Barclays Africa Group
Structural interest rate risk hedging programme
June 2014
Agenda
1
Why, what and how we hedge
2
Governance
3
Hedge performance
4
Current market conditions
5
Conclusions
2 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Why we hedge
Hedging strategy based on a clear rationale
Margins
Risk profile
Effectiveness
• Reduced margin volatility throughout an interest rate cycle and
increased margin certainty to business units
• Accurately reflects balance sheet risks
• Better hedge than natural credit loss offset
3 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Why we hedge
Hedging reduces margin compression when rates fall
Net interest margin before hedging
Prime-linked (floating)
rate received on assets
Net interest margin after hedging
Hedging
impact
Margin
Prime-linked (floating)
rate received on assets
Margin
Compressed
margin
Fixed / structural rate paid on liabilities
More stable
margin
achieved
Jibar-linked (floating)
rate paid on liabilities
Hedging reduces margin compression risk by converting fixed (or near fixed) liability exposures
into floating rate exposures. Prime-Jibar basis risk remains.
4 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
What we hedge
Structural exposures are converted into a floating rate
Assets
Rate exposure
• Fixed (bonds)
Liquid assets
Fixed rate loans
• Floating
(treasury bills)
• Fixed
• Floating (mainly
Prime-linked)
Liabilities
Equity
Capital markets
instruments
Money market
instruments
Floating rate
deposits
Floating rate
loans
Rate exposure
• Structural
• Fixed or floating
• Fixed or floating
(mainly Jibarlinked)
• Floating (Prime or
Jibar-linked)
Fixed rate
deposits
• Fixed
Structural
deposits
• Structural
5 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Structural exposures
are identified using a
well defined process.
Structural balances
included in programme
How we hedge
How structural hedging is conducted
South Africa only
2
Interest rate swaps used as
hedging instrument
3
No cash instruments used
4
6-year amortising profile used
for equity and 5-year for
products
Amortising nature of hedge programme
Balance
1
6 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
0
5 years
Required monthly hedge
Amortising structural balance
How we hedge
Introduced programme in 2006 to reduce margin volatility
SA interest rate cycles
30%
25%
Current cycle
longer than
historical average
of 5-6 years.
20%
15%
10%
Cycle 1 5 years
Cycle 2 6.5 years
Cycle 3 7 years
5%
Prime Rate
7 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Cycle 4 4.5 years
Cycle 5 8 years
How we hedge
Optimisation of hedging activity
Limits
•
Hedging activity conducted within strict limits
Flexibility
•
Flexibility to go marginally over-hedged or under-hedged at different
points in the interest rate cycle
Governance
•
Strong governance structure around hedge programme
8 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Governance
Hedging programme is well governed
Responsibilities
Boardappointed
committees
Group Risk
and Capital
Management
Committee
• Sets overall risk appetite and limits
• Drives overall hedging strategy (Africa Treasury
Committee)
Barclays
Africa Exco
risk
committees
Subcommittees
Africa Treasury
Committee
Africa Treasury
Hedge
Committee
Africa Market
Risk Committee
• Monitors compliance with risk limits (Africa Market
Risk Committee)
• Makes tactical hedging decisions within tight risk
limits
• Broad representation spanning research, markets,
treasury and risk
9 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Hedge performance
Hedge programme has performed in line with or better than expectations due to market conditions
4 000
13
12
3 000
11
10
9
1 000
8
7
0
6
-1 000
5
4
-2 000
2007
2008
2009
2010
2011
2012
2013
Income statement release
Cash flow hedge reserve (end of year)
3-month Jibar
5-year swap rate
10 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Rate (%)
R million
2 000
Current market conditions
SA rate environment remains uncertain
31 January 2014
9 June 2014
10
10
10
9
9
9
8
8
8
7
7
6
6
5
Rate (%)
31 December 2013
Rate (%)
Rate (%)
Forward-forward rates as at:
Year 1
Year 2
3-month Jibar
Year 3
5-year swap rate
5
7
6
Year 1
3-month Jibar
Year 2
Year 3
5-year swap rate
5
Year 1
3-month Jibar
Year 2
5-year swap rate
Absa Bank Limited earnings sensitivity:
A 100 basis point increase leads to a R758 million increase in earnings of Absa Bank Limited
(as at 31 December 2013)
11 Barclays Africa Group – Structural interest rate risk hedging programme June 2014
Year 3
Conclusions
•
Clear rationale to hedge
•
Follows a well structured and governed process
•
Exceeded expectations due to prolonged low rates cycle
- Proven effective through cycle
- Successfully reduces margin volatility
•
Absa Bank Limited remains positively exposed to increasing rates
12 Barclays Africa Group – Structural interest rate risk hedging programme June 2014