Full annual report - African Bank - Investoreports

offsite disaster recovery centre is tested annually. Testing
includes simulation of a disaster event whereby key users of
systems are requested to test the functionality of the
recovered system at the disaster recovery centre. Generators
and uninterrupted power supply capabilities at the central
offices and key sites minimise disruptions from power
outages.
The Banking unit has the ability to switch its main debtors
management and front end system to run interchangeably
between the disaster recovery and live sites, reducing
potential downtime to less than 30 minutes in the event of a
disaster. The Retail unit has secured a syndicated offsite
facility, fully configured to which it can relocate in the event of
the loss of their central office.
Appropriate insurance cover exists to provide effective cover
against business continuity disasters.
Financial risk
ABIL’s strategy and core competence resolves around the
underwriting of unsecured credit, primarily focusing on and
leveraging its appetite for credit risk (refer credit risk section
page 118 for detailed information). All other financial risks,
such as interest rate risk, market risk and tax risk, are mitigated
to levels that are acceptable to the group.
Interest rate risk management
In line with this philosophy relating to financial risk, the group
has a policy of maintaining a neutral view to interest rate risk.
Given that the nature of the loans that the group offers are
predominantly at fixed rates of interest, funding is raised
primarily at fixed rates to match this profile. Most variable
rate funding is swapped into a fixed rate exposure by way of a
directly matched interest rate derivative or an appropriate
inflation derivative. To the extent, however, that the growing
credit card portfolio exposes the Bank to floating interest rate
returns, an increasing portion of the funding raised by the
Bank will be done on a floating rate basis, thus matching our
assets to our liabilities. This strategy results in a steady
funding cost and low interest rate exposure through
the cycles.
Despite the group’s policy of maintaining a neutral view,
there will inevitably be some residual interest rate exposures
across the yield curve, and in this regard the group would only
enter into derivative hedging instruments where the exposure
exceeded internal tolerances and the cost of the hedge is
economically viable.
128
The group risk committee has set a limit for the effect of a 2%
movement in the yield curve to be no more than 1,75% of
headline earnings on a 12-month basis. Refer to the sensitivity
analysis on page 293 and 294 of the annual financial
statements for a discussion of the impact of interest rate
movements on the profitability of the group.
Market risk
The group avoids exposing itself to any other financial market
risk, such as foreign currency, equity or commodity price
movement risk. As the EMTN programme is utilised to raise
funding in foreign currencies, the Bank will be careful to
neutralise any cross currency movement risk by way of
entering into appropriate cross-currency swaps, both as to
the settlement of the capital in local currency terms and the
settlement of future coupon and capital payments in foreign
currency terms. In the Retail unit, the group uses forward
cover to protect itself against any currency exposure related
to the importing of merchandise.
The group invests its cash resources predominantly in the
short term interbank money markets, and limits are set for
exposures to any bank based on its capital base and stability
The only derivative contracts the group has entered into,
relate to:
■ The hedging of the group’s long term share based incentive
scheme, and the nature of the hedge contract is a contract
for differences (CFD) on the underlying ABIL share, which
matches exactly the profile of the long term incentive plan
exposure; and
■ The hedging of residual interest exposure as discussed
under interest rate risk management.
The group does not undertake any speculative trading in
derivatives.
Tax risk
Tax risk ordinarily arises when certain transactions are
structured in order to optimise the tax benefits of such a
transaction. In line with ABIL’s stance on risks not associated
with its core business, we have taken a conscious decision
not to enter into any transactions which may be structured
on a tax aggressive basis nor that may be dependent on
tax base. Appropriately qualified and experienced internal
and external tax resources are used extensively to review
business practices to ensure proper compliance with
tax legislation.