Chairman’s letter

A year of much progress in becoming a standalone financial services group; and of resilience in achieving results in a tough macroeconomic and socio-political climate.

Wendy Lucas-Bull

Chairman

2017 was a momentous year for our Group. We continued to focus on the implementation of our strategic commitments, while rolling out an unprecedented Separation, both within a challenging macroeconomic and socio-political context.

In December 2016 we reached agreement with Barclays PLC on how the Separation would happen, the available funding, and what it would take to execute on the programme.

Looking back, while the Board was conscious of Brexit and the changes in the United States administration, we could not have predicted the impact which these events would subsequently have in the global context, and we certainly could not have predicted the 2017 South African story.

It is clear from the lessons of the recent past that it is vital to build sustainably for the future, understand our constituency, and take all stakeholders into account when we make decisions.

Our Separation journey

In June 2017, Barclays PLC’s shareholding in Barclays Africa reduced to 23.4% through a second bookbuild. This was followed in September by the delivery of a cash contribution enabling an interim empowerment structure to acquire 1.5% of the shares in Barclays Africa for purposes of a future broad-based black economic empowerment structure, and a further sale in November of 7% to two institutional shareholders. In just six months, Barclays PLC transitioned from being our majority shareholder to holding just 14.9% and Barclays Africa ceased to be a subsidiary in a broader banking group, becoming a standalone African financial services group.

Our Board and its Separation Oversight Committee were regularly updated on the sell-down and the utilisation of the financial contribution made by Barclays PLC, to assist in neutralising the operational impact of the Separation on our business. The focus now is on monitoring the execution of the significant investment spend required, as well as managing the associated risks. Of particular importance has been (i) the path to regulatory deconsolidation for Barclays PLC (to be conferred ultimately by the regulators in the UK) as the achievement of this is a critical milestone; and (ii) the engagement with our regulators across the continent where updates and briefings have been regularly provided.

A bold new strategy for a standalone business

The Separation provides us with a unique opportunity to forge a new path, with a new strategy for the Group, and to make material changes. The changes will be to the way we adopt technology and the opportunities this creates; the way in which we serve our customers and grow our businesses; and how we address employee remuneration (as we will be outside of the scope of the European Union’s Capital Requirements Directive CRD IV, after regulatory deconsolidation).

Throughout 2017, Maria led the executive and leadership team in the creation of the new strategy in a process that ultimately involved thousands of employees, generating positive energy that was felt throughout the Group. Endorsed by the Board in December 2017, the strategy essentially identifies, and seeks to capture, the opportunities for growth brought about by technology, our footprint on the continent and our organisational capacity. It seeks to deepen our involvement in our communities, and to cultivate a new corporate culture.

We are working to create a culture that is entrepreneurial, innovative, and has a shared purpose and identity. The lens through which we can now look at Africa is different than before. As an independent entity, we have the opportunity to redefine our Group.

We are working to contribute significantly to the societies in which we operate, and to play our role in enhancing the African continent’s growth and development. We have a Shared Growth strategy, and this new approach will include a broader and more encompassing view of that same strategy.

Rebranding is a crucial element of the Separation and the trajectory of our Group, and the Board considered options for the future having regard to the extensive research that had been done and the stakeholder engagement that had taken place. Our brand will be pivotal in how we go to market across the continent, how we engage with our customers, our regulators and our employees. On 1 March 2018 we announced the Group’s brand to the market and our notice of annual general meeting includes a special resolution to change the name of Barclays Africa Group Limited to Absa Group Limited.

The 2017 South African story

South Africa is our largest market. Developments in its politics and economy tend to have a significant impact on our operating context.

The year 2017 tested every aspect of separation of powers and national governance, and was marred by political uncertainty as the governing African National Congress (ANC) saw a heated leadership contest ahead of its elective conference at the end of the year. While we obtained clarity as to the ANC leadership by year-end, concerns about corruption and systematic, undue influence on organs of state and parts of the private sector continued. These transgressions have resulted in substantial losses to the South African fiscus and loss of trust in key public and private sector institutions and leadership.

Offenders need to be prosecuted and governance measures need to be improved in all spheres of the state and in the economy in general.

A number of our service providers were implicated in these allegations, prompting our Board to reconsider our Group’s relationship with them. We considered the nature of their services, the complexities and risks of replacing them, and the responses/remedial actions required. We decided towards the end of the year that we would not contract McKinsey for new work, while we decided that the Group would retain the services of SAP and EOH considering the available information and the responses from these organisations.

We indicated our concerns regarding KPMG Inc. in our media statement of 2 October 2017. While we welcomed the new leadership at the firm, and the commencement of various independent reviews, we are concerned about the limited scope of these reviews. Several factors must be measured when appointing or terminating auditors, including audit quality, independence and the complexity of a major bank audit. Furthermore, our primary regulator, the South African Reserve Bank requires joint auditors for the major South African banks. Our audit committee secured additional support, enhanced quality processes as well as quality reviews from KPMG, locally and internationally. We note the establishment of a KPMG board with an independent chair and we will review our position as more information becomes available.

The developments in South Africa have prompted a raft of understandably negative messages from the ratings agencies. One of their major concerns (besides the general state of the South African economic outlook and the anticipated rise in debt-to-GDP ratio) was the governance and going concern status of the major state owned entities. This theme was also of great concern to the Board, having regard to the systemic risk to the country, and to our specific credit exposures to these entities, and became an area of focus, particularly during the second half of 2017.

Through all of this, the South African judiciary steadfastly maintained its independence and commitment to the rule of law. Several courts delivered judgments that upheld the supremacy of the Constitution of South Africa and helped to retain a measure of confidence in the country.

One of these court interventions pertained to the Public Protector’s Bankorp report, which directed that an amount of R1.25bn be recovered from Absa Bank (in relation to assistance provided by the South African Reserve Bank to Bankorp, a distressed bank later acquired by Absa Bank in 1992).

Our position has consistently been that this conclusion drawn by the Public Protector is erroneous and therefore we supported management’s decision to seek a review thereof in the High Court. The cost implications of this report have been significant for us, not just financially and in terms of management time, but in terms of damage to our reputation and physical threat to our employees and customers. While the Board was deeply troubled by the unwarranted harassment of our branch staff and customers, we welcomed the professionalism, care and rigour exhibited in the execution of business continuity measures. The court process culminated in a judgment delivered in mid-February 2018 that strongly upheld our position and that of the South African Reserve Bank and set aside the report and remedial action.

2017 ended with a significant governance failure in one of our large corporate clients, exposing financiers, creditors, pension funds, and a range of other investors and stakeholders to substantial losses.

Fortunately, 2018 brought welcome change with the election of Cyril Ramaphosa as South Africa’s new President, bringing hope for the years to come. We, together with many South Africans, see this as a turning point in our country’s history.

Rest of Africa

The 2017 story for our Rest of Africa banks and insurance companies brought more positive news, with generally more stable political environments (albeit with some political challenges in Kenya and Zambia). Though economic growth was tentative in some markets, it remained positive in many of our presence countries, with Ghana and Uganda standing out and recording brisk growth during the year. In these fast-changing markets, I am grateful for the expertise and oversight of the chairmen and boards of our bank subsidiaries. Regular engagement with the chairmen continued, with productive discussions on various topics including the new corporate strategy and the Separation.

What is the outcome of all of this; what does it mean for us?

The conditions in South Africa in 2017 have contributed to a low growth environment; with GDP growing at 1,3% in 2017, where unemployment (and youth unemployment in particular) rose to a new high, where emigration picked up and business confidence has dropped.

With delays in government spending in various areas, infrastructure projects are taking longer to mobilise. This impacts business momentum generally, and our corporate and lending activities in particular. Notwithstanding the difficult operating environment and the decline in key macro numbers, the business responded admirably with discipline in costs and collections, the latter positively impacting credit impairments which are an outcome of a strategic approach to appropriate lending. The Board was however, and continues to be, concerned about the lack of top-line growth particularly in Retail, and we are actively monitoring relevant metrics to measure our performance and trends in this area.

Maria and Jason outline the financial performance of our business in their reports.

In essence, there has been a wide economic impact on society, with the increased need for business in particular to maintain financial discipline, ensure appropriate conduct, and to increase contributions to society at large. The Group is committed to ensuring we conduct ourselves in accordance with both the law and our Values; that we act in the right way and treat our customers and clients fairly and that we apply a conduct lens to our corporate activities, the entities with which we do business, and those to whom we donate. In regard to the latter, we have expanded our Shared Growth initiatives and have contributed R292m to tertiary education in the last year, both in respect of university and technical and vocational colleges.

Beyond the financial implications, one of the emerging themes has been the lack of accountability. We have been at a moral crossroads in South Africa and need to recognise and instil in all people the critical importance of accountability. At Barclays Africa our code of conduct promotes doing the right thing for our customers and our employees, and taking responsibility for our actions. Through our various forums we identify misconduct, those accountable, and ensure disciplinary action and remuneration-related sanctions.

We have signed the Business Leadership South Africa Pledge, which commits the Group to actively combat corrupt practices wherever we encounter them; not act anti-competitively; have zero tolerance for corruption in our own midst; and protect whistleblowers. We are committed to the global Partnering Against Corruption Initiative.

Top risks and opportunities highlights the key risks that we faced and our ongoing efforts to mitigate them, both through Board oversight and management actions.

Oversight of fair and responsible remuneration continues to be a Board focus. Notwithstanding the constraints imposed by CRD IV, we have ensured that the growth in the income statement charge for performance costs has been in line with growth in headline earnings over the last four years.

One of the areas that required increased vigilance from management and our governance forums was cybercrime. Our Board, IT and risk committees have spent a considerable amount of time on this matter. It is clear that cyber criminals and organised crime syndicates are well funded and capable of sophisticated attacks. As the threats grow, the vigilance with which individuals protect their own personal information and digital interactions must increase, as must the innovative capability of cyber security and threat defence programmes at corporates.

While our technical teams have managed to defend phishing and other cyber-attacks, we are aware of the challenges ahead. Besides the implementation of systems to combat online fraud, we face a growing demand for people with the expertise to defend against the threat landscape. Over two million cyber security jobs are expected to be vacant globally by 2019, and the need in Africa for cyber security skills is critical as our continent digitises and connects virtually.

Regulatory environment

Themes from prior years continue to evolve with Basel 3 liquidity and capital reforms ever present. IFRS 9 was a significant factor for management and the Board (mainly through the audit, risk and models committees) with programmes in place to ensure appropriate levels of readiness and parallel runs to meet the 1 January 2018 deadline.

We welcome regulation that makes banks safer, improves systemic stability, protects depositors, and looks after customers.

However, we recognise that there may be an impact on capital and the related returns.

Through its various committees, and as one of our key governance objectives, the Board extensively monitors applicable legislation and regulation, and the related remediation actions and responses to issues raised by regulators across the continent. In 2017, the Board oversaw the conclusion of a number of remediation projects to ensure compliance with the National Credit Amendment and Financial Intelligence Centre Acts. It continued to monitor the responses to the Competition Commission’s referral of 18 banks to the Competition Tribunal. Although Barclays Africa is one of the banks, the Competition Commission is not seeking penalties against the Group. Along with Barclays PLC, we were the first to bring this conduct to the attention of the Commission under its leniency programme and we continue to cooperate with the Commission.

King IV presented an opportunity to re-examine governance around the boardroom table and in the business in general. The South African Reserve Bank included this as a flavour-of-the-year topic for review. The outcomes of the work done and our adherence to the principles were favourable and are detailed in the governance review, with more focus being given to combined assurance, stakeholder management, conduct policies and the development of an enhanced Group governance framework.

Board composition

Effective leadership is a prerequisite for any business. As part of our normal process of board composition analysis and refresh, we have appointed René van Wyk, Daniel Hodge, Monwabisi Fandeso and Tasneem Abdool-Samad to our Board. They bring additional financial, risk, regulatory, and banking skills to the table.

Transformation has again been a focus for the Board. We improved the diversity of our Board and have moved from 24% to 28% women and 29% to 33% Black South African members. We look forward to making further progress in this regard in 2018.

With regard to our Rest of Africa bank boards, we have seen a number of long-serving members retire, and 13 new directors appointed across seven boards. New chairmen were appointed to the boards of Barclays Bank Zambia Plc, and Barclays Bank Limited of Botswana.

In conclusion

Acknowledging the new entrants in our markets and the expanding number of traditional and non-traditional competitors, we are determined to grow our top-line income and regain our market share as we develop and execute on our new strategy. We will continue to effectively manage the Separation.

In order to deliver on our commitments, we rely on the support and commitment of all our stakeholders. Above all, we thank our management and employees for their focus and delivery and our customers and clients for entrusting us with their financial prosperity, and for their ongoing support.

I wish to thank my colleagues on the Board and the boards of all of our subsidiaries. Their ability to respond to matters and to support the forward momentum of the business has been remarkable and has allowed us to get more done in a year than we thought was possible. In particular, I wish to thank the chairmen of our committees for their tireless commitment, and Trevor Munday, our Lead Independent Director, who will be stepping down from the Board in May 2018.

Trevor joined the then Absa Group Board in April 2007 and became Lead Independent Director in September 2013. Trevor has chaired the risk, board finance, credit and models committees over the years and has been involved in the Board’s deliberations on milestone transactions, such as when we acquired the Rest of Africa businesses, and the Separation. Trevor has been a central figure with his ability to provide a sound, reasoned, experienced and commercial voice at our table. Thank you Trevor, for your immense contribution.