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BASEL PILLAR 3 DISCLOSURE for the Year Ended 30 June 2017 Contents

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BASEL PILLAR 3 DISCLOSURE for the Year Ended 30 June 2017 Contents BASEL PILLAR 3 DISCLOSURE for the year ended 30 June 2017 contents Overview of risk management ..... 01 Introduction ..... 01 FirstRand strategy ..... 03 Risk profile ..... 05 Current and emerging challenges ..... 07 Risk management approach ..... 08 Risk governance ..... 10 Risk measurement approaches ..... 18 Risk mitigation ..... 20 Financial resource management ..... 22 Risk appetite ..... 22 Stress testing and scenario planning ..... 25 Recovery and resolution regime ..... 26 Link between financial statements and regulatory exposures ..... 27 Capital management ..... 34 Common disclosures ..... 43 Funding and liquidity risk ..... 44 Credit risk ..... 57 Counterparty credit risk ..... 118 Securitisations ..... 133 Market risk in the trading book ..... 141 Non-traded market risk ..... 152 Interest rate risk in the banking book ..... 152 Structural foreign exchange risk ..... 156 Equity investment risk ..... 158 Insurance risk ..... 163 Operational risk ..... 164 Other risks ..... 170 Strategic risk ..... 170 Business risk ..... 171 Reputational risk ..... 172 Environmental and social risk ..... 172 Model risk ..... 173 Regulatory risk ..... 176 Conduct risk ..... 181 Remuneration and compensation ..... 183 1966/010753/06 Index of Pillar 3 disclosure templates and Regulation 43 ..... 184 Certain entities within the Definitions ..... 186 FirstRand group are Authorised Financial Services and Credit Abbreviations ..... 187 Providers. This report is available on the group’s website: www.firstrand.co.za Email questions to [email protected] OVERVIEW OF THE FIRSTRAND GROUP FirstRand’s portfolio of franchises comprises FNB, RMB, WesBank and Ashburton Investments and provides a universal set of transactional, lending, investment and insurance products and services. The FCC franchise represents group-wide functions. OVERVIEW OF RISK MANAGEMENT Introduction This risk and capital management report (Pillar 3 disclosure) covers the operations of FirstRand Limited (FirstRand or the group) and complies with: the Basel Committee on Banking Supervision’s (BCBS) revised Pillar 3 disclosure requirements (Pillar 3 standard), BCBS 309 published in January 2015; and Regulation 43 of the Regulations relating to Banks (Regulations), issued in terms of the Banks Act, 1990 (Act No. 94 of 1990), where not superseded by the revised Pillar 3 disclosure requirements. The most significant revisions are templates for quantitative disclosure and definitions; some with a fixed format which aims to enhance comparability of banks’ disclosures. Some differences exist between the practices, approaches, processes and policies of FirstRand Bank Limited (the bank or FRB) and its fellow wholly-owned subsidiaries of FirstRand. These are highlighted by reference to the appropriate entity, where necessary. This report has been internally verified through the group’s governance processes, in line with the group’s external communication and disclosure policy. The external communication and disclosure policy describes the responsibilities and duties of senior management and the board in the preparation and review of the Pillar 3 disclosure and aims to ensure that: minimum disclosure requirements of the Regulations, standards and directives are met; disclosed information is consistent with the manner in which the board assesses the group’s risk portfolio; the disclosure provides a true reflection of the group’s financial condition and risk profile; and the quantitative and qualitative disclosures are appropriately reviewed. 01 BASEL PILLAR 3 DISCLOSURE Overview of risk management continued SIMPLIFIED GROUP AND SHAREHOLDING STRUCTURE Remgro Limited Directors Royal Bafokeng Holdings (Pty) Ltd 3.9% 28.2% 9.9% 15.0% RMB Holdings Limited 34.1% BEE partners 5.2% LISTED HOLDING COMPANY (FIRSTRAND LIMITED, JSE: FSR) 100% 100% 100% 100% 100% FirstRand EMA FirstRand Investment FirstRand Investment FirstRand Bank FirstRand Insurance Holdings (Pty) Ltd Holdings (Pty) Ltd Management Limited Holdings (Pty) Ltd (FREMA) (FRIHL) Holdings Limited Africa and Investment Banking Other activities Insurance emerging markets management First National Bank1 58% FNB Namibia 96% RMB Private 100% Ashburton Fund 100% FirstRand Life Equity Holdings Managers Assurance Rand Merchant Bank1 69% FNB Botswana 93% RMB Private Equity 100% Ashburton Investor 100% FirstRand Insurance WesBank1 100% FNB Swaziland Services Services Company 100% RMB Securities FirstRand Bank India2 90% FNB Mozambique (FRISCOL)† 100% Ashburton 50% RMB Morgan FirstRand Bank London2,* 100% FNB Zambia Management Stanley Company (RF) FirstRand Bank 100% FNB Lesotho 100% FNB Securities Guernsey2,** Ashburton 100% FNB Tanzania 100% 100% RentWorks FirstRand Bank Kenya3 Investments 100% First National Bank International 100% Direct Axis FirstRand Bank Angola3 Ghana Holdings 81% MotoVantage FirstRand Bank Dubai3 100% RMB Nigeria 100% FNB CIS 100% FirstRand FirstRand Bank Shanghai3 100% FirstRand Management International International Company (RF) – Guernsey – Mauritius 100% Atlantic Asset 100% RMB Australia Management 1. Division Holdings 2. Branch 100% Various general 3. Representative office 100% FirstRand Securities partners# * MotoNovo Finance is a business segment of FirstRand Bank Limited 48% NewDisc (London Branch). ** Trading as FNB Channel Islands. # Ashburton Investments has a number of general partners for fund seeding purposes – all of these entities fall under FirstRand Investment Management Holdings Limited. † With effect from 1 July 2017. Structure shows effective consolidated shareholding For segmental analysis purposes, entities included in FRIHL and FREMA, FirstRand Investment Management Holdings Limited and FirstRand Insurance Holdings (Pty) Ltd are reported as part of the results of the managing franchise. The group’s securitisations and conduits are in FRIHL. 02 FirstRand strategy FirstRand’s portfolio of leading financial services franchises provides a universal set of transactional, lending, investment and insurance products and services. The franchises operate in markets and segments where they can deliver competitive and differentiated client-centric value propositions, leveraging the relevant distribution channels, product skills, licences and operating platforms of the wider group. Strategy is executed on the back of disruptive and innovative thinking, underpinned by an owner-manager culture combined with the disciplined allocation of financial resources. FirstRand’s strategy accommodates a broad set of growth opportunities across the entire financial services universe from a product, market, segment and geographic perspective. The group believes this will create long-term franchise value, ensure sustainable and superior returns for shareholders, within acceptable levels of volatility and maintain balance sheet strength. Currently group earnings are tilted to its domestic market where the lending and transactional franchises have delivered sustained growth since 2010 resulting from the acquisition of a deep and loyal customer base. The group recognises the imperative to continue to protect and grow these very valuable banking franchises, but it also believes that through the utilisation of the origination capabilities and distribution networks of those franchises, it can diversify and capture a larger share of profits from savings, insurance and investment products within its existing customer base. The growth opportunity is significant given the annual flows to other providers from FNB’s customer base alone. Through the manufacture and sale of its own insurance, savings and investment products, the group will, over time, offer differentiated value propositions for customers and generate new and potentially meaningful revenue streams for the group. To date, progress looks promising and FirstRand is incrementally increasing its share of the insurance, savings and investment profit pools that exist within its own customer base. The group also continues to protect and grow its large transactional and lending franchises. The group’s strategy outside of its domestic market centres on growing its presence and offerings in nine markets in the rest of Africa where it believes it can organically build competitive advantage and scale over time. In addition, it is focusing on leveraging its current operations in the UK to create new revenue streams. Over the past year, the group has focused on execution on the strategic framework depicted in the schematic below. FirstRand aims to create long-term franchise value, ensure sustainable and superior returns for shareholders within acceptable levels of volatility and maintain balance sheet strength DELIVERED THROUGH CURRENT STRATEGIES: INCREASE DIVERSIFICATION – ACTIVITY AND GEOGRAPHY Protect and grow Build a sustainable banking franchises Broaden financial Portfolio approach developed markets services offering to the rest of Africa business SUCCESS LIES IN EXECUTING ON THE FOLLOWING: Disciplined Create a platform- Drive efficiencies Cross-franchise Build allocation and franchise- and manage cost collaboration organisational of financial neutral business base structures and resources model develop diverse talent pools to enable execution 03 BASEL PILLAR 3 DISCLOSURE Overview of risk management continued The group’s strategy is executed through its portfolio of franchises within the framework set by the group. Retail and commercial Corporate and Instalment finance Asset Group-wide Key banking, and insurance investment and short-term management functions activities
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