Full integrated annual report - African Bank - Investoreports

Financial review
How ABIL generates revenue
ABIL generates revenue from sale of merchandise, interest income,
assurance income and non-interest income.
Sale of merchandise is sale of furniture and appliances on cash or
credit. The risk faced by the group in terms of this activity is the over-
reliance on suppliers to supply the goods and selling of merchandise
before it becomes obsolete. This risk is mitigated by the fact that the
group does not rely on a small group of suppliers and actively manages
stock turnover to minimise obsolescence.
Interest income is earned mainly on funds advanced to individual
customers for unsecured personal loans, credit cards and credit
to purchase furniture and appliances. The interest rates charged
to customers are dependent on a risk rating of the customer which
represents the credit risk. The risk relating to this is that the customer
may not repay all or a portion of the funds advanced. Thus the group
assesses the affordability of repayment and risk profi le of customers
carefully. Arrear accounts are actively managed as soon as they are in
default.
The group fi nances the advances by raising funding through unsecured
listed bonds, promissory notes, fi xed deposits and other short term
money market deposits. Interest is paid on these funding instruments
on a fi xed or fl oating rate basis. The group acquires interest rate risk
through the issue of fl oating rate debt as well as currency risk through
foreign currency dominated funding. All signifi cant interest rate risk is
hedged by the group through interest rate swaps, except to the extent
that the group has a natural hedge through its credit card lending
portfolio which is at variable interest rates. All foreign currency risk is
hedged through currency swaps.
The group also faces liquidity risk in that deposits placed on call with
African Bank could be withdrawn at any point without notice. This risk
is managed through ensuring that it restricts its short term funding to a
maximum of 20 percent of total funding and further maintaining both a
positive maturity profi le at all times as well as minimum cash levels.
The group also earns interest income on cash reserves placed on
deposit with other banks in South Africa. This gives rise to counterparty
risk in respect of these banks. To minimise this risk, the group limits
exposure to any one fi nancial institution and also invests its cash
reserves in the banks with the highest credit ratings within South Africa
and major banks in foreign countries in which the group’s furniture retail
and insurance businesses operate.
Assurance income consists of premiums received by the group to
insure various risks including death, disability, retrenchment, employer
imposed reduction in working hours, loss and damage to goods. There
In this section
How ABIL generates revenue
Financial results
Economic profi t
Capital management and
dividends
Group fi nancial statements
Company fi nancial statements
Banking business unit –
results at a glance
Retail business unit – results at
a glance
This is a condensed
version of the fi nancial
review. For more detailed
information please refer
to our web-based annual
fi nancial statements at
http://africanbank.
investoreports.com/
africanbank_ar_2011/
fi nancials/
Integrated report 2011 | African Bank Investments Limited 49