Standard Bank Namibia Risk and Capital Management Report 2010

Standard Bank Namibia Risk and Capital Management Report

Risk and capital management 1 Page Overview 1 Capital management 5 Credit risk 7 Liquidity risk 12 Market risk 15 Operational risk 17 Business risk 20 Reputational risk 20 Independent assurance 21 Sections forming part of the audited annual financial statements Specific information on risk and capital management integral to the audited annual financial statements can be found under the following sections of this risk management report: risk categories, page 4; capital management, page 5; credit risk, page 7; liquidity risk, page 12; and market risk, page 15. The risk and capital management information disclosed within these sections fulfils International Financial Reporting Standards (IFRS) and Basel II pillar 3 requirements, as stated in Determination on Public Disclosures for Banking Institutions (BID-18) issued under the Banking Institutions Act of 1998. Overview Introduction Effective risk and capital management is fundamental to the business activities of the company. While we remain committed to increasing shareholder value by developing and growing our business within our board-determined risk appetite, we are mindful of achieving this objective in line with the interests of all stakeholders. We seek to achieve an appropriate balance between risk and reward in our business, and continue to build and enhance the risk management capabilities that assist in delivering our growth plans in a controlled environment. Risk management is at the core of the operating structure of the company. We seek to limit adverse variations in earnings and capital by managing risk exposures within agreed levels of risk appetite. Our risk management approach includes minimising undue concentrations of exposure, limiting potential losses from stress events and the prudent management of liquidity. Our risk management processes have proven effective throughout, despite a tough economic environment. Executive management has remained closely involved with important risk management initiatives, which have focused particularly on preserving appropriate levels of liquidity and capital and clearly managing the risk portfolios. Risks are controlled at individual exposures and portfolio level, as well as in aggregate across all businesses and risk types. Frameworks The heads of the governance, risk and compliance functions are responsible for maintaining and implementing an overarching framework which: Defines the minimum governance and control structure and operational requirements. Specifies the required component frameworks within each of the GRCC functions. Specifies the way that these functions are integrated. The purpose of this overarching framework and its component frameworks is to ensure that all material risks to the company in

2 meeting its strategic and financial objectives are identified and managed proactively. The primary component frameworks are: Capital management Liquidity management Risk appetite Stress testing Risk management (covering credit, country risk, market risk and operational risk) Legal Compliance Governance Financial crime control Sustainability risk Business risk Reputational risk Strategic risk. Three lines of defence model The component frameworks contain, where relevant, organisation structures, reporting lines, standards, policies, procedures, limits and guidelines. Three lines of defence The company relies on three lines of defence. Responsibility and accountability for risk management within each line of defence resides at all levels (individual and committee; board, management and staff) within the group. Reporting lines reinforce segregation of duties and independence. First line of defence Second line of defence Third line of defence Management of: Business lines Legal entities Operations The global risk function and the global legal and compliance function Internal audit, within the global governance and assurance function Assesses, evaluates, measures and controls risks through the day-to-day activities of the business, within the frameworks set by the second line of defence. Reports to executive management and board governance structure. Sets overarching GRCC framework and component frameworks within the parameters set by the board. Provides independent oversight of the first line of defence. Reports to management and board risk governance structures. Provides an independent assessment of the adequacy and effectiveness of the overall risk management framework and risk governance structures, and reports to the board through the audit committee. Governance structure Strong independent oversight is in place at all levels throughout the company. Various committees, which are integral to the company s risk governance structure, allow executive management and the board to evaluate the risks faced by the company and the effectiveness of the company s management of these risks. The senior committees are set out in the diagram below. Standard Bank Namibia board Management committees Board committees Executive committee Audit committee Risk committee Credit committee Operational risk and compliance committee Capital management committee Asset and liability committee Personal & Business Banking credit committee Corporate & Investment Banking credit committee

3 The board audit committee (BAC) is responsible for: reviewing the group s financial position and making recommendations to the board on all financial matters including assessing the integrity and effectiveness of accounting, financial, compliance and other control systems; and ensuring effective communication between internal auditors, external auditors, the board, management and regulators. The board risk committee (BRC) and the board credit committee (BRC) provide among other things independent and objective oversight of risk and capital management across the group by: reviewing and providing oversight in respect of the adequacy and effectiveness of the company s risk management control framework; approving risk and capital management governance standards and policies; and approving and monitoring the company s risk appetite for each risk type under normal and potential stress conditions. Executive management oversight for all risk types is the responsibility of the executive committee (exco). This committee considers and, to the extent required, recommends for approval by the relevant board committees: levels of risk appetite and tolerance; risk governance standards for each risk type; actions on the risk profile; risk strategy and key risk controls across the group; capital planning and capital funding activities; utilisation of risk appetite. The audit, risk and credit committees meet quarterly with additional meetings when necessary. Executive management meets monthly. Approach and structure The company s approach to risk management is based on well-established governance processes and relies on both individual responsibility and collective oversight, supported by comprehensive reporting. Business unit heads are primarily responsible for managing risk within each of their businesses and are responsible for ensuring that there are appropriate, adequately designed and effective risk management frameworks, in compliance with company risk governance standards. Standards, policies and procedures The company has developed a set of risk governance standards for each major risk type to which it is exposed, and a standard for capital management. The standards set out minimum control requirements and ensure alignment and consistency in the manner in which the major risk types and capital management metrics are dealt with, from identification to reporting. All standards are applied consistently and are approved by the board risk committee. It is the responsibility of executive management in each business unit to ensure the implementation of risk and capital management standards and supporting policies and procedures. Compliance with risk standards is controlled through annual self-assessments by the business units supported by the internal auditors. Risk appetite Risk appetite is an expression of the amount, type and tenor of risk the group is willing to take in pursuit of its financial and strategic objectives, reflecting the group s capacity to sustain losses and continue to meet its obligations as they fall due in a range of different stress conditions. The company has developed a robust framework used to articulate appetite. The board establishes the company s parameters for risk appetite by: providing strategic leadership and guidance; reviewing and approving annual budgets and forecasts; and regularly reviewing and monitoring the company s performance in relation to risk through quarterly board reports. The board delegates the determination of risk appetite to the board risk committee and ensures that risk appetite is in line with strategy and the desired balance between risk and reward. The company s risk appetite statements are defined by three broad metrics: headline earnings; liquidity; and regulatory capital. These metrics are then converted into tolerance levels and limits through an analysis of the risks that impact on them. Stress testing Stress tests are used in proactively managing the company s risk profile, capital planning and management, strategic business planning and setting capital buffers. The company s overall stress testing programme is a key management tool within the organisation and facilitates a forward-looking perspective in risk management. Stress testing involves identifying possible events or future changes in economic conditions that could have an impact on the company. Stress testing is used to assess and manage the adequacy of regulatory and economic capital and is therefore an integral component of the internal capital adequacy assessment process (ICAAP). The company s stress testing framework guides the regular execution of stress tests at the portfolio and legal entity levels. Management reviews the outcomes of stress tests and selects appropriate mitigating actions to minimise and manage the risks to the company at the various levels. The appropriateness of the company-wide stress scenarios and the severity of the relevant scenarios are approved by the capital management committee (CMC) and are reviewed on at least an annual basis. The outcomes of stress scenarios are ultimately assessed against earnings, capital adequacy and liquidity on a consolidated basis

4 across all risk types and compared with the company s and Standard Bank Group s set risk appetite. During the year, the company performed company-wide stress tests across all major risk types based on a number of macroeconomic scenarios, each with different levels of severity. The outcome of these stress tests indicated that the company was well within its risk tolerance levels in all of the scenarios. King III There are gaps between the current risk governance and management and the recommendations of the King III report which will be addressed by management. Risk categories Credit risk Credit risk comprises counterparty risk, settlement risk and concentration risk. These risk types are defined as follows: Counterparty risk is the risk of credit loss to the company as a result of failure by a counterparty to meet its financial and/ or contractual obligations to the company. This risk type has three components: Primary credit risk, which is the EAD arising from lending and related banking product activities including underwriting the issue of these products in the primary market. Pre-settlement credit risk, which is the EAD arising from unsettled forward and derivative transactions. This risk arises from the default of the counterparty to the transaction and is measured as the cost of replacing the transaction at current market rates. Issuer risk, which is the EAD arising from traded credit and equity products including underwriting the issue of these products in the primary market. Settlement risk is the risk of loss to the company from settling a transaction where value is exchanged, but where the group may not receive all or part of the counter value. Credit concentration risk is the risk of loss to the company as a result of excessive build-up of exposure to a single counterparty or counterparty group, an industry, market, product, financial instrument or type of security, a country or geography, or a maturity. This concentration typically exists where a number of counterparties are engaged in similar activities and have similar characteristics, which could result in their ability to meet contractual obligations being similarly affected by changes in economic or other conditions. Country risk Country risk, also referred to as cross-border transfer risk, is the risk that a client or counterparty, including the relevant sovereign, may not be able to fulfil its obligations to the company outside the host country because of political or economic conditions in the host country. Liquidity risk Liquidity risk arises when the company, despite being solvent, cannot maintain or generate sufficient cash resources to meet its payment obligations as they fall due, or can only do so at materially disadvantageous terms. This type of event may arise when counterparties who provide the bank with funding withdraw or do not roll over that funding, or as a result of a generalised disruption in asset markets that make normally liquid assets illiquid. Market risk This is the risk of a change in the actual or effective market value, earnings or future cash flow of a portfolio of financial instruments 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 the above. Market risk is categorised according to trading book market risk, interest rate risk in the banking book, equity investments and foreign currency translation risk. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This includes information and legal risk but excludes reputational and strategic risk. Compliance risk Compliance risk is the risk of legal or regulatory sanctions, financial loss or loss to reputation that the group may suffer as a result of failure to comply with all laws, regulations, codes of conduct and standards of good practice applicable to its financial services activities. Business risk Business risk relates to the potential revenue shortfall compared to the cost base due to strategic and/or reputational reasons. The company s ability to generate revenue is impacted by, among others, the external macroeconomic environment, its chosen strategy and reputation in the markets in which it operates. Reputational risk Reputational risk results from damage to the company s image which may impair its ability to retain and generate business. Such damage may result from a breakdown of trust, confidence or business relationships. Safeguarding the company s reputation is of paramount importance to its continued success and is the responsibility of every member of staff; however, ultimate custodianship of reputational risk management rests with the managing director.

5 Capital management The company s capital management framework is designed to ensure the company is capitalised in line with the risk profile, regulatory requirements, economic capital standards and target ratios approved by the board. The company s capital management objectives are to: maintain sufficient capital resources to meet minimum regulatory capital requirements set by Bank of Namibia in accordance with Basel II requirements; maintain sufficient capital resources to support the company s risk appetite and economic capital requirements; ensure the company holds capital in excess of minimum requirements in order to achieve the target capital adequacy ratios set by management and to withstand the impact of potential stress events; and Maintain and adopt the dividend policy and dividend declarations of SBG and SBSA while considering shareholder and regulatory expectations. The capital management committee (CMC) ensures compliance with the company s capital management objectives. The committee reviews actual and forecast capital adequacy on a semi-annual basis. The processes in place for delivering the company s capital management objectives are: establishing internal targets for capital adequacy; allocating capital to support the company s strategic plans; applying stress tests to assess the company s capital adequacy under stress scenarios; developing, reviewing and approving ICAAP; capital planning and forecasting to ensure that capital ratios exceed the targets set by the board; and capital raising on a timely basis. Capital adequacy The company manages its capital base to achieve a prudent balance between maintaining capital ratios to support business growth and depositor confidence, and providing competitive returns to shareholders. The capital management process ensures that the company maintains sufficient capital levels for legal and regulatory compliance purposes. The company ensures that its actions do not compromise sound governance and appropriate business practices. Regulatory capital During the period under review, the company complied with all externally imposed capital requirements to which its banking activities are subject, mainly, but not limited to, the relevant requirements of the Banks Act and Determinations relating to Banks. Regulatory capital adequacy is measured via two risk-based ratios, tier I and total capital adequacy. Both measures of capital are stated as a percentage of risk-weighted assets. Tier I capital represents the permanent forms of capital such as share capital, share premium and retained earnings while total capital, in addition, includes other items such as subordinated debt and impairments for performing loans. Risk-weighted assets are determined on a granular basis by using risk weights. Both onand off-balance sheet exposures are included in the overall credit risk-weighted assets of the group. The company s tier I capital was N$990 million in (2009: N$919 million) and total capital was N$1,54 billion in (2009: N$1,16 billion). The total capital increased due to inclusion of the unaudited profits in tier II which was not allowed in 2009. Upon finalisation of the audit the profits will move to tier I but the total capital adequacy ratio will not change. No dividend was declared in as the company, in terms of its capital plan, intends to use available capital during 2011. The company maintained a well-capitalised position based upon total and tier I capital adequacy ratio and leverage ratio as set out on the pages that follow.

6 Basel II Basel I 2009 Tier I Issued primary capital and unimpaired reserve funds 1 076 563 919 269 Ordinary shares 2 000 2 000 Share premium 441 230 441 230 Shareholders reserves 633 333 476 039 Less: Regulatory deductions Intangible asset 86 136 990 427 919 269 Tier II Subordinated debt 149 473 149 473 Current unaudited profits 313 339 Impairment for performing loans 89 709 93 504 552 521 242 977 Total eligible capital 1 542 948 1 162 246 Total capital requirement 1 060 083 825 889 Total risk-weigted assets 10 600 832 8 258 889 Gross assets 14 455 272 13 346 949 Basel II risk-weighted assets Credit risk 9 255 075 8 258 889 Market risk 49 171 Operational risk 1 296 586 Total risk-weighted assets 10 600 832 8 258 889 Capital adequacy ratios Minimum regulatory requirement % Target ratio % Total capital adequacy ratio 10 11 12 14,6 14,1 Tier I capital adequacy ratio 1 7 7,7 8,4 9,3 11,1 Leverage ratio 1 6 6,6-7,2 6,9 6,9 1 Once the unaudited profits move to tier I in January 2011 the tier I CAR will increase to 12,3% and the leverage ratio will increase to 9%. % 2009 % Economic capital Economic capital is the basis for measuring and reporting all quantifiable risks faced by the company on a consistent riskadjusted basis. It is the amount of permanent capital that a transaction, business unit or risk type must hold to support the economic risk. For potential losses arising from risk types that are statistically quantifiable, economic capital reflects the worst case loss. The company is in process of developing its economic capital measurement practices. It considers its current capital level more than adequate.

7 Credit risk Framework Credit risk is the company s most material risk. It is managed in accordance with the company s comprehensive risk management control framework. A company credit standard sets out the principles under which the company is prepared to assume credit risk. Responsibility for credit risk resides within the company s credit business unit supported by the risk function and with oversight, as with other risks, by the risk committees and ultimately the board. The principal executive management committee responsible for the oversight of credit risk is the credit risk management committee (CRMC). The committee has a clearly defined mandate and delegated authorities, which are regularly reviewed. Credit committee responsibilities include governance oversight, risk appetite, model performance, development and validation, counterparty and portfolio risk limits and approvals, country, industry, market, product, obligor, customer segment and maturity concentration risk, risk mitigation and impairments. Basel II and IFRS Approaches adopted There are three approaches under Basel II for credit risk, the standardised approach, the FIRB approach, and the AIRB approach. The FIRB and AIRB approaches are collectively referred to as the internal ratings based (IRB) approaches. The version of Basel II adopted by the Bank of Namibia requires commercial banks to use the standardised approach. Standardised approach The calculation of regulatory capital for the standardised approach is based on net counterparty exposures after recognising a limited set of qualifying collateral. A prescribed percentage, being the risk weighting which is based on the perceived credit rating of the counterparty, is then applied to the net exposure. For corporate exposures that are rated by approved credit assessment institutions a Bank of Namibia prescribed risk weighting would be used. For counterparties for which there are no credit ratings available exposures are classified as unrated for determining regulatory capital requirements. Currently all (corporate) exposures are unrated, the company does not use external credit assessment institutions and no exposures are deducted from capital funds. Equity exposures The company has no equity exposures. Basel II exposures and accounting principles The risk management report addresses the disclosure requirements of Basel II pillar 3 and IFRS. These two reporting frameworks have many differences, which are important to understand in order to correctly interpret the disclosures in this report. The company s financial statements are prepared in accordance with and comply with IFRS. This framework is different from Basel II but shares the overall objective of increasing transparency by allowing users of market information, including regulators, to be more informed in their decision making. Pillar 3 disclosures, which aim to enable the market to assess an institution s capital adequacy, are intended to complement the minimum capital requirements and supervisory review process of Basel II. While the accounting and regulatory disclosure requirements differ in scope and objectives, they are not considered to be conflicting or inconsistent. This is because the source of all risk and financial disclosures emanates from a centralised set of reconciled data. A difference between IFRS and pillar 3 is that the analysis of credit risk exposures under IFRS is presented by class of financial instrument while pillar 3 requires classification by Basel II counterparty type. Classes are determined for IFRS purposes by taking into account the nature of the information to be disclosed, as well as the characteristics of the underlying financial instruments. Basel II counterparty types are assumed to have homogeneous risk characteristics which support the standardised risk weightings assigned to the different counterparty types. The Basel II exposure classes are therefore the basis for the preparation of regulatory reporting with the exception of the credit risk return which is still based on product types. The principles in IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in terms of IAS 32 and IAS 39. Fair value instruments IAS 39 permits any financial asset or financial liability, on meeting specific criteria, to be designated at fair value with all changes in fair value being recognised in profit or loss. For liabilities that are designated to be measured at fair value, any deterioration in the credit risk of the issuer will result in a decrease in its fair value and a resultant profit being recognised in profit or loss which would ultimately be recognised within other comprehensive income. IFRS requires the amount of change in fair value attributable to changes in credit risk on such liabilities, both for the period and cumulatively to date, to be disclosed in the financial statements. From a pillar 3 perspective, recognising gains as a result of deterioration in creditworthiness would undermine the quality of capital measures and performance ratios. Those fair value gains and losses attributable to credit risk, if it would occur, are excluded when calculating regulatory capital. Available-for-sale instruments IAS 39 permits certain financial assets, such as non-trading debt and equity instruments, to be classified as available-for sale. All financial assets classified in this manner are required to be measured at fair value with all unrealised gains and losses, with the exception of impairment losses, dividends and interest income, recognised in other comprehensive income. Banking supervisors agree that the resulting unrealised profits and losses cannot be included in regulatory capital as there is no inflow of capital and it is not permanently available. Such fair value gains are eliminated in determining the company s regulatory capital. Impairments In accordance with IAS 39, it is necessary to determine whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are recognised only if there is objective evidence of impairment,

8 resulting from one or more events that have occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably measured (incurred loss approach). An impairment loss is determined as the difference between the financial asset s carrying value and the present value of its estimated future cash flows, including any recoverable collateral, discounted at the 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 is recognised based on historic loss patterns and estimated emergence periods. While IFRS clearly states that it is based on an incurred loss approach, Basel II focuses on expected and unexpected losses. Basel II seeks to ensure that expected losses are addressed through the level of impairments held against the underlying exposure, while unexpected losses are addressed through holding regulatory capital in relation to the size and nature of the exposure held, known as capital adequacy. Credit portfolio analysis (Basel II) Analysis by asset class The credit portfolio is analysed in the tables that follow in terms of the standardised Basel II approach applicable in Namibia per counterparty, industry and geography. Gross exposures per counterparty On-balance Off-balance Gross defaulted Impairment of exposures sheet sheet Total exposures 1 Specific Portfolio Sovereign or central banks 1 424 033 1 020 1 425 053 Public sector entities 112 376 26 687 139 063 Banks 1 431 045 1 431 045 Corporates 3 441 027 355 833 3 796 860 Retail 2 492 264 408 940 2 901 204 214 141 44 196 Residential mortgage property 4 293 930 4 293 930 325 733 22 622 Commercial real estate 309 977 309 977 Other assets 966 864 966 964 14 471 516 792 480 15 263 996 539 874 66 818 30 131 Gross exposures per industry On-balance Off-balance Gross defaulted Impairment of exposures sheet sheet Total exposures 1 Specific 2 Portfolio Agriculture and forestry 213 121 3 238 216 360 36 Fishing 192 912 192 912 Mining 311 863 2 543 314 406 2 683 Manufacturing 85 532 35 247 120 779 2 120 Construction 143 227 114 918 258 145 1 366 Electricity, gas and water 160 083 1 436 161 519 486 Trade and accommodation 166 030 143 821 309 851 Transport and communication 244 943 60 363 305 306 824 Finance and insurance 4 457 321 34 040 4 491 361 1 287 Real estate and business services 131 551 144 783 276 334 Government services 1 447 685 4 563 1 452 248 Individuals 5 604 173 42 384 5 646 557 132 736 Others 1 313 075 40 607 1 353 682 34 921 Uncategorised 164 537 164 537 1 Gross defaulted exposures refer to past due and impaired exposures. 2 It is not possible to provide the sectorial analysis of specific impairment exposures. 14 471 516 792 480 15 263 996 176 459 66 818 30 131

9 Gross exposures per industry On-balance Off-balance Gross defaulted Impairment of exposures sheet sheet Total exposures 2 Specific Portfolio Namibia 14 471 517 792 480 15 263 997 539 874 66 818 30 131 The average amount of gross exposures during was N$14,66 million. Please refer to note 7.3 in the annual financial statements for a reconciliation of changes in specific and portfolio impairments. Credit risk mitigation (Basel II) Collateral, guarantees, credit derivatives and on- and off-balance sheet netting are widely used by the company to mitigate credit risk. The amount and type of credit risk mitigation depends on the circumstances in each case. Credit risk mitigation policy and procedure ensure that credit risk mitigation techniques are acceptable, used consistently, valued appropriately and regularly, and meet the risk requirements of operational management for legal, practical and timely enforceability. Detailed processes and procedures are in place to guide each type of mitigation used. The main types of collateral taken are mortgage bonds over residential, commercial and industrial properties, cession of book debts, bonds over plant and equipment and, for leases and instalment sales, the underlying moveable assets financed. Security values are reviewed on a regular basis and are revalued at the time of default if it is found that the existing value could have shifted materially from the time of valuation. Reverse repurchase agreements are underpinned by the assets being financed, which are mostly liquid, tradeable financial instruments. Guarantees and related legal contracts are often required, particularly in support of credit extension to groups of companies and weaker counterparties. Guarantor counterparties include banks, parent companies, shareholders and associated counterparties. Creditworthiness is established for the guarantor as for other counterparty credit approvals. For derivative transactions, the company typically requires the use of internationally recognised and enforceable Institute of Swap Dealers Association (ISDA) agreements with a credit support annexure or if not available long form confirmations. Exposures are generally marked-to market daily. Collateral Within the risk functions there are specialised legal practitioners who are responsible for ensuring that legally valid, binding and enforceable loan agreements and amendments to standard security documents are in place where required. Security is provided to the company by counterparties accepting lending facilities. In certain instances, further counsel is sought from external attorneys in respect of unusual forms of security or where security is provided by foreign companies. Wrong way risk exposures Wrong way risk arises where there is a positive correlation between counterparty default and transaction exposure. The company is not involved in the type of transactions from which this risk may arise. Derivative instruments The company does not use derivative instruments for counterparty credit risk mitigation. IFRS 7 Exposure to credit risk Non-performing loans Retail loans and advances are classified as non-performing when amounts are due and unpaid for 90 days or more or where there is objective evidence of a default for more than 90 days. Retail loans and advances are also individually classified as nonperforming, regardless of payment status, where the group identifies objective evidence of default. Corporate loans are analysed on a case-by-case basis and are classified as non-performing when amounts are due and unpaid for 90 days or more or where there is objective evidence of default, the severity of which is highly likely to result in payment default. Evidence of default Criteria used by the company in determining whether there is objective evidence of default include: known cash flow difficulties experienced by the borrower; breaches of loan covenants or conditions; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; where the company, for economic or legal reasons relating to the borrower s financial difficulty, grants the borrower a concession that the company would not otherwise consider. Definitions For the tables that follow, the definitions below have been used for the different categories of exposures: Non-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. Neither past due nor specifically impaired loans are loans that are current and fully compliant with all contractual terms and conditions.

10 Early arrears but not specifically impaired loans include those loans where the counterparty has failed to make contractual payments and 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 not expected but could occur if the adverse conditions persist. Non-performing but not specifically impaired loans include loans where the counterparty has failed to make contractual payments and is 90 days or more past due as well as those loans for which the company has identified objective evidence of default, such as a breach of a material loan covenant or condition. These loans are not specifically impaired due to the expected recoverability of the full carrying value when considering 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: sub-standard items that show underlying well defined weaknesses and are considered to be specifically impaired; doubtful items that are not yet considered final losses because of some pending factors that may strengthen the quality of the items; and loss items that are considered to be uncollectable in whole or in part. The company provides fully for its anticipated loss, after taking securities into account. Maximum exposure to credit risk by credit quality (Audited) Neither past due nor impaired Past due but not impaired Total performing loans Impaired Total Security against impaired loans Net impaired loans Cash and balance with central banks 360 758 360 758 360 758 Derivative assets 169 732 169 732 169 732 Trading assets 400 555 400 555 400 555 Financial investments 2 847 109 2 847 109 2 847 109 Loans and advances to banks 1 225 210 1 225 210 1 225 210 Loans and advances to customers 8 222 837 363 415 8 586 252 176 459 8 762 711 180 353 (3 894) mortgage lending 3 968 197 226 419 4 194 616 99 134 4 293 930 136 474 (37 160) instalment sales and finances leases 1 425 180 126 032 1 551 212 22 671 1 573 883 14 462 8 209 card debtors 159 696 3 831 163 527 2 893 166 420 2 893 other loans and advances 2 669 764 7 133 2 676 897 51 581 2 728 478 29 417 22 164 13 266 201 363 415 13 589 616 176 459 13 766 075 180 353 (3 894) 2009 Cash and balance with central banks 247 287 247 287 247 287 Derivative assets 55 647 55 647 55 647 Trading assets 314 634 314 634 314 634 Financial investments 2 431 818 2 431 818 2 431 818 Loans and advances to banks 1 308 056 1 308 056 1 308 056 Loans and advances to customers 7 353 159 634 230 7 987 389 252 722 8 240 111 152 021 100 701 mortgage lending 3 318 424 512 987 3 831 411 176 059 4 007 470 135 159 40 900 instalment sales and finances leases 1 259 598 111 179 1 370 777 13 054 1 383 831 5 988 7 066 card debtors 146 475 6 020 152 495 11 590 164 085 11 590 other loans and advances 2 628 662 4 044 2 632 706 52 019 2 684 725 10 874 41 145 11 710 601 634 230 12 344 831 252 722 12 597 553 152 021 100 701

11 Ageing of group loans and advances past due but not impaired (Audited) Less than 31 days 30 to 60 days 61 to 90 days More than 90 days Total Loans and advances to customers 274 920 63 833 17 530 7 132 363 415 mortgage lending 193 222 27 908 4 492 797 226 419 instalment sales and finance leases 73 909 34 670 12 953 4 500 126 032 card debtors 2 645 1 186 3 831 other loans and advances 5 144 69 85 1 835 7 133 274 920 63 833 17 530 7 132 363 415 2009 Loans and advances to customers 466 793 58 868 94 898 14 671 634 230 mortgage lending 397 397 21 701 84 030 9 859 512 987 instalment sales and finance leases 63 530 34 037 10 647 2 965 111 179 card debtors 3 176 2 644 6 020 other loans and advances 1 690 286 221 1 847 4 044 465 793 58 868 94 899 14 671 634 230 Renegotiated loans and advances (audited) Renegotiated loans and advances are exposures which have been refinanced, rescheduled, rolled over or otherwise modified because of weaknesses in the counterparty s financial position, and where it has been judged that normal repayment will likely continue after the restructure. There were no such items in and 2009. Collateral obtained by the company (audited) It is the company s policy to dispose of repossessed assets in an orderly manner. The proceeds are used to reduce or repay the outstanding claim. Generally, the company does not use repossessed assets for business purposes. The collateral held by the company for was N$2 million (2009: N$3 million) and predominantly related to residential properties in possession.

12 Liquidity risk Framework The nature of banking and trading results in continuous exposure to liquidity risk. The company s liquidity management framework, which is largely unchanged from the previous financial reporting period, is designed to measure and manage liquidity positions ensuring that payment obligations can be met at all times, under both normal and considerably stressed conditions. The assets and liabilities committee (ALCO) and the board review and set liquidity risk standards annually in accordance with regulatory requirements and international best practice and ALCO is responsible for ensuring compliance with liquidity policies. The primary components are detailed below. The liquidity management process is monitored by ALCO. There are regular independent reviews of the liquidity management process. The cumulative impact of these elements is monitored by ALCO and the process is underpinned by a system of extensive controls. These include the application of technology, documented processes and procedures, independent oversight and regular independent reviews and evaluations of system effectiveness. In periods of stable market conditions, the company s consolidated liquidity risk position is monitored on at least a monthly basis by ALCO. In periods of increased volatility, the frequency of meetings is increased significantly to facilitate appropriate management action. Liquidity and funding management The company manages liquidity in accordance with applicable regulations and international best practice. As part of a cohesive liquidity management process, the company distinguishes between tactical, structural and contingency liquidity risk. Liquidity risk management Tactical (shorter-term) liquidity risk management Structural (longer-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 balance sheet. Identify 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. Determine appropriate levels of standby liquidity facilities applicable to conduits. Monitor and manage liquidity early warning indicators. Establish and maintain contingency funding plans. Undertake regular liquidity stress testing and scenario analysis. If needed, convene liquidity crisis management committees. Inform liquidity buffer levels in accordance with anticipated stress events. Advise on diversification of liquidity buffer portfolios. Tactical liquidity risk management Cash flow management Active liquidity and funding management is an integrated effort across a number of functional areas. Short-term cash flow projections are used to plan for and meet the day-today requirements of the business, including adherence to prudential and internal requirements. The company s wholesale funding strategy is derived from the projected net asset growth which includes consideration of Personal & Business Banking and Corporate & Investment Banking asset classes, capital requirements, the maturity profile of existing wholesale funding and anticipated changes in the retail deposit base. Funding requirements and initiatives are assessed in accordance with ALCO requirements for diversification, tenor and currency exposure as well as the availability and pricing of alternative liquidity sources. An active presence is maintained in professional markets, supported by relationship management efforts among corporate and institutional clients. Liquidity buffer Portfolios of highly marketable securities over and above prudential 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 surplus marketable securities in compared to 2009. These portfolios are highly liquid and can be readily sold to meet liquidity requirements. Consequently, a maturity analysis for these assets is not disclosed as it is not considered necessary to enable users to evaluate the nature and extent of liquidity risk.

13 Company unencumbered surplus liquidity 2009 Marketable assets 4 741 4 224 In addition to minimum requirements, surplus liquidity holdings are informed by the results from liquidity stress testing. Structural requirements With actual cash flows typically varying significantly from the contractual position, behavioural profiling is applied to assets, liabilities and off-balance sheet commitments with an indeterminable maturity or drawdown period, as well as to certain liquid assets. Behavioural profiling assigns probable maturities based on actual customer behaviour. This is used to identify significant additional sources of structural liquidity in the form of liquid assets and core deposits, such as current and savings accounts that exhibit stable behaviour although these are repayable on demand or at short notice. Limits are set internally to restrict the cumulative liquidity mismatch between expected inflows and outflows of funds in different time buckets. These mismatches are monitored on a regular basis with active management intervention if potential limit breaches are evidenced. Comparing the to the 2009 position, it is evident that the structural mismatch has reduced and is comfortably within the stated mismatch risk appetite. One of the mechanisms employed to ensure adherence to these limits is the active management of the long-term funding ratio. The ratio is defined as those funding-related liabilities with a remaining maturity of greater than six as a percentage of total funding-related liabilities. The graph below illustrates the company s long-term funding ratio for the period January 2009 to December. The increase in the ratio is attributed to the increased percentage of term funding raised to support term lending. Long-term funding ratio % 30 25 20 15 10 5 0 January 2009 December The tables below analyse 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 trading derivatives) and will therefore not agree directly to the balances disclosed in the consolidated statement of financial position. 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. All other derivative 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 tables below and on the next page also include 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. Maturity analysis of financial liabilities by contractual maturity Demand 0 1 2 6 7 12 1 5 years After 5 years Total Derivative liability 26 504 61 916 10 054 3 345 101 819 Trading liabilities 19 170 19 170 Deposits and current accounts 1 977 338 1 294 665 4 255 833 3 063 630 1 731 450 310 000 12 632 916 Deposits and current accounts with banks 1 888 909 1 294 665 4 255 833 3 063 630 1 691 260 310 000 12 504 297 Deposits and current accounts with customers 88 429 40 190 128 619 Deferred taxation liability 12 653 10 042 2 611 Other liabilities 41 664 170 590 273 432 26 974 512 660 Subordinated bonds 7 295 157 095 164 390 Provision for postretirement medical benefits 1 102 4 408 61 239 66 749 Total recognised financial liabilities 2 019 002 1 510 929 4 585 823 3 241 923 1 768 788 371 239 13 497 704

14 Maturity analysis of financial instruments by contractual maturity Demand 0 1 2 6 7 12 1 5 years After 5 years Total Guarantees 614 985 614 985 Letters of credit 4 818 24 744 3 000 32 562 Unutilised borrowing facilities 2 922 069 2 922 069 Total unrecognised financial instruments 3 537 054 4 818 24 744 3 000 3 569 616 Demand 0 1 2 6 7 12 1 5 years After 5 years Total 2009 Derivative liability 8 533 16 614 3 532 872 29 551 Trading liabilities 28 135 28 135 Deposits and current accounts 6 572 368 969 614 1 663 639 1 125 472 748 063 11 079 155 Deposits and current accounts with banks 3 110 50 302 51 099 10 654 115 165 Deposits and current accounts with customers 6 569 258 919 312 1 612 540 1 114 818 748 063 10 963 991 Other liabilities 238 810 388 790 190 000 817 600 Subordinated bonds 7 295 7 295 164 391 179 981 Provision for postretirement medical benefits 1 102 4 408 46 965 52 475 Total recognised financial liabilities 6 811 178 1 395 072 1 877 548 1 137 401 917 734 46 965 12 185 898 Guarantees 392 640 392 640 Letters of credit 69 496 1 845 71 341 Total unrecognised financial instruments 392 640 69 496 1 845 463 981 Foreign currency liquidity management A number of parameters are observed to monitor changes in either market liquidity or exchange rates. Key to this is the restriction of foreign currency loans and advances in relation to foreign currency deposits. Diversified funding base The company employs a diversified funding strategy, sourcing liquidity in domestic and offshore markets. Concentration risk limits are used within the company to ensure that funding diversification is maintained across counterparties. In terms of the latter, limits are set internally to restrict top ten depositor exposures within the sight to three-month tenors to below 20% for top ten depositors of total funding-related liabilities respectively. When this limit is exceeded a special authority needs to be signed. Depositor concentration % 2009 % Top ten depositors 15,4 24,2 Primary sources of funding are in the form of deposits across a spectrum of retail and wholesale clients, as well as long-term capital market funding. The company remains committed to increasing its core deposits and accessing domestic and foreign capital markets when favourable to meet its evolving funding requirements. Liquidity stress testing and scenario analysis Stress testing and scenario analysis forms an important part of the company s liquidity management process. It is based on hypothetical as well as historical events. Anticipated onand off-balance sheet cash flows are subjected to a variety of bank specific stresses and scenarios to evaluate the impact of unlikely but plausible events on liquidity positions. Stresses and scenarios are based on hypothetical events as well as historical events. It provides assurance as to the company s ability to generate sufficient liquidity under adverse conditions and provides meaningful input in defining target liquidity risk positions. Contingency funding plans Contingency funding plans are designed to, as far as possible, protect stakeholder interests and maintain market confidence to ensure a positive outcome in the event of a liquidity crisis. The plans incorporate an extensive early warning indicator methodology supported by clear and decisive 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, liquidity generation and operations, as well as heightened and supplementary information requirements.