Investec integrated annual report 2021 CONTENTS Risk disclosures 1 01 Statement from the group chief risk officer 5 Salient features 9 Principal risks 10 Risk management approach and framework 22 Credit and counterparty risk and asset quality 24 Environmental, social and governance (ESG) risk and climate risk 56 Investment risk 57 Securitisation/structured credit 59 Market risk 61 Balance sheet risk and liquidity 67 Operational risk 79 Reputational, strategic and legal risk 83 Compliance 84 Recovery and resolution plan 87 Capital management and allocation 88 Annexures 02 Alternative performance measures 98 Definitions 100 Glossary 101 Corporate information 102 3 01 Risk disclosures Investec integrated annual report 2021 STATEMENT FROM THE GROUP CHIEF RISK OFFICER A summary of the year in review from a On 20 November 2020, Fitch Ratings In South Africa, the decline in net core risk perspective downgraded South Africa’s Long-Term loans was due to lower originations The executive management is integrally Foreign-Currency Issuer Default Rating during the year under review coupled involved in ensuring stringent (IDR) to ‘BB-’ from ‘BB’ with a Negative with repayments, mainly in the corporate management of risk, liquidity, capital and outlook. On the same day, Moody’s portfolio. conduct through our risk appetite downgraded the Government of South framework which is assessed with Africa’s long-term foreign-currency and Credit exposures are focused on consideration of prevailing market local-currency issuer ratings to Ba2 from secured lending to a select target conditions and overall Investec group Ba1 and maintained the negative outlook market, comprising high-income and strategy. The primary aim is to achieve a in place since 1 November 2019. Also on high net worth individuals, established suitable balance between risk and 20 November 2020, S&P affirmed its corporates, and medium-sized reward in our business. Although the ‘BB-/B’ long- and short-term foreign enterprises. Our risk appetite continued macro-environment during the year currency sovereign credit ratings and its to favour lower risk, income-based continued to present challenges due to ‘BB/B’ long- and short-term local lending, with exposures well the COVID-19 pandemic, the group was currency sovereign credit ratings on collateralised and with credit risk taken able to maintain sound asset South Africa with a stable outlook. over a short to medium term. Our focus performance and risk metrics throughout Further, on 21 May 2021, both S&P and over the past few years to realign and the year in review. Fitch affirmed their long-term sovereign rebalance our portfolios in line with our credit ratings and outlooks for South risk appetite framework is reflected in We are comfortable that we have strong Africa. The downgrades, taken in the movements in asset classes on our balance sheets with high levels of isolation of any other matters, are balance sheet; showing an increase in liquidity, strong capital and low leverage expected to have an immaterial impact private client, mortgages and corporate as well as established risk management on Investec’s risk weighted assets and other lending, and maintaining processes and systems in place to (RWAs) and therefore the impact on lending collateralised by property as a navigate through this period of regulatory capital is also expected to be proportion of net core loans. uncertainty. immaterial. In addition, the downgrades At 31 March 2021 our exposure to In the first quarter of 2020, the are expected to have a small impact on sectors considered vulnerable to COVID-19 pandemic combined with an cost of funds over time, as a result of COVID-19 in the UK totalled £1.2 billion oil price shock stunned global markets IBL being predominantly domiciled in or 9.6% of gross core loans. This is resulting in extreme market dislocations. South Africa and raising most of its predominantly through our global Since then we have seen multiple social deposits and funding in the closed Rand aviation finance business (3.1% of UK containment measures in the UK, South system, with very little mismatch gross core loans) and the UK focused Africa, as well as in many countries between foreign denominated funding high volume small ticket asset finance across the world and significant levels of and foreign denominated assets. business lending to SMEs and uncertainty. Offset against this, there IBL’s ratings continued to track rating corporates (2.6% of UK gross core have been unprecedented levels of adjustments to the South African loans). These businesses have government support provided and a sovereign rating during the course of the performed well to date considering the number of vaccines developed late in year. IBL’s national long-term ratings substantial economic disruption caused 2020 that are now being rolled out remain sound at Aa1.za from Moody’s, by the pandemic. In South Africa, at 31 worldwide. AA+(zaf) from Fitch and za.AA from S&P. March 2021, our exposure to sectors considered vulnerable to COVID-19 Additionally in the UK, the conclusion of The group’s net core loan book totalled R11.9 billion or 4.1% of gross Brexit late in December 2020 provided increased to £26.4 billion or 1.6% in core loans and include our aviation, some certainty and we have sought to neutral currency. trade finance, hotels, gaming and leisure adapt to the new legal and regulatory businesses. We remain confident that landscape. Activity levels as a result In the UK, growth in net core loans was we have a well-diversified portfolio have picked up, particularly in the driven by the residential mortgage across sectors. Government stimulus second half of the financial year as portfolio and other high net worth and support measures have mitigated clients have been in a position to make lending as we gained good traction in the impact on vulnerable sectors to date investment decisions given the greater our Private Banking strategy as well as but we continue to monitor these macro-economic certainty that exists, selective lending collateralised by sectors closely for signs of stress. albeit maintaining a cautious approach. property. Corporate client lending portfolios saw good activity albeit Asset quality metrics reflect the solid In the UK, IBP’s long-term Moody’s limited net book growth and were performance of core loans to date. The deposit rating is A1 (stable outlook) and impacted by the exit from Australia. On 8 group’s credit loss ratio was calculated Investec plc’s rating is Baa1 (stable December 2020 the group announced at 0.35% at 31 March 2021 down from outlook), in line with the prior year. IBP’s its exit from Australia to focus on 0.52% at 31 March 2020 which took into long-term Fitch rating is BBB+ (negative building scale and relevance in its core account the initial impacts of COVID-19. outlook). The negative outlook is market in the UK. The wind down of this The UK credit loss ratio was 0.56% at 31 improved from a Rating Watch Negative business is underway and the sale of c. March 2021, which remains elevated assigned by Fitch in April 2020 as a £400 million of the corporate lending relative to pre-pandemic levels. The result of the heightened risk from the portfolio took place in March 2021, South African credit loss ratio improved global COVID-19 pandemic. Following which has substantially reduced the to 0.18% at 31 March 2021 (31 March review by Fitch, the Rating Watch was group’s remaining exposure to this 2020: 0.38%) as the portfolio benefited removed and the BBB+ rating affirmed geography. Further exits are anticipated from better than expected recoveries. reflecting Fitch’s view that IBP’s ratings in the coming months and all remaining are not immediately at risk from the exposures will form part of the UK Stage 3 exposures totalled £697 million impact of the economic downturn given managed portfolio going forward upon at 31 March 2021 or 2.7% of gross core IBP’s sound underlying metrics. closure of the Australian branch. loans subject to ECL (31 March 2020: 5 01 Risk disclosures Investec integrated annual report 2021 STATEMENT FROM THE GROUP CHIEF RISK OFFICER CONTINUED 2.4%). Stage 3 exposures are well judgemental areas under IFRS 9 are risk and therefore do not alone result in covered by ECL provisions. The highlighted in this document and are a transfer across stages. We have percentage of Stage 3 loans (net of ECL subject to robust governance processes. structured different types of support to but before taking collateral into account) Investec plc applies the IFRS 9 most appropriately suit diverse client to net core loans and advances subject transitional arrangements (including needs. In the UK, COVID-19 relief to ECL amounted to 2.1% (31 March COVID-19 ECL add-backs) to regulatory measures currently in place have 2020: 1.6%). In the UK, Stage 3 capital calculations to absorb the impact reduced substantially from a peak of exposures in the Ongoing book permissible of IFRS 9 over time. Investec 13.7% of gross core loans at end June (excluding Legacy) reduced to £231 Limited absorbed the full impact of IFRS 2020 to £342 million or 2.7% at 31 million or 1.9% of gross core loans 9 on 1 April 2019, on adoption of the March 2021, of which £251 million are subject to ECL at 31 March 2021 (31 Foundation Internal Ratings-Based assets reported in Stage 1. In South March 2020: 2.2%) due to a number of approach (FIRB) for credit risk. Africa, COVID-19 relief measures successful exits from existing Stage 3 currently in place have reduced from a positions offset by limited new defaults.