Investec plc silo IFRS 9 Financial Instruments Transition Report

Transcription

1 Investec plc silo IFRS 9 Financial Instruments Transition Report 2018

2

3 Contents Introduction and objective of these disclosures 4 Overview of the group s IFRS 9 transition impact 5 Credit and counterparty risk management 8 Key drivers of measurement uncertainty 17 Capital management 20 Notes to the financial statements 22 Accounting policies 29 Special purpose auditor s report 34 For queries regarding information in this document Investor Relations Telephone (44) / (44) investorrelations@investec.com Internet address: Investec plc silo IFRS 9 Transition Report

4 Introduction and objective of these disclosures The objective of these transition disclosures is to provide an understanding of the impacts of the change in accounting standard from IAS 39 Financial Instruments: Recognition and Measurement to IFRS 9 Financial Instruments, which became effective for the group on 1 April The information in this document serves as a point-in-time bridge between IAS 39 and IFRS 9. This includes the day one impact on retained earnings and regulatory capital as well as changes to the classification and measurement of certain financial assets and liabilities as required under IFRS 9. IFRS 9 requires a move from incurred loss methodology under IAS 39 to an expected credit loss (ECL) methodology. This disclosure document explains the new ECL methodology, what its implications are for the group and what the implications are of the main judgements the group has made in implementing ECL, as well as the impacts from reclassification of certain assets and liabilities. The disclosures that follow reflect the impact of the adoption of IFRS 9 on the group s balance sheet and regulatory capital. Further details of specific IFRS 9 accounting policies (as well as previous IAS 39 policies) are described in more detail on page 29. All references in this document to Investec or the group relate to Investec plc (i.e. excluding Investec Limited). All information in this document is audited unless marked otherwise. Proviso Please note that matters discussed in this transition report may contain forward-looking statements which are subject to various risks and uncertainties and other factors, including, but not limited to: the further development of standards and interpretations under IFRS applicable to past, current and future periods, evolving practices with regard to the interpretation and application of standards under IFRS, particularly new standards such as IFRS 9. domestic and global economic and business conditions; and market-related risks. A number of these factors are beyond the group s control. As a result these factors may cause the group s actual future results, performance or achievements in the markets in which it operates to differ from those expressed or implied in this transition report. 4 Investec plc silo IFRS 9 Transition Report 2018

5 Overview of the group s IFRS 9 transition impact The adoption of IFRS 9 has resulted to result in the following day one impact for Investec plc. Balance sheet impairment allowance and provisions Total balance sheet impairment allowance and provisions increased by 106 million from 158 million as at 31 March 2018 to 264 million as at 1 April This is driven by an increase in legacy impairments of 58 million and an increase in ongoing impairments of 69 million, partially offset by a reduction of 21 million as a result of changes in classification and measurement of certain of the group s financial assets to fair value. The increase in impairment allowance and provisions reduced Investec plc s common equity tier 1 (CET 1) ratio by approximately 66bps on full adoption of IFRS 9, or approximately 3bps on a day one impact transitional basis. Changes in classification and measurement of certain financial assets Changes in classification and measurement to fair value of certain of the group s other financial assets resulted in a decrease to equity of 11 million (post taxation), with an approximate 7bps impact on the Investec plc CET 1 ratio. Reclassification of subordinated liabilities to fair value Following the adoption of IFRS 9 Investec plc has elected to designate its subordinated liabilities to fair value. From this designation, the interest rate portion of the subordinated debt reduced equity by 48 million (post taxation) with an approximate 37bps impact on the day one transitional CET 1 ratio which will come back into retained earnings over the duration of the remaining term of the instrument (maturing February 2022). In addition, an amount of 55 million (post taxation) has been transferred to an own credit reserve which does not have an impact on capital ratios. Taken together, the adoption of IFRS 9 resulted in a decrease in Investec plc s transitional CET 1 ratio of approximately 47bps from 10.6% to 10.1%, ahead of the Investec group target and in excess of minimum regulatory requirements. Investec plc confirmed to the PRA that it will use the transitional arrangements to absorb the full impact permissible of IFRS 9 in regulatory capital calculations. IAS 39 to IFRS 9 impairment allowance The following chart highlights the key drivers of the overall increase in Investec plc s impairment provision under IFRS 9 relative to IAS 39. million (21) 50 0 IAS 39 impairment provision at 31 March 2018 Reduction in impairment provision from changes in classification and measurement to fair value Stage 1 (12 month ECL) Stage 2 (Lifetime ECL) Stage 3 (Lifetime ECL; Multiple Economic Scenarios) IFRS 9 ECL impairment provision at 1 April 2018 Investec plc silo IFRS 9 Transition Report

6 Day one impact on CET 1 ratio The following chart highlights the day one impact on CET 1 ratio. Percentage (0.37) (0.07) (0.03) March 2018 CET 1 ratio Reclassification of subordinated liabilities to fair value Reclassification of certain financial assets to fair value Impact of ECL under transitional arrangements 1 April 2018 IFRS 9 Transitional CET 1 ratio Implementation of IFRS 9 The group established an IFRS 9 steering committee comprising of executive representation and key management from Risk, Finance, Analytics and IT. The committee is accountable for IFRS 9 implementation and is supported by working groups responsible for various work streams. The committee has provided regular updates on the status of the project to the appropriate board committees. The group s approach to risk management has not changed substantially with the introduction of IFRS 9. Credit decisions are undertaken on a case-by-case basis and the quality of clients and underlying cash flows remain paramount in decision-making. We have made a number of management judgements around subjective elements and inputs in order to implement IFRS 9. Some of these judgements relate to decisions made throughout the design and build of the ECL methodology, and others to the application of ECL methodology on an ongoing basis, which will result in inherent measurement uncertainty in our reportable ECL. The key judgements made by the group upon the implementation of IFRS 9 are highlighted in this document and include changes to asset quality definitions, use of expert judgement and risks arising from the use of internal models and forward-looking macro-economic scenarios overlaying these models. These key judgements have been approved by the Board through the Board Risk and Capital Committee (BRCC) and Audit Committee, and ongoing decision-making is governed by the appropriate forums, which have been adapted to ensure they are enabled to implement IFRS 9. The group has developed internal models to be suitable for use under IFRS 9. These models, which have been developed for all material asset classes, are subject to review and challenge by Models Forum, which is attended by members of Credit, Finance and Model Validation teams and mandated by the relevant Board approved Risk committees. This forum is mandated to review and approve model changes as required. 6 Investec plc silo IFRS 9 Transition Report 2018

7 IAS 39 to IFRS 9 balance sheet The adoption of IFRS 9, by applying the accounting policies and ECL methodologies outlined in this document, has resulted in a decrease of shareholders equity of 212 million at 1 April The following table sets out the IFRS 9 transition impact on the group on day one by balance sheet line item: 000 At 31 March 2018 IFRS 9 transition adjustments* At 1 April 2018 Assets Cash and balances at central banks (52) Loans and advances to banks (824) Reverse repurchase agreements and cash collateral on securities borrowed (326) Sovereign debt securities Bank debt securities Other debt securities (6 410) Derivative financial instruments (5 352) Securities arising from trading activities Investment portfolio Loans and advances to customers ( ) Other loans and advances (2 067) Other securitised assets Interests in associated undertakings Deferred taxation assets Other assets Property and equipment Investment properties Goodwill Intangible assets (69 183) Liabilities Deposits by banks Derivative financial instruments Other trading liabilities Repurchase agreements and cash collateral on securities lent Customer accounts (deposits) Debt securities in issue Liabilities arising on securitisation of other assets Current taxation liabilities Deferred taxation liabilities Other liabilities Subordinated liabilities Equity Ordinary share capital Perpetual preference share capital Share premium Treasury shares ( ) ( ) Other reserves ( ) (63 007) ( ) Retained income ( ) Shareholders equity excluding non-controlling interests ( ) Additional Tier 1 Capital Non-controlling interests Non-controlling interests in partially held subsidiaries Total equity ( ) Total liabilities and equity (69 183) * For the detailed impact on classification and measurement and ECL on transition refer to pages 21 to 28. Investec plc silo IFRS 9 Transition Report

8 Credit and counterparty risk management Credit and counterparty risk is assumed through a range of client-driven lending activities with private and corporate clients as well as through other counterparties, such as financial institutions and sovereigns. These activities are diversified across a number of business activities. Credit and counterparty risk governance structure To manage, measure, monitor and mitigate credit and counterparty risk, independent credit committees exist in each geography where we assume credit risk. These committees operate under board-approved delegated limits, policies and procedures. There is a high level of executive involvement and non-executive review and oversight in the credit decision-making forums depending on the size and complexity of the deal. It is our policy that all centralised credit committees are comprised of voting members who are independent of the originating business unit. All decisions to enter into a transaction are based on unanimous consent. In addition to the credit committees, the following processes assist in managing, measuring and monitoring credit and counterparty risk. The scope of these forums and committees have been adjusted where necessary to incorporate changes to governance processes arising from IFRS 9 implementation: Day-to-day arrears management and regular arrears reporting ensure that individual positions and any potential trends are dealt with in a timely manner. Watchlist committees review the management of distressed loans, potential problem loans and exposures in arrears that require additional attention and supervision. These committees review ECL impairments and staging at an asset level as well as potential fair value adjustments to loans and advances to customers and provide recommendations for the appropriate staging and level of ECL impairment if needed. Credit watchlist forum reviews and manages exposures that may potentially become distressed as a result of changes in the economic environment or adverse share price movements, or that are vulnerable to volatile exchange rate or interest rate movements or idiosyncratic financial distress. Arrears, default and recoveries forums specifically review and manage distressed loans and potentially distressed loans for private clients and corporates. These forums also review and monitor counterparties who have been granted forbearance measures. Credit risk classification and provisioning policy The group has incorporated IFRS 9 requirements into our group credit risk classification and provisioning policy. A framework has been established that incorporates both quantitative and qualitative measures. Any decisions in relation to significant increase in credit risk will be management decisions subject to approval by the appropriate committees. The policies for financial assets at amortised cost and at fair value through other comprehensive income (FVOCI), in accordance with IFRS 9, have been developed as described below: Definition of default The group has aligned the IFRS 9 and regulatory definitions of default, credit impaired and non-performing exposure. Assets that are more than 90 days past due, or considered by management as unlikely to pay their obligations in full without realisation of collateral are considered as exposures in default. Stage 1 All assets that are considered performing and have not had a significant increase in credit risk will be reported as Stage 1 assets. Under IFRS 9 these Stage 1 financial assets have loss allowances measured at an amount equal to 12 month ECL. Stage 2 Financial assets are considered to be in Stage 2 when their credit risk has increased significantly since initial recognition. The group was not required to hold specific impairments against these assets under IAS 39, however, a loss allowance equivalent to a lifetime ECL is now required to be held under IFRS 9. The group s primary indicator for Stage 2 assets are distressed loans, potential problem loans and exposures in arrears that require additional attention and supervision from Watchlist committees and are under management review. This comprises exposures that may potentially become distressed as a result of changes in the economic environment or adverse share price movements, or that are vulnerable to volatile exchange rate or interest rate movements or idiosyncratic financial distress, or private clients who have undergone a significant deterioration in financial circumstances. Assets that have been subject to forbearance are considered to be, at a minimum, Stage 2. Forbearance measures refer to concessions such as modification of the terms and conditions or refinancing that has been granted to a debtor in financial difficulties. These exposures are assessed on a case by case basis to determine whether the proposed modifications will be considered as forbearance. Where the credit committee considers it likely that the client will be able to return to perform against the original contractual obligations within a reasonable timeframe these assets will be considered performing and in Stage 2. Forbearance is distinguished from commercial renegotiations which take place as part of normal business activity and standard banking practice. 8 Investec plc silo IFRS 9 Transition Report 2018

9 In addition to loans under management review, an asset may also move from Stage 1 to Stage 2 if the model calculated probability of default (PD) has significantly increased since origination. This is tested as both a relative and absolute measure to further inform whether a significant deterioration in lifetime risk of default has occurred. As a backstop, the group does not rebut the presumption in IFRS 9 that all financial assets that are more than 30 days past due have experienced a significant increase in credit risk. Exposures move back to Stage 1 once they no longer meet the criteria above for a significant increase in credit risk and as cure periods (specifically relating to forborne exposures) are met. Stage 3 Financial assets will be included in Stage 3 when there is objective evidence of credit impairment. Under IFRS 9, the group assesses a loan as Stage 3 when contractual payments of either principal or interest are past due for more than 90 days, the debtor is assessed as unlikely to pay and credit impaired, or the loan is otherwise considered to be in default, for example due to the appointment of an administrator or in receivership. Forborne loans that are considered non-performing, for example if a loan is not expected to return to fulfil the original contractual obligations in a reasonable timeframe, will be classified as Stage 3. The group s policy is not to rebut the presumption in IFRS 9 that loans which are more than 90 days past due are in default. ECL The assessment of credit risk and the estimation of ECL are required to be unbiased, probability-weighted and should incorporate all available information relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39, and the resulting impairment charge may be more volatile. IFRS 9 will result in an increase in the total level of impairment allowances, since all financial assets if not measured at fair value through profit and loss (FVPL) will be assessed for at least 12 month ECL and the population of financial assets to which lifetime ECL applies is larger than the population for which there is objective evidence of impairment in accordance with IAS 39. A management overlay of 25 million has been considered appropriate in addition to the group s calculated model-driven ECL. This is due to Investec plc s limited experience of utilising model output for reporting purposes and uncertainty over the models predictive capability. The overlays have been designed to capture specific areas of model uncertainty during the initial adoption of IFRS 9. The group will continue to assess the appropriateness of this management overlay and expect that it will be unwound over time. Write-offs The group s policy on when financial assets are written off has not significantly changed on adoption of IFRS 9. A loan or advance is normally written off, in full, against the related allowance when the proceeds from realising any available security have been received or there is a reasonable amount of certainty that the exposure will not be recovered. Similarly the treatment and recognition of recoveries is unaffected by the implementation of IFRS 9. Any recoveries of amounts previously written off decrease the amount of impairment losses. Investec plc silo IFRS 9 Transition Report

10 IAS 39 to IFRS 9 increase in impairment allowance Total balance sheet impairment allowance increased by 106 million from 158 million under IAS 39 at 31 March 2018 to 264 million under IFRS 9 at 1 April This increase is explained in the table below. At 1 April 2018 million Stage 1 Stage 2 Stage 3 Changes in classification and measurement Total increase in impairment allowances Ongoing (8) 61 Legacy 8 50 (13) 45 Total (21) 106 Stage 1 (12 month ECL): IFRS 9 requires that for financial assets where there has been no significant increase in credit risk since origination a loss allowance equivalent to 12 month expected credit losses should be held. Previously under IAS 39 these exposures would not be subject to a specific impairment allowance. Stage 2 (Lifetime ECL): IFRS 9 requires financial assets that have experienced a significant increase in credit risk since initial recognition to carry a lifetime expected credit loss allowance. Under IAS 39, no specific impairment provision was held for Stage 2 assets. Stage 3 (Lifetime ECL; Multiple economic scenarios): This relates to additional impairment allowances required on Stage 3 exposures already in default or impaired under IAS 39. This is due to the differences in the way ECL under IFRS 9 and incurred loss provisions under IAS 39 are calculated, including the introduction of a range of forward-looking, probability weighted macro-economic scenarios as opposed to an expected outcome. Assets are individually assessed using multiple economic scenarios under IFRS 9, whereas assets treated as impaired under IAS 39 carried a provision reducing the carrying value to the expected recoverable amount. Changes in classification and measurement: Certain assets had specific impairments assigned under IAS 39, however under IFRS 9 these assets are now classified as fair value and are therefore no longer in scope of impairment allowances. These impaired assets are largely legacy property exposures and these impairments raised under IAS 39 have been used to reflect the assets at their fair value. 10 Investec plc silo IFRS 9 Transition Report 2018

11 Credit risk analysis of gross credit and counterparty exposures under IFRS 9 The table below indicates in which class of asset (on the face of the consolidated balance sheet) credit and counterparty exposures are reflected. Not all assets included in the balance sheet bear credit and counterparty risk. The IFRS 9 impairment model is applicable to all financial assets at amortised cost, lease receivables, debt financial assets at fair value through other comprehensive income, loan commitments and financial guarantee contracts. This contrasts with the IAS 39 impairment model which was not applicable to loan commitments and financial guarantee contracts, which were covered by IAS 37. At 1 April 2018 million Total credit and counterparty exposure of which FVPL of which amortised cost and FVOCI Expected credit losses^ Assets that we deem to have no legal credit exposure Notes Total gross assets Cash and balances at central banks Loans and advances to banks (1) Reverse repurchase agreements and cash collateral on securities borrowed Sovereign debt securities Bank debt securities Other debt securities (6) 272 Derivative financial instruments Securities arising from trading activities Investment portfolio Loans and advances to customers (248) Other loans and advances (3) Other securitised assets Interest in associated undertakings Deferred taxation assets Other assets Property and equipment Investment properties Goodwill Intangible assets Total on-balance sheet exposures (258) Guarantees Committed facilities related to loans and advances to customers (6) Contingent liabilities and other Total off-balance sheet exposures (6) Total gross exposures (264) ^ Expected credit losses include 2 million ECL held against financial assets held at FVOCI, which is reported on the balance sheet within reserves. This will result in minor differences between certain balance sheet lines reported above (loans and advances to customers and sovereign debt securities) and the statutory balance sheet. Loans and advances held at FVOCI total 402 million at 1 April 2018 and relate to loans that we intend at origination to hold and collect, but that we may elect to sell down over time. 1 Largely relates to exposures that are classified as investment risk in the banking book. 2 While the group manages all risks (including credit risk) from a day-to-day operational perspective, certain assets are within special purpose vehicles that ring-fence the assets to specific credit providers and limit security to the assets in the vehicle. The table above reflects the net credit exposure in the vehicles that the group has reflected in the total credit and counterparty exposure with the maximum credit exposure referenced to credit providers external to the group in the column headed assets that we deem to have no legal credit exposure. This also includes cash in the securitised vehicles. 3 Other assets include settlement debtors which we deem to have no credit risk exposure as they are settled on a delivery against payment basis. Investec plc silo IFRS 9 Transition Report

12 Credit risk analysis of gross credit and counterparty exposures under IFRS 9 (continued) Total gross credit and counterparty exposure: Gross credit and counterparty exposure totalled 19.2 billion at 1 April Cash and near cash balances amount to 5.8 billion and are largely reflected in the following line items in the table above: cash and balances at central banks, loans and advances to banks and sovereign debt securities. These exposures are all Stage 1. Certain debt securities and other loans and advances are Stage 2 and Stage 3 exposures, however these exposures are small relative to the size of the balance sheet and loans and advances to customers (including committed facilities) account for greater than 96% of overall ECLs. Loans and advances to customers: The tables that follow provide information with respect to the asset quality of our core loans and advances to customers, which account for the material ECL allowances. Loans and advances to customers held at fair value through profit and loss (FVPL): The combined effect of the application of the business model and the contractual cash flow characteristics tests has resulted in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. This has resulted in a 14 million reduction in Investec plc s loans and advances to customers primarily due to the reclassification of certain loans and advances to customers to FVPL, which now total 909 million at 1 April Off-balance sheet exposures: IFRS 9 requires a loss allowance to be held against off balance sheet items such as undrawn lending commitments held at amortised cost or FVOCI. Previously, an impairment provision would only have been held for a commitment in the event that a loss event had occurred. Exposures that are undrawn but that are intended to be sold down to mitigate concentration risk will be classified as FVPL. Exposures that are undrawn and that could potentially be sold down will be classified as FVOCI. 12 Investec plc silo IFRS 9 Transition Report 2018

13 Credit risk analysis of gross core loans and advances under IFRS 9 ongoing business An analysis of the ongoing business (i.e. excluding legacy business) core loans and advances to customers and asset quality is shown in the table below. million 1 April 2018 Gross core loans and advances to customers of which subject to ECL Gross exposure subject to ECL ( million) Stage Stage of which past due greater than 30 days 18 Stage Gross exposure (%) Stage % Stage 2 6.5% Stage 3 2.6% IFRS 9 ECL ( million) (93) Stage 1 (15) Stage 2 (33) Stage 3 (45) ECL coverage ratio (%) 1.1% Stage 1 0.2% Stage 2 6.0% Stage % A reconciliation of core loans and advances: statutory basis and ongoing basis Removal of: At 1 April 2018 million Statutory as disclosed Legacy business Ongoing business Gross core loans and advances to customers under IAS Fair value adjustment on transition (29) (15) (14) Gross core loans and advances to customers under IFRS of which subject to ECL IFRS 9 ECL impairments (248) (155) (93) Net core loans and advances to customers subject to ECL Investec plc silo IFRS 9 Transition Report

14 Legacy business overview under IFRS 9 Following the implementation of IFRS 9, our exposure (net of impairments) to the legacy portfolio has further reduced from 313 million at 31 March 2018 to 256 million at 1 April 2018 as shown in the analysis below. Impairments on legacy exposures under IFRS 9 have increased by 58 million, partially offset by a reduction of 13 million as a result of changes in classification and measurement of certain legacy assets to fair value. This has resulted in an overall net increase in legacy impairments of 45 million. Under IFRS 9 At 1 April 2018 million Total net assets (after impairments) Total balance sheet impairments* Legacy assets at amortised cost 228 (155) Stage 1 Stage 2 32 (8) Stage (147) Legacy assets at FVPL 28 Total legacy assets (net or at carrying value) 256 Effective coverage ratio on total legacy assets (including FVPL) 40% * Included in balance sheet impairments is a management overlay for legacy of 5 million. Excluded from balance sheet impairments is 3 million ECL held against committed facilities related to the legacy portfolio. Certain legacy assets have been reclassified to fair value, typically due to historic profit shares or equity conversion features. Under IFRS 9, these loan instruments are now classified and measured at FVPL. Related to these exposures were 13 million of IAS 39 provisions at 31 March 2018, which have been used to reduce the carrying value of these exposures as well as an additional 2 million of fair value adjustments taken through reserves. This has reduced the overall carrying value of FVPL assets to 28 million from 43 million at 31 March Total effective coverage on the overall legacy portfolio (including FVPL, calculated as if fair value adjustments are equivalent to balance sheet impairments) has therefore substantially increased to 39.9% at 1 April 2018 from 26.6% at 31 March 2018 (2017: 17.6%). Total legacy assets million Mar 08 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 1 Apr 18 IFRS Other Private Bank assets Private Bank Irish planning and development assets Other corporate assets and securitisation activities 14 Investec plc silo IFRS 9 Transition Report 2018

15 Credit risk analysis of gross core loans and advances under IFRS 9 The tables that follow provide information with respect to the asset quality of our core loans and advances on a statutory basis. million 1 April 2018 Loans and advances to customers per the balance sheet Net core loans and advances to customers of which subject to ECL million 1 April 2018 Gross core loans and advances to customers of which subject to ECL Gross exposure subject to ECL ( million) Stage Stage of which past due greater than 30 days 18 Stage Gross exposure (%) Stage % Stage 2 6.7% Stage 3 6.3% IFRS 9 ECL ( million) (248) Stage 1 (15) Stage 2 (41) Stage 3 (192) ECL coverage ratio (%) 2.8% Stage 1 0.2% Stage 2 6.9% Stage % Stage 1: 87.0% of gross exposure in scope for IFRS 9 is in Stage 1 and has not experienced a significant increase in credit risk since origination. Impairment is calculated based on a 12 month expected loss. Coverage for these performing, non-deteriorated assets is 0.2%. Stage 2: 6.7% of gross exposure is in Stage 2 and has seen a significant increase in credit risk since origination. Under IFRS 9, these assets require a lifetime expected loss to be held, resulting in an increase in coverage to 6.9%. Only 18 million or 0.2% of gross core loans shown in Stage 2 are greater than 30 days past due. An asset reported in Stage 2 does not imply we expect a loss on these assets. Stage 2 assets are assessed relative to their expected performance at the point of origination. While assets may underperform original expectations, the level of ECL indicates that our expected losses from these positions remain low. Stage 3: 6.3% of gross exposure is in Stage 3 which is made up of assets that are credit impaired. Coverage ratio totals 34.0%. UK Stage 3 ECL is predominantly driven by legacy. Investec plc silo IFRS 9 Transition Report

16 Credit risk an analysis of gross core loans and advances by risk category under IFRS 9 Gross core loans and advances at Amortised cost and FVOCI* Stage 1 Stage 2 Stage 3 Total Gross core loans and advances at FVPL Gross core loans and advances At 1 April 2018 million Drawn exposure ECL Drawn exposure ECL Drawn exposure ECL Drawn exposure ECL Lending collateralised by property (1) 296 (23) 426 (145) (169) Commercial real estate 586 (1) 255 (21) 225 (65) (87) Commercial real estate investment 476 (1) 239 (19) 176 (40) 891 (60) Commercial real estate development (7) 137 (7) Commercial vacant land and planning 6 (2) 32 (18) 38 (20) Residential real estate (2) 201 (80) 738 (82) Residential real estate investment (1) 39 (15) 191 (16) Residential real estate development (1) 112 (43) 492 (44) Residential vacant land and planning 5 50 (22) 55 (22) High net worth and other private client lending (2) 36 (2) 26 (9) (13) Mortgages (1) 33 (2) 18 (3) (6) High net worth and specialised lending 411 (1) 3 8 (6) 422 (7) Corporate and other lending (12) 262 (16) 112 (38) (66) Acquisition finance (5) 39 (1) 19 (6) (12) Asset-based lending 301 (1) 43 (2) 11 (1) 355 (4) 355 Fund finance (1) 13 (1) (2) Other corporate and financial institutions and governments (1) 431 (1) Asset finance (4) 100 (8) 78 (31) (43) Small ticket asset finance (3) 79 (7) 14 (9) (19) Large ticket asset finance 128 (1) 21 (1) 64 (22) 213 (24) Project finance 400 (1) 54 (3) (4) Resource finance 5 5 Gross core loans and advances (15) 594 (41) 564 (192) (248) * Legacy exposures are included in the table above and largely relate to lending collateralised by property. These exposures account for a significant portion of Stage 2 and Stage 3 assets. If these exposures were to be excluded from the table above, 89 million or 1.0% of total ongoing gross core loans subjected to ECL would be reported as Stage 3 lending collateralised by property. 16 Investec plc silo IFRS 9 Transition Report 2018

17 Key drivers of measurement uncertainty subjective elements and inputs The measurement of ECL under IFRS 9 has increased complexity and reliance on expert credit judgements. Key judgemental areas under the implementation of IFRS 9 are highlighted in this document and are subject to robust governance processes. Key drivers of measurement uncertainty include: the assessment of what constitutes a significant increase in credit risk; the introduction of a range of forward-looking probability weighted macro-economic scenarios; and estimations of probabilities of default, loss given default and exposures at default using models. In addition to these drivers, some initial judgements and assumptions were required in the design and build of the group s ECL methodology, which are not considered to have a material impact. This includes the use of income recognition effective interest rates (EIRs) that are calculated under IAS 39 and used as the discount factor in the IFRS 9 ECL calculation as well as the use of contractual maturity to assess behavioural lives. In addition where we have experienced limitations on the availability of probability of default origination data for the historic book a portfolio average has been used in some instances. We will continue to assess and monitor the group s measurement uncertainty and sensitivity to changes in economic credit conditions and expect to provide additional disclosures relating to sensitivities in the 2019 Annual Report. Forward-looking macro-economic scenarios The measurement of ECL also requires the use of multiple economic scenarios to calculate a probability weighted forward-looking estimate. These scenarios are updated at least twice a year, or more frequently if there is a macro-economic shock or significant shift in expectations. The weighting of these scenarios for IFRS 9 as well as the scenarios themselves are discussed and approved in Investec plc and IBP Capital Committee, which forms part of the principal governance framework for macro-economic scenarios. A number of forecast economic scenarios are considered for capital planning, stress testing (including Investec specific stress scenarios) and IFRS 9, including an expected scenario, an upside scenario and two Investec specific downside scenarios. IFRS 9 is likely to result in an increase in the volatility of provisions going forward, particularly for Stage 1 and Stage 2 assets as a result of macro-economic scenario changes. Sensitivities to macro-economic scenarios and factors will form part of our overall risk monitoring. Management and measurement of credit and counterparty risk Fundamental principles employed in the management of credit and counterparty risk include: A clear definition of our target market. A quantitative and qualitative assessment of the creditworthiness of our counterparties. Analysis of risks, including concentration risk (concentration risk considerations include asset class, industry, counterparty and geographical concentration). Decisions are made with reference to risk appetite limits. Prudential limits. Regular monitoring and review of existing and potential exposures once facilities have been approved. A high level of executive involvement in decision-making with non-executive review and oversight. Portfolio reviews and stress testing. Within the credit approval process, internal and external ratings are included in the assessment of client quality. A large proportion of the group s portfolio is not rated by external rating agencies. We place reliance upon internal consideration of counterparties and borrowers, and use ratings prepared externally where available as support in our decision-making process. Regular reporting of credit and counterparty risk exposures within our operating units is made to management, the executives and the board at the group risk and capital committee (GRCC) and board risk and capital committee (BRCC). The board regularly reviews and approves the appetite for credit and counterparty risk, which is documented in risk appetite statements and policy documents. This is implemented and reviewed by the credit risk management teams in each jurisdiction. Credit policies have been updated and amended to include changes to reflect the implementation of IFRS 9. Portfolio reviews and stress testing are undertaken on all material businesses, where the exposures are analysed to assess any migration in portfolio quality, highlight any vulnerabilities, identify portfolio concentrations and make appropriate recommendations, such as a reduction in risk appetite limits or specific exposures. Investec plc silo IFRS 9 Transition Report

18 Internal credit rating models and ECL methodology Internal credit rating models have been developed to cover all material asset classes. These internal credit rating models are then used for IFRS 9 modelling but adjusted for key differences. Internal credit models calculate through the economic cycle losses whereas IFRS 9 requires 12 month or lifetime point-in-time losses based on conditions at the reporting date and multiple economic scenario forecasts of the future conditions over the expected lives. Process to determine expected credit loss Macro-economic factors overlaid Expert credit review of model outputs Internal models IFRS 9 models Stage allocation ECL calculation ECLs are calculated using three main components: a probability of default (PD); a loss given default (LGD); and the exposure at default (EAD). Under IFRS 9, the 12 month and lifetime PDs represent the probability of a default occurring over the next 12 months or the lifetime of the financial exposures, respectively, based on conditions existing at the balance sheet date and future forecasted macro-economic conditions that affect credit risk. The LGD represents losses expected on default, taking into account the mitigating effect of collateral, its expected value when realised and the time value of money. The forecast value for the collateral is also affected by the range of forward-looking probability weighted macroeconomic scenarios. The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdown of a committed facility. The calculation of the 12 month ECL is based on the 12 month PD and LGD along with the EAD and effective interest rate (EIR) for the asset. Lifetime ECL is calculated using the lifetime PD curve, and the appropriate LGDs and EADs and discount rates derived from the EIR based on the remaining life of the financial asset. Expert judgement models have also been utilised for certain portfolios where the ECL is judged to be minimal, either due to the portfolio s relative size or the highly-rated nature of these portfolios, such as cash and balances held at central banks. Management adjustments are made to modelled output to account for situations where additional information and known or expected risk factors have not been captured in the modelling process. A management overlay of 25 million has been considered appropriate in addition to the group s calculated model-driven ECL. This is due to Investec plc s limited experience of utilising model output for reporting purposes and uncertainty over the models predictive capability. The overlays have been designed to capture specific areas of model uncertainty during the initial adoption of IFRS 9. The group will continue to assess the appropriateness of this management overlay and expect that it will be unwound over time. 18 Investec plc silo IFRS 9 Transition Report 2018

19 Capital management (unaudited) Investec plc applies the Standardised approach when calculating capital requirements. The impact of IFRS 9 on the group s CET 1 ratio is potentially more significant when compared to similar banks applying an Internal Ratings Based approach, who already deduct from CET 1 capital any excess expected losses over impairment allowances. We remain lowly leveraged and target a leverage ratio in all our banking subsidiaries in excess of 6%. The most recent capital plans have been prepared on an IFRS 9 basis to ensure the bank remains sufficiently capitalised under both normal and stressed market conditions. In December 2017 the European Union issued the final regulation setting out the IFRS 9 transitional arrangements firms may apply to minimise the impact of the IFRS 9 expected credit loss accounting on regulatory capital. The transitional arrangements allow the day one and any subsequent increases in Stage 1 and Stage 2 expected credit loss provisions to be phased in over five years, recognising 5% in 2018, increasing to 15% in 2019, 30% in 2020, 50% in 2021, and 75% in 2022, with full recognition in CET 1 capital ( full adoption of IFRS 9 ) in Investec plc notified the PRA in October 2017 of its intention to apply the IFRS 9 transitional arrangements, effective 1 April The following chart highlights the day one impact on CET 1 ratio as well as the impact of ECL on full adoption of IFRS 9. Percentage (0.37) (0.07) (0.66) March 2018 CET 1 ratio Reclassification of subordinated liabilities to fair value Reclassification of certain financial assets to fair value Impact of ECL on full adpotion of IFRS 9 Transitional arrangements 1 April 2018 IFRS 9 Transitional CET 1 ratio Investec plc silo IFRS 9 Transition Report

20 Capital impact The impact on the composition of our regulatory capital on a CRD IV basis is provided in the table below: Investec plc* Capital ratios million 31 March 2018 IAS 39 1 April 2018 IFRS 9 Transitional 1 April 2018 IFRS 9 Full adoption^ Shareholders equity excluding non-controlling interests Gains or losses on subordinated liabilities valued at fair value^ Transitional add-back of ECL 94 Other deductions (553) (553) (553) Common equity tier 1 capital Additional tier 1 capital Tier 1 capital Tier 2 capital Total regulatory capital Risk-weighted assets Capital ratios Common equity tier 1 ratio 10.6% 10.1% 9.8% Tier 1 ratio 12.5% 12.0% 11.7% Total capital adequacy ratio 15.0% 14.5% 14.3% Investec plc* Leverage ratios million 31 March 2018 IAS 39 1 April 2018 IFRS 9 Transitional 1 April 2018 IFRS 9 Full adoption^ Tier 1 capital Total exposure Leverage ratio 8.2% 8.0% 7.8% * Investec plc includes the deduction of foreseeable charges and dividends when calculating common equity tier 1 capital as now required under the Capital Requirements Regulation and European Banking Authority technical standards. Excluding the impact of the foreseeable charges and dividends totalling 65 million for Investec plc, the ratios would be 45bps higher. ^ As a result of the adoption of IFRS 9 Investec plc has elected to designate its subordinated liabilities to fair value. By the time of full adoption of IFRS 9 in 2023, these subordinated liabilities will have reached maturity. Redemption at maturity is at par and so the interest rate portion of the fair value adjustment 48 million (post-tax) will come back into retained earnings. In addition, an amount of 55 million (post-tax) has been transferred to an own credit reserve, which does not have an impact on capital ratios and which on maturity of the subordinated liabilities would be released. Therefore, the day one transitional impact on 1 April 2018 of 37bps has been excluded from the capital ratios at full adoption of IFRS 9 shown above. 20 Investec plc silo IFRS 9 Transition Report 2018

21 Classification and measurement overview From 1 April 2018, the group will classify all of its financial assets which fall within the scope of IFRS 9 in the following measurement categories: Amortised cost Fair value through other comprehensive income (FVOCI) Fair value through profit or loss (FVPL). The classification into one of these categories is based on the entity s business model for managing the assets and the contractual cash flow characteristics of the assets. The standard sets out three types of business models: Hold to collect: it is intended to hold the asset to maturity to earn interest; collecting repayments of principal and interest from the customer. These assets are accounted for at amortised cost. Hold to collect and sell: this model is similar to the hold to collect model, except that the entity may elect to sell some or all of the assets before maturity as circumstances change. These assets are accounted for at FVOCI. Hold to sell/managed on a fair value basis: the entity originates or purchases an asset with the intention of disposing of it in the short- or medium-term to benefit from capital appreciation or the portfolio is managed on a fair value basis. These assets are accounted for at FVPL. Solely payments of principal and interest (SPPI) Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the group assesses whether the assets cash flows represent solely payments of principal and interest (the SPPI test ). In making this assessment, the group considers whether the contractual cash flows are consistent with a basic lending arrangement (i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related asset is classified and measured at FVPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest. Designation at fair value The adoption of IFRS 9 also necessitates a review of the designation of financial instruments at fair value. IFRS 9 requires that the designation is revoked where there is no longer an accounting mismatch at 1 April 2018 and permits designations to be revoked or additional designations created at 1 April 2018 if there are accounting mismatches at that date. As a result: fair value designations for financial liabilities have been created where there is an accounting mismatch, as permitted by IFRS 9; and fair value designations have been revoked for certain assets where accounting mismatches no longer exist as a result of the adoption of the classification rules of IFRS 9. For the detailed accounting policies adopted by the group on the adoption of IFRS 9 refer to page 29. Investec plc silo IFRS 9 Transition Report

22 Analysis of financial assets and liabilities by measurement basis under IAS 39 and measurement category IFRS 9 The tables below shows an analysis of assets and liabilities under IAS 39 at 31 March 2018 and under IFRS 9 on 1 April 2018: IAS 39 measurement basis At fair value through profit or loss At 31 March Trading Designated at inception Availablefor-sale Financial assets Cash and balances at central banks Loans and advances to banks Reverse repurchase agreements and cash collateral on securities borrowed Sovereign debt securities Bank debt securities Other debt securities Derivative financial instruments Securities arising from trading activities Investment portfolio Loans and advances to customers Other loans and advances Other securitised assets Interests in associated undertakings Deferred taxation assets Other assets Property and equipment Investment properties Goodwill Intangible assets Financial liabilities Deposits by banks Derivative financial instruments Other trading liabilities Repurchase agreements and cash collateral on securities lent Customer accounts (deposits) Debt securities in issue Liabilities arising on securitisation of other assets Current taxation liabilities Deferred taxation liabilities Other liabilities Subordinated liabilities Investec plc silo IFRS 9 Transition Report 2018