analysis

2016Rm

2015Rm

Accrued interest receivable 20 23Assessed losses1 (68) (399)Assets on lease 189 230Capital gains tax 319 1 853Credit impairment charges (1 483) (1 463)Deferred acquisition costs 196 182Deferred revenue liability (72) (66)Property and equipment 1 930 1 813Derivatives and financial instruments 130 928Fair value adjustments on financial instruments (206) (97)Intangible asset – present value of in-force (PVIF) 36 40Policyholder change in valuation basis 2 418 2 385Post-employment benefits 149 58Share-based payments (708) (290)Special transfer to life fund (668) (284)Provisions and other items (1 375) (1 700)

Deferred tax closing balance 807 3 213

Deferred tax liabilities 2 795 5 094Deferred tax assets (1 988) (1 881)

1 The group has estimated tax losses of R316 million (2015: R1 659 million) which are available for set-off against future taxable income. These tax losses have arisen from the group entities incurring operational tax losses. This asset is anticipated to be recovered as financial projections indicate these entities are likely to produce sufficient taxable income in the near future. These deferred tax asset balances were offset against deferred tax liabilities, refer to annexure E.


234

16. Deferred taxation continued16.2 Deferred tax reconciliation

2016Rm

2015Rm

Deferred tax at the beginning of the year 3 213 2 760Total temporary differences for the year (2 406) 453

Deferred tax adjustment due to change in tax rate 22(Reversing)/originating temporary differences for the year (2 428) 453

Accrued interest receivable (3) 18Assessed losses 331 172Assets on lease (41) 4Capital gains tax (1 548) 136Credit impairment charges (20) (486)Deferred acquisition costs 14 21Deferred revenue liability (6) (7)Property and equipment 117 58Derivatives and financial instruments (798) 217Fair value adjustments on financial instruments (117) (311)Intangible asset – PVIF (4) (25)Policyholder change in valuation basis 33 146Post-employment benefits 91 (91)Share-based payments (418) 327Special transfer to life fund (384) 158Provisions and other differences 325 116

Deferred tax at the end of the year 807 3 213

Temporary differences for the year comprise:Recognised in OCI from continuing operations 939 (269)

Fair value adjustments on financial instruments 893 (223)Defined benefit fund remeasurements 46 (46)

Recognised in equity-deferred tax on share-based payments (207) 72Recognised in the income statement (3 869) 849Exchange differences 731 (199)

Recognised in OCI (767) 156Recognised in the income statement 1 498 (355)

Total (2 406) 453


17. Deposits and debt funding

2016Rm

2015Rm

Deposits and debt funding from banks 119 246 137 202Deposits and debt funding from customers 1 094 375 1 049 312

Current accounts 200 032 212 356Cash management deposits 172 194 130 386Call deposits 301 120 294 576Savings accounts 23 570 23 136Term deposits 229 272 240 246Negotiable certificates of deposit 124 536 105 447Securitisation issuances 272 3 172Foreign currency funding 36 358 38 961Other funding 7 021 1 032

Total 1 213 621 1 186 514


236

18. Subordinated debt

Redeemable/repayable date Callable date

Notional value1

Carrying value1

Carrying value

2016million

2016Rm

2015Rm

Banking activitiesThe Standard Bank of South Africa 20 340 21 309

SBK12 24 November 2021 24 November 2016 ZAR1 600 1 618SBK13 24 November 2021 24 November 2016 ZAR1 150 1 160SBK15 23 January 2022 23 January 2017 ZAR1 220 1 242 1 239SBK14 1 December 2022 1 December 2017 ZAR1 780 1 795 1 795SBK16 15 March 2023 15 March 2018 ZAR2 000 2 008 2 008SBK9 10 April 2023 10 April 2018 ZAR1 500 1 529 1 529SBK17 30 July 2024 30 July 2019 ZAR2 000 2 031 2 029SBK19 24 October 2024 24 October 2019 ZAR500 508 508SBK202 2 December 2024 2 December 2019 ZAR2 250 2 269 2 269SBK212 28 January 2025 28 January 2020 ZAR750 763 763SBK222 28 May 2025 28 May 2020 ZAR1 000 1 009 1 009SBK242 19 October 2025 19 October 2020 ZAR880 897 897SBK18 24 October 2025 26 October 2020 ZAR3 500 3 565 3 557SBK262 25 April 2026 25 April 2021 ZAR500 511SBK252 25 April 2026 26 April 2021 ZAR1 200 1 225SBK232 28 May 2027 28 May 2022 ZAR1 000 988 928

Africa Regions tier II bonds July 2016 – May 2022 July 2016 – May 2017 Various 180 676

Subordinated bonds issued to group companies (737) (789)

Total bonds qualifying as SARB regulatory banking capital 19 783 21 196Africa Regions bonds not qualifying as SARB regulatory banking capital 1 618 2 371

Stanbic Bank Kenya 8 December 2021 1 June 2020 KES4 000 532 602Stanbic IBTC Bank

(Nigeria) 30 September 2024 1 October 2019 NGN15 440 686 1 226Standard Bank

MozambiqueSeptember 2020 – October 2025

September 2020 – October 2020 MZN1 001 196 334

Other Africa Regions bonds

October 2024 – December 2024

October 2019 – December 2019 Various 204 209

Total subordinated bonds – banking activities 21 401 23 567

LibertyQualifying as regulatory insurance capital 4 596 3 574

LGL 02 13 August 2017 ZAR1 000 1 029 1 028LGL 03 3 April 2018 ZAR1 000 1 018 1 016LGL 04 14 August 2020 ZAR1 000 1 032 1 031LGL 05 12 December 2021 ZAR500 500LGL 06 4 October 2022 ZAR400 407LGL 07 4 October 2022 ZAR600 610 499

Total 25 997 27 141

1 The difference between the carrying and notional value represents foreign exchange movements, transaction costs included in the initial carrying amounts, accrued interest and the unamortised fair value adjustments relating to bonds, where applicable, hedged for interest rate risk.

2 The terms of the issued bonds include a regulatory requirement which provides for the write-off in whole or in part on the earlier of a decision by the relevant regulator (SARB) that a write-off, or a public sector injection of capital or equivalent support is necessary, without which the issuer would have become non-viable.


19. Provisions and other liabilities19.1 Summary

2016Rm

20151

Rm

Trading settlement liabilities 9 459 7 078Items in the course of transmission 2 434 3 798Post-employment benefits (note 46) 1 343 1 372Third-party liabilities arising on consolidation of mutual funds (note 19.2) 44 046 46 329Cash-settled share-based payment liability (annexure C) 516 481Insurance payables 7 941 7 963Reinsurance liability2 555 617Staff-related accruals 7 075 9 170Short-term insurance liability 925 937Deferred revenue liability 268 247Deemed disposal taxation liability 873Collateral and other insurance risk management liabilities 11 748 16 159Other liabilities 9 633 8 360

Total 96 816 102 511

1 The note disclosure (including 2015) has been expanded for a better analysis of the balance.2 Refer to the accounting policy elections regarding detail of the change in presentation policy.

19.2 Third-party liabilities arising on consolidation of mutual funds

2016Rm

2015Rm

Balance at the beginning of the year 46 329 34 503Additional mutual funds classified as subsidiaries 223 330Net capital (repayment)/contribution or change in effective ownership (22) 6 600Mutual funds no longer classified as subsidiaries (639) (1 158)Distributions (1 226) (1 247)Fair value adjustment (619) 7 301

Balance at the end of the year 44 046 46 329

The group has classified certain mutual funds as investments in subsidiaries. Consequently, fund interests not held by the group are classified as third-party liabilities as they represent demand deposit liabilities measured at fair value.



238

20. Classification of assets and liabilities Accounting classifications and fair values of assets and liabilities The tables that follow categorise the group’s assets and liabilities as at 31 December 2016 between that which is

financial and non-financial. All financial assets and liabilities have been classified according to their measurement category with disclosure of the fair value being provided for these items.

Held-for-trading

Rm

Designated at fair value

Rm

Held-to-maturity

Rm

Loans and receivables1

Rm

Available-for-sale

Rm

Other amortised

cost1

Rm

Other assets/

liabilitiesRm

Total carrying amount

RmFair value2

Rm

2016AssetsCash and balances with central banks 77 474 77 474 77 474Derivative assets 68 620 68 620 68 620Trading assets 129 845 129 845 129 845Pledged assets 1 178 16 169 198 1 232 18 777 18 779Financial investments 352 445 75 201 17 252 38 876 483 774 484 163Loans and advances to banks 143 788 143 788 143 674Loans and advances to customers 96 921 521 921 617 913 949Policyholders’ assets 7 314 7 314 7 314Interest in associates and joint ventures 8 196 8 196Investment property 31 155 31 155 31 155Other financial assets3 11 843 11 843Other non-financial assets 51 887 51 887

Total 199 643 376 024 75 201 1 172 076 40 108 91 238 1 954 290

LiabilitiesDerivative liabilities 75 083 75 083 75 083Trading liabilities 47 867 47 867 47 867Deposits and debt funding from banks 119 246 119 246 118 909Deposits and debt funding from customers 13 627 1 080 748 1 094 375 1 111 276Policyholders’ liabilities4 91 613 215 617 307 230 91 613Subordinated debt 25 997 25 997 26 384Other financial liabilities3 44 046 21 408 65 454Other non-financial liabilities 39 679 39 679

Total 122 950 149 286 1 247 399 255 296 1 774 931

1 Includes financial assets and financial liabilities for which the carrying value has been adjusted for changes in fair value due to designated hedged risks.

2 Carrying value has been used where it closely approximates fair values, excluding non-financial assets and liabilities. 3 The fair value of the other financial assets and liabilities approximates the carrying value due to their short-term nature.4 The fair value has been provided for financial liabilities under investment contracts which have been designated at fair value.

The remaining liabilities for which fair value disclosure has not been provided relate to insurance contracts and investment contracts with discretionary participation features that are not financial instruments as defined.



240

20. Classification of assets and liabilities continued Accounting classifications and fair values of assets and liabilities continued

Held-for-trading

Rm

Designated at fair value

Rm

Held-to-maturity

Rm

Loans and receivables1

Rm

Available-for-sale

Rm

Other amortised

cost1

Rm

Other assets/

liabilitiesRm

Total carrying amount

RmFair value2

Rm

2015AssetsCash and balances with central banks 75 112 75 112 75 112Derivative assets 111 089 111 089 111 089Trading assets 86 219 86 219 86 219Pledged assets 8 220 22 319 175 3 715 34 429 34 434Financial investments 350 544 73 689 21 418 41 053 486 704 487 147Loans and advances to banks3 165 156 165 156 163 005Loans and advances to customers3 78 911 683 911 761 896 045Policyholders’ assets4 7 579 7 579 7 579Interest in associates and joint ventures 9 703 9 703Investment property 30 508 30 508 30 508Other financial assets5 11 767 11 767Other non-financial assets 56 901 56 901

Total 205 528 380 520 73 689 1 185 311 44 768 97 112 1 986 928

LiabilitiesDerivative liabilities 133 958 133 958 133 958Trading liabilities 43 304 43 304 43 304Deposits and debt funding from banks 137 202 137 202 134 531Deposits and debt funding from customers 18 929 1 030 383 1 049 312 1 035 638Policyholders’ liabilities5, 6 88 459 216 735 305 194 88 459Subordinated debt 27 141 27 141 23 456Other financial liabilities5 46 329 46 580 92 909Other non-financial liabilities4 19 000 19 000

Total 177 262 153 717 1 241 306 235 735 1 808 020

1 Includes financial assets and financial liabilities for which the carrying value has been adjusted for changes in fair value due to designated hedged risks.

2 Carrying value has been used where it closely approximates fair values, excluding non-financial assets and liabilities. 3 A balance of R19 836 million was reclassified from loans and advances to customers to loans and advances to banks in order to align the

counterparty to the underlying lending arrangement and to conform with the basis of disclosure in the current financial period.4 Refer to the accounting policy elections regarding detail on the change in presentation policy.5 The fair value of the other financial assets and liabilities approximates the carrying value due to their short-term nature.6 The fair value has been provided for financial liabilities under investment contracts which have been designated at fair value. The remaining

liabilities for which fair value disclosure has not been provided relate to insurance contracts and investment contracts with discretionary participation features that are not financial instruments as defined.


242

21. Fair value disclosures21.1 Assets and liabilities measured at fair value

2016 2015

Level 1Rm

Level 2Rm

Level 3Rm

TotalRm

Level 1Rm

Level 2Rm

Level 3Rm

TotalRm

Assets Measured on a recurring basis1

Derivative assets 183 66 322 2 115 68 620 59 108 573 2 457 111 089Trading assets 54 635 70 459 4 751 129 845 31 486 45 791 8 942 86 219Pledged assets 16 829 1 750 18 579 29 977 4 277 34 254Financial investments 214 451 168 915 7 955 391 321 202 120 179 464 10 013 391 597Loans and advances

to customers 96 96 2 76 78Policyholders’ assets2 7 314 7 314 7 579 7 579Investment property 31 155 31 155 30 508 30 508

Total assets at fair value 286 098 314 856 45 976 646 930 263 644 345 760 51 920 661 324

LiabilitiesMeasured on a recurring basis1

Derivative liabilities 145 66 384 8 554 75 083 19 119 298 14 641 133 958Trading liabilities 26 995 16 691 4 181 47 867 21 388 19 432 2 484 43 304Deposits and debt

funding from customers 13 627 13 627 18 929 18 929

Policyholders’ liabilities2 91 613 91 613 88 459 88 459

Other financial liabilities 44 046 44 046 46 329 46 329

Total liabilities at fair value 27 140 232 361 12 735 272 236 21 407 292 447 17 125 330 979

1 Recurring fair value measurements of assets or liabilities are those assets and liabilities that IFRS require or permit to be carried at fair value in the statement of financial position at the end of each reporting period.

2 Refer to the accounting policy elections regarding details of the change in presentation policy.

Assets and liabilities transferred between level 1 and level 2 During the year, no significant assets or liabilities were transferred between level 1 and level 2 (2015: Rnil).


21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Level 3 financial assets and financial liabilities Reconciliation of level 3 assets The following table provides a reconciliation of the opening to closing balance for all assets that are measured at fair

value and incorporate inputs that are not based on observable market data (level 3).

Measured on a recurring basis

Derivative assets

Rm

Trading assets

Rm

Financial invest-ments

Rm

Invest-ment

property Rm

TotalRm

Balance at 1 January 2016 2 457 8 942 10 013 30 508 51 920Total gains/(losses) included in

profit or loss 960 (469) (1 055) 328 (236)

Interest income 30 30Trading revenue 960 (469) (47) 444Other revenue 12 12Investment (losses)/gains (1 050) 328 (722)

Total gains included in OCI 117 117Issuances and purchases 23 393 2 417 822 3 655Sales and settlements (1 575) (3 846) (3 000) (475) (8 896)Transfers into level 32 249 359 13 621Transfers out of level 33 (516) (502) (1 018)Reclassifications4 (112) (112)Exchange movement gains/(losses) 1 (48) (28) (75)

Balance at 31 December 2016 2 115 4 751 7 955 31 155 45 976



244

21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Level 3 financial assets and financial liabilities continued Reconciliation of level 3 assets continued


Measured on a non-

recurring basis

Derivative assets

Rm

Trading assets

Rm


Rm

Invest-ment

property Rm

Non-current assets

held for sale1

RmTotal

Rm

Balance at 1 January 2015 753 4 647 5 807 27 022 3 574 41 803

Total gains/(losses) included in profit or loss 649 212 (11) 1 285 (510) 1 625

Interest income 65 65Trading revenue 649 212 (2) (510) 349Other revenue (172) (172)Investment gains 98 1 285 1 383

Total gains/(losses) included in OCI 129 (1) 128

Issuances and purchases 1 672 1 100 1 851 2 434 7 057Sales and settlements (626) (495) (1 696) (267) (3) (3 087)Transfers into level 32 3 477 3 552 7 029Transfers out of level 33 (167) (167)Disposal of non-current

assets held for sale (3 143) (3 143)Exchange movement gains 9 1 548 34 83 675

Balance at 31 December 2015 2 457 8 942 10 013 30 508 51 920

1 Relates to financial assets within the disposal group that have been classified as level 3.2 Transfers of financial assets between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. During the

year, the valuation inputs of certain financial assets became unobservable. The fair value of these assets was transferred into level 3.3 During the year, the valuation inputs of certain level 3 financial assets became observable. The fair value of these financial assets was transferred

into level 2.4 Level 3 financial assets were reclassified from held-for-trading to loans and receivables at amortised cost in terms of IFRS during 2016. Refer to

note 22.


21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Unrealised gains/(losses) for the period included in profit or loss for level 3 assets held at the end of

the reporting period


Derivative assets

Rm

Trading assets

Rm


Rm

Invest-ment

property Rm

TotalRm

2016Interest income 47 47Trading revenue 1 043 (469) (48) 526Other revenue (540) (540)Investment management and

service fee income and gains (4 297) (4 297)

Total 1 043 (469) (541) (4 297) (4 264)

2015Interest income 47 47Trading revenue 414 266 (58) 622Other revenue 165 165Investment management and

service fee income and gains 1 147 1 147

Total 414 266 154 1 147 1 981


246

21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Reconciliation of level 3 liabilities The following table provides a reconciliation of the opening to closing balance for all liabilities that are measured at fair

value based on the inputs that are not based on observable market data (level 3).


Measured on a non-recurring

basis

TotalRm

Derivative liabilities

Rm

Trading liabilities

Rm

Non-current

liabilities held for

sale1

Rm

Balance at 1 January 2015 5 958 1 922 6 482 14 362Total losses included in profit or loss –

trading revenue2 5 641 56 232 5 929Issuances and purchases 3 344 924 4 268Sales and settlements (301) (435) (736)Disposal of non-current liabilities held for sale (6 905) (6 905)Exchange movement (gains)/losses (1) 17 191 207

Balance at 31 December 2015 14 641 2 484 17 125

Balance at 1 January 2016 14 641 2 484 17 125Total (gains)/losses included in profit or loss –

trading revenue2 (4 896) 310 (4 586)Issuances and purchases 1 804 1 804Sales and settlements (1 193) (416) (1 609)Transfers into level 33 1 1Exchange movement losses/(gains) 1 (1)

Balance at 31 December 2016 8 554 4 181 12 735

1 Relates to financial liabilities within the disposal group that have been classified as level 3.2 The change in fair value has been materially offset by changes in the fair value of financial assets and liabilities classified as level 2 in the fair value

hierarchy which hedge this position. 3 Transfers of financial liabilities between the levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period.

During 2016, the valuation inputs of certain financial liabilities became unobservable. The fair value of these liabilities was transferred into level 3.


21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Unrealised (gains)/losses for the period included in profit or loss for level 3 liabilities held at the end of

the reporting period


TotalRm

Derivative liabilities

Rm

Trading liabilities

Rm

2016Trading revenue (6 309) 26 (6 283)

2015Trading revenue 5 879 56 5 935

Sensitivity and interrelationships of inputs The behaviour of the unobservable parameters used to fair value level 3 assets and liabilities is not necessarily

independent, and may often hold a relationship with other observable and unobservable market parameters. Where material and possible, such relationships are captured in the valuation by way of correlation factors, though these factors are, themselves, frequently unobservable. In such instances, the range of possible and reasonable fair value estimates is taken into account when determining appropriate model adjustments.

The table that follows indicates the sensitivity of valuation techniques and main assumptions used in the determination of the fair value of the level 3 assets and liabilities measured and disclosed at fair value. The table further indicates the effect that a significant change in one or more of the inputs to a reasonably possible alternative assumption would have on profit or loss at the reporting date (where the change in the unobservable input would change the fair value of the asset or liability significantly). The changes in the inputs that have been used in the analysis have been determined taking into account several considerations such as the nature of the asset or liability and the market within which the asset or liability is transacted.


248

21. Fair value disclosures continued21.1 Assets and liabilities measured at fair value continued Sensitivity and interrelationships of inputs continued

Change in significant unobservable input

Effect on profit or loss

FavourableRm

(Unfavourable)Rm

2016Derivative instruments From (1%) to 1% 606 (605)Trading assets From (1%) to 1% 578 (578)Financial investments From (1%) to 1% 79 (77)Trading liabilities From (1%) to 1% 260 (260)

Total 1 523 (1 520)

2015Derivative instruments From (1%) to 1% 48 (48)Trading assets From (1%) to 1% 239 (239)Financial investments From (1%) to 1% 283 (283)Trading liabilities From (1%) to 1% 163 (163)

Total 733 (733)

In 2016, a 1% change of the significant unobservable inputs relating to the measurement of an equity investment classified as available-for-sale resulted in a R120 million favourable and unfavourable effect recognised in OCI (2015: Rnil).

Refer to key management assumptions and annexure E for more information about valuation techniques used.

21.2 Assets and liabilities not measured at fair value for which fair value is disclosed

2016 2015

Level 1Rm

Level 2Rm

Level 3Rm

TotalRm

Level 1Rm

Level 2Rm

Level 3Rm

TotalRm

AssetsCash and balances

with central banks 77 474 77 474 75 112 75 112Financial investments 32 707 56 458 3 677 92 842 34 619 58 863 2 068 95 550Loans and advances

to banks1 15 936 123 835 3 903 143 674 6 932 128 913 27 160 163 005Loans and advances

to customers1 104 588 809 265 913 853 10 601 137 083 748 283 895 967Pledged assets 200 200 180 180

Total 126 117 284 881 817 045 1 228 043 127 264 324 859 777 691 1 229 814

Liabilities Deposits and debt

funding from banks 43 455 71 718 3 736 118 909 40 960 90 989 2 582 134 531Deposits and debt

funding from customers 723 886 364 133 9 630 1 097 649 502 009 466 297 48 403 1 016 709Subordinated debt 102 26 282 26 384 102 23 354 23 456

Total 767 443 462 133 13 366 1 242 942 543 071 580 640 50 985 1 174 696

1 A balance of R19 836 million was reclassified from loans and advances to customers to loans and advances to banks for 2015 in order to align the counterparty to the underlying lending arrangement and to conform with the basis of disclosure in the current financial period.


21. Fair value disclosures continued21.3 Third-party credit enhancements There were no significant liabilities measured at fair value that existed during the year which had been issued with

inseparable third-party credit enhancements.

21.4 Loans and advances and deposits from customers designated at fair value through profit or loss

2016Rm

2015Rm

Loans and advancesMaximum exposure to credit risk 96 78Current year gain on changes in fair value attributable to changes in credit risk 19 17Cumulative gain on changes in fair value attributable to changes in credit risk 36 17

Deposits from customersCurrent year gain on changes in fair value attributable to changes in credit risk (23) 1Cumulative gain on changes in fair value attributable to changes in credit risk 37 60Contractual payment required at maturity 14 467 19 413

Carrying amount of deposits from customers 13 627 18 929Difference between carrying amount and contractual payment 840 484

The changes in fair value of the designated financial liabilities attributable to changes in credit risk are calculated by reference to the change in the credit risk implicit in the market value of the group’s senior notes.

22. Reclassification of financial assets The group reclassified assets of R112 million (2015: Rnil) from held-for-trading to loans and receivables for which there

was a clear change in intent to hold the assets for the foreseeable future rather than to exit or trade in the short term. This represents the estimated amounts of future cash flows expected to be recovered at the date of reclassification. During 2016, no financial assets matured in the company (2015: financial assets with a carrying value and fair value of R499 million matured).

2016Rm

2015Rm

Carrying value of reclassified financial assets at the end of the year 1 233 997Fair value of reclassified financial assets at the end of the year 1 140 917A fair value gain of R88 million (2015: R92 million loss1) after tax would have been recognised in 2016 had all reclassifications not been effected.

The table below sets out the amounts actually recognised in profit or loss:

Period after reclassificationTrading income 10Net interest income/(expense)2 163 (53)

1 This amount was previously erroneously disclosed as a gain of R92 million for the group.2 Included in this are items subject to fair value hedge accounting for interest rate risk only. The total fair value adjustment recognised in net interest

income in respect of the hedged items amounted to a gain of R82 million (2015: R82 million loss).


250

23. Financial instruments subject to offsetting, enforceable master netting arrangements or similar agreements

IFRS requires a financial asset and a financial liability to be offset and the net amount presented in the statement of financial position when, and only when, the group has a current legally enforceable right to set off recognised amounts, as well as the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. There are no instances where the group has a current legally enforceable right to offset without the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

The following table sets out the impact of offset, as well as the required disclosures where financial assets and financial liabilities that are subject to enforceable master netting arrangements, or similar agreements, irrespective of whether they have been offset in accordance with IFRS.

It should be noted that the information below is not intended to represent the group’s actual credit exposure nor will it agree to that presented in the statement of financial position.

Gross amount of recognised

financial assets1

Rm

Financial liabilities set

off in the statement of

financial position2

Rm

Net amount of financial

assetssubject to

netting agreements3

Rm

Collateral received4

Rm

Net amount

Rm

Assets2016Derivative assets 45 972 (38) 45 934 (41 316) 4 618Trading assets 48 153 48 153 (45 370) 2 783Loans and advances5 111 072 (33 190) 77 882 (76 589) 1 293

Total 205 197 (33 228) 171 969 (163 275) 8 694

2015 (restated)6

Derivative assets 74 455 74 455 (68 533) 5 922Trading assets 23 577 23 577 (21 242) 2 335Loans and advances5 110 748 (34 862) 75 886 (74 256) 1 630

Total 208 780 (34 862) 173 918 (164 031) 9 887



23. Financial instruments subject to offsetting, enforceable master netting arrangements or similar agreements continued

Gross amount of recognised

financial liabilities1

Rm

Financial assets set off in the

statement of financial position2

Rm

Net amounts of financial

liabilities subject to

netting agreements3

Rm

Collateral pledged7

Rm

Net amount

Rm

Liabilities2016Derivative liabilities 53 915 (38) 53 877 (46 424) 7 453Trading liabilities 31 147 31 147 (31 147)Deposits and debt funding5 39 374 (33 190) 6 184 6 184

Total 124 436 (33 228) 91 208 (77 571) 13 637

2015 (restated)7

Derivative liabilities 90 316 90 316 (72 405) 17 911Trading liabilities 34 225 34 225 (31 890) 2 335Deposits and debt funding5 45 463 (34 862) 10 601 (4 417) 6 184

Total 170 004 (34 862) 135 142 (108 712) 26 430

1 Gross amounts are disclosed for recognised financial assets and financial liabilities that are either offset in the statement of financial position or are subject to a master netting arrangement or a similar agreement, irrespective of whether the offsetting criteria is met.

2 Gross amounts of recognised financial assets or financial liabilities that qualify for offset in accordance with the criteria per IFRS.3 Related amounts not offset in the statement of financial position that are subject to a master netting arrangement or similar agreement, including

financial collateral (whether recognised or unrecognised) and cash collateral.4 In most cases, the group is allowed to sell or repledge collateral received.5 The most material amounts offset in the statement of financial position pertain to cash management accounts. The cash management accounts

allow holding companies (or central treasury functions) to manage the cash flows of a group by linking the current accounts of multiple legal entities within a group. It allows for cash balances of the different legal entities to be offset against each other to arrive at a net balance for the whole group. In addition, all repurchase agreements (for financial liabilities) and reverse repurchase agreements (for financial assets), subject to master netting arrangement (or similar agreement), have been included.

6 In 2015, amounts were erroneously duplicated in this disclosure. Consequently, the amounts presented at 31 December 2015 have been restated. The restatement did not affect the group’s statement of financial position.

7 In most instances, the counterparty may not sell or repledge collateral pledged by the group.

The table below sets out the nature of agreements and the types of rights relating to items which do not qualify for offset but that are subject to a master netting arrangement or similar agreement.

NATURE OF AGREEMENT RELATED RIGHTS

Derivative assets and liabilities

International swaps and derivatives association agreements

The agreement allows for offset in the event of default

Trading assets and liabilities

Global master repurchase agreements

The agreement allows for offset in the event of default

Loans and advances Customer agreement and Banks Act

In the event of liquidation or bankruptcy, offset shall be enforceable subject to meeting Banks Act requirements

Deposits and debt funding Customer agreement and Banks Act

In the event of liquidation or bankruptcy, offset shall be enforceable subject to meeting Banks Act requirements


252

24. Contingent liabilities and commitments24.1 Contingent liabilities

2016Rm

2015Rm

Letters of credit and bankers’ acceptances 12 607 11 437Guarantees 64 076 67 161

Total 76 683 78 598

Loan commitments of R97 573 million (2015: R99 255 million) that are irrevocable over the life of the facility or revocable only in response to material adverse changes are included in the risk and capital management report.

24.2 Commitments

2016Rm

2015Rm

Investment property 633 835Property and equipment 315 405Other intangible assets 399 1 169

Total 1 347 2 409

The expenditure will be funded from the group’s internal resources.

24.3 Operating lease commitments The future minimum payments under non-cancellable operating leases are as follows:

2016Rm

2015Rm

Property and equipmentWithin one year 1 089 937After one year but within five years 1 859 2 089After five years 376 709

Total 3 324 3 735

The operating lease commitments comprise a number of separate operating leases in relation to properties and equipment, none of which are individually significant to the group.


24. Contingent liabilities and commitments continued24.4 Legal proceedings defended In the ordinary course of business, the group is involved as a defendant in litigation, lawsuits and other proceedings.

Management recognises the inherent difficulty of predicting the outcome of defended legal proceedings. Nevertheless, based on management’s knowledge from investigation, analysis and after consulting with legal counsel, management believes that there are no individual legal proceedings that are currently assessed as being ‘likely to succeed and material’ or ‘unlikely to succeed but material should they succeed’. The group is also the defendant in some legal cases for which the group is fully indemnified by external third parties, none of which are individually material. Management is accordingly satisfied that the legal proceedings currently pending against the group should not have a material adverse effect on the group’s consolidated financial position and the directors are satisfied that the group has adequate insurance programmes and, where required in terms of IFRS for claims that are probable, provisions in place to meet claims that may succeed.

Competition Commission – trading of foreign currency pairs In April 2015, the South African Competition Commission announced that it had initiated a complaint against SNYS and

21 other institutions concerning possible contravention of the Competition Act in relation to USD/ZAR trading between 2007 and 2013. No mention was made of SBSA. On 15 February 2017, the Competition Commission lodged five complaints with the Competition Tribunal against 18 institutions, including SBSA and SNYS, in which it alleges unlawful collusion between those institutions in the trading of USD/ZAR. The group only learned of the complaints at this time and is engaging with the Competition Commission to better understand the basis for the complaints and the appropriate response. The group considers these allegations in an extremely serious light and remains committed to maintaining the highest levels of control and compliance with all relevant regulations. The allegations are confined to USD/ZAR trading activities within SBSA and do not relate to the conduct of the group more broadly.

Indemnities granted following disposal of SB Plc Under the terms of the disposal of SB Plc on 1 February 2015, the group provided ICBC with certain indemnities to be

paid in cash to ICBC or, at ICBC’s direction, to any SB Plc (now ICBCS) group company, a sum equal to the amount of losses suffered or incurred by ICBC arising from certain circumstances. Where an indemnity payment is required to be made by the group to the ICBCS group, such payment would be grossed up from ICBC’s shareholding at the time in ICBCS to 100%. These payments may, inter alia, arise as a result of an enforcement action, the cause of which occurred prior to the date of disposal. Enforcement actions include actions taken by regulatory or governmental authorities to enforce the relevant laws in any jurisdiction. While there have been no material claims relating to these indemnification provisions during 2016, the indemnities provided are uncapped and of unlimited duration as they reflect that the pre-completion regulatory risks attaching to the disposed-of business remain with the group post completion. The indemnification provisions covered the Deferred Prosecution Agreement (DPA) that ICBCS entered into with the United Kingdom Serious Fraud Office (SFO) (as more fully set out in the announcement made to shareholders via the JSE SENS on 30 November 2015). In terms of the DPA, prosecution has been suspended and will be withdrawn after three years provided that SB Plc has complied with its obligations under the DPA. Any claims that may arise for SNYS with respect to the Competition Commission matter referred to above are also likely to fall within the scope of this indemnity as the conduct, which is the subject of the referral, pre-dates the disposal of SB Plc.


254

25. Maturity analysis The group assesses the maturity of its financial assets and financial liabilities at 31 December each year. This gives an

indication of the remaining life of these assets at that point in time. The following table illustrates the maturities based on a contractual discounted basis. For the maturity analysis of financial liabilities on a contractual undiscounted basis, refer to the funding and liquidity risk section within the risk and capital management report.

Note

Redeem-able on

demandRm

Within 1 year

Rm

Within 1 – 5 years

Rm

After 5 years

RmUndated

RmTotal

Rm

2016Cash and balances with

central banks 1 35 719 41 755 77 474Trading assets 3 2 821 45 239 17 704 33 870 30 211 129 845Pledged assets 4 15 438 2 054 1 061 224 18 777Financial investments 5 (8) 169 991 37 849 65 009 210 933 483 774Gross loans and advances 6 117 502 296 263 358 824 314 609 1 087 198Net derivative liability 2 357 (5 883) (937) (6 463)Trading liabilities 15 (410) (15 110) (8 033) (5 196) (19 118) (47 867)Deposits and debt funding 17 (767 341) (317 269) (96 391) (32 620) (1 213 621)Subordinated debt 18 (4 058) (16 601) (5 338) (25 997)

2015Cash and balances with

central banks 1 35 053 40 059 75 112Trading assets 3 2 814 29 503 31 105 85 22 712 86 219Pledged assets 4 23 113 8 591 2 725 34 429Financial investments 5 9 140 070 51 490 49 707 245 428 486 704Gross loans and advances 6 128 534 288 129 363 986 318 920 1 099 569Net derivative liability 2 (6 928) 150 (16 091) (22 869)Trading liabilities 15 (284) (19 108) (6 264) (17 648) (43 304)Deposits and debt funding 17 (732 954) (306 546) (113 211) (33 803) (1 186 514)Subordinated debt 18 (3 074) (22 643) (1 424) (27 141)

26. Interest income

2016Rm

2015Rm

Interest on loans and advances 97 893 83 918Interest on investments 6 881 4 959Unwinding of discount element of credit impairments for loans and advances

(note 6.3) 982 869Fair value adjustments on debt financial instruments 22 23Dividends on dated securities 2 282 1 766

Total 108 060 91 535

Comprising:Interest income on items measured at fair value through profit and loss 2 219 5 142Interest income on items measured at amortised cost 105 841 86 393


27. Interest expense

2016Rm

2015Rm

Debt funding 377 376Savings and deposit accounts 15 984 13 134Foreign finance creditors 1 189 1 001Subordinated debt 3 364 2 773Other interest-bearing liabilities 30 254 24 941

Total 51 168 42 225

Comprising:Interest expense on items measured at fair value through profit and loss 354 4 637Interest expense on items measured at amortised cost 50 814 37 588

28. Fee and commission revenue

2016Rm

2015Rm

Account transaction fees 11 389 10 856Card-based commission 6 319 5 655Knowledge-based fees and commission 2 235 2 336Electronic banking fees 3 219 2 823Insurance – fees and commission 1 897 1 767Foreign currency service fees 1 870 1 925Documentation and administration fees 1 969 1 693Other 5 025 4 342

Total 33 923 31 397

All fee and commission revenue reported above relates to financial assets or liabilities not carried at fair value through profit or loss.

29. Fee and commission expense

2016Rm

2015Rm

Account transaction fees 1 092 999Card-based commission 1 973 1 737Electronic banking fees 669 646Insurance fees and commission 536 541Documentation and administration fees 212 192Other 429 362

Total 4 911 4 477

All fee and commission expense reported above relates to financial assets or liabilities not carried at fair value through profit and loss.


256

30. Trading revenue

2016Rm

2015Rm

Fixed income and currencies 8 931 9 447Equities 1 993 1 368Commodities 64 201

Total 10 988 11 016

31. Other revenue

2016Rm

2015Rm

Banking and other revenue 834 1 804Property-related revenue 334 371Insurance – bancassurance profit 1 797 1 692

Total 2 965 3 867

32. Insurance premiums received

2016Rm

2015Rm

Insurance premiums 41 288 39 245Reinsurance premiums (1 922) (1 673)

Total 39 366 37 572

33. Insurance benefits and claims paid

2016Rm

2015Rm

Claims and policyholders' benefits under insurance contracts 39 664 34 362Insurance claims recovered from reinsurers (1 450) (1 203)

38 214 33 159Change in policyholder liabilities under insurance contracts (598) 3 725

Insurance contracts (1 164) 3 794Policyholder assets related to insurance contracts 265 (1 072)Investment contracts with DPF 404 802Reinsurance assets (103) 201

Total 37 616 36 884


34. Investment management and service fee income and gains

2016Rm

2015Rm

Investment income 21 405 20 070

Interest income1 13 321 12 942Dividends received 4 819 4 151

Listed shares 3 126 2 097Unlisted instruments 1 584 1 489Manufactured dividends on scrip lending 109 565

Scrip lending fees 17 20Rental income from investment property 2 518 2 306Hotel operations’ sales 585 524Adjustment to surplus recognised on defined benefit pension fund 31 20Sundry income 114 107

Investment (losses)/gains (2 249) 12 881

Investment property 327 1 285Financial instruments held at fair value through profit or loss (1 974) 10 212Financial instruments held for trading through profit or loss 2 238 (3 954)Mutual funds (2 794) 5 266Other (46) 72

Management and service fee income 3 731 3 840

Total 22 887 36 791

1 Interest of R13 192 million (2015: R12 885 million) relates to financial assets held at fair value through profit or loss.

35. Fair value adjustments to investment management liabilities and third-party fund interests

2016Rm

2015Rm

Fair value adjustments to long-term policyholder liabilities under investment contracts 3 891 6 181

Fair value adjustments to third-party mutual fund interests (619) 7 301

Total 3 272 13 482

36. Credit impairment charges

2016Rm

2015Rm

Net credit impairments raised and released for loans and advances (note 6.3) 10 464 10 426Recoveries on loans and advances previously written off (931) (1 055)

Total 9 533 9 371


258

37. Operating expenses – banking and insurance

2016Rm

2015Rm

Banking activities 56 235 51 434

Information technology 5 880 5 755Communication 1 176 1 173Premises 3 870 3 561Staff costs 30 976 27 968Japan fraud 300Other 14 033 12 977

Investment management and life insurance activities 17 374 16 184

Staff costs 4 030 3 950Office costs 3 335 3 259Training and development costs 668 609Acquisition costs 4 723 4 760Other 4 618 3 606

Total 73 609 67 618

The following disclosable items are included in other operating expenses:Auditors’ remuneration 273 249

Audit fees 216 207

Current year 215 206Prior year 1 1

Fees for other services1 57 42

Operating lease charges 2 258 2 049Amortisation – intangible assets (note 12) 2 072 1 564Depreciation (note 11) 3 033 3 119Premises – other expenses 1 615 1 515Professional fees 1 463 2 174

1 All fees for services paid to the group’s auditors were considered and approved by the group’s audit committee in terms of its non-audit services policy. Refer to the report of the group audit committee chairman for further information.


38. Non-trading and capital related items

2016Rm

20151

Rm

Impairment of goodwill (482) (333)(Loss)/gain on disposal of business (8) 306Impairment of associates and joint ventures (10) (112)Gain on disposal of associate 19Realised foreign currency profit on foreign operations 62 5Loss on sale of property and equipment (50) (48)Impairment of intangibles (654) (1 330)

Total (1 123) (1 512)

1 The note disclosure (including 2015) has been expanded for a better analysis of the balance.

39. Profit from discontinued operation Standard Bank Plc The agreed disposal of the group’s investment in SB Plc was classified as a discontinued operation in 2015. The income

and expenses relating to the disposal group have been presented in the income statement as a single amount relating to the after-tax loss for the prior year.

2015Rm

Operating loss (378)Aluminium residual asset write down1 (276)Separation and legal costs (45)Partial insurance recovery for aluminium2 541Deferred prosecution agreement3 (336)Gain on disposal 3 235

Profit from discontinued operation 2 741

1 The aluminium asset write down reflects the write down of certain aluminium reverse repurchase agreements. The balance of the positions were written down during 2014.

2 A settlement agreement was concluded with the majority of the group’s third-party insurers in respect of the loss suffered as a consequence of the fraud in Qingdao relating to the aluminium reverse repurchase agreements.

3 The DPA settlement agreement relates to the indemnification by the group to ICBC with respect to the DPA that ICBCS entered into with the United Kingdom SFO in November 2015. The amount includes a settlement agreement with the United States Securities and Exchange Commission relating to the same matter.


260

40. Direct and indirect taxation40.1 Indirect taxation

2016Rm

2015Rm

Value added tax 1 693 2 222Other indirect taxes and levies 725 517

Total 2 418 2 739

40.2 Direct taxation

2016Rm

2015Rm

South African normal taxation 10 652 6 568

Current 10 039 6 884Prior year 613 (316)

Deferred taxation (2 406) 453

Current (2 051) 578Prior year (377) (125)Change in tax rate adjustment 22

CGT, foreign normal and withholding tax – current year 651 1 125

8 897 8 146Income tax recognised in OCI (172) 113Deferred tax recognised directly in equity 207 (72)

Direct taxation per the income statement 8 932 8 187


40. Direct and indirect taxation continued40.2 Direct taxation continued Income tax recognised in OCI from continuing operations The table below sets out the amount of income tax relating to each component within OCI:

2016Rm

2015Rm

Items that may be reclassified subsequently to profit or lossMovements in the cash flow hedging reserve (81) 101

Net change in fair value of cash flow hedges 444 (656)Realised fair value adjustments of cash flow hedges transferred to profit or loss (525) 757

Movements in the available-for-sale revaluation reserve (45) (17)

Net change in fair value of available-for-sale financial assets (49) (3)Realised fair value adjustments on available-for-sale financial assets transferred to

profit or loss 4 (14)

Items that may not be reclassified to profit or lossDefined benefit fund adjustments (46) 46Other (17)

Total (172) 113

Tax rate reconciliation

2016%

2015%

Direct taxation – statutory rate 28.0 28.0Prior year tax 0.7 (1.3)

Direct taxation – current year 28.7 26.7Capital gains tax 1.9Foreign tax and withholding tax 1.8 1.5Change in tax rate 0.1

Direct taxation – current year – normal 30.6 30.1Permanent differences (4.9) (5.7)

Dividends received (4.3) (3.0)Other non-taxable income – interest (5.1) (5.1)Other non-taxable income – capital profit 0.4 (1.0)Non-deductible expenses 4.4 4.3Non-deductible expenses – DPA fine 0.2Effects of profits taxed in different jurisdictions (0.3) (1.1)

Direct effective tax rate1 25.7 24.4

1 Expressed as a percentage of profit before direct taxation.


262

41. Earnings per ordinary share

2016Rm

2015Rm

The calculations of basic earnings per ordinary share and diluted earnings per ordinary share are as follows:Earnings attributable to ordinary shareholders 22 206 23 754

Continuing operations 22 206 21 013Discontinued operation 2 741

Weighted average number of ordinary shares in issue (number of shares)Weighted average number of ordinary shares in issue before adjustments 1 618 445 138 1 618 659 186Adjusted for shares held pursuant to Tutuwa initiative (5 750 291) (7 600 667)1

Adjusted for deemed treasury shares held by entities within the group (14 955 201) (13 659 540)2

Total 1 597 739 646 1 597 398 979

Basic earnings per ordinary share (cents) 1 389,8 1 487,0

Continuing operations 1 389,8 1 315,5Discontinued operation 171,5

Diluted earnings per ordinary shareWeighted average number of ordinary shares in issue (number of shares) 1 597 739 646 1 597 398 979Adjusted for the following potential dilution:

Share incentive schemes 21 704 438 14 124 212

Standard Bank group share incentive scheme 636 407 929 3314

Standard Bank equity growth scheme 5 028 557 2 738 3895

Deferred bonus scheme 8 258 684 5 903 1286

Performance reward plan 3 854 013 1 462 8947

Tutuwa initiative 3 926 777 3 090 4703

Diluted weighted average number of ordinary shares in issue (number of shares) 1 619 444 084 1 611 523 191

Diluted earnings per ordinary share (cents) 1 371,2 1 474,0

Continuing operations 1 371,2 1 303,9Discontinued operation 170,1

1 The number of shares held by the Tutuwa participants are deducted as they are deemed not to be issued in terms of IFRS.2 The number of shares held by entities within the group are deemed to be treasury shares for IFRS purposes.3 Dilutive effect of shares held pursuant to Tutuwa initiative.4 1 887 866 (2015: 2 752 820) share options were outstanding at the end of the year in terms of the GSIS. 5 17 809 194 (2015: 22 626 594) rights outstanding at the end of the year in terms of the Standard Bank EGS, convertible into 5 259 490

(2015: 3 014 981) ordinary shares that is equivalent to the full value of the rights at year end.6 13 672 693 (2015: 9 819 235, restated to only show the equity-settled units) units were outstanding in terms of DBS.7 6 753 333 (2015: 4 070 933, restated to only show the equity-settled units) units were outstanding in terms of the PRP.


41. Earnings per ordinary share continued Dilutive impact of shares issued during the year Equity growth scheme 1 515 774 (2015: 1 361 888) rights were issued during the year in terms of the Standard Bank EGS and were convertible

into 294 765 (2015:0) ordinary shares and included in the calculation of diluted earnings per ordinary share.

Deferred bonus scheme 7 803 319 (2015: 4 895 306) units were issued during the year to employees domiciled in South Africa and included in

the calculation of diluted earnings per ordinary share.

During the year, 2 071 000 (2015: 9 590 721) units were hedged relating to both current and prior years DBS units of which 1 392 000 (2015: 7 146 721) were included in the calculation of diluted earnings per ordinary share.

Performance reward plan 2 768 300 (2015: 1 983 200) units were issued during the year to employees domiciled in South Africa and included in

the calculation of diluted earnings per ordinary share.

During the year, no (2015: 4 173 453) units were hedged relating to both current and prior years PRP units of which none (2015: 2 778 106) were included in the calculation of diluted earnings per ordinary share.

Refer to annexure C for further details on the group’s share incentive schemes.


264

42. Headline earnings

2016 2015

GrossRm

Direct taxRm

Non-controlling

interests and

preference share-

holdersRm

Profit attri-

butable toordinary

share-holders

RmGross

Rm

Direct taxRm

Non-controlling

interests and

preference share-

holdersRm

Profit attri-

butable toordinary

share-holders

Rm

Profit for the year from continuing operations 34 726 (8 932) (3 588) 22 206 33 547 (8 187) (4 347) 21 013

Headline adjustable items added 989 (178) (8) 803 1 687 (381) (42) 1 264

Goodwill impairment – IAS 36 482 482 333 333

Loss on sale of property and equipment – IAS 16 50 (11) (3) 36 48 (10) 38

Gains on disposal of business – IAS 27/ IAS 28 (11) (11) (195) 15 (180)

Realised foreign currency profit on foreign operations – IAS 21 (62) (62) (5) (5)

Impairment of associate – IAS 28/IAS 36 10 10 112 112

Impairment of intangible assets – IAS 36 654 (171) 483 1 330 (372) (28) 930

Realised (gains)/losses on available-for-sale assets – IAS 39 (134) 4 (5) (135) 64 (14) (14) 36

Standard Bank Group headline earnings from continuing operations 35 715 (9 110) (3 596) 23 009 35 234 (8 568) (4 389) 22 277


42. Headline earnings continued

2016 2015

GrossRm

Direct taxRm

Non-controlling

interests and

preference share-

holdersRm

Profit attri-

butable toordinary

share-holders

RmGross

Rm

Direct taxRm

Non-controlling

interests and

preference share-

holdersRm

Profit attri-

butable toordinary

share-holders

Rm

Profit for the year from discontinued operation 2 741 2 741

Headline adjustable items reversed (2 831) (2 831)

Loss on disposal of subsidiary – IFRS 10 1 303 1 303

Realised foreign currency profit on foreign operations – IAS 21 (4 054) (4 054)

Net investment hedge gain (68) (68)

Realised gains on available-for-sale assets – IAS 39 (12) (12)

Standard Bank Group headline earnings from discontinued operation (90) (90)

Standard Bank Group headline earnings 35 715 (9 110) (3 596) 23 009 35 144 (8 568) (4 389) 22 187

2016cents

2015cents

Headline earnings per ordinary share 1 440,1 1 388,9

Continuing operations 1 440,1 1 394,5Discontinued operation (5,6)

Diluted headline earnings per ordinary share 1 420,8 1 376,8

Continuing operations 1 420,8 1 382,4Discontinued operation (5,6)

Headline earnings are calculated in accordance with Circular 2/2015 Headline Earnings issued by SAICA at the request of the JSE.


266

43. Distributions

2016Rm

2015Rm

Ordinary shares 11 510 10 396

Final371 cents per share declared on 3 March 2016 (2015: 339 cents per share declared

on 5 March 2015) 6 006 5 485

Interim340 cents per share declared on 18 August 2016 (2015: 303 cents per share

declared on 14 August 2015) 5 504 4 911

A final dividend No.95 of 440 cents per share was declared on 2 March 2017, payable on 3 April 2017 to all shareholders registered on 31 March 2017, bringing the total dividends declared in respect of 2016 to 780 cents per share (2015: 674 cents per share).

Second preference shares 406 377

Final369,76 cents per share declared on 3 March 2016 (2015: 358,16 cents per share

declared on 5 March 2015) 196 190

Interim396,13 cents per share declared on 18 August 2016 (2015: 353,20 cents per share

declared on 14 August 2015) 210 187

Total 11 916 10 773

6.5% first cumulative preference shares dividend No. 95 of 3,25 cents per share (2015: 3,25 cents) was declared on 2 March 2017, payable on 27 March 2017 to all shareholders registered on 24 March 2017.

Non-redeemable, non-cumulative, non-participating preference shares dividend No. 25 of 407,57 cents per share (2015: 369,76 cents), was declared on 2 March 2017, payable on 27 March 2017 to all shareholders registered on 24 March 2017.

44. Statement of cash flows notes44.1 Adjustments for non-cash items and other adjustments included in the income statement

2016Rm

2015Rm

Depreciation and amortisation 5 105 4 683Credit impairment and other impairment losses 9 533 9 371Investment gains and policyholders’ transfers 5 543 (2 971)Net (outflows)/inflows from third-party financial liabilities arising on consolidation

of mutual funds (1 664) 4 527Interest expense1 52 299 43 245Interest income1 (121 391) (104 481)Other (7 665) 1 564

Total (58 240) (44 062)

1 Included are non-cash flow items disclosed in income/expenses from investment management and life insurance activities.


44. Statement of cash flows notes continued44.2 Increase in income-earning assets

2016Rm

2015Rm

Net derivative (liabilities)/assets (13 386) 9 205Trading assets (46 006) (10 617)Pledged assets 8 727 (7 574)Financial investments (7 299) (7 420)Loans and advances (44 235) (90 489)Other assets 1 431 (1 364)

Total (100 768) (108 259)

44.3 Increase in deposits, trading and other liabilities

2016Rm

2015Rm

Deposits and debt funding 91 078 88 327Trading liabilities 5 443 (3 649)Other liabilities and provisions (275) 13 343

Total 96 246 98 021

44.4 Disposal of a subsidiary

2015Rm

Non-current assets held for sale (217 381)Non-current liabilities held for sale 202 867

Net asset value disposed of (14 514)Profit on disposal of subsidiaries (3 495)Release of reserve movements to profit or loss 4 608

Sale consideration (13 401)Insurance and settlement costs (232)Deferred non-cash consideration 1 126Investment in associate 5 222

Cash consideration received (7 285)Less: cash held within subsidiary disposed 11 839

Net cash outflow from disposal of subsidiaries 4 554


268

44. Statement of cash flows notes continued44.5 Reconciliation of subordinated debt

2016Rm

2015Rm

Balance at the beginning of the year 27 141 25 521Subordinated debt issued 2 694 4 005Subordinated debt redeemed (3 175) (3 127)Exchange movements (848) 441Increase/(decrease) in accrued finance cost 128 (56)Decrease in subordinated bonds issued to group companies 52 351Amortisation, cost capitalisation and fair value adjustments 5 6


The above disclosure is an inclusion due to our early adoption of amendments to IAS 7. Refer to the accounting policy elections for further details.

Refer to note 18 the subordinated debt note for details on subordinated debt.

45. Related party transactions45.1 Key management personnel Key management personnel include: the members of the SBG board of directors and prescribed officers effective

for 2016 and 2015. Non-executive directors are included in the definition of key management personnel as required by IAS 24 Related Party Disclosures. Prescribed officers are defined in the Companies Act. The board of directors is the same for the company and the group. The definition of key management includes the close family members of key management personnel and any entity over which key management exercises control or joint control. Close family members are those family members who may be expected to influence, or be influenced by, that person in their dealings with SBG. They may include the person’s domestic partner and children, the children of the person’s domestic partner, and dependants of the person or the person’s domestic partner.

2016Rm

2015Rm

Key management compensationSalaries and other short-term benefits paid 124 119Post-employment benefits 4 5IFRS 2 value of share options, rights and units expensed 103 76

Total 231 200

Loans and advancesLoans outstanding at the beginning of the year 11 10Change in key management structures 2 (2)Net loans (repaid)/granted during the year (2) 3

Loans outstanding at the end of the year 11 11

Interest income 1 1

Loans include mortgage loans, vehicle and asset finance and credit cards. No specific credit impairments have been recognised in respect of loans granted to key management in the current or prior year.

The mortgage loans and vehicle and asset finance are secured by the underlying assets.

All other loans are unsecured.


45. Related party transactions continued45.1 Key management personnel continued

2016Rm

2015Rm

Deposits and debt funding1

Deposits outstanding at the beginning of the year 32 150Change in key management structures (11) (118)Net deposits received during the year 5

Deposits outstanding at the end of the year 26 32

Net interest income 5 3

Investment productsBalance at the beginning of the year 162 400Change in key management structures 241 (257)Investments (repaid)/placed during the year (243) 19

Balance at the end of the year 160 162

Third-party funds under managementFund value at the beginning of the year 299 859Change in key management structures (65) (590)Net deposits, including commission and other transaction fees 5 30

Fund value at the end of the year 239 299

Net investment return income 2 7Financial consulting fees and commission 9 9

Shares and share options held2

Shares beneficially owned (number) 1 552 359 1 349 917Share options held (number) 4 225 216 3 982 654

1 Deposits and debt funding include cheque, current and savings accounts.2 Aggregate details of SBG shares and share options held by key management personnel.


270

45. Related party transactions continued45.2 Balances and transactions with ICBCS Transactions with ICBCS are made in the ordinary course of business and on substantially the same terms, including

interest rates and collateral, as those prevailing at the time for comparable transactions with other third parties. These transactions also did not involve more than the normal risk of collectability or present other unfavourable features. There were no bad debt expenses or provisions for bad debts that related to balances and transactions with ICBCS. The following significant balances and transactions were entered into between the group and ICBCS, an associate of the group:

2016Rm

2015Rm

Derivative assets 1 856 4 780Trading assets 24 35Loans and advances 30 111 29 902Other assets 232 158

Derivative liabilities (2 271) (5 351)Deposits and debt funding (1 315) (6 756)Provisions and other liabilities (287) (218)

The group entered into certain transitional services level arrangements with ICBCS in order to manage the orderly separation of ICBCS from the group post the sale of 60% of SB Plc. In terms of these arrangements, services are delivered and received from ICBCS for the account of each respective party.

45.3 Balances and transactions with ICBC The group has several business relationships with ICBC, a 20.1% shareholder. Transactions with ICBC are made in the

ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other third parties. These transactions also did not involve more than the normal risk of collectability or present other unfavourable features. There were no bad debt expenses or provisions for bad debts that related to balances and transactions with ICBC. The following significant balances and transactions were entered into between the group and ICBC.

2016Rm

2015Rm

Trading assets 7Loans and advances 246 153Other assets 656 918Deposits and debt funding (6 583)Provisions and other liabilities (71)

The group recognised losses in respect of certain commodity reverse repurchase agreements with third parties prior to the date of conclusion of the sale and purchase agreement, relating to SB Plc (now ICBCS) with ICBC. As a consequence of the sale and purchase agreement, the group holds the right to 60% of insurance and other recoveries, net of costs, relating to claims for those recognised losses prior to the date of conclusion of the transaction. Settlement of these amounts will occur based on audited information on pre-agreed anniversaries of the completion of the transaction and the full and final settlement of all claims in respect of losses incurred. As at 31 December 2016, a balance of USD48 million (R656 million) is receivable from ICBC in respect of this arrangement (2015: USD40 million; R619 million).

The group has off-balance sheet letters of credit exposure issued to ICBC as at 31 December 2016 of R349 million (2015: R216 million). The group received R1 million in fee and commission income relating to these transactions (2015: R2 million).


45. Related party transactions continued45.4 Post-employment benefit plans

Details of balances with SBG and transactions between SBG and the group’s post-employment benefit plans are listed below:

2016Rm

2015Rm

Fee income 31 39Deposits held with the group 80 563Interest paid 175 123Investments held in bonds and money markets 947 667Value of SBG ordinary shares held 570 471

In addition to the above the group manages R11 918 million (2015: R11 776 million) of the post-employment benefit plans’ assets.

46. Pensions and other post-employment benefits

2016Rm

2015Rm

Amount recognised as assets in the statement of financial position (note 8)Standard Bank banking activitiesRetirement funds (note 46.1) 1 283 1 160LibertyRetirement funds (note 46.1) 215 301

Total 1 498 1 461

Amounts recognised as liabilities in the statement of financial position (note 20.1)Standard Bank banking activitiesRetirement funds (note 46.1) 74 91Post-employment healthcare benefits – other funds (note 46.2) 776 801LibertyPost-employment healthcare benefits (note 46.2) 493 480

Total 1 343 1 372

The total amount recognised as an expense for the defined contribution plans operated by the group amounted to R1 014 million (2015: R881 million).


272

46. Pensions and other post-employment benefits continued46.1 Retirement funds Standard Bank retirement funds Membership of the principal fund, the Standard Bank Group Retirement Fund (SBGRF), exceeds 95% of SBSA’s

permanent staff. The fund, one of the 10 largest in South Africa, is governed by the Pension Funds Act 24 of 1956 (Pension Funds Act). Member-elected trustees represent 50% of the trustee board. The assets of the fund are held independently.

SBGRF is regulated by the Pension Funds Act, as well as the Financial Services Board.

The fund is subject to a statutory financial review by actuaries at an interval of not more than three years. A full actuarial valuation was performed during the 2016 financial year and, in the opinion of the actuary, the fund was considered to be financially sound. The next actuarial valuation is to be performed on 31 December 2018.

From 1 January 1995, new employees became entitled to defined contribution benefits only. Employees who were members of the fund on 31 December 1994, were entitled to guaranteed benefits under the old rules of the defined benefit fund. Given the defined benefit nature of the guaranteed benefits, the entire plan is classified as a defined benefit plan and accounted for as such. A specific liability was recognised within the fund to provide for the guaranteed defined benefits.

On 1 November 2009, the fund introduced individual member investment choice for defined contribution members and the pre-1995 members could choose to give up their guaranteed defined benefits and instead accept an offer of a 10% enhancement to their actuarial reserve values. Over 90% of the pre-1995 defined benefit members accepted the offer and converted to defined contribution plans. The assets and liabilities of the Provider Fund were transferred by way of a Section 14 transfer in terms of the Pension Funds Act, 1956 as amended into the SBGRF.

The majority of employees in South Africa who are not members of the SBGRF are members of two other funds designed for their occupational groups. Employees in territories beyond South African jurisdiction are members of either defined contribution or defined benefit plans governed by legislation in their respective countries.

Liberty retirement funds The Liberty defined benefit pension scheme closed to new employees from 1 March 2001 and with effect from this

date, the majority of employees accepted an offer to convert their retirement plans from defined benefit to defined contribution plans. Employees joining after 1 March 2001 automatically become members of the defined contribution schemes. The ACA and Rentmeester defined benefit pension funds are all fully funded. All funds are governed by the Pension Funds Act.

Description of risks Post-retirement obligation risk is the risk to the group’s comprehensive income that arises from the requirement to

contribute as an employer to an under-funded defined benefit plan. The group operates both defined contribution plans and defined benefit plans, with the majority of its employees participating in defined contribution plans. The defined benefit pension and healthcare schemes for past and certain current employees, create post-retirement obligations. The group mitigates these risks through independent asset managers and independent asset and liability management advisors for material funds. Potential residual risks which may impact the group are managed within the group asset and liability management process.


46. Pensions and other post-employment benefits continued46.1 Retirement funds continued

2016Rm

2015Rm

The amounts recognised in the statement of financial position in respect of the retirement funds are determined as follows:Present value of funded obligations (33 456) (32 194)Fair value of plan assets 34 879 33 643

Surplus 1 423 1 449Asset ceiling 2 (79)

Included in the statement of financial position 1 425 1 370Comprising:SBGRF 1 283 1 160Liberty retirement funds 215 301Other retirement funds (73) (91)

1 425 1 370Included in:Other assets (note 8) 1 498 1 461Provisions and other liabilities (note 19) (73) (91)

Movement in the present value of funded obligationsBalance at the beginning of the year 32 194 30 368Current service cost 966 839Interest cost 3 148 2 439Employee contributions 743 632Actuarial (gains)/losses (608) 1 088Exchange (gains)/losses (220) 112Benefits paid (2 767) (3 284)


Movement in the fair value of plan assetsBalance at the beginning of the year 33 643 32 028Interest income 3 260 2 549Contributions received 1 515 1 310Net return on assets (574) 968Reduction in employer surplus account (17)Exchange (losses)/gains (198) 89Benefits paid (2 767) (3 284)

Balance at the end of the year 34 879 33 643Comprising:Cash 824 1 281Equities 15 210 13 543Bonds 10 239 9 782Property and other 8 606 9 037

Plan assets do not include property occupied by the group.

The group expects to pay R847 million in contributions to the Standard Bank retirement funds in 2017 (2016: R775 million).


274

46. Pensions and other post-employment benefits continued46.1 Retirement funds continued

2016Rm

2015Rm

The amounts recognised in profit or loss are determined as follows:Current service cost 966 839Net interest costs (112) (108)

Included in staff costs 854 731

The expected long-term rate of return is based on the expected long-term returns on equities, cash and bonds. The split between the individual asset categories is considered in setting these assumptions. Adjustments were made to reflect the effect of expenses.

Components of OCINet return on assets (574) 974Actuarial gains/(losses) 608 (1 088)

Gains/(losses) from changes in demographic assumptions 375 (1 249)Gains from changes in financial assumptions 243 169Loss from changes in experience adjustments (10) (8)

Asset ceiling 81 (6)

Remeasurements recognised in other comprehensive income 115 (120)

Reconciliation of net defined benefit assetNet defined benefit asset at the beginning of the year 1 370 1 587Net expense recognised (854) (731)Amounts recognised in OCI 115 (120)Company contributions 772 658Exchange gain/(losses) 22 (24)

Net defined benefit asset at the end of the year 1 425 1 370

46.2 Post-employment healthcare benefits The group provides the following post-employment healthcare benefits to its employees:

Standard Bank The largest portion of this liability represents a South African post-employment healthcare benefit scheme that covers

all employees who went on retirement before 1 March 2000. The liability is unfunded and is valued every year using the projected unit credit method. The latest full actuarial valuation was performed at 31 December 2015. The next actuarial valuation is to be performed on 31 December 2018.

Liberty Liberty operates an unfunded post-employment medical aid benefit for employees who joined before 1 July 1998.

For past service of employees, Liberty recognises and provides for the actuarially determined present value of post-employment medical aid employer contributions on an accrual basis using the projected unit credit method.


46. Pensions and other post-employment benefits continued46.2 Post-employment healthcare benefits continued

2016Rm

2015Rm

The amounts recognised in the statement of financial position in respect of post-employment healthcare benefits are determined as follows:Present value of unfunded defined benefit obligations 1 269 1 281

Included in the statement of financial position 1 269 1 281Comprising:Standard Bank 776 801Liberty 493 480

Movement in the present value of defined benefit obligations:Balance at beginning of the year 1 281 1 206Net expense recognised 123 109Benefits paid (77) (83)Amounts recognised in OCI (58) 49

Balance at end of the year 1 269 1 281

2016Rm

2015Rm

The amounts recognised in profit or loss are determined as follows:Current service cost 53 41Net interest cost 70 68

Included in staff costs 123 109

Components of OCIActuarial (gains)/losses arising from changes in financial assumptions (44) 50Actuarial gains arising from experience adjustments (14) (1)

Remeasurements recognised in OCI (58) 49

Assumed medical inflation rates have a significant effect on the amounts recognised in profit or loss. A one percentage point change in the medical inflation rate would have the following effects on amounts recognised:

2016 2015

1% increaseRm

1% decreaseRm

1% increaseRm

1% decreaseRm

Effect on the aggregate of the current service cost and interest cost 7 (6) 20 12

Effect on the defined benefit obligation 70 (60) 80 (67)


276

47. Segment reporting 47.1 Operating segments The group is organised on the basis of products and services and the segments have been identified on this basis.

The principal business units in the group are as follows:

Personal & Business BankingBanking and other financial services to individual customers and small- to medium enterprises in South Africa, the group’s Africa Regions and the Channel Islands

Corporate & Investment BankingCorporate and investment banking services to clients, including governments, parastatals, larger corporates, financial institutions and international counterparties

Client coverage Relationship management Sector expertise.

Global markets FIC Commodities Equities.

Transactional products and services Transactional banking Investor services Trade finance.

Investment banking Advisory Debt products Real estate finance Structured finance Structured trade finance and

commodity finance Debt capital markets Equity capital markets.

Real estate and principal investment management

BUSINESS UNITS AND WHAT WE OFFER

Transactional products Comprehensive suite of transactional,

saving, investment, trade, foreign exchange, payment and liquidity management solutions made accessible through a range of physical and digital channels.

Lending products Lending products offered to both

personal and business markets Business lending offerings constitute

a comprehensive suite of lending product offerings, structured working capital finance solutions and commercial property finance solutions.

Mortgage lending Residential accommodation loans to

mainly personal market customers.

Card products Credit card facilities to individuals and

businesses (credit card issuing) Merchant transaction acquiring

services (merchant solutions).

Vehicle and asset finance Finance of vehicles for retail market

customers Finance of vehicles and equipment in

the business and corporate assets market

Fleet solutions.

Bancassurance and wealth Brokerage and underwriting of

short-term insurance products comprising simple embedded products, including homeowners’ insurance and loan protection plans sold in conjunction and related banking products, funeral cover, household contents and vehicle insurance

Brokerage of long-term insurance products comprising long-term complex insurance products including life, disability and investment policies sold by qualified intermediaries

Financial planning and modelling Integrated fiduciary services including

fiduciary advice, will drafting and custody services, trust and estates administration as well as pension fund asset management, tailored banking, wealth management, investment and advisory services solutions for private high net worth individuals

Offshore financial services to African clients in high net worth, mass affluent and corporate sectors

Investment services, including global asset management offering through Melville Douglas comprehensive portfolios of multi-asset funds, advisory and discretionary stockbroking solutions.


LibertyLife insurance and investment management activities in the Liberty group of companies

Central and other Other Banking Interests

BUSINESS UNITS AND WHAT WE OFFER

Individual arrangements Insurance and investment solutions

to individual mass-affluent and affluent consumers, mainly in South Africa.

Group arrangements Insurance and investment solutions

to corporate customers and retirement funds across sub-Saharan Africa.

Asset management (Stanlib) Asset management capabilities

to manage asset flows, including international flows, that are invested in Africa.

Includes the impact of the Tutuwa initiative, group hedging activities, group capital instruments, group surplus capital and strategic acquisitions costs

Includes the results of centralised support functions (back office), with the direct costs of support functions recharged to the business segments.

Equity investments held in terms of strategic partnership agreements with ICBC, including:

ICBC Standard Bank Plc (40% associate)

ICBC Argentina (20% associate).



278

47. Segment reporting continued47.1 Operating segments continued

Personal & Business Banking

Corporate & Investment Banking Central and other Banking activities

Other banking interests Liberty

Standard Bank Group

2016Rm

20151

Rm2016

Rm20151

Rm2016

Rm20151

Rm2016

Rm20151

Rm2016

Rm20151

Rm2016

Rm20151

Rm2016

Rm20151

Rm

Income from banking activities 67 480 60 637 35 249 31 388 (2 872) (912) 99 857 91 113 99 857 91 113

Net interest income 40 035 35 263 18 548 14 828 (1 691) (781) 56 892 49 310 56 892 49 310

Interest income 72 110 61 414 58 414 46 279 (22 464) (16 158) 108 060 91 535 108 060 91 535Interest expense (32 075) (26 151) (39 866) (31 451) 20 773 15 377 (51 168) (42 225) (51 168) (42 225)

Net fee and commission revenue 24 503 22 712 5 574 5 389 (1 065) (1 181) 29 012 26 920 29 012 26 920

Fee and commission revenue 28 184 26 030 5 778 5 568 (39) (201) 33 923 31 397 33 923 31 397Fee and commission expense (3 681) (3 318) (204) (179) (1 026) (980) (4 911) (4 477) (4 911) (4 477)

Trading revenue 398 375 10 730 9 925 (140) 716 10 988 11 016 10 988 11 016Other revenue 2 544 2 287 397 1 246 24 334 2 965 3 867 2 965 3 867

Income from investment management and life insurance activities 21 365 23 997 21 365 23 997

Insurance premiums received 39 366 37 572 39 366 37 572Insurance benefits and claims paid (37 616) (36 884) (37 616) (36 884)Investment management and service fee income and gains 22 887 36 791 22 887 36 791Fair value adjustments to investments management liabilities and

third-party fund interests (3 272) (13 482) (3 272) (13 482)

Total income 67 480 60 637 35 249 31 388 (2 872) (912) 99 857 91 113 21 365 23 997 121 222 115 110Credit impairment charges (8 030) (7 815) (1 603) (1 279) 100 (277) (9 533) (9 371) (9 533) (9 371)

Net income after credit impairment charges 59 450 52 822 33 646 30 109 (2 772) (1 189) 90 324 81 742 21 365 23 997 111 689 105 739Operating expenses in banking operations (40 641) (36 582) (18 766) (17 520) 3 172 2 668 (56 235) (51 434) (56 235) (51 434)Operating expenses in life insurance operations (17 374) (16 184) (17 374) (16 184)

Net income before non-trading and capital related items 18 809 16 240 14 880 12 589 400 1 479 34 089 30 308 3 991 7 813 38 080 38 121Non-trading and capital related items (379) (804) (111) (261) (633) (337) (1 123) (1 402) (110) (1 123) (1 512)Share of post tax profit/(loss) from associates and joint ventures 169 172 2 50 1 7 172 229 (8) (569) 23 17 187 (323)

Net income before indirect taxation 18 599 15 608 14 771 12 378 (232) 1 149 33 138 29 135 (8) (569) 4 014 7 720 37 144 36 286Indirect taxation (537) (611) (302) (408) (1 026) (962) (1 865) (1 981) (553) (758) (2 418) (2 739)

Profit before direct taxation 18 062 14 997 14 469 11 970 (1 258) 187 31 273 27 154 (8) (569) 3 461 6 962 34 726 33 547Direct taxation (4 970) (3 997) (2 701) (1 646) 40 (230) (7 631) (5 873) (1 301) (2 314) (8 932) (8 187)

Profit for the year from continuing operations 13 092 11 000 11 768 10 324 (1 218) (43) 23 642 21 281 (8) (569) 2 160 4 648 25 794 25 360(Loss)/profit from discontinued operation (316) 3 057 2 741 2 741

Profit for the year 13 092 11 000 11 768 10 008 (1 218) 3 014 23 642 24 022 (8) (569) 2 160 4 648 25 794 28 101

Attributable to equity holders of the parent 12 519 10 681 10 466 8 660 (1 320) 2 977 21 665 22 318 (8) (569) 955 2 382 22 612 24 131Attributable to non-controlling interests 573 319 1 302 1 348 102 37 1 977 1 704 1 205 2 266 3 182 3 970

Headline earnings 12 630 11 280 10 558 9 076 (1 126) (33) 22 062 20 323 (8) (569) 955 2 433 23 009 22 187Return on equity (ROE) % 18.7 18.2 20.0 18.0 16.8 16.3 (0.1) (7.5) 8.4 23.7 15.3 15.6Net interest margin (%) 5.87 5.48 2.21 1.87 3.83 3.52 3.83 3.52Credit loss ratio (%) 1.25 1.27 0.30 0.24 0.86 0.87 0.86 0.87Cost-to-income ratio (%) 60.2 60.3 53.2 55.8 56.3 56.5 56.3 56.5Number of employees 28 301 27 823 4 365 4 346 15 956 15 789 48 622 47 958 6 145 6 403 54 767 54 361Impairment of non-financial assets (350) (771) (135) (277) (169) (172) (654) (1 220) (110) (654) (1 330)

1 Where reporting responsibility for individual cost centres and divisions within business units changes, the segmental analysis’ comparative figures are reclassified accordingly.


280

47. Segment reporting continued47.2 Geographic information

South Africa

Rm

Africa Regions

Rm

StandardBankInter-

national Rm

Eliminations1

Rm

Standard Bank

Group Rm

2016Total income2 85 559 34 066 3 165 (1 568) 121 222

Banking activities 67 041 31 219 3 165 (1 568) 99 857Liberty 18 518 2 847 21 365

Total headline earnings 18 234 4 537 779 (541) 23 009

Banking activities 17 271 4 545 787 (541) 22 062Other banking interests (8) (8)Liberty 963 (8) 955

Total assets 1 654 670 309 543 96 680 (106 603) 1 954 290

Banking activities 1 256 929 303 197 90 235 (106 603) 1 543 758Other banking interests 6 445 6 445Liberty 397 741 6 346 404 087

Non-current assets3 68 609 11 313 6 479 (20) 86 381

Banking activities 27 519 10 691 34 (20) 38 224Other banking interests 6 445 6 445Liberty 41 090 622 41 712

20154

Total income2 82 442 30 416 2 552 (300) 115 110

Banking activities 60 968 27 893 2 552 (300) 91 113Liberty 21 474 2 523 23 997

Total headline earnings 17 425 4 315 (88) 535 22 187

Banking activities 15 079 4 228 481 535 20 323Other banking interests (569) (569)Liberty 2 346 87 2 433

Total assets 1 657 679 341 527 108 983 (121 261) 1 986 928

Banking activities 1 255 671 335 150 101 050 (121 261) 1 570 610Other banking interests 7 933 7 933Liberty 402 008 6 377 408 385

Non-current assets3 67 808 13 664 8 037 (18) 89 491

Banking activities 27 101 12 978 104 (18) 40 165Other banking interests 7 933 7 933Liberty 40 707 686 41 393

1 Eliminations include intersegmental transactions and balances. 2 Total income from continuing operations. Total income is attributable based on where the operations are located. 3 Non-current assets are assets that are expected to be recovered more than 12 months after the reporting period. The group has reassessed what

is included in non-current assets, as defined in IFRS 8 Operating Segments. The 2015 amounts have been restated to align with the 2016 assessment. This did not affect the group’s statement of financial position.

4 Where reporting responsibility for individual cost centres and divisions within business units changes, the segmental analysis’ comparative figures are reclassified accordingly.


Standard Bank Group Limited – company annual financial statements

Statement of financial positionas at 31 December 2016

Note

COMPANY

2016Rm

20151

Rm20141

Rm

Assets Financial investments 48 116 114Other assets 170 170 332Interest in subsidiaries 49 67 835 68 329 67 104Interest in associates1 50 787 672 796Current tax asset 35 67 45

Total assets 68 943 69 352 68 277

Equity and liabilitiesEquity 68 242 68 394 66 291

Share capital and premium 13 17 960 17 946 18 067Preference share capital and premium 13 5 503 5 503 5 503Reserves 44 779 44 945 42 721

Liabilities 701 958 1 986

Current tax liabilities 14Deferred tax liabilities 51 10Derivative liabilities 174Indebtedness by the company to group subsidiaries 49 625 921 1 700Other liabilities 52 37 112

Total equity and liabilities 68 943 69 352 68 277

1 Refer to note 50 interest in associates for the restatement due to the change in accounting policy.

ANNUAL FINANCIAL STATEMENTS Standard Bank Group Limited Company annual financial statements continued

282

Statement of comprehensive incomefor the year ended 31 December 2016

Note

COMPANY

2016Rm

20151

Rm

Interest income 89 81Interest expense (2) (3)Other (losses)/income 52 (24) 19Dividends from subsidiaries 11 652 12 029

Total income 11 715 12 126Operating expenses (13) (244)

Income after operating expenses 11 702 11 882Gain on disposal of subsidiary and associate 87Impairment of investment in subsidiaries and associates (28) (105)

Income before share of profits from associates 11 674 11 864Share of profits from associates 192 164

Income before direct taxation 11 866 12 028Direct taxation 53 (85) (164)

Profit for the year 11 781 11 864Other comprehensive income 2 2

Total comprehensive income 11 783 11 866



Statement of cash flowsfor the year ended 31 December 2016

Note

COMPANY

2016Rm

20151

Rm

Net cash flows from operating activities 11 765 11 705

Profit before direct taxation 11 866 12 028Adjusted for non-cash items and other adjustments included in the income

statement 54.1 (11 823) (12 192)(Increase)/decrease in income-earning assets 54.2 (2) 48Increase/(decrease) in deposits, trading and other liabilities 54.3 15 (249)Interest income 89 81Interest expense (2) (3)Dividends received 11 652 12 104Net taxation paid (30) (112)

Net cash flows generated from/(used in) investing activities 137 (1 866)

Decrease/(increase) in investment in subsidiaries 54.4 137 (1 866)

Net cash flows used in financing activities (11 902) (9 839)

Proceeds from issue of share capital 333 520Share buy-backs (319) (641)Preference share redemption 1 055Net dividends paid (11 916) (10 773)

Net increase in cash and cash equivalentsCash and cash equivalents at beginning of the year

Cash and cash equivalents at end of the year




284

Statement of changes in equity for the year ended 31 December 2016

Note

Share capital and premium

Rm

Preference share

capital andpremium

Rm

Share-based payment

reserveRm

Revaluation reserve

Rm


Rm

Empowerment reserve

Rm

Available- for-salereserve

Rm

Retained earnings

RmTotal

Rm

CompanyBalance at 1 January 2015 as previously reported 18 067 5 503 206 3 100 969 (1 498) 39 461 65 808Restatement of opening retained earnings 50 483 483

Balance at 1 January 2015 – restated 18 067 5 503 206 3 100 969 (1 498) 39 944 66 291Issue of share capital and share premium 13 520 520Repurchase of share capital and share premium (641) (641)Equity-settled share-based payment transactions 76 76Total comprehensive income 2 11 864 11 866

Other comprehensive income 2 2Profit for the year 11 864 11 864

Dividends paid 169 (10 942) (10 773)Preference share redemption 1 055 1 055

Balance at 31 December 2015 17 946 5 503 282 3 100 969 (274) 2 40 866 68 394

Balance as at 1 January 2016 17 946 5 503 282 3 100 969 (274) 2 40 866 68 394Issue of share capital and share premium 13 333 333Repurchase of share capital and share premium (319) (319)Equity-settled share-based payment transactions (33) (33)Vested units transfer to retained earnings (238) 238Total comprehensive income 2 11 781 11 783

Other comprehensive income 2 2Profit for the year 11 781 11 781

Dividends paid (11 916) (11 916)

Balance at 31 December 2016 17 960 5 503 11 3 100 969 (274) 4 40 969 68 242


286

Notes

48. Financial investments

2016Rm

2015Rm

Financial investments held in banking activities – unlisted equities 116 114

The unlisted equities have been classified as available-for-sale as level 3 in the fair value hierarchy.

49. Interest in subsidiaries

2016Rm

2015Rm

Shares at cost 65 399 64 140Indebtedness to the company (annexure A) 1 523 3 243Investment through equity-settled share incentives 913 946

67 835 68 329Indebtedness by the company (annexure A) (625) (921)

Total interest in subsidiaries 67 210 67 408

Principal subsidiaries and investments and related loans are listed in annexure A. For more detail regarding related party transactions, refer to note 45.

Indebtedness to the company are all current assets not impaired and have been classified as loans and advances which are measured on an amortised cost basis. The carrying value approximates fair value and are classified as level 3 in the fair value hierarchy. Changes in the indebtedness during the year include repayments, new loans, interest accruals and exchange rate differences.

Indebtedness by the company are all liabilities repayable on demand and are measured at amortised cost. The carrying value approximates fair value and are classified as level 3 in the fair value hierarchy. Changes in the indebtedness during the year include repayments, new loans, interest accruals and exchange rate differences.

The company’s investments in subsidiaries (measured at cost) are reviewed annually for impairment with reference to impairment indicators that include the following:

Dividends declared by subsidiaries in excess of the subsidiaries’ total comprehensive income earned in the reporting period

The carrying value of the investment exceeds the subsidiary’s net asset value of the subsidiary, including any associated goodwill.

When on impairment indicators exist the recoverable amount of the company’s investment in the subsidiary is determined (as the higher of the value in use and fair value less cost to sell). An impairment loss is recognised in profit or loss if the carrying value exceeds the recoverable amount.


49. Interest in subsidiaries continued During the reporting period, an impairment loss of R28 million was recognised on the company’s investment in

Andisa/ Andisa Incwala. The events and circumstances that led to the recognition of the impairment was that the recoverable amount (being the value in use) of the entity was less than the carrying value.

During the year, the group entered into a corporate restructure which resulted in the following changes for the company:

Increased its investment in SBLH in November 2016 by R1.1 billion for capital regulatory requirements for purposes of its capital investment in ICBCS in January 2017

Decreased its investment in SBLH, due to a reduction in SBLH’s share capital

Increased its legal ownership in Stanbic Africa Holdings Limited from 74.1% to 100%

Obtained a direct shareholding in SML Limited of 72.01%.

50. Interest in associates

2016Rm

20151

Rm20141

Rm

Carrying value at beginning of the year as previously reported 142 313 313Restatement – change in presentation policy 530 483 548

Restated carrying value at beginning of the year 672 796 861Share of profit 192 164 135Dividend received (77) (75) (200)Disposal and impairment of associate (213)

Carrying value at end of the year 787 672 796

1 Refer to the accounting policy elections regarding detail on the change in presentation policy.

The company’s investments in associates include South African Home Loans Proprietary Limited (SAHL).

Refer to Annexure B for details on associates.


288

51. Deferred tax

2016Rm

2015Rm

Deferred tax reconciliationDeferred tax asset at the beginning of the year 26(Reversing) temporary difference for the year (10) (26)

Deferred tax on assessed loss (utilised) (26)Deferred tax on net investment hedge reserve recognised in other

comprehensive income (9)Fair value adjustment (1)

Deferred tax liability at end of the year (10)

52. Other income

2016Rm

2015Rm

Losses on derivatives (75) (34)Foreign exchange gains 20 32Other 31 21

Total (24) 19

53. Direct taxation

2016Rm

20151

Rm

Current yearSouth African normal tax 113Deferred tax charge 10Foreign and withholding taxes 38 74Prior yearsSouth African normal tax prior year underprovision 37 (23)

Total direct taxation recognised in statement of comprehensive income 85 164

South African tax rate reconciliation (%)Direct tax – statutory rate 28.0 28.0Prior year tax 0.3 (0.2)

Direct tax – current year 28.3 27.8Withholding tax 0.3 0.6

Direct tax – current year – normal 28.6 28.4Permanent differences (27.9) (27.1)

Gain on disposal of subsidiary (0.2)Impairment of investment 0.1 0.2Dividends received (27.5) (28.0)Equity accounted earnings (0.5) (0.4)Other 1.3

Direct effective tax rate2 0.7 1.3

1 The tax rate reconciliation has been updated to align with the group disclosures. The 2015 percentages have been restated accordingly. This had no effect on the statement of comprehensive income.

2 Expressed as a percentage of profit before direct tax.


54. Statement of cash flows notes54.1 Adjustment for non-cash items and other adjustments included in the income statement

2016Rm

20151

Rm

Dividends received (11 652) (12 029)Interest income (89) (81)Interest expense 2 3Share of profits from associates (192) (164)Gain on disposal of subsidiary (87)Impairment of investment 28 105Non-cash expenses 25 59Fair value adjustments on derivatives 75 34Foreign exchange gains (20) (32)

Total (11 823) (12 192)


54.2 (Increase)/decrease in income-earning assets

2016Rm

2015Rm

Financial investments (2) (114)Other assets 162

Total (2) 48

54.3 Increase/(decrease) in deposits, trading and other liabilities

2016Rm

2015Rm

Derivative liabilities (174)Other liabilities 15 (75)

Total 15 (249)

54.4 Decrease/(increase) in investment in subsidiaries

2016Rm

2015Rm

Increase in investment in subsidiaries (1 287) (167)Proceeds on disposal of subsidiaries 62Movement in indebtedness to the company 1 720 (982)Movement in indebtedness by the company (296) (779)

Total 137 (1 866)

55. Liquidity, credit and market risk information Other assets and liabilities consist mainly of non-financial assets and liabilities which are not subject to liquidity,

credit and market risk.

290


Annexure ASubsidiaries, consolidated and unconsolidated structured entitiesas at 31 December 2016

STANDARD BANK GROUP1

Melville Douglas Investment Management1

Standard Insurance1

Standard Trust1

Stanvest1

SBG Securities1

Standard Bank Properties1

Standard Lesotho Bank (80%)

Standard Bank Namibia2

Standard Bank Swaziland (72.22%)

Standard Bank de Angola S.A. (51%)

Standard Advisory (China)

Standard Advisory London, UK

Standard New York, USA

The Standard Bank of South Africa1

Blue Bond Investments (RF)1

Diners Club (S.A.)1

Standard Bank Insurance Brokers1

Stanbic Africa Holdings, UK

Stanbic Bank Botswana

Stanbic Bank Ghana (99.54%)

Standard Holdings Côte d’Ivoire (99%)

• Stanbic Bank S.A., Côte d’Ivoire (99%)

Stanbic Bank Tanzania (99.99%)

Stanbic Bank Uganda (80%)

Stanbic Bank Zambia (99.99%)

Stanbic Holdings, Kenya (60%)

• Stanbic Bank, Kenya

Stanbic IBTC Holdings, Nigeria (53.2%)

• Stanbic IBTC Bank, Nigeria (99.99%)

Stanbic Bank Zimbabwe

Standard Bank RDC S.A., DRC (99.99%)

Standard Bank Malawi (60.18%)

Standard Bank (Mauritius)

Standard Bank S.A.R.L., Mozambique (98.14%)


The diagram above depicts principal subsidiaries only. A full list of the group’s subsidiaries and consolidated structured entities is available at the company’s registered office. The holding in subsidiaries is 100% unless otherwise indicated.

STANDARD BANK GROUP1

1 Incorporated in South Africa.2 Standard Bank Group Limited legally owns 90% of SBN Holdings

(Namibia) but consolidates 100% due to the control it retains over its empowerment structure.

Standard Bank Group International, Isle of Man

SBIC Finance, Isle of Man

Stanbic International Insurance, Isle of Man

Standard Finance, Isle of Man

SML, Isle of Man

Standard Bank Offshore Group, Jersey

Standard Bank International Investments, Jersey

Standard Bank Offshore Trust Company Jersey

Standard Bank Isle of Man

Standard Bank Trust Company (Mauritius)

Standard Bank Jersey

Standard Bank London Holdings, UK

Standard Advisory Asia, Hong Kong

Liberty Holdings1

(53.62%)

Liberty Group1

• Frank Life1

STANLIB1

• STANLIB Asset Management1

• STANLIB Collective Investments1

• STANLIB Fund Managers Jersey • STANLIB Multi-Manager1

• STANLIB Wealth Management1

Liberty Group Properties1

Liberty Holdings Namibia (75%)

Liberty Kenya Holdings (57.74%)


Subsidiaries

Nature of operation

Nominal share capital

issuedRm

Effective holding Non-controlling interest Book value of shares Net indebtedness

2016%

2015%

2016%

2015%

2016Rm

2015Rm

2016Rm

2015Rm

Standard Bank Group Limited will ensure that the capital adequacy of its subsidiaries denoted by # will meet the requirements of home and host regulators, as required by section 70A of the South African Banks Act.

Banking subsidiariesStanbic Bank Botswana Limited (Botswana)1# Commercial bank 423 100 100Stanbic Bank Ghana Limited (Ghana)1,3# Commercial bank 630 99 99 1 1Stanbic Bank Kenya Limited (Kenya)1,6# Commercial bank 418 60 60 40 40Stanbic Bank S.A. (Côte d’Ivoire)1,# Commercial bank 375 100Stanbic Bank Tanzania Limited (Tanzania)1,3# Commercial bank 44 100 100Stanbic Bank Uganda Limited (Uganda)1,4# Commercial bank 227 80 80 20 20Stanbic Bank Zambia Limited (Zambia)1,3# Commercial bank 660 100 100Stanbic Bank Zimbabwe Limited (Zimbabwe)1# Commercial bank 2 100 100 136 136Stanbic IBTC Bank PLC (Nigeria)1# Commercial bank 103 53 53 47 47Standard Bank de Angola S.A. (Angola)# Commercial bank 768 51 51 49 49 359 359Standard Bank Isle of Man Limited (Isle of Man)1# Merchant bank 25 100 100Standard Bank Jersey Limited (Jersey)1# Merchant bank 320 100 100Standard Bank Limited (Malawi)1,4# Commercial bank 23 60 60 40 40Standard Bank (Mauritius) Limited (Mauritius)1# Commercial bank 342 100 100Standard Bank Namibia Limited (Namibia)1,5# Commercial bank 2 100 100Standard Bank RDC S.A. (DRC)1,3# Commercial bank 247 100 100Standard Bank S.A.R.L. (Mozambique)1# Commercial bank 309 98 98 2 2Standard Bank Swaziland Limited (Swaziland)# Commercial bank 15 72 72 28 28 94 94Standard Lesotho Bank Limited (Lesotho)# Commercial bank 21 80 80 20 20 13 13The Standard Bank of South Africa Limited# Commercial bank 60 100 100 41 005 40 005 870 2 341

Non-banking subsidiariesEcentric Payment Systems Proprietary Limited1 Development and marketing transactions –

switching software and services 100 100Liberty Group Limited1 Insurance company 29 54 54 46 46Liberty Holdings Limited4 Insurance holding company 26 54 54 46 46 7 668 7 668Melville Douglas Investment Management Proprietary Limited# Asset and portfolio management 100 100 53 53SBG Securities Proprietary Limited# Stockbrokers 100 100 320 320SBN Holdings Limited (Namibia)5 Bank holding company 1 100 100 400 400Stanbic Africa Holdings Limited (UK) Investment holding company 1 494 100 100 5 643 2 160Stanbic Holdings PLC (Kenya)4,7 Bank holding company 275 60 60 40 40Stanbic IBTC Holdings PLC (Nigeria)1,4 Bank holding company 275 53 53 47 47Standard Advisory (China) Limited (China) Trading company 8 100 100 10 10Standard Advisory London Limited (UK) Arranging and advisory company 1 100 100 557 557Standard Bank Group International Limited (Isle of Man) Investment holding company 100 100 1 217 5 588Standard Bank International Investments Limited (Jersey)1# Portfolio management 100 100Standard Bank London Holdings Limited (UK) Investment holding company 6 337 100 100 7 658 6 555


ANNUAL FINANCIAL STATEMENTS Annexure A Subsidiaries, consolidated and unconsolidated structured entities continued


Subsidiaries continued

Nature of operation

Nominal share capital

issuedRm

Effective holding Non-controlling interest Book value of shares Net indebtedness

2016%

2015%

2016%

2015%

2016Rm

2015Rm

2016Rm

2015Rm

Non-banking subsidiaries continuedStandard Bank Offshore Group Limited (Jersey) Investment holding company 17 100 100 49 49Standard Bank Offshore Trust Company Jersey Limited (Jersey)1# Trust company 6 100 100Standard Bank Trust Company (Mauritius) Limited (Mauritius)1# Trust company 100 100Standard Finance Limited (Isle of Man)1# Finance company 100 100Standard Insurance Limited Short-term insurance 15 100 100 30 30Standard New York, Inc (US) Securities broker/dealer 55 100 100 55 55Standard Trust Limited# Trust company 100 100STANLIB Limited1 Wealth and asset management 54 54 46 46Miscellaneous Finance companies 132 88 28 (19)

Total 65 399 64 140 898 2 322

1 Held indirectly, no book value in Standard Bank Group Limited. 2 Effective holding company comprises direct and indirect holdings.3 Minorities hold 0.5% or less. 4 Listed on a stock exchange.5 Standard Bank Group legally owns 90% of SBN Holdings (Namibia) but consolidates 100% due to its empowerment structure. 6 Stanbic Bank Kenya Limited was previously known as CfC Stanbic Bank Limited.7 Stanbic Holdings PLC (Kenya) was previously known as CfC Stanbic Holdings Limited.

The nominal share capital issued of foreign subsidiaries has been stated in the above table at their rand equivalents at the rates of exchange ruling on the dates of provision of capital. The country of incorporation is South Africa unless otherwise indicated.

A full list of the group’s subsidiaries and consolidated structured entities is available at the company’s registered office.



Consolidated structured entities

Name of the entity Nature of the operations

Amount of support provided as at1,2,3 Type of support4

TERMS OF CONTRACTUAL ARRANGEMENTS

EVENTS/CIRCUMSTANCES THAT COULD EXPOSE THE GROUP TO A LOSS AS A RESULT OF THE CONTRACTUAL ARRANGEMENT

2016Rm

2015Rm

2016 2015


Facilitates mortgage-backed securitisations. The group is the primary liquidity facility provider to BG 1.

48 49 Subordinatedloan

Subordinated loan

The subordinated loan does not have a fixed term or repayment date. All the profits in BG 1 are paid out to the group as interest on the loan granted.

Should BG 1’s customers be unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

735 898 Mortgage- backed

notes

Mortgage- backed

notes

The group holds the class A4, A6, B, C, D, E and F notes. Interest for the different classes of notes accrues at the three-month JIBAR rate plus a margin ranging between 0.55% to 8%. Interest is payable quarterly. The notes maturity date is 21 November 2032.



23 65 Subordinatedloan

Subordinated loan

The loans do not have a fixed term or repayment date. The first loss subordinated loan incurs interest at a rate of prime plus 5% while the second loss loan incurs interest at a rate of prime less 1.5% per annum and is only payable when BG 2 has sufficient cash reserves. Due to the buyback of the mortgage assets mentioned below, a portion of the subordinated loans in the current period were repaid.



notes

Mortgage- backed

notes

The mortgage-backed assets were bought back in July 2016, hence all note holders both internal and external were settled. The group subsequently holds subordinated loans in the entity to fund the mortgage assets that are remaining in the entity.



204 69 Subordinated loan

Subordinated loan

The loans do not have a fixed term or repayment date. The first loss subordinated loan incurs interest at a rate of prime plus 5% while the second loss loan incurs interest at a rate of prime less 1.5% per annum and is only payable when BG 3 has sufficient cash reserves. Due to the buyback of the mortgage assets mentioned below, a portion of the subordinated loans in the current period were repaid; however, some of the underlying mortgage assets remained in the entity and were not transferred to SBSA and as a result, additional funding was required by SBSA to fund the shortfall.


990 Mortgage- backed

notes

Mortgage- backed

notes

The mortgage-backed assets were bought back in October 2016, hence all noteholders both internal and external were settled. The group subsequently holds subordinated loans in the entity to fund the mortgage assets that are remaining in the entity.




Subordinated loan

The loans do not have a fixed term or repayment date. The loan incurs interest at a rate of prime less 1.5% per annum and is only payable when BG 4 has sufficient cash reserves. Due to the buyback of the mortgage assets mentioned below, a portion of the subordinated loans in the current period were repaid.



notes

Mortgage- backed

notes

The mortgage-backed assets were bought back in December 2016, hence all noteholders both internal and external were settled. The group subsequently holds subordinated loans in the entity to fund the mortgage assets that are remaining in the entity.








2016Rm

2015Rm

2016 2015

Siyakha Fund (RF) Limited (Siyakha)

Facilitates mortgage-backed securitisations. The group is the primary liquidity facility provider to Siyakha.


Subordinated loan

The loan does not have a fixed term or repayment date. Interest is charged at prime plus 5% and is only payable when Siyakha has sufficient cash reserves.

Should Siyakha' s customers be unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

990 1 038 Mortgage- backed

notes

Mortgage- backed

notes

The group holds class A1 notes for which interest accrues at the three month JIBAR rate plus 1.10%. The group also holds class A2, B, C and D notes for which interest accrues at a rate from prime less 2.1% to prime plus 2%. Interest is payable quarterly. The notes’ maturity date is 11 February 2045.

Blue Shield Investments 01 (RF) Limited (Blue Shield)5

Facilitates mortgage-backed securitisations. The group is the primary liquidity facility provider to Blue Shield.


Subordinated loan

The subordinated loan is provided by the group. Interest is charged at the lower of prime plus 10% or net profit after tax or cash balance available in Blue Shield.

Should Blue Shield's customers be unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

16 168 16 073 Mortgage- backed

notes

Mortgage- backed

notes

The group holds class A1, A2, A3 and C notes. Interest for the different classes of notes accrues at the three month JIBAR rate plus a margin ranging between 1.55% and 4.00%. Interest is payable quarterly. The notes’ maturity date is 21 November 2019.

Blue Banner SecuritisationVehicle RC1 Proprietary Limited (Blue Banner)

Originates mortgage loans on behalf of group. The group is required to provide the funding for these mortgage loans.

129 160 Bridging finance

Bridging finance

The loan does not have a fixed term or repayment date. Any profits in Blue Banner are paid out as interest to the group.

Should Blue Banner's customers be unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

Out of the Blue OriginatorProprietary Limited (OTB)

OTB originates loans on behalf of Blue Titanium Conduit (RF) Limited (BTC). BTC is consolidated by the group.

Overdraft facility

Overdraft facility

OTB applied for the necessary overdraft facility as and when it originates loans. The drawn amount is settled once the originated loan is sold to BTC. The terms are negotiated and agreed upon at the time of the grant of the overdraft facility. OTB applied for and was granted an overdraft facility of R900 million in 2016 (2015: R600 million). OTB drew down on the overdraft facility in both the current and prior year. As at 31 December 2016, the outstanding balance on the facility was Rnil (2015: Rnil).

This SE does not expose the group to a risk of loss as it acts as a conduit between the group and BTC. OTB draws down on the overdraft facility as and when BTC originates loans and the facility is repaid on the same day of the draw down.

Blue Titanium Conduit (RF) Limited (BTC)

Purchases eligible term assets and funds such investments through the issuance of commercial paper. The group is the primary liquidity facility provider to BTC.

Liquidity facility

Liquidity facility

The liquidity facility is limited to the value of the underlying assets in BTC. As at 31 December 2016, the liquidity facility limit was R2 738 million (2015: R3 190 million). BTC had not drawn down on the liquidity facility as at 31 December 2016.

In the event that the underlying assets are classified as non-performing loans.

382 233 Commercial paper

Commercial paper

The group periodically invests in commercial paper (CP) issued by BTC. The CP is typically short term in nature, and issued at arm’s length. During the year ended 31 December 2016, CP issued by BTC was priced at a spread of between 43 and 60 basis points over JIBAR.

475 Credit enhancement

facility

Credit enhancement

facility

The credit enhancement facility is limited to 15% of the outstanding CP issued in the market. BTC had drawn down on the credit enhancement facility as at 31 December 2016.


Consolidated structured entities continued







2016Rm

2015Rm

2016 2015

Rapvest Investments Proprietary Limited

Facilitates finance deals for other group companies and third parties through preference share investments and loans to clients.

3 961 3 253 Loan Loan The loan is repayable on demand and no interest is charged on the loan.

In the event that the underlying assets are classified as non-performing loans.

1 056 Preference shares

Preference shares

The preference shares accrue dividends at a rate of 85% of the prime interest rate payable in April and October annually. The preference shares were redeemed on 2 June 2016.

SB-Debtors Discounting No. 1 Proprietary Limited (SB-Debtors)

SB-Debtors was set up to enable Main Street 367 (RF) Proprietary Limited (Main Street) to fund the subordinated loans to BG 1, BG 2, BG 3, BG 4 and Siyakha. The group provides the funding to enable SB-Debtors to originate these loans.

466 4666 Loan Loan The loan has no fixed repayment date. Interest is calculated as the higher of the variable rate of three-month JIBAR plus 0.7% per annum and the cash available less R15 000.

In the event that customers of BG 1, BG 2, BG 3, BG 4 and Siyakha are unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

Main Street 367 (RF) Proprietary Limited (Main Street)

Facilitates financing to BG 1, BG 2, BG 3, BG 4 and Siyakha. SB-Debtors provides the funding to Main Street to enable Main Street to originate these loans.


Subordinated loan

The loan is only repayable to the extent that Main Street receives payment from BG 1, BG 2, BG 3, BG 4 and Siyakha. The interest is charged at the higher of JIBAR plus 10% and the cash available in terms of Main Street’s priority of payments less R15 000.

In the event that customers of BG 1, BG 2, BG 3, BG 4 and Siyakha are unable to meet their contractual obligations under the mortgage loan agreement and the loans are classified as non-performing.

1 The amount of support provided includes loans and advances and drawn down credit facilities provided to SEs by the group.2 During the reporting period, the group did not provide any financial or other support to any SE without having a contractual obligation to do so.3 This is the amount as reported on the balance sheet as at 31 December 2016 and 2015, respectively. For credit facilities, the amount shown is the undrawn

balance as at the reporting date.4 In addition to the financial support provided to the SEs, the group enters into other transactions with SEs in the ordinary course of business. These transactions

include loans and advances, deposits and current accounts and derivatives.5 Blue Shield Investments 01 (RF) Limited was previously known as Tabistone 06 (RF) Limited.6 In 2015 amounts were erroneously included without taking interest into account in this disclosure. Consequently, the amounts presented at 31 December 2015

have been restated. The restatement did not affect the group’s statement of financial position.


Consolidated structured entities continued


Unconsolidated structured entitiesThe group has an interest in the following unconsolidated structured entities:

NATURE AND PURPOSE OF ENTITY

PRINCIPAL NATURE OF FUNDING

PRINCIPAL NATURE OF ASSETS TERMS OF CONTRACTUAL ARRANGEMENTS

EVENTS/CIRCUMSTANCES THAT COULD EXPOSE THE GROUP TO A LOSS

Blue Diamond Investments No. 1 (RF) Limited



The group purchases credit protection from Blue Diamond Investments No. 1, 2 and 3 (BD) in the form of credit-linked notes on single or multiple corporate names. BD then purchases credit protection from third-party investors on single or multiple corporate names. The group purchases high-quality collateral with maturities that match BD’s obligations in respect of its issued credit-linked notes. The group provides collateral to BD which is held as credit protection for the third-party investors. The collateral is ring-fenced such that it is linked to a particular series of notes and the relevant related contract(s) as part of a transaction. This structure has been designed to provide third-party investors indirect exposure to corporate names, and in doing so, reduces the group’s exposure to credit risk.

Credit-linked notes issued to third-party investors

Credit-linked notes issued by the group

12 years The group compensates BD for providing credit protection over single or multiple corporate names. The group also settles BD’s operating expenses as and when necessary, typically in the event that BD has liquidity constraints. Any payment for such amounts is to be refunded by BD to the group.

In the event of a credit event and BD is unable to pay, the group would be exposed to a credit loss. This risk is considered remote given the collateral held by BD.

The group is further exposed to the risk of loss should it be unable to recover any unexpected operating expenses from BD.

Africa ETF Issuer (Limited) offering the following:

• AfricaPalladium ETF (JSE code: ETFPLD)

• AfricaPlatinum ETF (JSE code: ETFPLT)

• AfricaGold ETF (JSE code: ETFGLD)

The palladium, platinum and gold exchange traded funds (ETFs) have been established for investors to participate in changes in the spot price of underlying commodities. The ETFs issue debentures to investors with each debenture backed by the respective physical commodity. On issuance each debenture is based on 1/100th of a troy ounce of the respective commodity. The physical commodities are stored at recognised custodian vaults in London. The ETFs are denominated in rands and are classified as domestic assets. The ETFs are regulated by the Financial Markets Act and the JSE’s Listings Requirements.

The unconsolidated structured entity is funded by the issue of non-interest bearing debentures that are 100% backed by the underlying physical commodity

Physical commodities (Palladium, Platinum and Gold)

Undated The group established these structured entities to accommodate client requirements to hold investments in specific commodity assets. The group manages the ETFs and also provides liquidity to the ETFs by acting as a committed market maker.

The maximum exposure to loss is limited to the on-balance sheet position held by the group through acting as a committed market maker for the ETFs. This exposes the group to the commodity price risk associated with the underlying commodity and is managed in accordance with the group’s market risk management policy.

Calibre Mortgage Fund (Pty) Ltd

SE set up by South African Home Loans (Pty) Ltd (SAHL) into which it originates home loans. The SE is funded by debt provided by Liberty and equity provided by SAHL. The SE has been set up by SAHL as a funding vehicle into which Liberty can lend on a secured basis.

Liberty as debt provider Senior home loans

The loan tenor is 20 years and bears interest at an average rate of 3 month JIBAR + 2.30%.

To the extent that asset quality in the vehicle deteriorates to a level where losses exceed subordinated debt in the capital structure, the group may be exposed to a credit loss.

Greenhouse Funding 3 (Pty) Ltd (Greenhouse)

Greenhouse is an SE set up by Nedbank Limited. The SE is a securitisation vehicle into which it originates home loans. Liberty is one of the investors in the structure and holds listed debt instruments. Equity is provided by Nedbank Limited. Greenhouse has been set up by Nedbank Limited as a funding vehicle into which Liberty can lend on a secured basis.

Liberty as debt provider Senior, unrated debentures secured by underlying assets



SA Taxi Finance Solutions (Pty) Ltd (SA Taxi)

SE set up by SA Taxi to raise debt funding which it in turn uses to originate taxi loans.

Liberty as debt provider Senior, unrated debentures secured by underlying assets



Universal Credit S.A. (Universal)

Universal is an investment fund. Liberty as debt provider Segregated investment fund

The loan tenor is 5 years. In the event of defaults in the underlying pool of credit assets, the group may be exposed to a credit loss.


304

Unconsolidated structured entities continuedThe following represents the group’s interests in these entities:

2016Rm

2015Rm

Balance sheetUnconsolidated structured entities:Financial investments 187 175Deposits and debt funding from customers (1 776) (1 658)Trading assets 37 36

Total (1 552) (1 447)

For both 2016 and 2015, Blue Diamond No. 1, No. 2 and No. 3 earned income via a once-off fee and commission income earned for structuring the SE.



Details of group companies with material non-controlling interests

Liberty Group Limited Africa Regions1

2016 2015 2016 20152

Non-controlling interests (%) 46 46 * *Summarised financial information on an IFRS basis

before intercompany eliminations:Total assets 421 890 419 318 174 836 214 297Total liabilities 392 884 393 325 152 292 187 243Total income 62 744 73 995 22 326 19 620Profit for the year 2 626 4 287 5 857 5 161Change in cash balances with central banks (4 182) 5 128 (3 109) 11 750

Profit attributable to non-controlling interests after intercompany eliminations 1 442 2 121 1 887 1 654

Non-controlling interest within statement of financial position 16 458 13 626 6 970 9 093

Dividends paid to non-controlling interests 959 905 299 616

1 All balances except total assets and total liabilities (translated using the closing exchange rate) have been translated using cumulative exchange rates.2 In 2015, countries without material minority interests were erroneously included in the table above. Prior year numbers have therefore been restated to

correctly reflect group entities with material non-controlling interests.* Refer to page 292 for further detail.


Safika Holdings Proprietary Limited

Industrial and Commercial Bank

of China (Argentina) S.A.

South African Home Loans

Proprietary LimitedICBC

Standard Bank Plc1Other

joint venturesOther

associates

Total associates and joint ventures –

equity accounted

Ownership structure Associate Associate Associate Associate Joint ventures Associates Associates and joint ventures

Nature of business Investment holding company Banking Finance Banking Various Various Various

Principal place of business and country of incorporation

South Africa Argentina South Africa London, UK Various Various Various

Year end February December February December Various Various Various

Accounting treatment Equity accounted Equity accounted Equity accounted Equity accounted Equity accounted Equity accounted Equity accounted

Date to which equity accounted 31 December 2016 31 December 2016 31 December 2016 31 December 2016 31 December 2016 Various Various

2016Rm

2015Rm

2016Rm

20153

Rm2016

Rm2015

Rm2016

Rm20153

Rm2016

Rm2015

Rm2016

Rm20153

Rm2016

Rm2015

Rm

Effective holding (%) 26.67 26.67 20 20 50 50 40 40 Various Various Various Various Various VariousCarrying value 516 646 1 940 2 097 790 672 4 505 5 836 87 76 357 376 8 196 9 703

Income statementRevenue 13 66 17 600 17 968 3 774 880 4 205 2 250Total comprehensive income/(losses) 13 55 2 867 3 025 384 317 (1 735) (3 584)

Total comprehensive income/(losses) attributable to equity holders of the associate and joint ventures 3 15 562 689 384 317 (713) (1 132)

Dividend received from associates/ joint ventures 133 50 69 78 75

Statement of financial position2

Non-current assets 1 939 3 119 1 520 1 477 28 347 25 794 152 264 130 538Current assets 187 235 64 707 68 038 3 241 2 261 124 506 181 526Non-current liabilities (125) (200) (254) (21 849) (25 634) (53 877) (66 499)Current liabilities (192) (807) (57 931) (60 964) (7 878) (796) (209 797) (228 906)

Net asset value attributable to equity holders of the associate and joint venture 1 934 2 422 8 096 8 298 1 861 1 625 13 096 16 659

Proportion of net asset value based on effective holding 516 646 1 619 1 660 931 813 5 238 6 664

Goodwill 321 437 (733) (828)Cumulative impairment (141) (141)

Carrying value 516 646 1 940 2 097 790 672 4 505 5 836

Share of profits/(losses) from associate and joint ventures 3 15 583 605 192 158 (591) (1 173) 24 18 (24) 54 187 (323)

1 The group disposed of 60% of SB Plc to ICBC on 1 February 2015. The final cash proceeds on this 60% disposal, which was based on a discount to the 31 January 2015 net asset value amounted to USD675 million. The group retained a 40% interest in SB Plc (now ICBCS ), with this interest being recognised as investment in an associate from 1 February 2015.

2 Summarised financial information of the associates and joint ventures is provided based off the latest available management accounts received.3 In 2015, certain amounts were erroneously included in this disclosure. Consequently, the amounts presented at 31 December 2015 have been restated.

The restatement did not affect the group’s statement of financial position.

Annexure BAssociates and joint ventures



STANLIB Income Fund

STANLIB Property Income Fund

STANLIB Balanced Cautious Fund

STANLIB Balanced Fund

STANLIB Corporate Money

Market Fund

Other associates and joint ventures – fair value accounted

Total associates and joint ventures – fair value accounted

Ownership structure Associate Associate Associate Associate Joint ventures AssociatesAssociates and joint

ventures

Nature of business Fund Fund Fund Fund Various Various Various

Principal place of business South Africa South Africa South Africa South Africa Various Various Various

Year end December December March February Various Various Various

Accounting treatment Fair value accounted Fair value accounted Fair value accounted Fair value accounted Fair value accounted Fair value accounted Fair value accounted

2016Rm

2015Rm

2016Rm

20151

Rm2016

Rm2015

Rm2016

Rm2015

Rm2016

Rm2015

Rm2016

Rm20151

Rm2016

Rm2015

Rm

Effective holding (%) 8 9 13 12 19 16 24 23 9 12 Various Various Various VariousFair value 1 630 1 667 946 868 1 752 1 438 1 531 1 694 2 852 3 062 4 284 7 671 12 995 16 400

Income statementRevenue 1 883 1 594 483 449 538 438 314 265 2 400 2 072Total profit for the year 1 740 1 447 381 348 396 332 216 193 2 335 2 007

Total comprehensive income 1 740 1 447 381 348 396 332 216 193 2 335 2 007

Dividend received from associates 110 206 49 38 71 48 50 44 113 284


Non-current assets 21 308 19 068 7 286 7 239 9 177 8 778 6 244 7 050 27 545 20 269Current assets 668 594 11 25 259 435 250 465 4 136 6 143Non-current liabilitiesCurrent liabilities (320) (319) (8) (8) (46) (18) (150) (117) (6) (6)

Net asset value 21 656 19 343 7 289 7 256 9 390 9 195 6 344 7 398 31 675 26 406

Carrying value, including loans measured at fair value 1 630 1 667 946 868 1 752 1 4383 1 531 1 694 2 852 3 062 4 284 7 671 12 995 16 400

Assets held with group companies4 2 607 2 488 274 327 7 11 8 339 2 187

1 Other associates and joint ventures – fair value accounted has been aggregated to include certain associates and joint ventures that were previously separately disclosed. STANLIB Property Income Fund has been excluded from other associates and joint ventures – fair value accounted as it is separately disclosed in 2016.

2 Summarised financial information of the associates and joint ventures is provided based on the latest available management accounts received.3 Prior year was erroneously disclosed as R1 483 million and has been restated to reflect the correct amount of R1 438 million. 4 Relates to balances included in the group’s deposits and debt funding.

ANNUAL FINANCIAL STATEMENTS Annexure B Associates and joint ventures continued

310

Private equity/venture capital associates and joint ventures1

2016Rm

2015Rm

Cost 48 48Carrying value 389 492


Non-current assets 2 014 3 207Current assets 187 235Non-current liabilities (125)Current liabilities (192) (814)

Income statementAttributable income before impairment 3 51Realised gains on disposal for the period included in headline earnings 45Other income 81

Fair value 389 482

1 Included in note 9 associates and joint ventures.2 Summarised financial information of the associates and joint ventures is provided based on the latest available management accounts received.

The investments in associates and joint ventures were made by the group’s private equity operations and have been ring-fenced for headline earnings purposes. On the disposal of these associates and joint ventures held by the group’s private equity division the gain or loss on the disposal will be included in headline earnings in terms of Circular 2/2015 Headline Earnings, issued by the South African Institute of Chartered Accountants at the request of the JSE.

ANNUAL FINANCIAL STATEMENTS Annexure B Associates and joint ventures continued


Share-based paymentsThe group’s share incentive schemes enable key management personnel and senior employees to benefit from the performance of the group and certain group companies’ share prices. For further detail regarding the share schemes refer to the group’s governance and remuneration report.

2016Rm

2015Rm

Expenses recognised in staff costs:Deferred bonus scheme 1 029 745Performance reward plan 274 180Quanto stock scheme 238 184Equity growth scheme 12 88Liberty share incentive scheme 138 148Other share incentive schemes (24) (33)

Total expenses recognised in staff costs 1 667 1 312

Summary of liabilities recognised in other liabilities:Deferred bonus scheme 161 41Performance reward plan 110 39Quanto stock scheme 222 326Other share incentive schemes (including Liberty share incentive schemes) 23 75

Total liability recognised in other liabilities 516 481

Equity growth schemeThe EGS is an equity-settled scheme and represents appreciation rights allocated to employees. The EGS rights are only awarded to individuals in the employment of a group equity domiciled in South Africa. The converted value of the rights is effectively settled by the issue of SBG shares equivalent to the value of the rights. The scheme has five different subtypes of vesting categories as illustrated by the table below:

Year%

vestingExpiry(years)

Vesting categoriesType A 3, 4, 5 50, 75, 100 10Type B 5, 6, 7 50, 75, 100 10Type C 2, 3, 4 50, 75, 100 10Type D 2, 3, 4 33, 67, 100 10Type E 3, 4, 5 33, 67, 100 10

A reconciliation of the movement of share options is detailed below:

Number of rightsAverage price

range (R)

2016 2015 2016

Movement summaryRights outstanding at beginning of the year 22 626 594 28 515 142Granted 1 515 774 1 361 888 122.24Exercised (6 119 878) (6 202 199) 62.39 – 126.87Lapsed/forfeited (213 296) (1 048 237) 62.39 – 111.94

Rights outstanding at the end of the year 17 809 194 22 626 594

Annexure CGroup share incentive schemes

312

Equity growth scheme continuedDuring the year, 1 498 258 (2015: 2 004 396) SBG shares were issued to settle the appreciated rights value. At the end of the year, the group would need to issue 5 259 490 (2015: 3 014 982) SBG shares to settle the outstanding appreciated rights value.

The group is required to ensure that employees’ tax arising from benefits due in terms of the scheme is paid in accordance with the Fourth Schedule of the Income Tax Act of South Africa. Where employees have elected not to fund the tax from their own resources the tax due is treated as a diminution of the gross benefits due under the scheme. A total of 456 664 (2015: 631 361) SBG shares were issued and sold to settle the employees’ tax due during the year. This reduces the liability due in respect of the outstanding appreciated rights value.

Share options were exercised regularly throughout the year. The weighted average share price for the year was R151.63 (2015: R147.88).

The following rights granted to employees, including executive directors, had not been exercised at year end:

Option expiry period

2016 2015

Number of rights

Option price range (R)

Weighted average

price (R)

Number of rights

Option price range(R)

Weighted average

price (R)

Year to 31 December 2016 1 047 234 77.83 – 82.00 79.53Year to 31 December 2017 542 291 98.00 – 106.80 98.02 1 291 189 98.00 – 106.80 98.03Year to 31 December 2018 1 866 849 83.10 – 92.00 91.94 2 679 384 83.10 – 92.00 91.96Year to 31 December 2019 1 795 422 62.39 – 98.20 64.07 2 675 233 62.39 – 98.20 64.11Year to 31 December 2020 3 690 526 102.00 – 116.80 111.80 4 583 623 102.00 – 116.80 111.76Year to 31 December 2021 4 152 641 90.50 – 107.55 98.74 5 986 779 90.50 – 107.55 98.76Year to 31 December 2022 701 661 98.75 – 108.90 108.42 720 835 98.75 – 108.90 108.44Year to 31 December 2023 883 205 115.51 115.51 930 005 115.51 115.51Year to 31 December 2024 1 298 937 126.87 126.87 1 350 424 126.87 126.87Year to 31 December 2025 1 361 888 156.96 156.96 1 361 888 156.96 156.96Year to 31 December 2026 1 515 774 122.24 122.24

Total 17 809 194 22 626 594

The share appreciation rights granted during the year were valued using a Black-Scholes option pricing model. Each grant was valued separately. The weighted fair value of the options granted per vesting type and the assumptions utilised are illustrated below:

Type D

2016 2015

Number of appreciation rights granted 1 515 774 1 361 888Weighted average fair value at grant date (R) 35.19 37.72The principal inputs are as follows:Weighted average share and exercise price (R) 122.24 156.96Expected life (years) 6.23 6.20Expected volatility (%) 25.63 22.19Risk-free interest rate (%) 8.60 7.24Dividend yield (%) 3.98 3.87

No A, B, C or E rights were granted during the year. The appreciation rights granted during the year had a fair value of R53.3 million (2015: R51 million) at grant date.

ANNUAL FINANCIAL STATEMENTS Annexure C Group share incentive schemes continued


Quanto stock schemeSince 2007, Standard Bank International has operated a deferred incentive arrangement in the form of the Quanto stock unit plan. All employees granted an annual performance award over a threshold have part of their award deferred. The award units are denominated in USD, the value of which moves in parallel to the change in price of the SBG shares listed on the JSE. Awards are issued to individuals in employment of a group entity domiciled in Standard Bank International and are cash-settled. Awards vest over a three-year period.

Special terms apply to employees designated by the Prudential Regulatory Authority (PRA) as Code Staff. For these employees the deferred portion of the incentive is delivered in Quanto stock units with a three-year vesting and an additional six-month holding period after vesting. Thereafter half of the remaining incentive (non-deferred portion) is paid immediately in cash and the other half is delivered in Quanto stock units with a six-month vesting period.

The change in liability due to the change in the SBG share price, is hedged through the use of equity options designated as cash flow hedges.

Units

2016 2015

Movement summaryUnits outstanding at beginning of the year 263 434 334 247Granted 128 640Lapsed/forfeited (6 450) (33 725)Exercised (144 045) (165 728)

Units outstanding at end of the year 112 939 263 434

Deferred bonus scheme All employees granted an annual performance award over a threshold have part of their award deferred. In addition, the group makes special awards of DBS to qualifying employees. The award is indexed to the group’s share price and accrues notional dividends during the vesting period, which are payable on vesting. Awards vest in three equal amounts at 18 months, 30 months and 42 months from the date of award. The final payout is determined with reference to the group’s share price on vesting date. These awards have been partially hedged through the use of equity forwards.

The DBS was extended to include qualifying employees in the employment of the group entity domiciled in Standard Bank International. These units are denominated in local functional currency. The value of the units move in parallel to the changes in SBG share price listed on the JSE and accrue notional dividends during the vesting period, which are payable on vesting.

314

Deferred bonus scheme continuedAwards issued to individuals in employment of a group entity domiciled in South Africa are classified as equity-settled and awards made to individuals in group entities domiciled outside of South Africa are classified as cash-settled.

Units

2016 2015

Movement summaryUnits outstanding at beginning of the year 11 148 980 11 242 206Units granted during the year 9 018 902 5 497 632Exercised (5 164 076) (5 105 155)Lapsed/forfeited (602 028) (485 703)

Units outstanding at the end of the year 14 401 778 11 148 980

Outstanding equity-settled units 13 672 693 9 819 235Outstanding cash-settled units 729 085 1 329 745

Weighted average fair value at grant date (R) 141.13 156.1Expected life (years) 2.51 2.51

Performance reward plan The performance-driven share plan which rewards value delivered against specific targets. The PRP incentivises a group of senior executives to meet the group strategic long-term objectives that deliver value to shareholders, to align the interests of those executives with shareholders and to act as an attraction and retention mechanism in a highly competitive marketplace for skills. The PRP operates alongside the existing conditional, equity-settled long-term plans, namely the EGS, DBS, and other share incentive schemes.

The award is indexed to the group’s share price and accrues notional dividends during the vesting period, which are payable on vesting. Shares that vest (if any), and that are delivered to the employee, are conditional on the pre-specified performance metrics. These awards have been partially hedged through the use of equity forwards.

Awards issued to individuals in employment of a group entity domiciled in South Africa are classified as equity-settled and awards made to individuals in group entities domiciled outside of South Africa are classified as cash-settled.

Units

2016 2015

Movement summaryUnits outstanding at beginning of the year 5 014 170 2 979 700Units granted during the year 3 124 400 2 449 700Lapsed/forfeited (435 367) (415 230)

Units outstanding at the end of the year 7 703 203 5 014 170

Outstanding equity-settled units 6 753 333 4 070 933Outstanding cash-settled units 949 870 943 237

Weighted average fair value at grant date (R) 122.24 157.04Expected life (years) 3.07 3.07

ANNUAL FINANCIAL STATEMENTS Annexure C Group share incentive schemes continued


Other share schemes

SCHEME DESCRIPTION CLASSIFICATIONSTOCKSYMBOL

2016 2015

Outstanding units

Outstandingunits

Liberty Holdings group restricted share plan

During 2012, Liberty introduced the Liberty Holdings group restricted share plan which has two methods of participation:

Long-term plan awards granted prior to 28 February 2013 vest 33 1/3 % at the end of year two, three and four respectively while awards granted subsequently vest 33 1/3 % at the end of year three, four and five respectively.

Deferred-plan awards vest 33 1/3 % at the end of 18 months, 30 months and 42 months respectively.

Equity-settled scheme

LBH

3 794 112 3 779 974

Liberty share unit rights (SUR)

In 2010, Liberty introduced an SUR plan where units are allocated to qualifying executives and senior management. The units are settled in cash up to three years after grant date.

Cash-settled scheme

LBH

41 867 83 734

Nigeria share schemes

On 1 March 2010 and 1 March 2011, share appreciation rights were issued to key management personnel. 50% of the rights vest three years after grant date, 25% of the rights vest four years after grant date and 25% of the rights vest five years after grant date.

Cash-settled scheme

IBTCCB: NL

59 113 755 67 824 702

Group share incentive scheme (GSIS)

GSIS confers rights to employees to acquire shares at the value of the SBG share price at the date the option was granted. The scheme has various vesting periods, and expires ten years after grant date. During the year, 691 534 (2015: 1 177 949) SBG shares were issued to settle the GSIS awards.

Equity-settled scheme

SBK

1 887 866 2 752 820


Executive directors’ and prescribed officers’ emoluments 2016

Fixed remuneration Variable remuneration

Totalcompensation

for the yearR’000

% changein total

compensation

Grant datevalue of

participationrights/units

forfeited3

R’000

Cashportion of

packageR’000

Otherbenefits

R’000

Pensioncontributions

R’000

Totalfixed

remunerationR’000

Cashbonus2

R’000

DBS:notional

dividendsR’000

Deferredbonus2

R’000

Totalvariable

compensationfor the year

R’000

% changein variable

compensation

Executive directors*BJ Kruger 2016 7 809 190 1 106 9 105 10 090 494 12 790 23 374 2 32 479 3 (3 953)

2015 7 538 171 1 076 8 785 10 150 896 11 850 22 896 104 31 681 58 (914)

SK Tshabalala 2016 7 850 242 1 106 9 198 10 090 789 12 790 23 669 6 32 867 5 (3 953)

2015 7 583 277 1 129 8 989 10 150 350 11 850 22 350 41 31 339 27 (457)

A Daehnke4 2016 2 986 2 375 3 363 7 400 552 8 100 16 052 19 415 (1 898)

Prescribed officersDC Munro 2016 5 802 143 847 6 792 12 900 1 133 15 600 29 633 5 36 425 4 (3 162)

2015 5 609 202 774 6 585 12 150 2 286 13 850 28 286 116 34 871 80 (228)

PL Schlebusch 2016 5 834 206 812 6 852 11 150 1 223 13 850 26 223 7 33 075 6 (3 162)

2015 5 594 230 755 6 579 10 650 1 523 12 350 24 523 35 31 102 28

Former executive director*SP Ridley5 2016 1 963 99 154 2 216 5 000 5 000 7 216

2015 5 532 271 677 6 480 6 650 986 8 350 15 986 27 22 466 19 (457)

1 In order to align incentive payments with the performance period to which they relate, the above variable remuneration relates to the year under review irrespective of when payment is made.

2 The DBS is an equity-settled share scheme. The final value of the award is dependent on the performance of the group’s share price. The deferred award is issued in the following financial year. The deferred award in the table above is the total award relating to the respective performance year. Deferred bonus amounts awarded for the 2016 performance year are subject to choice. Participants can elect to have the value of the deferred award, or a part thereof, invested in the share appreciation rights plan (SARP) rather than the default DBS. To the extent that SARP is selected, a 10% premium of the value of the award is added. Deferred bonus amounts not invested in SARP will be unitised with respect to the group’s closing share price on the date on which the group’s year end financial results are communicated publicly. The elections and the number of units relating to the 2016 performance year will be disclosed in the group’s 2017 annual financial statements.

3 The grant date Black-Scholes value has been used for the forfeited EGS. The grant date share price has been used for the forfeited PRP units.4 Appointed effective 1 May 2016. The above remuneration represents remuneration for services rendered as an executive director.5 Retired on 30 April 2016.* All executive directors were also prescribed officers of the group for 2015 and 2016, and former prescribed officers until the date of their resignation or

retirement.

Annexure DEmoluments and share incentives of directors and prescribed officers


318

Non-executive directors 2016

Fixed remuneration

Services asdirectors of

StandardBank Group

R’000

StandardBank Groupcommittee

feesR’000

Servicesas directors

of groupsubsidiaries

R’000

Otherbenefits1

R’000

Totalcompensation

for the yearR’000

MJD Ruck 2016 248 870 2 298 3 416

2015 233 810 2 145 3 188

Adv KD Moroka 2016 248 772 248 1 268

2015 233 689 233 1 155

TS Gcabashe2 2016 5 978 538 6 516

2015 3 446 155 119 251 3 971

EM Woods 2016 248 973 273 1 494

2015 233 1 043 326 1 602

RMW Dunne 2016 248 1 208 248 1 704

2015 233 1 128 256 1 617

PD Sullivan 2016 991 1 405 1 146 3 542

2015 939 1 131 1 171 3 241

W Wang 2016 248 296 28 572

2015 233 325 558

BS Tshabalala 2016 248 681 356 1 285

2015 233 438 728 1 399

AC Parker 2016 248 401 372 1 021

2015 233 271 441 945

ANA Peterside CON 2016 991 450 991 2 432

2015 939 252 939 2 130

S Gu 2016 991 562 28 1 581

2015 939 528 1 467

JH Maree3 2016 28 2 6277 2 655

2015

NNA Matyumza3 2016 28 28 56

2015

Dr ML Oduor-Otieno4 2016 991 293 991 2 275

2015

GJ Fraser-Moleketi3 2016 28 28 56

2015

JM Vice3 2016 28 237 28 293

2015

GMB Kennealy3 2016 28 28 56

2015

Total 2016 11 818 8 148 9 718 538 30 222

Total 2015 7 894 6 770 6 358 251 21 273


ANNUAL FINANCIAL STATEMENTS Annexure D Emoluments and share incentives of directors and prescribed officers continued


Former non-executive directors 2015

Fixed remuneration

Services as directors of

Standard Bank Group

R’000

Standard Bank Group

committee fees

R’000

Services as directors

of group subsidiaries

R’000

Other benefits1

R’000

Total compensation

for the yearR’000

TMF Phaswana5 2015 2 315 151 2 466

Lord Smith of Kelvin, KT5 2015 385 112 382 879

FA du Plessis6 2015 95 155 165 415

Total 2015 2 795 267 547 151 3 760

1 Use of motor vehicle and/or club subscriptions.2 Appointed as group chairman on 28 May 2015.3 Appointed on 21 November 2016.4 Appointed on 1 January 2016.5 Retired on 28 May 2015.6 Resigned on 28 May 2015.7 Paid from Liberty Holdings.


Performance reward planThe group’s PRP is settled in SBG shares with a three-year vesting period which is in effect from March 2014. The awards are subject to the achievement of performance conditions set at award date and that determine the number of shares that ultimately vest. The awards will only vest in future in terms of the rules of the PRP. The shares, subject to meeting the pre-specified conditions, are delivered to the employee on vesting date. Notional dividends accrue during the vesting period and will be payable on vesting date.

Share incentivesEquity growth schemeThe Equity Growth Scheme allocates participation rights to participate in the future growth of the SBG share price. The eventual value of the right is settled by the receipt of SBG shares equivalent to the full value of the participation rights.

Deferred bonus schemeEmployees are awarded a deferred bonus, as a mandatory deferral of their short-term incentive or as discretionary award, into the DBS. The deferred bonus is unitised into a number of units with respect to the group’s share price on the date of award. The shares are delivered to the employee on the vesting date. Notional dividends on the units are paid to the employees on the vesting date.


Director’s name

Opening balance

1 January

Number of share

incentives allocated

Issue or offer date

Number of participation

rights forfeited

for the performance

year

Grant date value of

participation rights/units

forfeited(R)

Number of share

incentives exercised

during the year

Issue price (R)/resultant

shares

Deliveryvalue1

(R)

Balance of share

incentives 31 December

Number of share

incentives2Issue date

Offer price

(R)Vesting

category Expiry date

Executive directors*SK Tshabalala3 EGS

2016 1 133 914 (45 000) 10 866 1 597 500 1 038 914 100 000 2008/03/06 92.00 B 2018/03/06 (50 000) 14 364 2 350 000 37 5004 2009/03/06 62.39 B 2019/03/06

2015 1 196 414 (12 500) (456 750) (50 000) 22 311 4 165 000 1 133 914 62 5004 2010/03/05 111.94 A 2020/03/05 62 5004 2010/03/05 111.94 B 2020/03/05 100 0004 2011/03/04 98.80 A 2021/03/04 100 0004 2011/03/04 98.80 B 2021/03/04 61 4714 2012/03/08 108.90 A 2022/03/08 212 834 2012/03/08 108.90 D 2022/03/08 70 7424 2013/03/07 115.51 E 2023/03/07 231 367 2013/03/07 115.51 D 2023/03/07

PRP

20176 264 500 85 400 2017/03/02 (31 156) (3 952 762)7 318 744 67 3445 2014/03/06 126.87 2017/03/31

2016 162 200 102 300 2016/03/03 122,24 264 500 63 700 2015/03/05 156.96 2018/03/31102 300 2016/03/03 122.24 2019/03/31

Refer to page 326 for the footnotes.


Director’s name

Opening balance

1 January

Number of share


Issue or offer date


rights forfeited

for the performance

year

Grant date value of


forfeited(R)

Number of share


during the year


shares

Deliveryvalue1

(R)

Balance of share


Number of share


Offer price

(R)Vesting


BJ Kruger EGS

2016 884 387 (50 000) 20 059 4 130 500 584 387 100 0004 2010/03/05 111.94 B 2020/03/05 (150 000) 42 478 8 295 000 50 0004 2011/03/04 98.80 B 2021/03/04 (100 000) 23 609 4 216 000 61 4714 2012/03/08 108.90 A 2022/03/08

2015 909 387 (25 000) (913 500) 884 387 56 5944 2013/03/07 115.51 E 2023/03/07 316 322 2014/03/06 126.87 D 2024/03/06

PRP

20176 264 500 85 400 2017/03/02 (31 156) (3 952 762)7 318 744 67 3445 2014/03/06 126.87 2017/03/31

2016 162 200 102 300 2016/03/03 122.24 264 500 63 700 2015/03/05 156.96 2018/03/31102 300 2016/03/03 122.24 2019/03/31

A Daehnke8 EGS

2016 194 450 (7 500) 2 273 342 450 186 950 4 100 2007/03/08 98.00 A 2017/03/08

2015 201 950 (7 500) 3 707 682 875 194 450 4 100 2007/03/08 98.00 B 2017/03/08

7 500 2008/03/06 92.00 A 2018/03/06

27 500 2008/03/06 92.00 B 2018/03/06

12 500 2009/03/06 62.39 A 2019/03/06

12 500 2009/03/06 62.39 B 2019/03/06

12 500 2010/03/05 111.94 A 2020/03/05

12 500 2010/03/05 111.94 B 2020/03/05

12 500 2011/03/04 98.80 A 2021/03/04

12 500 2011/03/04 98.80 B 2021/03/04 68 750 2014/03/06 126.87 D 2024/03/06

PRP

20176 142 800 47 800 2017/03/02 (14 961) (1 898 102)7 175 639 32 3395 2014/03/06 126.87 2017/03/31

2016 85 500 57 300 2016/03/03 122.24 142 800 38 200 2015/03/05 156.96 2018/03/3157 300 2016/03/03 122.24 2019/03/31



Share incentives continued


Director’s name

Opening balance

1 January

Number of share


Issue or offer date


rights forfeited

for the performance

year

Grant date value of


forfeited(R)

Number of share


during the year


shares

Deliveryvalue1

(R)

Balance of share


Number of share


Offer price

(R)Vesting


DC Munro EGS

2016 796 458 (47 500) 14 821 2 484 250 573 958 50 000 2008/03/06 92.00 B 2018/03/06

(175 000) 44 299 7 479 500 25 0004 2009/03/06 62.39 B 2019/03/06

2015 927 708 (6 250) (228 375) (50 000) 23 681 4 552 500 796 458 50 000 2010/03/05 111.94 A 2020/03/05

(75 000) 33 491 5 786 250 50 000 2010/03/05 111.94 B 2020/03/05

50 0004 2011/03/04 98.80 A 2021/03/04

50 0004 2011/03/04 98.80 B 2021/03/04

61 4714 2012/03/08 108.90 A 2022/03/08

60 948 2013/03/07 115.51 D 2023/03/07

70 7424 2013/03/07 115.51 E 2023/03/07

105 797 2014/03/06 126.87 D 2024/03/06

PRP

20176 249 800 68 300 2017/03/02 (24 924) (3 162 108)7 293 176 53 8765 2014/03/06 126.87 2017/03/31

2016 168 000 81 800 2016/03/03 122.24 249 800 89 200 2015/03/05 156.96 2018/03/3181 800 2016/03/03 122.24 2019/03/31

PL Schlebusch EGS

2016 175 036 (12 500) 5 407 1 132 625 112 536 12 500 2010/03/05 111.94 B 2020/03/05

(12 500) 3 018 513 250 25 0004 2011/03/04 98.80 B 2021/03/04

(37 500) 10 929 2 032 500 18 4424 2012/03/08 108.90 A 2022/03/08

2015 430 352 (12 500) 4 444 1 182 125 175 036 56 5944 2013/03/07 115.51 E 2023/03/07

(71 875) 23 073 4 669 000

(40 000) 13 663 2 358 400

(37 500) 10 853 2 230 000

(18 441) 4 886 1 218 766

(75 000) 23 207 4 728 750

PRP

20176 224 300 68 300 2017/03/02 (24 924) (3 162 108)7 267 676 53 8765 2014/03/06 126.87 2017/03/31

2016 142 500 81 800 2016/03/03 122.24 224 300 63 700 2015/03/05 156.96 2018/03/3181 800 2016/03/03 122.24 2019/03/31



Share incentives continued


Director’s name

Opening balance

1 January

Number of share


Issue or offer date


rights forfeited

for the performance

year

Black- Scholes value of

participation rights

forfeited(R)

Number of share


during the year


shares

Deliveryvalue1

(R)

Balance of share


Number of share


Offer price

(R)Vesting


Non-executive directorJH Maree9 EGS

2016 759 010 62 5004 2009/03/06 62.39 B 2019/03/06

500 0004 2010/03/05 111.94 A 2020/03/0561 4714 2012/03/08 108.90 A 2022/03/0856 5944 2013/03/07 115.51 E 2023/03/08

78 445 2015/03/05 156.96 D 2025/03/05

Former executive director*

SP Ridley10 EGS

2016 439 328 (30 000) 6 492 1 016 400 379 328 100 0004 2010/03/05 111.94 A 2020/03/05

(30 000) 10 248 2 084 700 100 0004 2011/03/04 98.80 A 2021/03/04

2015 476 828 (12 500) (456 750) (25 000) 9 811 1 912 500 439 328 100 0004 2011/03/04 98.80 B 2021/03/04

36 8834 2012/03/08 108.90 A 2022/03/08

42 4454 2013/03/07 115.51 E 2023/03/07

PRP

2016 114 100 114 100 63 100 2014/03/06 126.87 2017/03/31

51 000 2015/03/05 156.96 2018/03/31

1 For the EGS awards, this is determined as the difference between the grant date share price and share price on the date of exercise.2 Represents the number of share incentives held as at 31 December 2016, which have been adjusted for conditional requirements. 3 As at 31 December 2016, SK Tshabalala has a right to 418 814 (2015: 418 814) shares as a beneficiary of the Tutuwa Managers’ Trusts. At 31 December 2016, the

debt per share was R58.26 (2015: R56.82). 4 Conditional awards.5 The remaining PRP units that have not been forfeited will vest on 31 March 2017. The value of the award will be determined with reference to the share price at

the vesting date and will be disclosed in the group’s 2017 financial statements.6 PRP units allocated in 2017 have been determined using the closing SBG price of R146.38 on 1 March 2017. The actual number of PRP units will, in terms of the

scheme’s rules, be determined with reference to the closing SBG share price on 2 March 2017. The actual number of units will be updated and disclosed in the group’s 2017 annual financial statements.

7 PRP units met a 68.37% conditional requirement and will be delivered to participants in the 2017 financial year. As a result, 31.63% of the award has been forfeited.

8 Appointed as director on 1 May 2016.9 Awards disclosed are in relation to those received whilst the participant was in the company’s employment. Retired participants would in the normal course

retain their holdings post retirement.10 Retired on 30 April 2016. Balance and number of share incentives are at 30 April 2016.* All executive directors were also prescribed officers of the group for 2015 and 2016, and former prescribed officers until the date of their resignation or

retirement.



Deferred bonus schemesThe table below reflects bonus awards for the 2016 and previous financial years. The awards will only vest in future in terms of the rules of the DBS. The deferred bonus awards for the 2016 performance year are only issued in the 2017 financial year.

Director’s namePerformance

yearIssuedate1

Amountdeferred

(R)

Awardprice

(R)Units

awarded

Expiry date/final vesting

date

Balance of units1 January

2016

Number of unitsexercised during

the year

Exercise dateshare price

(R)

Value of unitsexercised

(R)

Balance of units31 December

2016

Executive directors*SK Tshabalala 2013 2014/03/06 11 100 000 126.87 87 492 2017/09/30 58 328 29 164 146.08 4 260 277 29 164

2014 2015/03/05 8 037 500 156.96 51 208 2018/09/30 51 208 17 069 146.08 2 493 440 34 1392015 2016/03/03 11 850 000 122.24 96 941 2019/09/30 96 941

2016 2017/03/022 12 790 000

BJ Kruger 2012 2013/03/07 5 100 000 115.51 44 153 2016/09/30 14 719 14 719 146.08 2 150 1522014 2015/03/05 4 975 000 156.96 31 696 2018/09/30 31 696 10 565 146.08 1 543 335 21 1312015 2016/03/03 11 850 000 122.24 96 941 2019/09/30 96 941

2016 2017/03/022 12 790 000

A Daehnke3 2012 2013/03/07 4 000 000 115.51 34 630 2016/09/30 11 544 11 544 146.08 1 686 3482013 2014/03/06 2 412 500 126.87 19 016 2017/09/30 12 678 6 338 146.08 925 855 6 3402014 2015/03/05 5 400 000 156.96 34 404 2018/09/30 34 404 11 468 146.08 1 675 245 22 9362015 2016/03/03 6 217 500 122.24 50 864 2019/09/30 50 864

2016 2017/03/022 8 100 000

DC Munro 2012 2013/03/07 5 887 500 115.51 50 970 2016/09/30 16 990 16 990 146.08 2 481 8992013 2014/03/06 11 137 500 126.87 87 787 2017/09/30 58 525 29 262 146.08 4 274 593 29 2632014 2015/03/05 5 850 000 156.96 37 271 2018/09/30 37 271 12 423 146.08 1 814 752 24 8482015 2016/03/03 13 850 000 122.24 113 302 2019/09/30 113 302 113 302

2016 2017/03/022 15 600 000

PL Schlebusch 2012 2013/03/07 6 225 000 115.51 53 892 2016/09/30 17 964 17 964 146.08 2 624 1812013 2014/03/06 10 850 000 126.87 85 521 2017/09/30 57 014 28 507 146.08 4 164 303 28 5072014 2015/03/05 8 650 000 156.96 55 110 2018/09/30 55 110 18 370 146.08 2 683 490 36 7402015 2016/03/03 12 350 000 122.24 101 031 2019/09/30 101 031 101 031

2016 2017/03/022 13 850 000

Non-executive directorJH Maree4 2016 10 354

Former executive director*SP Ridley5 2012 2013/03/07 4 700 000 115.51 40 690 2016/09/30 13 564 13 564

2013 2014/03/06 7 850 000 126.87 61 875 2017/09/30 41 250 41 2502014 2015/03/05 6 850 000 156.96 43 642 2018/09/30 43 642 43 6422015 2016/03/03 8 350 000 122.24 68 309 2019/09/30 68 309

1 Units are granted in DBS and vest in three equal tranches at 18, 30 and 42 months from date of award.2 Deferred bonus amounts awarded in March 2017 are still subject to choice. Participants can elect to have the value of the deferred award, or a part thereof,

invested in the SARP rather than the default DBS. To the extent that SARP is selected, a 10% premium of the value of the award is added. Deferred bonus amounts not invested in SARP (previously EGS) will be unitised with respect to the group’s closing share price on 2 March 2017. This award will be updated in the group’s 2017 annual financial statements to reflect the choices made and units/rights awarded.

3 Appointed as director on 1 May 2016.4 Awards disclosed are in relation to those received while participant was in the company’s employment. Retired participants would in the normal course retain

their holdings post retirement.5 Retired on 30 April 2016. Balance of units is at 30 April 2016.* All executive directors were also prescribed officers of the group for 2015 and 2016, and former prescribed officers until the date of their resignation or

retirement.


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1. Basis of consolidation

BASIS OF CONSOLIDATION

Common control transactions

Foreign currency translations

Subsidiaries

Separate financial statements

Consolidated financial statements

• Acquisitions • Disposal of a

subsidiary • Partial disposal of a

subsidiary • Initial measurement

of non-controlling interest

Group companies

Transactions and balances

Subsidiaries (including mutual funds in which the group has both an irrevocable asset management agreement and a significant investment) Separate financial statementsInvestments in subsidiaries are accounted for at cost less accumulated impairment losses (where applicable) in the separate financial statements. The carrying amounts of these investments are reviewed annually for impairment indicators and, where an indicator of impairment exists, are impaired to the higher of the investment’s fair value less costs to sell or value in use.

Consolidated financial statementsThe accounting policies of subsidiaries that are consolidated by the group conform to the group’s accounting policies. Intragroup transactions, balances and unrealised gains (losses) are eliminated on consolidation. Unrealised losses are eliminated in the same manner as unrealised gains, but only to the extent that there is no evidence of impairment. The proportion of comprehensive income and changes in equity allocated to the group and non-controlling interest are determined on the basis of the group’s present ownership interest in the subsidiary.

Subsidiaries are consolidated from the date on which the group acquires control up to the date that control is lost. Control is assessed on a continuous basis. For mutual funds the group further assesses its control by considering the existence of either voting rights or significant economic power.


Annexure EDetailed accounting policies


1. Basis of consolidation continued

Acquisitions The acquisition method of accounting is used to account for the acquisition of subsidiaries by the group.

The consideration transferred is measured as the sum of the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. The consideration includes any asset, liability or equity resulting from a contingent consideration arrangement. The obligation to pay contingent consideration is classified as either a liability or equity based on the terms of the arrangement. The right to a return of previously transferred consideration is classified as an asset.

Transaction costs are recognised within profit or loss as and when they are incurred. Where the initial accounting is incomplete by the end of the reporting period in which the business combination occurs (but no later than 12 months since the acquisition date), the group reports provisional amounts.

Where applicable, the group adjusts retrospectively the provisional amounts to reflect new information obtained about facts and circumstances that existed at the acquisition date and affected the measurement of the provisional amounts. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess (shortage) of the sum of the consideration transferred (including contingent consideration), the value of non-controlling interest recognised and the acquisition date fair value of any previously held equity interest in the subsidiary over the fair value of identifiable net assets acquired is recorded as goodwill in the statement of financial position (gain on bargain purchase, which is recognised directly in non-trading and capital related items).

When a business combination occurs in stages, the previously held equity interest is remeasured to fair value at the acquisition date and any resulting gain or loss is recognised in non-trading and capital related items.

Increases in the group’s interest in a subsidiary, when the group already has control, are accounted for as transactions with equity holders of the group. The difference between the purchase consideration and the group’s proportionate share of the subsidiary’s additional net asset value acquired is accounted for directly in equity.

Disposal of a subsidiary

A disposal arises where the group loses control of a subsidiary. When the group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between the fair value of the consideration received (including the fair value of any retained interest in the underlying investee) and the carrying amount of the assets and liabilities and any non-controlling interest. Any gains or losses in OCI that relate to the subsidiary are reclassified to profit or loss at the time of the disposal. On disposal of a subsidiary that includes a foreign operation, the relevant amount in the FCTR is reclassified to profit or loss at the time at which the profit or loss on disposal of the foreign operation is recognised.

Partial disposal of a subsidiary

A partial disposal arises as a result of a reduction in the group’s ownership interest in an investee that is not a disposal (i.e. a reduction in the group’s interest in a subsidiary while retaining control). Decreases in the group’s interest in a subsidiary, where the group retains control, are accounted for as transactions with equity holders of the group. Gains or losses on the partial disposal of the group’s interest in a subsidiary are computed as the difference between the sales consideration and the group’s proportionate share of the investee’s net asset value disposed of, and are accounted for directly in equity. On the partial disposal of a subsidiary that includes a foreign operation, a proportionate share of the balance of the FCTR is transferred to non-controlling interest.

Initial measurement of non-controlling interest

The group elects on each acquisition to initially measure non-controlling interest on the acquisition date at either fair value or at the non-controlling interest’s proportionate share of the investees’ identifiable net assets.

332

ANNUAL FINANCIAL STATEMENTS Annexure E Detailed accounting policies continued

1. Basis of consolidation continuedCommon control transactionsCommon control transactions, in which the company is the ultimate parent entity both before and after the transaction, are accounted for at book value.

Foreign currency translationsGroup companiesThe results and financial position of foreign operations that have a functional currency that is different from the group’s presentation currency are translated into the group’s presentation currency as follows:

assets and liabilities (including goodwill, intangible assets and fair value adjustments arising on acquisition) are translated at the closing rate at the reporting date

income and expenses are translated at average exchange rates

all resulting foreign exchange differences are accounted for directly in a separate component of OCI, being the group’s FCTR.

Transactions and balancesForeign currency transactions are translated into the respective group entities’ functional currencies at exchange rates prevailing at the date of the transactions (in certain instances a rate that approximates the actual rate at the date of the transaction is utilised, for example, an average rate for a month). Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates, are recognised in profit or loss (except when recognised in OCI as part of qualifying cash flow hedges and net investment hedges).

Non-monetary assets and liabilities denominated in foreign currencies that are measured at historical cost are translated using the exchange rate at the transaction date, and those measured at fair value are translated at the exchange rate at the date that the fair value was determined. Exchange rate differences on non-monetary items are accounted for based on the classification of the underlying items.

Foreign exchange gains and losses on equities (debt) classified as available-for-sale financial assets are recognised in the available-for-sale reserve in OCI (interest income), whereas the exchange differences on equities (debt) that are classified as held at fair value through profit or loss are reported as part of the other revenue (interest income).

Foreign currency gains and losses on intragroup loans are recognised in profit or loss except where the settlement of the loan is neither planned nor likely to occur in the foreseeable future. In these cases, the foreign currency gains and losses are recognised in the group’s FCTR.


2. Interest in associates and joint arrangements

INTEREST IN ASSOCIATES AND JOINT ARRANGEMENTS

Private equity and venture capital

investmentsJoint operations

Associates and joint ventures

TYPE INITIAL AND SUBSEQUENT MEASUREMENT (CONSOLIDATED ACCOUNTS)

Associates and joint ventures

Associates and joint ventures are initially measured at cost and subsequently accounted for using the equity method at an amount that reflects the group’s share of the net assets of the associate or joint venture (including goodwill).

Equity accounting is applied from the date on which the entity becomes an associate or joint venture up to the date on which the group ceases to have significant influence or joint control.

Equity accounting of losses is restricted to the interests in these entities, including unsecured receivables or other commitments, unless the group has an obligation or has made payments on behalf of the associate or joint ventures.

Unrealised profits from transactions are eliminated in determining the group’s share of equity accounted profits. Unrealised losses are eliminated in the same way as unrealised gains (but only to the extent that there is no evidence of impairment).

Where there is an indicator of impairment the carrying amount of the investment is tested for impairment by comparing its recoverable amount with its carrying amount.

Impairment losses are recognised through non-trading and capital related items. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, but only to the extent that the investment’s carrying amount does not exceed the carrying amount that would have been determined, net of equity accounted losses, if no impairment loss had been recognised.

For a disposal of an associate or joint venture, being where the group loses significant influence over an associate or loses joint control over a joint venture, the difference between the sales proceeds and any retained interest and the carrying value of the equity accounted investment is recognised as a gain or loss in non-trading and capital related items. On disposal of an associate or joint venture that is a foreign operation, the relevant amount in the FCTR is reclassified to non-trading and capital related items at the time at which the profit or loss on disposal is recognised. Any gains or losses in other OCI reserves that relate to the associate or joint venture are reclassified to non-trading and capital related items at the time of the disposal.


334

TYPE INITIAL AND SUBSEQUENT MEASUREMENT (CONSOLIDATED ACCOUNTS)

Associates and joint ventures continued

For a partial disposal of an associate or joint venture, being where there is a reduction in an interest in an associate while retaining significant influence and the reduction of an interest in a joint venture while retaining joint control, the difference between the consideration received and the carrying value of the proportionate share of the investment disposed is accounted for as a gain or loss on disposal and are accounted for in non-trading and capital related items. For the partial disposal of an associate or a joint venture, that includes a foreign operation, the proportionate share of the balance of the FCTR is reclassified to non-trading and capital related items. Any gains or losses in other OCI reserves that relate to the associate or joint venture are reclassified to non-trading and capital related items at the time of the disposal to the extent of the proportionate share disposed of.

The accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies of the group.

Private equity and venture capital investments

Private equity and venture capital investments, including mutual funds held by investment-linked insurance funds that are associates. These associates are either designated on initial recognition at fair value through profit or loss, or are equity accounted.

Joint operations The following is recognised for joint operations:

assets it controls, including its share of assets jointly controlled

liabilities, including its share of liabilities incurred jointly

revenue from the sale of its share of output and from the sale of the output by a joint operation

expenses, including the share of expenses incurred jointly.

Individual assets are individually assessed for impairment and, where applicable, are impaired to the higher of the fair value less cost to sell and the asset’s value in use.

SEPARATE FINANCIAL STATEMENTS

Same accounting treatment as for group financial statements.

2. Interest in associates and joint arrangements continued


3. Financial instruments

FINANCIAL INSTRUMENTS

Financial assets

Held-to-maturity

Loans and receivables

Available-for-sale

Held-for-trading

Designated at fair value through

profit or loss

• Nature • Subsequent

measurement • Impairment • Reclassification • Derecognition

Financial liabilities

Designated at fair value through

profit or loss

Held-for-trading

Amortised cost

• Nature • Subsequent

measurement • Impairment • Reclassification • Derecognition

Financial guarantee contracts

Derivatives and embedded

derivatives

Hedge accounting

Fair value hedges

Cash flow hedges

Net investment hedges

Other

Sale and repurchase

agreements and lending

of securities (including

commodities)

Offsetting

Initial measurement – financial instrumentsAll financial instruments are measured initially at fair value plus directly attributable transaction costs and fees, except for those financial instruments that are subsequently measured at fair value through profit or loss where such transaction costs and fees are immediately recognised in profit or loss. Financial instruments are recognised (derecognised) on the date the group commits to purchase (sell) the instruments (trade date accounting).

Financial assetsNature

Held-to-maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities that management has both the positive intent and ability to hold-to-maturity.

Loans and receivables Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified as at fair value through profit or loss or available-for-sale.


336

3. Financial instruments continuedFinancial assets continuedNature continued

Held-for-trading Those financial assets acquired principally for the purpose of selling in the near term (including all derivative financial assets), those that form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.

Included are commodities that are acquired principally for the purpose of selling in the near future or generating a profit from fluctuations in price or broker-trader margin.

Designated at fair value through profit or loss

Financial assets are designated to be measured at fair value in the following instances:

to eliminate or significantly reduce an accounting mismatch that would otherwise arise

where the financial assets are managed and their performance evaluated and reported on a fair value basis

where the financial asset contains one or more embedded derivatives that significantly modify the financial asset’s cash flows.

Available-for-sale Financial assets that are not classified into one of the above financial asset categories.

Subsequent measurementSubsequent to initial measurement, financial assets are classified in their respective categories and measured at either amortised cost or fair value as follows:

Held-to-maturity and loans and receivables

Amortised cost using the effective interest method with interest recognised in interest income, less any impairment losses which are recognised as part of credit impairment charges.

Directly attributable transaction costs and fees received are capitalised and amortised through interest income as part of the effective interest rate.

Available-for-sale Fair value, with gains and losses recognised directly in the available-for-sale reserve until the financial asset is derecognised or impaired.

Interest income on debt financial assets is recognised in interest income in terms of the effective interest rate method. Dividends received on debt (equity) available-for-sale financial assets are recognised in interest income (other revenue) within profit or loss.

When debt (equity) available-for-sale financial assets are disposed of, the cumulative fair value adjustments in OCI are reclassified to interest income (other revenue).

Held-for-trading Fair value, with gains and losses arising from changes in fair value (including interest and dividends) recognised in trading revenue.


Fair value, with gains and losses recognised in interest income/(other revenue) for all debt/(equity) financial assets.


3. Financial instruments continuedFinancial assets continuedImpairmentA financial asset is impaired if objective evidence indicates that a loss event has occurred after initial recognition which has a negative effect on the estimated future cash flows of the financial asset that can be estimated reliably. The group assesses at each reporting date whether there is objective evidence that a financial asset which is either carried at amortised cost or classified as available-for-sale is impaired as follows:

Held-to-maturity and loans and receivables (‘amortised cost’)

The following criteria are used in determining whether there is objective evidence of impairment for loans or groups of loans:

known cash flow difficulties experienced by the borrower

a breach of contract, such as default or delinquency in interest and/or principal payments

breaches of loan covenants or conditions

it becomes probable that the borrower will enter bankruptcy or other financial reorganisation

where the group, for economic or legal reasons relating to the borrower’s financial difficulty, grants the borrower a concession that the group would not otherwise consider.

The group first assesses whether there is objective evidence of impairment individually for loans that are individually significant, and individually or collectively for loans that are not individually significant. Non-performing loans include those loans for which there is identified objective evidence of impairment, such as a breach of a material loan covenant or condition, as well as those loans for which instalments are due and unpaid for 90 days or more. The impairment of non-performing loans takes into account past loss experience adjusted for changes in economic conditions and the nature and level of risk exposure since the recording of the historic losses.

When a loan carried at amortised cost has been identified as specifically impaired, the carrying amount of the loan is reduced to an amount equal to the present value of its estimated future cash flows, including the recoverable amount of any collateral, discounted at the financial asset’s original effective interest rate. The carrying amount of the loan is reduced through the use of a specific credit impairment account and the loss is recognised as a credit impairment charge in profit or loss.

Increases in loan impairments and any subsequent reversals thereof, or recoveries of amounts previously impaired (including loans that have been written off), are reflected within credit impairment charges in profit or loss. Subsequent to impairment, the effects of discounting unwind over time as interest income.

The calculation of the present value of the estimated future cash flows of collateralised financial assets recognised on an amortised cost basis includes cash flows that may result from foreclosure less costs of obtaining and selling the collateral, whether or not foreclosure is probable.

If the group determines that no objective evidence of impairment exists for an individually assessed loan, whether significant or not, it includes the loan in a group of financial loans with similar credit risk characteristics and collectively assesses for impairment. Loans that are individually assessed for impairment and for which an impairment loss is recognised are not included in a collective assessment for impairment.

Impairment of groups of loans that are assessed collectively is recognised where there is objective evidence that a loss event has occurred after the initial recognition of the group of loans but before the reporting date. In order to provide for latent losses in a group of loans that have not yet been identified as specifically impaired, a credit impairment for incurred but not reported losses is recognised based on historic loss patterns and estimated emergence periods (time period between the loss event and the date on which the group identifies the losses). Groups of loans are also impaired when adverse economic conditions develop after initial recognition, which may impact future cash flows. The carrying amount of groups of loans is reduced through the use of a portfolio credit impairment account and the loss is recognised as a credit impairment charge in profit or loss.


338

3. Financial instruments continuedImpairment continued

Available-for-sale Previously impaired loans are written off once all reasonable attempts at collection have been made and there is no realistic prospect of recovering outstanding amounts.

Available-for-sale debt instruments are impaired when there has been a significant or prolonged decline in the fair value of the instrument below its cost and for equity instruments where there is information about significant changes with an adverse effect on the environment in which the issuer operates that indicates that the cost of the investment in the equity instrument may not be recovered.

When an available-for-sale asset has been identified as impaired, the cumulative loss, measured as the difference between the acquisition price and the current fair value, less any previously recognised impairment losses on that financial asset, is reclassified from OCI to profit or loss, within interest income (other revenue) for debt (equity) instruments.

If, in a subsequent period, the amount relating to an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through interest income for available-for-sale debt instruments. Any reversal of an impairment loss in respect of an available-for-sale equity instrument is recognised directly in OCI.

ReclassificationReclassifications of financial assets are permitted only in the following instances:

Held-to-maturity Where the group is to sell more than an insignificant amount of held-to-maturity investments, the entire category would be tainted and reclassified as available-for-sale assets with the difference between amortised cost and fair value being accounted for in OCI.

Available-for-sale The group may choose to reclassify financial assets that would meet the definition of loans and receivables if the group, at the date of reclassification, has the intention and ability to hold these financial assets for the foreseeable future or until maturity.

Held-for-trading The group may elect to reclassify non-derivative financial assets out of held-for-trading category in the following instances:

if the financial asset is no longer held for the purpose of selling it in the near term and the financial asset would not otherwise have met the definition of loans and receivables, it is permitted to be reclassified only in rare circumstances

if the financial asset is no longer held for the purpose of selling it in the near team and the financial asset would have met the definition of loans and receivables, it is permitted to be reclassified if the group, at the date of reclassification, has the intention and ability to hold these financial assets for the foreseeable future or until maturity.

Reclassifications are made at fair value as of the reclassification date. Effective interest rates for financial assets reclassified to loans and receivables, held-to-maturity and available-for-sale categories are determined at the reclassification date. Subsequent changes in estimates of cash flows (other than credit impairment changes) adjust the financial asset’s effective interest rates prospectively. On reclassification of a trading asset, all embedded derivatives are reassessed and, if necessary, accounted for separately.


3. Financial instruments continuedFinancial liabilitiesNature

Held-for-trading Those financial liabilities incurred principally for the purpose of repurchasing in the near term (including all derivative financial liabilities) and those that form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.


Financial liabilities are designated to be measured at fair value in the following instances:

to eliminate or significantly reduce an accounting mismatch that would otherwise arise

where the financial liabilities are managed and their performance evaluated and reported on a fair value basis

where the financial liability contains one or more embedded derivatives that significantly modify the financial asset’s cash flows.

At amortised cost All other financial liabilities not included in the above categories.

Subsequent measurementSubsequent to initial measurement, financial liabilities are classified in their respective categories and measured at either amortised cost or fair value as follows:

Held-for-trading Fair value, with gains and losses arising from changes in fair value (including interest and dividends) recognised in trading revenue.


Fair value, with gains and losses arising from changes in fair value (including interest and dividends) recognised in interest expense.

Amortised cost Amortised cost using the effective interest method with interest recognised in interest expense.


340

3. Financial instruments continuedDerecognition and modification of financial assets and liabilitiesFinancial assets and liabilities are derecognised in the following instances:

DERECOGNITION MODIFICATION

Financial assets Financial assets are derecognised when the contractual rights to receive cash flows from the financial assets have expired, or where the group has transferred its contractual rights to receive cash flows on the financial asset such that it has transferred substantially all the risks and rewards of ownership of the financial asset. Any interest in the transferred financial assets that is created or retained by the group is recognised as a separate asset or liability.

The group enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or a portion of the risks or rewards of the transferred assets. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with the retention of all or substantially all risks and rewards include securities lending and repurchase agreements.

When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction, similar to repurchase transactions. In transactions where the group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, the asset is derecognised if control over the asset is lost. The rights and obligations retained in the transfer are recognised separately as assets and liabilities as appropriate.

In transfers where control over the asset is retained, the group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

Where an existing financial asset or liability is replaced by another with the same counterparty on substantially different terms, or the terms of an existing financial asset or liability are substantially modified, such an exchange or modification is treated as a derecognition of the original asset or liability and the recognition of a new asset or liability, with the difference in the respective carrying amounts being recognised in profit or loss.

In all other instances, the renegotiated asset or liability’s effective interest rate is redetermined at date of modification taking into account the renegotiated terms.

Financial liabilities Financial liabilities are derecognised when the financial liabilities’ obligation is extinguished, that is, when the obligation is discharged, cancelled or expires.


3. Financial instruments continuedFinancial guarantee contractsA financial guarantee contract is a contract that requires the group (issuer) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

Financial guarantee contracts are initially recognised at fair value, which is generally equal to the premium received, and then amortised over the life of the financial guarantee. Financial guarantee contracts are subsequently measured at the higher of the:

present value of any expected payment, when a payment under the guarantee has become probable

unamortised premium.

Derivatives and embedded derivativesIn the normal course of business, the group enters into a variety of derivative transactions for both trading and hedging purposes. Derivative financial instruments are entered into for trading purposes and for hedging foreign exchange, interest rate, inflation, credit, commodity and equity exposures. Derivative instruments used by the group in both trading and hedging activities include swaps, options, forwards, futures and other similar types of instruments based on foreign exchange rates, credit risk, inflation risk, interest rates and the prices of commodities and equities.

Derivatives are initially recognised at fair value. Derivatives that are not designated in a qualifying hedge accounting relationship are classified as held-for-trading with all changes in fair value being recognised within trading revenue. This includes forward contracts to purchase or sell commodities, where net settlement occurs or where physical delivery occurs and the commodities are held to settle another derivative contract. All derivative instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined contract is not measured at fair value through profit or loss. The host contract is accounted for and measured applying the relevant group accounting policy.

The method of recognising fair value gains and losses on derivatives designated as a hedging instrument depends on the nature of the hedge relationship.

Hedge accountingDerivatives are designated by the group into the following relationships:

TYPE OF HEDGE NATURE TREATMENT

Fair value hedges Hedges of the fair value of recognised financial assets, liabilities or firm commitments.

Where a hedging relationship is designated as a fair value hedge, the hedged item is adjusted for the change in fair value in respect of the risk being hedged. Gains or losses on the remeasurement of both the derivative and the hedged item are recognised in profit or loss. Fair value adjustments relating to the hedging instrument are allocated to the same line item in profit or loss as the related hedged item. Any hedge ineffectiveness is recognised immediately in trading revenue.

If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, then hedge accounting is discontinued. The adjustment to the carrying amount of a hedged item measured at amortised cost, for which the effective interest method is used, is amortised to profit or loss as part of the hedged item’s recalculated effective interest rate over the period to maturity.


342

3. Financial instruments continuedHedge accounting continued

TYPE OF HEDGE NATURE TREATMENT

Cash flow hedges Hedges of highly probable future cash flows attributable to a recognised asset or liability, a forecasted transaction, or a highly probable forecast intragroup transaction.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedging reserve. The ineffective part of any changes in fair value is recognised immediately in profit or loss as trading revenue.

Amounts recognised in OCI are transferred to profit or loss in the periods in which the hedged forecast cash flows affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the cumulative gains or losses recognised previously in OCI are transferred and included in the initial measurement of the cost of the asset or liability.

If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued. The cumulative gains or losses recognised in OCI remain in OCI until the forecast transaction is recognised in the case of a non-financial asset or a non-financial liability, or until the forecast transaction affects profit or loss in the case of a financial asset or a financial liability. If the forecast transaction is no longer expected to occur, the cumulative gains and losses recognised in OCI are immediately reclassified to profit or loss and classified as trading revenue.

Net investment hedges

Hedges of net investments in a foreign operation.

The designated component of the hedging instrument that relates to the effective portion of the hedge, is recognised directly in the foreign currency hedge of net investment reserve. The ineffective part of any changes in fair value is recognised immediately in profit or loss as trading revenue. The cumulative gains and losses in OCI are accounted for similarly to cash flow hedges.

OtherSale and repurchase agreements and lending of securities (including commodities)Securities sold subject to linked repurchase agreements (repurchase agreements) are reclassified in the statement of financial position as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral. The liability to the counterparty is included under deposit and current accounts or trading liabilities, as appropriate.

Securities purchased under agreements to resell (reverse repurchase agreements), at either a fixed price or the purchase price plus a lender’s rate of return, are recorded as loans and included under trading assets or loans and advances, as appropriate. For repurchase and reverse repurchase agreements measured at amortised cost, the difference between the purchase and sales price is treated as interest and amortised over the expected life using the effective interest method.

Securities lent to counterparties are retained in the annual financial statements. Securities borrowed are not recognised in the annual financial statements unless sold to third parties. In these cases, the obligation to return the securities borrowed is recorded at fair value as a trading liability. Income and expenses arising from the securities borrowing and lending business are recognised over the period of the transactions.

OffsettingFinancial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to setoff the recognised amounts and there is an intention to settle the asset and the liability on a net basis, or to realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the counterparties to the transaction.


4. Fair value

FAIR VALUE

Fair value hierarchy

Inputs and valuation

techniques

Portfolio valuations

Day one profit/loss

Cost exception

Hierarchy levels

Hierarchy transfer policy

In terms of IFRS, the group is either required to or elects to measure a number of its financial assets and financial liabilities at fair value. Regardless of the measurement basis, the fair value is required to be disclosed, with some exceptions, for all financial assets and financial liabilities.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market between market participants at the measurement date under current market conditions. Fair value is a market-based measurement and uses the assumptions that market participants would use when pricing an asset or liability under current market conditions. When determining fair value it is presumed that the entity is a going concern and is not an amount that represents a forced transaction, involuntary liquidation or a distressed sale. In estimating the fair value of an asset or a liability, the group takes into account the characteristics of the asset or liability that market participants would take into account when pricing the asset or liability at the measurement date.


344

4. Fair value continuedFair value hierarchyThe group’s financial instruments that are both carried at fair value and for which fair value is disclosed are categorised by level of fair value hierarchy. The different levels are based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement.

Hierarchy levelsThe levels have been defined as follows:

Level 1 Fair value is based on quoted market prices (unadjusted) in active markets for an identical financial asset or liability. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 Fair value is determined through valuation techniques based on observable inputs, either directly, such as quoted prices, or indirectly, such as those derived from quoted prices. This category includes instruments valued using quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3 Fair value is determined through valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instrument being valued and the similar instrument.

Hierarchy transfer policyTransfers of financial assets and financial liabilities between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period.

Inputs and valuation techniquesFair value is measured based on quoted market prices or dealer price quotations for identical assets and liabilities that are traded in active markets, which can be accessed at the measurement date, and where those quoted prices represent fair value. If the market for an asset or liability is not active or the instrument is not quoted in an active market, the fair value is determined using other applicable valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. These include the use of recent arm’s length transactions, discounted cash flow analyses, pricing models and other valuation techniques commonly used by market participants.

Fair value measurements are categorised into level 1, 2 or 3 within the fair value hierarchy based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement.

Where discounted cash flow analyses are used, estimated future cash flows are based on management’s best estimates and a market-related discount rate at the reporting date for an asset or liability with similar terms and conditions.

If an asset or a liability measured at fair value has both a bid and an ask price, the price within the bid-ask spread that is most representative of fair value is used to measure fair value.


4. Fair value continuedInputs and valuation techniques continuedThe group’s valuation control framework governs internal control standards, methodologies, and procedures over its valuation processes, which include the following valuation techniques and main inputs and assumptions per type of instrument:

ITEM AND DESCRIPTION VALUATION TECHNIQUEMAIN INPUTS AND ASSUMPTIONS

Derivative financial instruments Derivative financial instruments comprise foreign exchange, interest rate, commodity, credit and equity derivatives that are either held-for-trading or designated as hedging instruments in hedge relationships.

Standard derivative contracts are valued using market accepted models and quoted parameter inputs. More complex derivative contracts are modelled using more sophisticated modelling techniques applicable to the instrument. Techniques include:

discounted cash flow model

Black-Scholes model

combination technique models.

For level 2 and 3 fair value hierarchy items

discount rate*

spot prices of the underlying

correlation factors

volatilities

dividend yields

earnings yield

valuation multiples.Trading assets and trading liabilities Trading assets and liabilities comprise instruments which are part of the group’s underlying trading activities. These instruments primarily include sovereign and corporate debt, commodities, collateral, collateralised lending agreements and equity securities.

Where there are no recent market transactions in the specific instrument, fair value is derived from the last available market price adjusted for changes in risks and information since that date. Where a proxy instrument is quoted in an active market, the fair value is determined by adjusting the proxy fair value for differences between the proxy instrument and the financial investment being fair valued. Where proxies are not available, the fair value is estimated using more complex modelling techniques. These techniques include discounted cash flow and Black-Scholes models using current market rates for credit, interest, liquidity, volatility and other risks. Combination techniques are used to value unlisted equity securities and include inputs such as earnings and dividend yields of the underlying entity.

Pledged assets Pledged assets comprise instruments that may be sold or repledged by the group’s counterparty in the absence of default by the group. Pledged assets include sovereign and corporate debt, equities, commodities pledged in terms of repurchase agreements and commodities that have been leased to third parties.

Financial investments Financial investments are non-trading financial assets and primarily comprise of sovereign and corporate debt, listed and unlisted equity instruments, listed sovereign or corporate debt, investments in debentures issued by the SARB, investments in mutual fund investments and unit-linked investments.



346

4. Fair value continuedInputs and valuation techniques continued


Loans and advances to banks and customers Loans and advances comprise:

Loans and advances to banks: call loans, loans granted under resale agreements and balances held with other banks

Loans and advances to customers: mortgage loans (home loans and commercial mortgages), other asset-based loans, including collateralised debt obligations (instalment sale and finance leases), and other secured and unsecured loans (card debtors, overdrafts, other demand lending, term lending and loans granted under resale agreements).

For certain loans fair value may be determined from the market price of a recently occurring transaction adjusted for changes in risks and information between the transaction and valuation dates. Loans and advances are reviewed for observed and verified changes in credit risk and the credit spread is adjusted at subsequent dates if there has been an observable change in credit risk relating to a particular loan or advance. In the absence of an observable market for these instruments, discounted cash flow models are used to determine fair value. Discounted cash flow models incorporate parameter inputs for interest rate risk, foreign exchange risk, liquidity and credit risk, as appropriate. For credit risk, probability of default and loss given default parameters are determined using credit default swaps (CDS) markets, where available and appropriate, as well as the relevant terms of the loan and loan counterparty such as the industry classification and subordination of the loan.


discount rate*

Deposits and debt funding Deposits from banks and customers comprise amounts owed to banks and customers, deposits under repurchase agreements, negotiable certificates of deposit, credit-linked deposits and other deposits.

For certain deposits, fair value may be determined from the market price on a recently occurring transaction adjusted for all changes in risks and information between the transaction and valuation dates. In the absence of an observable market for these instruments, discounted cash flow models are used to determine fair value based on the contractual cash flows related to the instrument. The fair value measurement incorporates all market risk factors, including a measure of the group’s credit risk relevant for that financial liability. The market risk parameters are valued consistently to similar instruments held as assets stated in the section above. The credit risk of the reference asset in the embedded CDS in credit-linked deposits is incorporated into the fair value of all credit-linked deposits that are designated to be measured at fair value through profit or loss. For collateralised deposits that are designated to be measured at fair value through profit or loss, such as securities repurchase agreements, the credit enhancement is incorporated into the fair valuation of the liability.


discount rate*



4. Fair value continuedInputs and valuation techniques continued


Policyholders’ assets and liabilities Policyholders’ assets and liabilities comprise unit-linked policies and annuity certains.

Unit-linked policies: assets which are linked to the investment contract liabilities are owned by the group. The investment contract obliges the group to use these assets to settle these liabilities. Therefore, the fair value of investment contract liabilities is determined with reference to the fair value of the underlying assets (i.e. amount payable on surrender of the policies).

Annuity certains: discounted cash flow models are used to determine the fair value of the stream of future payments.


discount rate*

spot price of underlying.

Third-party financial liabilities arising on the consolidation of mutual funds (included in other liabilities)These are liabilities that arise on the consolidation of mutual funds.

The fair values of third-party financial liabilities arising on the consolidation of mutual funds are determined using the quoted put (exit) price provided by the fund manager and discounted for the applicable notice period. The fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.


discount rate*

* Discount rates, where applicable, include the risk-free rate, risk premiums, liquidity spreads, credit risk (own and counterparty as appropriate), timing of settlement, storage/service costs, prepayment and surrender risk assumptions and recovery rates/loss given default.

Portfolio valuationsThe group has elected the portfolio exception to measure the fair value of certain groups of financial assets and financial liabilities. This exception permits the group of financial assets and financial liabilities to be measured at fair value on a net basis, with the net fair value being allocated to the financial assets and financial liabilities.

Day one profit or lossFor financial instruments, where the fair value of the financial instrument differs from the transaction price, the difference is commonly referred to as day one profit or loss. Day one profit or loss is recognised in profit or loss immediately where the fair value of the financial instrument is either evidenced by comparison with other observable current market transactions in the same instrument, or is determined using valuation models with only observable market data as inputs.

Day one profit or loss is deferred where the fair value of the financial instrument is not able to be evidenced by comparison with other observable current market transactions in the same instrument, or is determined using valuation models that utilise non-observable market data as inputs.

The timing of the recognition of deferred day one profit or loss is determined individually depending on the nature of the instrument and availability of market observable inputs. It is either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement.

Cost exceptionWhere the fair value of investments in equity instruments or identical instruments do not have a quoted price in an active market, and derivatives that are linked to and must be settled by delivery of such equity instruments, are unable to be reliably determined, those instruments are measured at cost less impairment losses. Impairment losses on these financial assets are not reversed.


348

5. Employee benefits

EMPLOYEE BENEFITS

Terminationbenefits

Short-term benefits

Post-employment benefits

Defined contribution plans

Defined benefit plans

TYPE AND DESCRIPTION

STATEMENT OF FINANCIAL POSITION

STATEMENT OF OTHER COMPREHENSIVE INCOME INCOME STATEMENT

Defined contribution plans The group operates a number of defined contribution plans. See note 47 for more information.

Accruals are recognised for unpaid contributions.

No direct impact. Contributions are recognised as an operating expense in the periods during which services are rendered by the employees.

Defined benefit plans The group operates a number of defined benefit retirement and post-employment medical aid plans. Employer companies contribute to the cost of benefits taking account of the recommendations of the actuaries. See note 46 for more information.

Assets or liabilities measured at the present value of the estimated future cash outflows, using interest rates of government bonds denominated in the same currency as the defined benefit plan (corporate bonds are used for currencies for which there is a deep market of high-quality corporate bonds), with maturity dates that approximate the expected maturity of the obligations, less the fair value of plan assets.

A net defined benefit asset is only recognised to the extent that economic benefits are available to the group from reductions in future contributions or future refunds from the plan.

Remeasurements of the net defined benefit obligation, including actuarial gains and losses, the return on plan assets (excluding interest calculated) and the effect of any asset ceiling are recognised within OCI.

Net interest income/(expense) is determined on the defined benefit asset/(liability) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset/(liability).

Other expenses related to the defined benefit plans are also recognised in operating expenses.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in operating expenses. The group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.


5. Employee benefits continued




Termination benefits Termination benefits are recognised when the group is committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy when it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.

A liability is recognised for the termination benefit representing the best estimate of the amount payable.

No direct impact. Termination benefits are recognised as an expense in operating expenses if the group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.

Short-term benefits Short-term benefits consist of salaries, accumulated leave payments, profit share, bonuses and any non-monetary benefits such as medical aid contributions.

A liability is recognised for the amount expected to be paid under short-term cash bonus plans or accumulated leave if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

No direct impact. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed in operating expenses as the related service is provided.

6. Non-financial assets

NON-FINANCIAL ASSETS

Intangible assets

Investment property

Goodwill

Present value of acquired in-force policyholder contracts and investment contracts with

discretionary participation features

Computer software

Other intangible assets

Tangible assets

Property

Equipment

Land


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6. Non-financial assets continued

TYPE AND INITIAL AND SUBSEQUENT MEASUREMENT

USEFUL LIVES, DEPRECIATION/ AMORTISATION METHOD OR FAIR VALUE BASIS IMPAIRMENT

Tangible assets (property, equipment and land)Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Land is measured at cost less accumulative impairment losses.

Costs that are subsequently incurred are included in the asset’s related carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits will flow to the group and the cost of the item can be measured reliably. Expenditure, which does not meet these criteria, is recognised in operating expenses as incurred.

Where significant parts of an item of property or equipment have different useful lives, they are accounted for as separate major components of property and equipment.

Property and equipment are depreciated on the straight-line basis over estimated useful lives (see below) of the assets to their residual values. Land is not depreciated.

Buildings 40 yearsComputer equipment 3 – 5 yearsMotor vehicles 4 – 5 yearsOffice equipment 5 – 10 yearsFurniture 5 – 13 yearsLeased assets Shorter of

useful life or lease term

The residual values, useful lives and the depreciation method applied are reviewed, and adjusted if appropriate, at each financial year end.

These assets are reviewed for impairment at each reporting date and tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognised in non-trading and capital related items for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and value in use.

Fair value less costs to sell is determined by ascertaining the current market value of an asset and deducting any costs related to the realisation of the asset.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For the purposes of assessing impairment, assets that cannot be tested individually are grouped at the lowest CGUs.

Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. The carrying amount of these other assets may, however, not be reduced below the higher of the CGU’s fair value less costs to sell and its value in use.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed through non-trading and capital related items only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.





Goodwill Goodwill represents the excess of the consideration transferred and the acquisition date fair value of any previously held equity interest over the group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary, associate or joint venture at the date of the acquisition. The group’s interest in acquired subsidiaries takes into account any non-controlling interest.

Goodwill arising on the acquisition of subsidiaries (associates or joint ventures) is reported in the statement of financial position as part of ‘Goodwill and other intangible assets’ (‘Interest in associates and joint ventures’).

Not applicable. The accounting treatment is generally the same as that for tangible assets except as noted below.

Goodwill is tested annually for impairment and additionally when an indicator of impairment exists.

An impairment loss in respect of goodwill is not reversed.

Present value of acquired in-force policyholder contracts and investment contracts with discretionary participation features

Where a portfolio of policyholder contracts is acquired either directly from another insurer or through the acquisition of a subsidiary, the PVIF business on the portfolio, being the net present value of estimated future cash flows of the existing contracts, is recognised as an intangible asset.

The PVIF intangible asset is carried in the statement of financial position at cost less accumulated amortisation and accumulated impairment losses.

The PVIF intangible asset is amortised on a basis consistent with the settlement of the relevant liability in respect of the purchased contracts (4 to 12 years). The estimated life is re-evaluated annually.

Same accounting treatment as for tangible assets.


352




Computer software Costs associated with developing or maintaining computer software programmes and the acquisition of software licences are generally recognised as an expense as incurred.

However, direct computer software development costs that are clearly associated with an identifiable and unique system, which will be controlled by the group and have a probable future economic benefit beyond one year, are recognised as intangible assets.

Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses from the date that the assets are available for use.

Expenditure subsequently incurred on computer software is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates.

Amortisation is recognised in operating expenses on a straight-line basis at rates appropriate to the expected lives of the assets (2 to 15 years) from the date that the asset is available for use.

Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted, if necessary.

Intangible assets that have an indefinite useful life are tested annually for impairment and additionally when an indicator of impairment exists.

The accounting treatment for computer software and other intangible assets is otherwise the same as for tangible assets.

Other intangible assets The group recognises the costs incurred on internally generated intangible assets such as brands, customer lists, customer contracts and similar rights and assets, in operating expenses as incurred.

The group capitalises brands, customer lists, customer contracts, distribution forces and similar rights acquired in business combinations.

Capitalised intangible assets are measured at cost less accumulated amortisation and accumulated impairment losses.

Amortisation is recognised in operating expenses on a straight-line basis over the estimated useful lives of the intangible assets, not exceeding 20 years, from the date that the asset is available for use.

Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted, if necessary.

DerecognitionNon-financial assets are derecognised on disposal or when no future economic benefits are expected from their use or disposal. The gain or loss on derecognition is recognised in profit or loss and is determined as the difference between the net disposal proceeds and the carrying amount of the non-financial asset.





Investment propertyInitially measured at cost, including transaction costs.

Subsequently measured at fair value and included as part of investment management and service fee income and gains within the profit or loss.

The fair value is based on valuation information at the reporting date.

If the valuation information cannot be reliably determined, the group uses alternative valuation methods such as discounted cash flow projections or recent prices in active markets.

Fair value adjustments recognised in investment management and service fee income and gains are adjusted for any double-counting arising from the recognition of lease income on the straight-line basis compared to the accrual basis normally assumed in the fair value determination.

Not applicable.

DerecognitionInvestment property is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss on derecognition is recognised in investment management and service fee income and gains and is determined as the difference between the net disposal proceeds and the carrying amount of the non-financial asset.

When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.

When the use of a property changes such that it is reclassified from property and equipment to investment property, the difference between the carrying value at date of reclassification and its fair value is recognised in OCI.


354

7. Property developments and properties in possession

PROPERTY DEVELOPMENTS AND PROPERTIES IN POSSESSION

Properties in possession

Property developments

Property developments

Property developments are stated at the lower of cost or net realisable value. Cost is assigned by specific identification and includes the cost of acquisition and where applicable, development and borrowing costs during development.

Properties in possession

Properties in possession are properties acquired by the group which were previously held as collateral for underlying lending arrangements that, subsequent to origination, have defaulted. The properties are initially recognised at cost and are subsequently measured at the lower of cost and its net realisable value.

Any subsequent write-down in the value of the acquired properties is recognised as an operating expense. Any subsequent increases in the net realisable value, to the extent that it does not exceed its original cost, are also recognised within operating expenses.


8. Equity-linked transactions

EQUITY COMPENSATION PLANS

Cash-settled share-based payments

Equity-settled share-based payments

Equity-settled share-based payments

The fair value of the equity-settled share-based payments are determined on grant date and accounted for within operating expenses – staff costs over the vesting period with a corresponding increase in the group’s share-based payment reserve. Non-market vesting conditions, such as the resignation of employees and retrenchment of staff, are not considered in the valuation but are included in the estimate of the number of options expected to vest. At each reporting date, the estimate of the number of options expected to vest is reassessed and adjusted against operating expenses and share-based payment reserve over the remaining vesting period.

On vesting of the equity-settled share-based payments, amounts previously credited to the share-based payment reserve are transferred to retained earnings through an equity transfer. On exercise of the equity-settled share-based payment, any proceeds received are credited to share capital and premium.

Cash-settled share-based payments

Cash-settled share-based payments are accounted for as liabilities at fair value until the date of settlement. The liability is recognised over the vesting period and is revalued at every reporting date up to and including the date of settlement. All changes in the fair value of the liability are recognised in operating expenses.


356

9. Leases

LEASES

Operating leases

Finance leases

Lessee

Lessor

Lessee

Lessor



INCOME STATEMENT

Finance leases – lessee Leases, where the group assumes substantially all the risks and rewards incidental to ownership, are classified as finance leases.

The leased asset is capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments together with an associated liability to the lessor. Refer to non-financial assets accounting policy for the treatment of the leased asset.

Lease payments less the interest component, which is calculated using the interest rate implicit in the lease or the group’s incremental borrowing rate, are recognised as a capital repayment which reduces the liability to the lessor.

A lease finance cost, determined with reference to the interest rate implicit in the lease or the group’s incremental borrowing rate, is recognised within interest expense over the lease period.

Finance leases – lessor Leases, where the group transfers substantially all the risks and rewards incidental to ownership, are classified as finance leases.

Finance lease receivable, including initial direct costs and fees, are primarily accounted for as financing transactions in banking activities, with rentals and instalments receivable, less unearned finance charges, being included in loans and advances.

Finance charges earned within interest income are computed using the effective interest method, which reflects a constant periodic rate of return on the investment in the finance lease.

The tax benefits arising from investment allowances on assets leased to clients are accounted for within direct taxation.


9. Leases continued



INCOME STATEMENT

Operating leases – lessee All leases that do not meet the criteria of a financial lease are classified as operating leases.

Accruals for unpaid lease charges, together with a straight-line lease asset or liability, being the difference between actual payments and the straight-line lease expense are recognised.

Payments made under operating leases, net of any incentives received from the lessor, are recognised in operating expenses on a straight-line basis over the term of the lease. Contingent rentals are expensed as they are incurred.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of a penalty is recognised as operating expenses in the period in which termination takes place.

Operating leases – lessor All leases that do not meet the criteria of a financial lease are classified as operating leases.

The asset underlying the lease continues to be recognised and accounted for in terms of the relevant group accounting policies.

Accruals for outstanding lease charges, together with a straight-line lease asset or liability, being the difference between actual payments and the straight-line lease income are recognised.

Operating lease income net of any incentives given to lessees, is recognised on the straight-line basis or a more representative basis where applicable over the lease term and is recognised in operating expenses.

When an operating lease is terminated before the lease period has expired, any payment required by the group by way of a penalty is recognised as income in the period in which termination takes place.


358

10. Non-current assets held for sale, disposal groups and discontinued operations

NON CURRENT ASSETS HELD FOR SALE, DISPOSAL GROUPS AND DISCONTINUED OPERATIONS

Continuing operations

Discontinued operations

TYPE AND DESCRIPTIONSTATEMENT OF FINANCIAL POSITION


Non-current assets and liabilities

Comprising assets and liabilities that are expected to be recovered primarily through sale or distribution to owners rather than continuing use (including regular purchases and sales in the ordinary course of business).

Immediately before classification, the assets (or components of a disposal group) are remeasured in accordance with the group’s accounting policies and tested for impairment. Thereafter, the assets are measured at the lower of their carrying amount and fair value less costs to sell.

Assets and liabilities (or components of a disposal group) are presented separately in the statement of financial position.

In presenting the group’s non-current assets and liabilities as held for sale, intercompany balances are eliminated in full.

OCI movements are presented separately.

Impairment losses on initial classification, as well as subsequent gains and losses on remeasurement of these assets are recognised in profit or loss.

Property and equipment and intangible assets are not subsequently depreciated or amortised.

Equity accounting thereafter for an interest in an associate or joint venture is suspended.


10. Non-current assets held for sale, disposal groups and discontinued operations continued

TYPE AND DESCRIPTIONSTATEMENT OF FINANCIAL POSITION


Discontinued operations The group classifies a component of the business as a discontinued operation when that component has been disposed of, or is classified as held for sale or for distribution, and:

represents a separate major line of business or geographical area of operations

is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations

is a subsidiary acquired exclusively with a view to resale.

See above treatment for non-current assets/disposal groups that are either held for sale or for distribution to owners.

Discontinued operations are presented separately within the income statement, statement of OCI and the statement of cash flows.

Intercompany income and expense transactions between the group’s continuing and discontinued operations are not eliminated.

Continuing operations Non-current assets/disposal groups that are either held for sale or for distribution to owners that do not meet the criteria of a discontinued operation.

See above treatment for non-current assets/disposal groups that are either held for sale or for distribution to owners.

Non-current assets/disposal groups that are either held for sale or for distribution to owners that do not meet the criteria of a discontinued operation are accounted for within the group’s continuing operations.


360

11. Equity

EQUITY

Black economic empowerment

ownership initiative (Tutuwa)

Share issue costs DividendsReacquired equity

instruments

Reacquired equity instruments

Where subsidiaries purchase/(short sell) Standard Bank Group Limited’s equity instruments, the consideration paid/(received) is deducted/(added) from/(to) equity attributable to ordinary shareholders as treasury shares on consolidation.

Fair value changes recognised by subsidiaries on these instruments are reversed on consolidation and dividends received are eliminated against dividends paid. Where such shares are subsequently sold or reissued/(reacquired) outside the group, any consideration received/(paid) is included in equity attributable to ordinary shareholders.

Black economic empowerment ownership initiative (Tutuwa)

The group subscribed for 8.5% redeemable, cumulative, preference shares issued by the Tutuwa entities controlled by the group. The initial repurchase of group shares by the Tutuwa entities was treated as a reduction in the group’s equity. Subsequent to the repurchase of the group shares, the Tutuwa entities containing these shares were sold to the black participants. The capital and dividends on the preference shares are repayable from future ordinary dividends received on group shares or from the disposal of the group’s shares. As a result of the group’s right to receive its own dividends back in the form of preference dividends and capital on the preference shares, the subsequent sale of the Tutuwa entities and consequent delivery of the group shares to the black participants (although legally effected) is not accounted for as a sale. The preference share investment in the Tutuwa entities is also not accounted for as an asset. The preference share asset is effectively eliminated against equity as a negative empowerment reserve.

As a consequence of the above, the IFRS accounting treatment followed until full redemption, or third-party financing, is as follows:

the 8.5% redeemable, cumulative, preference shares issued by the Tutuwa entities and subscribed for by the group are not recognised as financial assets, but eliminated against equity as a negative empowerment reserve

the preference dividends received from the Tutuwa entities are eliminated against the ordinary dividends paid on the group shares held by the Tutuwa entities

preference dividends accrued but not received, due to cash distributions paid to participants, increase the empowerment reserve

for purposes of the calculation of earnings per share, the weighted average number of shares in issue is reduced by the number of shares held by those Tutuwa entities that have been sold to the black participants. The shares will be restored on full redemption of the preference shares, or to the extent that the preference share capital is financed by a third party

perpetual preference shares issued by the group for the purposes of financing the repurchased group shares are classified as equity. Dividends paid are accounted for on declaration.

Share issue costs Incremental external costs directly attributable to a transaction that increases or decreases equity are deducted from equity, net of related tax. All other share issue costs are expensed.

Dividends Distributions are recognised in equity in the period in which they are declared. Distributions declared after the reporting date are disclosed in the distributions note to the annual financial statements.


12. Provisions, contingent assets and contingent liabilities

PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

Contingent assets

Contingent liabilities

Provisions

Provisions for legal claims

Provision for restructuring

Provision for onerous contracts

Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are determined by discounting the expected future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The group’s provisions typically (when applicable) include the following:

Provisions for legal claimsProvisions for legal claims are recognised on a prudent basis for the estimated cost for all legal claims that have not been settled or reached conclusion at the reporting date. In determining the provision management considers the probability and likely settlement (if any). Reimbursements of expenditure to settle the provision are recognised when and only when it is virtually certain that the reimbursement will be received.

Provision for restructuringA provision for restructuring is recognised when the group has approved a detailed formal plan, and the restructuring either has commenced or has been announced publicly. Future operating costs or losses are not provided for.


362

12. Provisions, contingent assets and contingent liabilities continued

Provisions continued Provision for onerous contractsA provision for onerous contracts is recognised when the expected benefits to be derived by the group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the group recognises any impairment loss on the assets associated with that contract.

Contingent assets Contingent assets are not recognised in the annual financial statements but are disclosed when, as a result of past events, it is probable that economic benefits will flow to the group, but this will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the group’s control.

Contingent liabilities Contingent liabilities include certain guarantees (other than financial guarantees) and letters of credit and are not recognised in the annual financial statements but are disclosed in the notes to the annual financial statements unless they are considered remote.

13. Policyholder insurance and investment contracts

POLICYHOLDER INSURANCE AND INVESTMENT CONTRACTS

Guidance on classification of

contracts

Classification of contracts

Insurance and investment

contract classification

DPF

Professional guidance issued by the ASSA

Long-term insurance contracts and

investment contracts with DPF

Long-term investment contracts without DPF

Investment contracts with a DPF switching

option

Short-term insurance

Receivables and payables

Reinsurance contracts held


13. Policyholder insurance and investment contracts continuedGuidance on classification of contractsInsurance and investment contract classificationThe group issues contracts that transfer insurance risk or financial risk or, in some cases, both.

An insurance contract is a contract under which the group (insurer) accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder or, in the case of life annuities, the lifespan of the policyholder is greater than that assumed. Such contracts may also transfer financial risk. The group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event that are significantly more than the benefits payable if the insured event did not occur.

Short-term insurance provides benefits under short-term policies, typically one year or less, which include engineering, fire, personal liability, marine and aviation, motor, personal accident, medical expenses, theft and the Workmen’s Compensation Act, or a contract comprising a combination of any of those policies.

Investment contracts are those contracts that transfer financial risk with no significant insurance risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable.

Discretionary participation featuresA number of insurance and investment contracts contain a DPF feature. This feature entitles the policyholder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses at the discretion of the group.

The terms and conditions or practice relating to these contracts are in accordance with the group’s published Principles and Practices of Financial Management, as approved by the FSB. The terms ‘reversionary bonus’ and ‘smoothed bonus’ refer to the specific forms of DPF contracts underwritten by the group. All components in respect of DPFs are included in policyholders’ assets and liabilities.

Professional guidance issued by the Actuarial Society of South AfricaIn terms of IFRS 4 Insurance Contracts (IFRS 4), insurance liabilities are measured under existing local practice. The group had, prior to the adoption of IFRS 4, adopted the Professional Guidance Notes (PGNs) issued by the ASSA to determine the liability in respect of insurance contracts issued in South Africa. The group has continued to value long-term insurance liabilities in accordance with these.

In 2012, the naming convention was changed and the term PGN was replaced with either APN or SAP depending on whether the former PGN was best-practice or mandatory respectively.

These are available on the ASSA website – www.actuarialsociety.org.za

Where applicable, the APNs and SAPs are referred to in the accounting policies and notes to the annual financial statements.

Classification of contractsPolicyholder contracts are classified into four categories, depending on the duration of or type of investment benefit or insurance risks. The accounting for each of these contracts are detailed below.


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13. Policyholder insurance and investment contracts continuedLong-term insurance contracts and investment contracts with DPF

Measurement These contracts are valued in terms of the FSV basis as described in SAP 104 Life offices – valuation of long-term insurers (SAP 104), using a discounted cash flow methodology. The assets and liabilities are reflected as policyholders’ assets and liabilities in the statement of financial position. The discounted cash flow methodology allows for premiums and benefits payable in terms of the contract, future administration expenses and commission, investment return, tax and any expected losses in respect of options.

The liability is based on assumptions of the best estimate of future experience, plus compulsory margins as required in terms of SAP 104, plus additional discretionary margins. Derivatives embedded in the group’s insurance contracts are not separated and measured at fair value if the embedded derivative itself meets the definition of an insurance contract.

The liabilities in respect of the investment guarantees’ underlying maturity and death benefits, and guaranteed annuity options are measured in accordance with APN 110 Reserving for minimum investment return guarantees on a market-consistent basis. Discretionary margins are held to ensure that the profit and risk margins in the premiums are not capitalised before it is probable that future economic benefits will flow to the entity.

These profits emerge over the lifetime of the contract in line with the risk borne by the group. Liabilities for individual market-related policies, where benefits are in part dependent on the performance of underlying investment portfolios, are taken as the aggregate value of the policies’ investment in the investment portfolio at the valuation date (the unit reserve element), reduced by the excess of the present value of the expected future risk and expense charges over the present value of the expected future risk benefits and expenses on a policy-by-policy cash flow basis (the rand reserve element).

Reversionary bonus classes of policies, and policies with fixed and guaranteed benefits are valued by discounting the expected future cash flows at market-related rates of interest reduced by an allowance for investment expenses and the relevant compulsory margins (the guaranteed element). Future bonuses have been allowed for at the latest declared rates where appropriate. The rand reserve element of market-related policies and the guaranteed element in respect of other policies are collectively known as the rand reserve.

In respect of corporate life and lump sum disability business, no discounting of future cash flows is performed. However, a provision will be held if the expected guaranteed premiums under the current basis and investment returns in the short term are not sufficient to meet expected future claims and expenses. For corporate investment contracts with DPF, in addition to the value of the policies’ investment in the investment portfolios held, an additional provision will be held if the expected fee recoveries in the short term are not sufficient to meet expected expenses.

Within the group all investment contracts invested in smoothed bonus portfolios are classified as investment contracts with DPF. In respect of insurance and investment contracts with DPF where bonuses are smoothed, bonus stabilisation provisions are held arising from the difference between the after taxation investment performance of the assets net of the relevant management fees and the value of the bonuses declared. In accordance with SAP 104, where the bonus stabilisation provision is negative, this provision is restricted to an amount that can reasonably be expected to be recovered through under distribution of bonuses during the ensuing three years. All bonus stabilisation provisions are included in policyholders’ liabilities. The liability estimates are reviewed bi-annually. The effect of any change in estimates is recognised in profit or loss.

Where policyholders, in respect of certain policies, are entitled to a part surrender, any part surrender is treated as a derecognition of the policyholders’ asset or liability.


13. Policyholder insurance and investment contracts continuedClassification of contracts continuedLong-term insurance contracts and investment contracts with DPF continued

Measurement continued

Shadow accounting is applied to policyholder insurance contracts where the underlying measurement of the policyholder insurance liability depends directly on the fair value of any owner-occupied properties.

Any unrealised gains and losses on such owner-occupied properties are recognised in OCI. The shadow accounting adjustment to policyholder insurance contracts is recognised in OCI to the extent that the unrealised gains or losses, together with any related taxation on owner-occupied properties backing policyholder insurance liabilities are also recognised directly in OCI.

Incurred but not reported claims (IBNR)

Provision is made in policyholders’ assets and liabilities for the estimated cost at the end of the year of claims incurred but not reported at that date. IBNR provisions for the main categories of business are calculated using run-off triangle techniques. These liabilities are not discounted due to the short-term nature of IBNR claims. Outstanding claims and benefit payments are stated gross of reinsurance.

Liability adequacy test At each reporting date the adequacy of the insurance liabilities is assessed. If that assessment shows that the carrying amount of insurance liabilities net of any related intangible PVIF business assets is inadequate in the light of the estimated future cash flows, then the deficiency is recognised in profit or loss.

Premium income Premiums and annuity considerations on insurance contracts, other than in respect of universally costed policies (policies where insurance risk charges are dependent on the excess of the sum assured over the value of units underlying the contract), recurring premium pure risk policies (collectively the Lifestyle series) and corporate schemes, are recognised when due in terms of the contract. Premiums receivable in respect of corporate schemes are recognised when there is a reasonable assurance of collection in terms of the policy contract. Premiums in respect of the Lifestyle series of policies are recognised when premiums are received, as failure to pay a premium will result in a reduction of attributable fund value, if available, or else in the lapse of the policy. Premium income on insurance contracts is recognised gross of reinsurance. Premiums are shown before deduction of commission.

Claims Claims on insurance contracts, which include death, disability, maturity, surrender and annuity payments, are recognised in insurance benefits and claims paid when the group is notified of a claim, based on the estimated liability for compensation owed to policyholders. Changes in the provision for IBNR claims are also recognised in insurance benefits and claims paid. Reinsurance recoveries are accounted for in the same period as the related claims.

Acquisition costs

Acquisition costs for insurance contracts represent commission and other costs that relate to the securing of new contracts and the renewing of existing contracts. These costs are expensed as incurred in insurance benefits and claims paid.

The FSV method for valuing insurance contracts and investment contracts with DPF makes implicit allowance for the deferral of acquisition costs and hence no explicit deferred acquisition cost asset is recognised in the statement of financial position for these contracts.


366

13. Policyholder insurance and investment contracts continuedClassification of contracts continued Long-term investment contracts without DPF

Measurement The group issues investment contracts without fixed benefits (unit-linked and structured products) and investment contracts with fixed and guaranteed benefits (term certain annuity). Investment contracts without fixed benefits are financial liabilities whose fair value is dependent on the fair value of the underlying financial assets, derivatives and/or investment property and are designated at inception as at fair value through profit or loss. These investment contracts are accounted for as financial liabilities and are designated at fair value through profit or loss.

For investment contracts with fixed and guaranteed terms, future benefit payments and premium receipts are discounted using market-related rates at the relevant statement of financial position date. No initial profit is recognised immediately as any profit on initial recognition is amortised over the life of the contract.

Amounts received and claims incurred on investment contracts

Amounts received under investment contracts, such as premiums, are recorded as deposits to investment contract liabilities, whereas claims incurred are recorded as deductions from investment contract liabilities.

DRL on investment management contracts

A DRL is recognised in respect of upfront fees, which are directly attributable to a contract, that are charged for investment management services. The DRL is then released to investment management and service fee income and gains when the services are provided, over the expected duration of the contract on a straight-line basis.

Regular charges billed in advance are recognised on a straight-line basis over the billing period, which is the period over which the service is rendered. Outstanding fees are accrued as a receivable in terms of the investment management contract.

DAC in respect of investment contracts

Commissions paid and other incremental acquisition costs are incurred when new investment contracts are obtained or existing investment contracts are renewed. These costs are expensed as incurred, unless specifically attributable to an investment contract with an investment management service element. Such costs are deferred and amortised on a straight-line basis over the expected life of the contract (10 to 16 years for linked annuities, one year for corporate business and five years for other investment contracts), taking into account all decrements, as they represent the right to receive future management fees.

A DAC asset is recognised for all applicable policies with the amortisation being calculated on a portfolio basis. An impairment test is conducted annually at the reporting date on the DAC balance to ensure that the amount will be recovered from future revenue generated by the applicable remaining investment management contracts.

Investment contracts with a DPF switching option

Measurement On certain investment contracts, policyholders have an option to switch some or all of their investment from a DPF fund to a non-DPF fund (and vice versa). The value of the liability held with respect to these contracts is taken at the aggregate value of the policyholder investment in the investment portfolio at the valuation date.


13. Policyholder insurance and investment contracts continuedClassification of contracts continued Short-term insurance

Gross written premiums

Gross premiums exclude value added tax (VAT). Premiums are accounted for as income when the risk related to the insurance policy commences and are amortised over the contractual period of risk cover by using an unearned premium provision. All premiums are shown before deduction of commission payable to intermediaries.

Provision for unearned premiums

The provision for unearned premiums represents the portion of the current year’s premiums that relate to risk periods extending into the following year. The unearned premiums are calculated using a straight-line basis, except for those insurance contracts where allowance is made for uneven exposure.

Liability adequacy Provision is made for underwriting losses that may arise from unexpired risks when it is anticipated that unearned premiums will be insufficient to cover future claims, as well as claims-handling fees and related administrative costs.

Provision for reported claims and IBNR claims

Provision is made on a prudent basis for the estimated final cost of all claims that had not been settled on the accounting date, less amounts already paid. Claims and loss adjustment expenses are charged to income as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. The group’s own assessors or contracted external assessors individually assess claims. The claims provision includes an estimated portion of the direct expenses of the claims and assessment charges.

Provision is also made for claims arising from insured events that occurred before the close of the accounting period, but which had not been reported to the group at that date (IBNR claims). This provision is calculated using run-off triangle techniques. The provision for claims is not discounted for the time value of money due to the expected short duration to settlement.

DAC Commissions that vary and are related to securing new contracts and renewing existing contracts are deferred over the period in which the related premiums are earned, and recognised as a current asset. All other costs are recognised as expenses within insurance benefits and claims paid when incurred.

DRL A DRL is raised for any income receivable on the placement of reinsurance for risks arising from short-term insurance contracts. The DRL is released to income systematically over the coverage period of the respective reinsurance contract.

Receivables and payablesReceivables and payables related to insurance contracts and investment contracts are recognised when due. These include amounts due to and from agents, brokers and policyholders. Receivables and payables related to insurance contracts are subsequently measured in terms of IFRS 4 Insurance Contracts (IFRS 4), while those related to investment contracts are designated at fair value.

Reinsurance contracts heldThe group cedes some insurance risk in the normal course of business. Reinsurance contracts are contracts entered into by the group with reinsurers under which the group is compensated for the entire, or a portion of, losses arising on one or more of the insurance contracts issued by the group.

The expected benefits to which the group is entitled under its reinsurance contracts held are recognised as reinsurance assets and included in ‘Other assets’ in the statement of financial position. Reinsurance assets are assessed for impairment at each reporting date. Any impairment loss is recognised in profit or loss.

Outward reinsurance premiums are recognised as an expense and are accounted for in the same accounting period that premiums received are recognised as revenue in insurance premiums.


368

14. Taxation

EMPLOYEE BENEFITS

Indirect tax Dividends tax

Direct taxation: Direct taxation

includes all domestic and foreign taxes based on taxable

profits and capital gains tax

Current tax

Deferred tax

TYPE DESCRIPTION, RECOGNITION AND MEASUREMENT OFFSETTING

Direct taxation: current tax

Current tax is recognised in the direct taxation line in the income statement except to the extent that it relates to a business combination (relating to a measurement period adjustment where the carrying amount of the goodwill is greater than zero), or items recognised directly in equity or in OCI.

Current tax represents the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to tax payable in respect of previous years.

Current and deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Direct taxation: deferred tax

Deferred tax is recognised in direct taxation except to the extent that it relates to a business combination (relating to a measurement period adjustment where the carrying amount of the goodwill is greater than zero), or items recognised directly in equity or in OCI.

Deferred tax is recognised in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax is not recognised for the following temporary differences:

the initial recognition of goodwill

the initial recognition of assets and liabilities in a transaction that is not a business combination, which affects neither accounting nor taxable profits or losses

investments in subsidiaries, associates and jointly controlled arrangements (excluding mutual funds) where the group controls the timing of the reversal of temporary differences and it is probable that these differences will not reverse in the foreseeable future.


14. Taxation continued

TYPE DESCRIPTION, RECOGNITION AND MEASUREMENT OFFSETTING

Direct taxation: deferred tax continued

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the asset or liability and is not discounted.

Deferred tax assets are recognised to the extent that it is probable that future taxable income will be available against which the unused tax losses can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally, the group is unable to control the reversal of the temporary difference for associates unless there is an agreement in place that gives the group the ability to control the reversal of the temporary difference.

Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.

Indirect taxation Indirect taxes, including non-recoverable VAT, skills development levies and other duties for banking activities, are recognised in the indirect taxation line in the income statement.

Not applicable.

Dividend tax Taxes on dividends declared by the group are recognised as part of the dividends paid within equity as dividend tax represents a tax on the shareholder and not the group.

Dividends tax withheld by the group on dividends paid to its shareholders and payable at the reporting date to the South African Revenue Service (where applicable) is included in ‘Other liabilities’ in the statement of financial position.

Not applicable.


370

15. Revenue and expenditure

REVENUE AND EXPENDITURE

Investment management and life insuranceBanking activities

Insurance premium revenue

Investment income

Management fees on assets under management

Net interest income

Non-interest revenue

• Net fee and commission revenue • Trading revenue • Other revenue • Dividend income • Short-term insurance income • Customer loyalty programmes

TYPE DESCRIPTION RECOGNITION AND MEASUREMENT

Banking activities Net interest income Interest income and expense (with the exception of borrowing costs that are capitalised on qualifying assets, that is assets that necessarily take a substantial period of time to get ready for their intended use or sale and which are not measured at fair value) are recognised in net interest income using the effective interest method for all interest-bearing financial instruments.

In terms of the effective interest method, interest is recognised at a rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. Direct incremental transaction costs incurred and origination fees received, including loan commitment fees, as a result of bringing margin-yielding assets or liabilities into the statement of financial position, are capitalised to the carrying amount of financial instruments that are not at fair value through profit or loss and amortised as interest income or expense over the life of the asset or liability as part of the effective interest rate.

Where the estimates of payments or receipts on financial assets (except those that have been reclassified from held-for-trading) or financial liabilities are subsequently revised, the carrying amount of the financial asset or financial liability is adjusted to reflect actual and revised estimated cash flows. The carrying amount is calculated by computing the present value of the adjusted cash flows at the financial asset or financial liability’s original effective interest rate. Any adjustment to the carrying value is recognised in net interest income.


15. Revenue and expenditure continued


Banking activities Net interest income Where financial assets have been impaired, interest income continues to be recognised on the impaired value (gross carrying value less specific impairment) based on the original effective interest rate.

Fair value gains and losses on realised debt financial instruments, including amounts reclassified from OCI in respect of available-for-sale debt financial assets are included in net interest income.

Dividends received on preference share investments classified as debt form part of the group’s lending activities and are included in interest income.

Net fee and commission revenue

Fee and commission revenue, including transactional fees, account servicing fees, investment management fees, sales commissions and placement fees are recognised as the related services are performed. Loan commitment fees for loans that are not expected to be drawn down are recognised on a straight-line basis over the commitment period.

Loan syndication fees, where the group does not participate in the syndication or participates at the same effective interest rate for comparable risk as other participants, are recognised as revenue when the syndication has been completed. Syndication fees that do not meet these criteria are capitalised as origination fees and amortised to the income statement as interest income. The fair value of issued financial guarantee contracts on initial recognition is amortised as income over the term of the contract.

Fee and commission expenses, included in net fee and commission revenue, are mainly transaction and service fees relating to financial instruments, which are expensed as the services are received. Expenditure is recognised as fee and commission expenses where the expenditure is linked to the production of fee and commission revenue.

Trading revenue Trading revenue comprises all gains and losses from changes in the fair value of trading assets and liabilities, together with related interest income, expense and dividends.

Other revenue Other revenue includes gains and losses on equity instruments designated at fair value through profit or loss, dividends relating to those financial instruments, underwriting profit from the group’s short-term insurance operations and related insurance activities and remeasurement gains and losses from contingent consideration on disposals and purchases.

Gains and losses on equity available-for-sale financial assets are reclassified from OCI to other revenue on derecognition or impairment of the investments. Dividends on these instruments are also recognised in other revenue.

Dividend income Dividends are recognised in interest income (other revenue) for debt (equity instruments) when the right to receipt is established. Scrip dividends are recognised as dividends received where the dividend declaration allows for a cash alternative.


372

15. Revenue and expenditure continued


Banking activities continued

Short-term insurance income

Includes premium income, commission and policy fees earned, as well as net incurred claim losses and broker commission paid. Annual business income is accounted for on the accrual basis and comprises the cash value of commission and fees earned when premiums or fees are payable directly to the group. Direct commission income is accounted for as and when cash is received and comprises the cash value of commission earned when premiums are payable directly to the underwriters.

Customer loyalty programmes

The group’s banking activities operate a customer loyalty programme in terms of which it undertakes to provide goods and services to certain customers. The reward credits are accounted for as a separately identifiable component of the fee and commission income transactions of which they form a part.

The consideration allocated to the reward credits is measured at the fair value of the reward credit and is recognised over the period in which the customer utilises the reward credits. Expenses relating to the provision of the reward credits are recognised in operating expenses as and when they are incurred.

Investment management and life insurance

Insurance premium revenue

Insurance premium revenue includes life insurance premiums, health insurance premiums and short-term insurance premiums. Refer to accounting policy 13.

Investment income Investment income for investment management and life insurance activities comprises mainly rental income from properties, interest, hotel operations’ sales and dividends. Dividends are recognised when the right to receive payment is established and interest income is recognised using the effective interest method.

Hotel operation sales comprise the fair value of the sale of accommodation, food and beverage, other guest facilities and rentals received. Revenue is shown net of VAT, returns, rebates and discounts.

Management fees on assets under management

Fee income includes management fees on assets under management and administration fees. Management fees on assets under management are recognised over the period for which the services are rendered, in accordance with the substance of the relevant agreements.

Administration fees received for the administration of medical schemes are recognised when the services are rendered.

OffsettingIncome and expenses are presented on a net basis only when permitted by IFRS, or for gains and losses arising from a group of similar transactions.


16. Other significant accounting policies

OTHER SIGNIFICANT ACCOUNTING POLICIES

Fiduciary activitiesStatutory credit risk

reserveNon-trading and

capital related itemsSegment reporting

Segment reporting An operating segment is a component of the group engaged in business activities, whose operating results are reviewed regularly by management in order to make decisions about resources to be allocated to segments and assessing segment performance. The group’s identification of segments and the measurement of segment results is based on the group’s internal reporting to the chief operating decision maker.

Transactions between segments are priced at market-related rates.

The group’s segmental results are presented by normalising the group’s IFRS results. The normalised adjustments reflect the group’s view of the economics of its black economic empowerment ownership initiatives, the group’s share exposures entered into to facilitate client trading activities and for the benefit of Liberty policyholders that are deemed to be treasury shares. To arrive at the normalised results, the IFRS results have been adjusted for the following items:

preference share funding for the group’s Tutuwa transaction is deducted from equity and restates the number of shares held by black participants to the weighted number of shares in issue

group shares held for the benefit of Liberty policyholders are recognised as assets with fair value changes, including dividends thereon, recognised in the income statement

group shares purchased or sold short to facilitate client trading activities are recognised as assets or liabilities as appropriate with fair value changes, including dividends thereon, recognised in trading revenue.

Fiduciary activities The group commonly engages in trust or other fiduciary activities that result in the holding or placing of assets on behalf of individuals, trusts, post-employment benefit plans and other institutions. These assets and the income arising directly thereon are excluded from these annual financial statements as they are not assets of the group. However, fee income earned and fee expenses incurred by the group relating to the group’s responsibilities from fiduciary activities are recognised in profit or loss.

Statutory credit risk reserve

The statutory credit risk reserve represents the amount which local regulatory authorities within the group’s rest of Africa operations require in addition to the IFRS impairment provision.

Non-trading and capital related items

Non-trading and capital related items primarily include the following:

gains and losses on disposal of subsidiaries, joint ventures and associates (including foreign exchange translation gains and losses)

gains and losses on the disposal of property and equipment and intangible assets

impairment and reversals of impairments of joint ventures and associates

impairment of investments in subsidiaries, associates and joint ventures, property and equipment, and intangible assets

other items of a capital related nature.


374

16. Other significant accounting policies continuedNew standards and interpretations not yet adopted The following new or revised standards, amendments and interpretations are not yet effective for the year ended 31 December 2016 and have not been applied in preparing these annual financial statements.

PRONOUNCEMENT TITLE EFFECTIVE DATE

IFRS 9 Financial Instruments This standard will replace the existing standard on the recognition and measurement of financial instruments and requires all financial assets to be classified and measured on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.

The accounting for financial assets differs in various other areas to existing requirements such as embedded derivatives and the recognition of fair value adjustments in OCI.

All changes in the fair value of financial liabilities that are designated at fair value through profit or loss due to changes in own credit risk will be required to be recognised within OCI.

The standard has introduced a new expected-loss impairment model that will require more timely recognition of expected credit losses. This new model will apply to financial assets measured at either amortised cost or fair value through OCI, as well as loan commitments when there is present commitment to extend credit (unless these are measured at fair value through profit or loss).

With the exception of purchased or originated credit impaired financial assets, expected credit losses are required to be measured through a loss allowance at an amount equal to either 12-month expected credit losses or full lifetime expected credit losses.

A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition, as well as for certain contract assets or trade receivables. For all other financial instruments, expected credit losses are measured at an amount equal to 12-month expected credit losses.

The revised general hedge accounting requirements are better aligned with an entity’s risk management activities, provide additional opportunities to apply hedge accounting and various simplifications in achieving hedge accounting.

The standard will be applied retrospectively (without restating comparative figures). The impact on the annual financial statements has not yet been fully determined. Refer to page 140 of the risk management report for details on the group’s implementation project.

Annual periods beginning on or after 1 January 2018.


16. Other significant accounting policies continuedNew standards and interpretations not yet adopted continued


IFRS 10 and IAS 28 (amendments)

Sale or Contribution of Assets between an Investor and its Associate or Joint VentureThe amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture.

The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary.

The amendments will be applied prospectively and are not expected to have a material impact on the group’s annual financial statements.

To be determined.

IFRS 15 Revenue from Contracts with CustomersThis standard will replace the existing revenue standards and their related interpretations. The standard sets out the requirements for recognising revenue that applies to all contracts with customers (except for contracts that are within the scope of the standards on leases, insurance contracts or financial instruments).

The core principle of the standard is that revenue recognised reflects the consideration to which the company expects to be entitled in exchange for the transfer of promised goods or services to the customer.

The standard incorporates a five-step analysis to determine the amount and timing of revenue recognition.

The standard will be applied retrospectively. The impact on the annual financial statements has not yet been fully determined. However, is not expected to be significant.


376




IFRS 16 LeasesThis standard will replace the existing standard IAS 17 Leases as well as the related interpretations and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, being the lessee (customer) and the lessor (supplier).

The core principle of this standard is that the lessee and lessor should recognise all rights and obligations arising from leasing arrangements on balance sheet.

The most significant change pertaining to the accounting treatment of operating leases is from the lessees’ perspective. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and introduces a single lessee accounting model, where a right of use (ROU) asset together with a liability for the future payments is to be recognised for all leases with a term of more than 12 months, unless the underlying asset is of low value.

The lessor accounting requirements in IAS 17 has not changed substantially in terms of this standard, as a result a lessor continues to classify its leases as operating leases or finance leases and accounts for these as it currently done in terms of IAS 17.

In addition, the standard requires the lessor to provide enhanced disclosures about its leasing activities and in particular about its exposure to residual value risk and how it is managed.

The standard will be applied retrospectively. The impact on the annual financial statements has not yet been fully determined.


IFRS 2 (amendment) Share-based PaymentThe amendments are intended to eliminate diversity in practice in three main areas of the classification and measurement of share-based payment transactions are:

the effects of vesting conditions on the measurement of a cash-settled share based payment transaction

the classification of a share-based payment transaction with net settlement features for withholding tax obligations

the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled.

The amendments will be applied prospectively. The impact on the annual financial statements has not yet been fully determined.





IFRS 4 (amendment) Insurance ContractsThe amendment to applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts introduce two approaches: an overlay approach and a deferral approach. The amended standard will give all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 is applied before the new insurance contracts standard is issued; and give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until 2021. The entities that defer the application of IFRS 9 will continue to apply the existing financial instruments standard IAS 39.

The amendments to IFRS 4 supplement existing options in the standard that can already be used to address the temporary volatility.

The amendments will be applied retrospectively. The impact on the annual financial statements has not yet been fully determined.


International Financial Reporting Interpretations Committee (IFRIC) 22

Foreign Currency Transactions and Advance ConsiderationThe IFRIC provides guidance on how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency.

The IFRIC will be applied retrospectively or prospectively. The impact on the annual financial statements has not yet been fully determined but is not expected to have a significant impact on the group.


IAS 40 amendment Investment PropertyThe amendments clarify the requirements on transfers to, or from, investment property when, and only when, there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use.

The amendments will be applied prospectively. The impact on the annual financial statements has not yet been fully determined but is not expected to have a significant impact on the group.


Annual Improvements 2014 – 2016 cycle

The IASB has issued various amendments and clarifications to existing IFRS.

Various effective dates, the earliest being for the group’s 2017 financial year.


CONSOLIDATED STATEMENT OF FINANCIAL POSITION1

2016USDm*

2016GBPm*

2016EURm*

CAGR**%

2016Rm

2015Rm

2014Rm

2013Rm

2012Rm

2011Rm

AssetsCash and balances with central banks 5 661 4 573 5 370 19 77 474 75 112 64 302 53 310 61 985 31 907Financial investments, trading

and pledged assets 46 209 37 330 43 838 9 632 396 607 352 537 146 457 018 473 216 413 433Loans and advances 77 849 62 891 73 854 6 1 065 405 1 076 917 928 241 839 620 811 171 801 308Current and deferred taxation assets 180 146 171 6 2 467 2 415 2 213 1 943 1 514 1 883Derivative and other assets 6 589 5 323 6 250 (12) 90 167 135 641 82 324 88 691 153 915 173 439Non-current assets held for sale (100) 219 958 183 284 960 34 085Interest in associates and joint ventures 600 484 568 35 8 196 9 703 3 727 4 797 3 035 1 849Goodwill and other intangible assets 1 730 1 398 1 641 13 23 675 24 031 21 175 18 085 14 687 12 754Property and equipment 1 172 947 1 112 1 16 041 17 670 16 737 16 882 15 733 14 920Investment property 2 276 1 839 2 160 6 31 155 30 508 27 022 27 299 24 133 23 470Policyholders’ assets 534 432 507 7 314 7 579 6 507

Total assets 142 800 115 363 135 471 5 1 954 290 1 986 928 1 909 352 1 690 929 1 560 349 1 509 048

Equity and liabilitiesEquity 13 106 10 588 12 433 9 179 359 178 908 161 634 152 648 130 889 117 897

Equity attributable to ordinary shareholders 11 016 8 899 10 450 9 150 757 151 069 136 985 128 936 111 085 99 450Preference share capital and premium 402 325 382 5 503 5 503 5 503 5 503 5 503 5 503Non-controlling interests 1 688 1 364 1 601 12 23 099 22 336 19 146 18 209 14 301 12 944

Liabilities 129 694 104 775 123 038 5 1 774 931 1 808 020 1 747 718 1 538 281 1 429 460 1 391 151

Deposits and debt funding 88 679 71 640 84 128 7 1 213 621 1 186 514 1 047 212 921 738 910 682 868 586Derivative and other liabilities 12 561 10 147 11 916 (5) 171 899 236 469 146 558 149 304 198 150 217 779Trading liabilities 3 498 2 826 3 318 5 47 867 43 304 43 761 35 368 44 474 37 283Current and deferred taxation liabilities 608 491 577 6 8 317 9 398 8 980 8 907 7 922 6 245Non-current liabilities held for sale (100) 182 069 134 504 27 939Subordinated debt 1 900 1 535 1 802 1 25 997 27 141 25 521 24 516 31 548 24 754Policyholders’ liabilities 22 448 18 136 21 297 8 307 230 305 194 293 617 263 944 236 684 208 565

Total equity and liabilities 142 800 115 363 135 471 5 1 954 290 1 986 928 1 909 352 1 690 929 1 560 349 1 509 048

1 Figures included in the six-year review have been restated where necessary to provide a meaningful comparison of performance over the years.* The foreign-denominated results above have been derived from the group’s audited ZAR results by using the closing exchange rates. The foreign-denominated

results above have not been audited and have been presented for illustrative purposes only. This illustration would not be equivalent to that which would have resulted had the group presented its results in a currency other than ZAR in terms of IAS 21 The Effects of Changes in Foreign Exchange Rates.

** Compound annual growth rate.

Exchange rates utilised to convert the 31 December 2016 statement of financial position ZAR exchange rates (closing):USD – 13.69 (2015: 15.50)GBP – 16.94 (2015: 22.93)EUR – 14.43 (2015: 16.86)

Annexure FSix-year review



CONSOLIDATED INCOME STATEMENT1

2016USDm*

2016GBPm*

2016EURm*

CAGR**%

2016Rm

2015Rm

2014Rm

2013Rm

2012Rm

2011Rm

Banking activities Net interest income 3 872 2 850 3 499 15 56 892 49 310 45 152 39 095 33 966 28 827Non-interest revenue 2 925 2 152 2 642 8 42 965 41 803 38 891 34 311 32 286 29 725

Net fee and commission revenue 1 975 1 453 1 784 8 29 012 26 920 26 079 23 184 21 694 19 782Trading revenue 748 550 676 7 10 988 11 016 9 294 7 811 6 789 7 896Other revenue 202 149 182 8 2 965 3 867 3 518 3 316 3 803 2 047

Income from banking activities 6 797 5 002 6 141 11 99 857 91 113 84 043 73 406 66 252 58 552Income from investment management

and life insurance activities 1 454 1 070 1 314 7 21 365 23 997 21 209 21 945 18 841 15 036

Net insurance premiums 119 88 108 (3) 1 750 688 (6 476) (10 779) (14 233) (2 087)Investment management and service fee

income and gains 1 558 1 146 1 408 22 887 36 791 38 743 50 774 47 949 22 442Fair value adjustments to investment

management liabilities and third-party fund interests (223) (164) (202) (9) (3 272) (13 482) (11 058) (18 050) (14 875) (5 319)

Total income 8 251 6 072 7 455 10 121 222 115 110 105 252 95 351 85 093 73 588Credit impairment charges (649) (478) (586) 8 (9 533) (9 371) (9 009) (9 158) (8 714) (6 436)

Income after credit impairment charges 7 602 5 594 6 869 11 111 689 105 739 96 243 86 193 76 379 67 152Operating expenses in banking activities (3 828) (2 816) (3 459) 10 (56 235) (51 434) (46 596) (42 055) (37 221) (34 725)Operating expenses in insurance activities (1 183) (870) (1 069) 11 (17 374) (16 184) (14 546) (14 226) (12 080) (10 410)

Net income before non-trading and capital related items 2 591 1 908 2 341 12 38 080 38 121 35 101 29 912 27 078 22 017

Non-trading and capital related items (76) (56) (69) 79 (1 123) (1 512) 986 (78) (704) (61)Share of post tax profit/(loss) from

associates and joint ventures 13 9 12 (8) 187 (323) 626 685 701 284

Net income before indirect taxation 2 528 1 861 2 284 11 37 144 36 286 36 713 30 519 27 075 22 240Indirect taxation (165) (121) (149) 12 (2 418) (2 739) (2 439) (1 911) (1 621) (1 384)

Profit before direct taxation 2 363 1 740 2 135 11 34 726 33 547 34 274 28 608 25 454 20 856Direct taxation (608) (447) (549) 9 (8 932) (8 187) (8 061) (7 580) (7 002) (5 713)

Profit for the year from continuing operations 1 755 1 293 1 586 11 25 794 25 360 26 213 21 028 18 452 15 143

Profit/(loss) for the year from discontinued operation (100) 2 741 (4 048) (1 022) 817 641

Profit for the year 1 755 1 293 1 586 10 25 794 28 101 22 165 20 006 19 269 15 784Attributable to non-controlling interests and preference shareholders (244) (180) (221) 7 (3 588) (4 347) (4 260) (3 800) (3 223) (2 558)

Attributable to group ordinary shareholders 1 511 1 113 1 365 11 22 206 23 754 17 905 16 206 16 046 13 226

Headline earnings 1 566 1 153 1 415 11 23 009 22 187 20 882 16 986 14 564 13 400

1 Figures included in the six year review have been restated where necessary to provide a meaningful comparison of performance over the years.* The foreign-denominated results above have been derived from the group’s audited ZAR results by using the average exchange rates. The foreign-denominated

results above have not been audited and have been presented for illustrative purposes only. This illustration would not be equivalent to that which would have resulted had the group presented its results in a currency other than ZAR in terms of IAS 21 The Effects of Changes in Foreign Exchange Rates.

** Compound annual growth rate.

Exchange rates utilised to convert the 31 December 2016 income statementZAR exchange rates (average):USD – 14.69 (2015: 12.75) GBP – 19.96 (2015: 19.49) EUR – 16.26 (2015: 14.14)

ANNUAL FINANCIAL STATEMENTS Annexure F Six-year review continued

382

SHARE STATISTICS AND MARKET INDICATORS

CAGR% 2016 2015 2014 2013 2012 2011

Share statisticsDividend cover times (2) 1.9 2.0 1.8 2.0 2.1 2.0Dividend yield % 4 5.1 5.9 4.2 4.1 3.8 4.3Earnings yield % 2 9.5 12.0 7.5 8.2 7.9 8.7Price earnings ratio times (2) 10.5 8.3 13.4 12.2 12.7 11.5Price-to-book times 1 1.6 1.2 1.7 1.6 1.7 1.5Number of shares traded millions 6 1 271.8 1 052.8 798.0 1 012.2 938.2 959.4Turnover in shares traded % 5 79 65 49 63 59 61Market capitalisation Rm 9 245 595 183 672 232 203 209 381 190 937 156 889

Market indicators at 31 DecemberStandard Bank Group

share price High for the year cents 7 15 748 17 700 14 930 13 054 12 030 11 000 Low for the year cents 2 9 700 9 480 11 416 10 316 9 876 8 775 Closing cents 9 15 175 11 350 14 348 12 942 11 888 9 875Prime overdraft rate (closing) % 3 10.50 9.75 9.25 8.50 8.50 9.00JSE All Share Index (closing) points 10 50 654 50 694 49 771 46 256 39 250 31 986JSE Banks Index (closing) points 13 77 545 61 072 72 998 57 745 53 362 41 178ZAR exchange rates (closing) USD R 11 13.69 15.50 11.57 10.49 8.48 8.09 GBP R 6 16.94 22.93 18.02 17.36 13.71 12.48 EUR R 7 14.43 16.86 14.01 14.44 11.18 10.46ZAR exchange rates (average) USD R 15 14.69 12.75 10.84 9.64 8.21 7.25 GBP R 11 19.96 19.49 17.85 15.09 13.01 11.62 EUR R 10 16.26 14.14 14.39 12.81 10.55 10.08

ANNUAL FINANCIAL STATEMENTS Annexure F Six-year review continued

RESULTS AND RATIOS*

CAGR%

2016Rm

2015Rm

2014Rm

2013Rm

2012Rm

2011Rm

Standard Bank GroupShare statisticsNumber of ordinary shares listed

on JSE (millions)Weighted average 1 1 597.7 1 597.4 1 584.7 1 566.7 1 521.5 1 510.4End of period 1 1 596.6 1 601.4 1 577.8 1 584.4 1 535.9 1 514.1Share statistics per ordinary share (cents)Basic earnings cents 10 1 389,8 1 487,0 1 129,9 1 034,4 1 054,6 875,7Headline earnings cents 10 1 440,1 1 388,9 1 081,4 1 084,2 957,2 887,2Dividends cents 13 780,0 674,0 598,0 533,0 455,0 425,0Net asset value cents 8 9 442,0 9 433,5 8 682,0 8 137,6 7 232,5 6 568,3ROE % 1 15.3 15.6 13.0 14.2 14.2 14.6

* Excludes the discontinued operation relating to SB Plc.


CAPITAL ADEQUACY, EMPLOYEE AND OTHER RELEVANT STATISTICS

CAGR% 2016 2015 2014 2013 2012 2011

Capital adequacy1

Risk-weighted assets Rm 4 883 179 944 039 915 213 841 272 841 835 710 725Tier I capital2 Rm 8 126 188 125 710 117 970 110 834 94 420 85 547Total capital2 Rm 7 146 318 147 998 141 963 136 084 120 173 101 978Tier I capital to risk-

weighted assets3 % 4 14.3 13.3 12.9 13.2 11.2 12.0Total capital to risk-

weighted assets3 % 3 16.6 15.7 15.5 16.2 14.3 14.3Employee statistics Number of employees Banking activities 1 48 622 47 958 42 642 42 221 42 736 45 904Group 1 54 767 54 361 49 259 48 808 49 017 51 656Employee turnover rate % (3) 10.0 11.2 10.5 13.2 10.2 11.6Headline earnings per employee Rm 10 420 125 404 739 355 635 354 871 302 508 265 140Points of representation ATMs and ANAs* units 2 7 410 7 193 7 065 7 861 7 841 6 770Banking branches

and service centres locations (>1) 1 211 1 221 1 233 1 283 1 249 1 217Social investment and environment Corporate social

investment spend2 Rm (4) 95.7 115.9 115.0 104.0 106.4 119.5Carbon footprint

(metric tons CO2)2 9 281 264 324 637 309 017 392 159 412 089 180 403

1 In accordance with Basel II principles relating to the treatment of insurance entities, insurance operations are excluded from the capital base of the banking group and its related risk-weighted assets. Capital in insurance operations in excess of statutory minimum requirements is not recognised in group capital.

2 South African banking activities only.3 Capital includes unappropriated profit. * Automated notes acceptor.

384


Third-party assets under management and funds under administrationMembers of the group provide discretionary and non-discretionary investment management services to institutional and private investors. Commissions and fees earned in respect of trust and management activities performed are included in profit or loss. Assets managed and funds administered on behalf of third parties include:

2016Rbn

2015Rbn

Banking activitiesAsset management 242 317

Trusts and estates 52 101Unit trusts/collective investments 9 10Segregated funds 28Portfolio management 144 198Other 9 8

Fund administration 299 235

Unit trusts/collective investments 32 31Segregated funds 73Portfolio management 48 48Other 146 156

Geographical area1 541 552

Africa Regions 474 450Standard Bank International 67 102

Total banking activities 1 082 1 104

LibertyAsset management 53 50

Segregated funds 49 46Properties 4 4

Wealth management – funds under administration 312 308

Single manager unit trust 122 126Institutional marketing 51 47Linked and structured life products 74 72Multi-manager 14 13Africa Regions 51 50

Total Liberty 365 358

Total assets under management and funds under administration 906 910

1 During 2015, the geographical area amounts were erroneously allocated. Consequently, the amounts presented at 31 December 2015 have been restated. The restatement did not affect the group’s statement of financial position.

Included in the balances above are funds for which the fund value is determined using directors’ valuations.

Annexure GThird-party funds under management

DisclaimerThis document contains certain statements that are ’forward-looking’ with respect to certain of the group’s plans, goals and expectations relating to its future performance, results, strategies and objectives. Words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “predict” or similar expressions typically identify forward-looking statements. These forward-looking statements are not statements of fact or guarantees of future performance, results, strategies and objectives, and by their nature, involve risk and uncertainty because they relate to future events and circumstances which are difficult to predict and are beyond the group’s control, including but not limited to, domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of changes in domestic and global legislation and regulations in the jurisdictions in which the group and its affiliates operate. The group’s actual future performance, results, strategies and objectives may differ materially from the plans, goals and expectations expressed or implied in the forward-looking statements. The group makes no representations or warranty, express or implied, that these forward-looking statements will be achieved and undue reliance should not be placed on such statements. The group undertakes no obligation to update the historical information or forward-looking statements in this document and does not assume responsibility for any loss or damage arising as a result of the reliance by any party thereon.

Contact and other details

Standard Bank Group LimitedRegistration No 1969/017128/06Incorporated in the Republic of South Africa

Head: Investor relationsSarah Rivett-CarnacTel: +27 11 631 6897

Group financial directorArno DaehnkeTel: +27 11 636 3756

Group secretaryZola StephenTel: +27 11 631 9106

Registered address9th Floor, Standard Bank Centre5 Simmonds StreetJohannesburg 2001PO Box 7725Johannesburg 2000

Website: www.standardbank.com

Please direct all customer-related queries and comments to: [email protected]

Please direct all investor relations queries and comments to: [email protected]

Refer to www.standardbank.com/reporting for a list of definitions, acronyms and abbreviations

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