Credit and counterparty risk is assumed mainly through lending collateralised by property and lending activities by private and corporate clients, although some credit and counterparty risk does arise in other businesses.
Lending collateralised by property We provide senior debt and other funding for property transactions. Income producing assets account for the majority of exposure to lending collateralised by property. The portfolio is predominantly made up of commercial property collateral.
Client quality and expertise are at the core of our credit philosophy. Our exposure to the property market is well diversifi ed with strong bias towards prime locations for residential exposure and focus on tenant quality for commercial assets. Debt service cover ratios are a key consideration in the lending process supported by reasonable loan to security value ratios.
An analysis of the lending collateralised by property portfolio and asset quality information is provided on pages 38 to 41.
Private Client activities
We target high net worth individuals, active wealthy entrepreneurs, high-income professionals, newly qualifi ed professionals with high-income earning potential, self- employed entrepreneurs, owner managers in mid-cap companies and sophisticated investors.
Lending products are targeted to meet the requirements of our clients. Central to our credit philosophy is the concept of sustainability of income through the cycle. As such, the client base has been
Credit risk arises from the following activities:
• Personal Banking delivers products to enable target clients to create and manage their wealth, private client mortgages, transactional banking, high net worth lending, trust and fi duciary, offshore banking and foreign exchange
• Residential Mortgages provides mortgage loan facilities for high-income professionals and high net worth individuals tailored to their individual needs as well as vanilla mortgage products for professional target market clients
• Specialised Lending provides structured credit facilities to high net worth individuals and their controlled entities
• The Professional Finance team creates innovative products specifi cally designed to meet the personal and professional fi nance needs of predominantly medical, dental and accounting professionals. This enables these clients to maximise their personal wealth through cash management and investment opportunities.
An analysis of the private client loan portfolio and asset quality information is provided on pages 38 to 41.
Corporate Client activities
We focus on traditional bank lending activities, as well as treasury and trading execution services that are customer fl ow related. The treasury function, as part of the daily management of liquidity, places funds with central banks and other commercial banks and fi nancial institutions. These market counterparties are highly rated, investment grade entities with credit risk of a systemic nature in Southern Africa, the UK, Europe, Australia and the US. A rigorous internal assessment process, supported by rating agency information, is undertaken to analyse each counterparty to which we may be potentially exposed to ascertain their credit worthiness.
Our trading portfolio consists of positions in interest rates, foreign exchange,
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Within the corporate lending businesses, credit risk can arise from asset fi nance, power and infrastructure fi nance, resource fi nance, corporate loans, growth and acquisition fi nance, asset-based lending, fund fi nance, debt origination, credit investments and securitisation activities. There are approved limits specifying the maximum exposure to each individual counterparty and industry limits, to minimise concentration risk. Facilities are secured on the assets of the underlying entity. The credit appetite for each counterparty is based on the fi nancial strength of the principal borrower, underlying cash fl ow and security. Political risk insurance is taken where deemed appropriate. There is also strong adherence to prudent country risk limits to manage concentration risk on an ongoing basis.
Assets we are involved in are diverse and centre around our areas of expertise including, resources, aircraft, equipment leasing corporate credit, power and infrastructure fi nance. Any assets originated are required to be of very strong credit quality that we are comfortable to hold on balance sheet to maturity, or purchased at suffi ciently low distressed prices that we are happy to hold these assets on balance sheet to maturity because of low imputed loan to value ratios and strong cash fl ows. A summary of the nature of the lending and/or credit risk assumed within some of the key areas within our corporate lending business is provided below:
• Small Ticket Asset Finance: provides lending to corporates to support asset purchases and other business requirements
• Large Ticket Asset Finance: provides the fi nance and structuring expertise for aircraft and larger lease assets, the majority of which are senior loans with a combination of corporate and asset- backed collateral against the exposure
• Project and Infrastructure Finance (PIF): arranges and provides typically long-term fi nancing for infrastructure assets, such as power, transport, social infrastructure (PIF/private-public partnerships) and telecommunications against projected future cash fl ows of an individual project (or multiple) as well as the balance sheet of a corporate
• Resource Finance: debt arranging and underwriting, together with structured hedging solutions within the mining and oil and gas sectors. The underlying commodities are mainly precious and base metals, coal as well as oil and gas. The borrower in most cases is an established mining company or a subsidiary thereof. Any debt exposure is secured by the borrower’s assets and repaid from mining cash fl ows which are subject to the volatility of the market prices for the underlying commodity as well as the successful extraction of resources
• Corporate Loans: provides senior loans to mid-cap companies. Credit risk is assessed against debt service coverage from the robustness of the cash generation for the business based on historic and forecast information. These loans are predominantly in the UK and we act as transaction leader or arranger. We have a close relationship with management and the sponsor, as well as having negotiation infl uence over legal documentation and a meaningful voting percentage in the company
• Growth and Acquisition Finance:
provides debt funding to proven management teams, running small to mid-cap sized companies. Credit risk is assessed against debt service coverage from the robustness of the cash generation of the business. This will be based on historic and forecast information
• Asset Based Lending: provides working capital and business loans secured on collateral or assets used in the conduct of the business, for example, accounts receivable, inventory, plant and machinery. We also provide advances against cash fl ow or other assets such as committed income or rights
• Fund Finance: provides bespoke credit facilities to segregated funds to facilitate investment opportunities prior to institutional cash calls which the fund has on irrevocable commitments. Fund Finance will also support management companies in their coinvestment requirements
• Structured Credit Exposure: in the primary markets where we retain portions of the securities of our own
securitisations and secondary market exposures mostly for accrual and to a lesser extent arbitrage purposes, generating annuity margin income and investment income
• Securitisation: structuring and sale of fi nancial assets, mostly in the form of sale to special purpose entities which issue securities to investors.
An analysis of the corporate client loan portfolio and asset quality information is provided on pages 38 to 41.
Corporate Advisory and Investment Banking Activities
Counterparty risk in this area is modest. The business also trades approved shares on an approved basis and makes markets in shares where we are appointed corporate broker under pre-agreed market risk limits. Settlement trades are all on a delivery versus payment basis, through major stock exchanges. Credit risk only occurs in the event of counterparty failure and would be linked to any fair value losses on the underlying security.
Wealth & Investment
Investec Wealth & Investment provides investment management services to private clients, charities, intermediaries, pension schemes and trusts. Wealth & Investment is entirely an agency business that takes no principal risk. Its core business is discretionary and non-discretionary investment management services. Settlement risk can arise due to undertaking transactions in an agency capacity on behalf of clients. However, the risk is not considered to be material as most transactions are undertaken with large institutional clients, are monitored daily, and trades are usually settled within two days. Asset Management
Investec Asset Management regularly transacts with well known rated market counterparties. These are all on an exchange traded delivery versus payment basis and exposure is to a movement in the value of the underlying security in the unlikely event a counterparty fails. Direct cash placements follow our policy, as outlined above, of only being exposed to systemic banks of investment grade quality in Southern Africa, the UK, Europe and the US.
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