31.

32.

33.

34.

35.

36.

37.

FINANCIAL RISK MANAGEMENT

• In the first line of defence, business unit management is primarily responsible for risk management. Their assessment, evaluation and measurement of risk needs is integrated with the day-to-day activities of the business. This process includes the implementation of the Group’s risk management policies, identification of key areas of risk and implementation of correctional action where required. Business unit management is also accountable for appropriate reporting to the governance bodies within the Group.
• The second line of defence consists of the Group risk management unit which is independent of line management. The Group function is primarily responsible for setting group’s risk management framework and policy, and providing oversight and independent reporting to Executive Management and to the board and Risk and Capital committees respectively.
• The third line of defence consists of group internal audit function which provides an independent assessment of the adequacy and effectiveness of the overall risk management framework and reports directly to the Group Audit and Compliance committee (GACC). The GACC is responsible for monitoring compliance with the Group’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. The GACC is assisted in these functions by Group Internal Audit. Group Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit committee.

Risk governance standards, policies and procedures
The Group has developed a set of policies, procedures and standards for each major risk type. The policies and procedures sets out and ensures alignment and consistency in a manner in which the major risk types across the Group are identified, measured, managed and reported on.

All policies and procedures are applied consistently across the Group and are approved by GRCM. It is the responsibility of business unit management to ensure the requirements of risk policies and procedures are properly implemented and adhered to on a regular basis. Business units and Group risk functions are required to self assess and report on a quarterly basis to the Group Compliance Officer.

Risk categories
The principal risks to which the Group is exposed and which it manages are listed hereunder:

Credit risk
Credit risk is the risk of loss to the Group as a result of failure by a client or counterparty to meet its contractual obligations to the Group.

Market risk
Market risk is defined as the risk of change in the actual or effective market value or earnings of a portfolio of financial instruments caused by adverse movements in market variables such as equity, currency exchange rates, interest rates, credit spreads and the implied volatilities in all of the above.

Liquidity risk
Liquidity risk arises when the Group is unable to make its payment obligations when they fall due. This is as a result of the Group’s inability to liquify assets or to obtain funding timeously to meet its liquidity needs.

Operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed business operations caused through process, people or systems, or alternatively through external events.

Business risk
Business risk is the risk of loss due to adverse operating conditions caused by market-driven pressures such as decreased demand, increased competition, cost increases or by Group specific causes such as poor choice of strategy, reputational damage or losses incurred to protect reputation. These losses may be increased through inflexible cost structures or inefficiencies.

CREDIT RISK
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s loans and advances to customers, deposits with other banks and investment securities. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk).

Management of credit risk
The board of directors has delegated responsibility for the management of credit risk to its Credit Review Committee of the Group. A separate Group Credit department exists, reporting to the Chief Risk Officer, which is responsible for oversight of the Group’s credit risk, including:

• Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;
• Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to business unit Credit Officers. Larger facilities require approval by Group Credit, Head of Group Credit, Credit Review Committee of the Group or the board of directors as appropriate;
• Reviewing and assessing credit risk. Group Credit assesses all credit exposures in excess of designated limits, prior to facilities being committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process;
• Limiting concentrations of exposure to counterparties, geographies and industries for loans and advances, deposits with banks and investment securities;
• Developing and maintaining the Group’s risk indicators in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk system is used in determining where impairment provisions may be required against specific credit exposures. The current risk framework consists of four B to E grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. The responsibility for setting risk grades lies with the final approving executive/committee as appropriate. Risk grades are subject to regular reviews by Group Risk;
• Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided to Group Credit on the credit quality of local portfolios and appropriate corrective action is taken;
• Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk; and

Each business unit is required to implement group credit policies and procedures, with credit approval authorities delegated from the Group Credit Committee. Each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to Group approval.

Regular audits of business units and Group credit processes are undertaken by Group Internal Audit. In addition, large exposures are reviewed and authorised by the board.

Securitisation
The Group uses securitisation primarily as an alternative source of funding for its instalment finance operations, by adding flexibility to structural liquidity risk and diversifying the funding base. All securitisable assets are subject to the Group’s credit risk policies and procedures.

The Group fulfils a number of roles in the process of securitising these assets including that of originator, sponsor, hedge counterparty and administrator, and applies its Group credit risk policies and procedures to these functions.

Deposits with other banks
The Group places funds on a daily basis with other banks. These deposits are generally held on overnight call or on a short term tenor, and are available on demand or at maturity. The deposits are made in accordance with the mandates and directives provided by the ALCO and Risk and Capital Management committees. In terms of these policies, deposits can only be made with banking institutions that have AAA or AA ratings as provided by the accredited global rating agencies, and may not exceed the defined internal benchmarks of the Group. Deposits with other banks are reported on a daily basis to Executive Management and to ALCO on a monthly basis to ensure compliance with the Group’s ALCO policy. Collateral is generally not held for deposit with other banks.

Other receivables
Included in other receivables, is the Group’s exposure to its Freight & Forwarding customers. These majority of these customers are Gauteng based. This subsidiary has defined credit risk management policies and procedures. Clients are granted credit limits in terms of this policy and exposures and utilisation levels are monitored on a monthly basis by management. The Group insures its receivables with a major insurance underwriter to mitigate its exposure to any losses. Details of impairment and collateral are provided in the notes that follow.

Impaired loans and securities
Impaired loans and securities are loans and securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/securities agreement(s). These loans are graded in the Group’s internal credit risk grading system.

Past due but not impaired loans
Loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Group.

Loans with renegotiated terms
Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring.

Credit impairment
The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a portfolio loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.

Write-off policy
The Group writes off a loan/security balance (and any related allowances for impairment losses) when Group Credit determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/ issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure.

Credit risk measurement and determination
The Group uses its internally developed models and practices to measure and manage credit risk, by utilising skilled resources to ensure it is properly managed and controlled. The Group has adopted the standardised approach in terms of Basel II to measure credit risk through the majority of its business, and uses the regulatory risk buckets per SARB as a measurement criterion for assessing performing counterparties as follows:

Click to enlarge

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequences of this may be the failure to meet obligations to repay depositors/investors and fulfil commitments to lend.

This risk is inherent in all banking and financial service operations and can be impacted by a range of institutional specific and market-wide events.

Management of liquidity risk
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group ALCO sets limits and mandates for the Group Treasury department to manage the liquidity risk within this framework.

Group Treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Group Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, inter-bank loans and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The liquidity requirements of business units and subsidiaries are met through short-term loans from Group Treasury to cover any short-term fluctuations and longer-term funding to address any structural liquidity requirements. The Group believes that the management of liquidity should encompass an overall balance sheet approach which consolidates all sources and uses of liquidity whilst maintaining a balance between liquidity, profitability and interest rate considerations.

Liquidity risk measurement
The daily liquidity position is monitored, reported in the form of cash flow measurement and projections in terms of key periods ranging from demand to long-term periods. Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover the liquidity position of both the Group and operating subsidiaries and foreign branches. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. Sources of liquidity are regularly reviewed to maintain a wide diversification by financial, product and form.

Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities issued, other borrowings and commitments maturing within the next month. The Group ALCO monitors the exposure to liquidity risk in terms of internal benchmarks it has set and defined for Group Treasury to maintain. A similar, but not identical, calculation is used to measure the Group’s compliance with the liquidity limit established by the Group’s lead regulator, South African Reserve Bank.

Market risk on equity investments
Sasfin Capital division enters into private equity investments in unlisted entities in accordance with delegated authority limits as defined by the Group’s Investment committee. Market risk on these investments is managed in accordance with purpose and strategic benefits to the Group, and not only on investment returns and mark-to-market considerations. Periodic reviews and assessments are undertaken on the performance of the investments.

Hedging
Forward exchange contracts are entered into as fair value hedges for foreign currency liabilities.

Derivative instruments
These transactions have been entered into in the normal course of business and no material losses are anticipated other than those for which provision has been made in the income statement. There are no commitments or contingent commitments under derivative financial instruments that are settled other than with cash.

Notional principal
Represents the gross notional value of all outstanding contracts as at year-end. The gross notional value is the sum of the absolute value of all purchases and sales of derivative instruments. This value will not affect the amount receivable or payable under a derivative contract due to the cash-settled nature of the various contracts. The gross notional value represents only the measure of involvement by the Group in derivative contracts and not its exposure to market or credit risks arising from such contracts.

With effect from 1 January 2008, the Group’s lead regulator, the South African Reserve Bank (“SARB”), adopted the new Basel II Capital Adequacy Framework (“Basel II”) banking regulation, and all banks in South Africa had to legislatively comply with these new regulations.

Basel II incentivises banks through lower capital requirements, to measure and improve their risk management processes. The formulation of the Basel II framework encapsulates more flexible and risk-sensitive systems, and consists of three pillars:

• Pillar I sets out the minimum capital requirements that banks are required to meet in respect of credit, market and operational risks. The requirements with regards to Pillar I are largely rules based, computed on applicable risk-weightings to various asset classes and exposures. Pillar I also contains details of the components of regulatory capital.
• Pillar II (supervisory review): sets out the requirement that banks must assess their capital adequacy relative to their risk profile. The assessment is to be completed on an annual basis and submitted to the SARB for assessment and review.
• Pillar III sets out the disclosure requirements for banks that have adopted the new accord, thus encouraging transparency and corporate governance and regular disclosures of its capital adequacy levels and ratios.

The Group has adopted the following Basel II approaches in respect of risk assessment and measurement, as summarised hereunder:

Consolidation approach
The Group adopted the aggregation approach in terms of Basel II regulations which includes the full risk weighted exposures of all the subsidiaries in the Group.

Capital management
The Group manages its capital to achieve a prudent balance between maintaining capital ratios to support business growth and depositor confidence, and aims to provide investors and shareholders above market-related returns on a sustainable basis. The Group has formulated its Internal Capital Adequacy Assessment Process (“ICAAP”), which is more widely encompassing of all risks faced by the Group, and ensures the Group maintains adequate capital levels for legal and regulatory compliance purposes. The Group ensures that its actions do not compromise sound governance and appropriate business practices, and the Group is indeed adequately capitalised at all times. The management of the Group’s capital is under the duties and responsibilities of the Group Risk and Capital Management committee (“GRCMC”).

Regulatory capital
The SARB sets and monitors capital requirements for the Group as a whole. During the year under review, the Group complied with all regulatory imposed capital requirements in terms of the new regulations. The capital adequacy ratio (“CAR”), which reflects the capital strength of the Group, is calculated by dividing the capital held by the entities by its risk-weighted assets and exposures as computed.

• Tier I (Primary capital) represents permanent forms of capital which includes share capital and premium, retained earnings, and a portion of perpetual non-cumulative non-redeemable preference shares that qualify as Tier I capital.
• Tier II (secondary capital) includes the remaining portion of non-cumulative preference shares, general debt reserves, revaluation reserves and other qualifying reserves.

Economic capital
Economic capital is the basis for measuring and reporting the quantifiable economic and financial risks faced by the Group. This is used for risk management, capital management, capital planning and allocation, evaluation of new businesses and performance measurement across the Group.

The Group is assisted in its process through its adoption of an ICAAP policy and model, which reflects management’s internal identification and assessment of risk. The process requires the Group to assess its capital adequacy against estimates to absorb unexpected losses that may arise from risks inherent in the business. Available capital is then compared to the required minimum capital in terms of Pillar I and Pillar II as defined, and a buffer is held for uncertainties to ensure that the Group is adequately capitalised. Stress testing and scenario analysis is performed to ensure the bank is adequately capitalised (i.e. sufficient capital resources to meet the capital demands of the Group under a severely stressed scenario). In terms of the Group’s governance process, the ownership of this process rests with the GRCMC.

38.

SUBSIDIARY COMPANIES, SPECIAL PURPOSE ENTITIES AND ASSOCIATED COMPANIES

39.

SHARE BASED PAYMENTS

The Group has an established share option scheme which entitles staff to purchase shares in the Company. In accordance with the scheme options are exercisable at the market price of the shares at the date of the grant.

Trust
The Sasfin Share Incentive Trust

Description of the arrangement
Share options are granted to personnel holding various job levels with the Group, the granting of share options is at the discretion of the trustees, acting on recommendation of executive management. The granting of share options is based on job level and performance. Grant dates are determined by the trustees.

Vesting requirements and contractual life of options
The terms and conditions of the grants are three years of service, thereafter share options vest over three consecutive years. The contractual life of the options is three years.

The number and weighted average exercise prices of the equity based share options are as follows:

40.

SEGMENT REPORTING

Semgment information is presented in respect of the Group’s business and geographical segments. The primary format, which is business segments, is based on the Group’s management and internal reporting structure.

Segment capital expenditure is the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill.

BUSINESS SEGMENTS
The Group comprises the following main business segments:

Business Banking – includes the Group’s Equipment Rental Finance and Business Finance units, comprising Debtor Finance, Trade Finance and Capital Equipment Finance.

Capital – includes private equity, property private equity and corporate finance activities such as acquisitions, mergers and buy-outs.

Logistics and Risk Management – international freight forwarding and clearing, as well as healthcare consulting and short-term insurance are housed within this division.

Wealth Management – this division comprises various units, private client portfolio management and stock broking; asset consulting; financial and investment planning, fiduciary services and asset and fund management.

Treasury – comprises Domestic Treasury and Money Market operation, Exchange Control Services, and International Treasury and Foreign Exchange services and Securitisation Commercial Paper, and Securitisation Funding Structures. The Group also has central Corporate Services, and these include information technology, hu

man resources, finance and administration, marketing, risk and credit, legal and compliance and internal audit. These costs are allocated to the business segments on a reasonable basis.