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Management discussion continued
Capital, cash flow
and funding
Capital management
Effective capital management is a key
determinant in the sustainability of any
bank. The strength of this process was
most evident when in 2002 ABIL
withstood the liquidity and confidence
crisis that swept the banking sector, and
emerged stronger and well positioned to
participate in the consolidation process
that followed.
Capital adequacy
ABIL has stated in the past that the build
up of capital over the last two years was
excessive, and that given the necessary
steps of a credit rating upgrade and a
new benchmark debt issue, it would set
about addressing the surplus capital.
In arriving at an optimal level of capital
to be maintained, ABIL has developed
the following methodology which is
applied to its different asset classes as
set out below:
Non-performing loans – these are
assets that are considered impaired
and for accounting purposes are
African Bank Investments Limited 22
Capital optimisation requires the careful
balancing of two key factors, namely
capital adequacy and return on equity.
Capital adequacy
While the Banks Act sets a minimum
level of capital of 10% to risk weighted
assets, ABIL operates in an environment
in which it believes higher levels should
be maintained. Capital is required to
ensure that there is a sufficient risk
cushion to protect the balance sheet
provided for in terms of AC133. The
group however considers it prudent
to maintain capital equal to 100% of
the residual NPLs that are not
covered by the total provisions held.
Performing loans – these assets,
while fully performing, contain
inherent risk of default within them
and the group believes that it
should maintain capital equal to
three times the average annual
credit losses expected on these
loans. The expected losses are a
function of the credit vintage charts
and the net collections recoveries.
Current expected credit losses for
from shocks as well as to provide a
sufficient level of credit enhancement for
the raising of debt at competitive rates.
The capital adequacy for ABIL as at
30 September 2003 was 44,5%
(2002: 38,1%).
African Bank ABIL Group
R000 Sep 03 Sep 02 Sep 03 Sep 02
Total assets
On-balance sheet assets 6 427 349 6 641 547 6 478 142 7 023 898
Off-balance sheet assets 155 724 173 099 96 876 146 406
6 583 073 6 814 646 6 575 018 7 170 304
Total risk weighted assets 5 442 172 5 999 151 6 239 830 6 971 408
Total capital
Tier 1 2 088 061 1 874 592
Tier 2 131 279 164 115
Total 2 219 340 2 038 707 2 775 073 2 654 015
% % % %
Capital adequacy
Tier 1 38,4 31,3
Tier 2 2,4 2,7
Total 40,8 34,0 44,5 38,1
the group are approximately 8,2%.
Both these parameters are assessed
and updated on a periodic basis
and should result in lower capital
being held for these assets over
time.
Cash reserves – these are primarily
invested with A1 banks and hence a
capital ratio of 4% is maintained.
Goodwill – 100% capital is
maintained.
Other assets – capital of 20% is
maintained.
The above may be represented in the
following table: