Credit risk management

Contents
Absas risk appetite Retail banking six months ago Retail banking - current situation and going forward Credit environment Advances growth Impairment trends Actions to mitigate trends Corporate and investment banking - current situation and going forward Credit environment Corporate and Business Bank - progress made Absa Capital - progress made Credit risk strategies and priorities Conclusion

Absas risk appetite

A chosen methodology to balance risk and return in the implementation of strategies and business plans Risk appetite sets a maximum loss that we are prepared to absorb given the overall returns of the business: Overall portfolio Home loans Corporate Card Personal and micro loans Risk appetite is validated by estimating Absas sensitivity to macroeconomic events using stress testing and scenario analysis Absas risk appetite is formally approved by the board It is a dynamic measure and revised to reflect market conditions and shareholder expectations

Retail banking - six months ago we said

House prices to grow at a slower rate Household debt to income to increase Upturn in sector overdue position Impairments to grow Balance risk and return in credit strategies and business plans Improve automated decisioning in risk assessment Invest in collections and retail credit risk team

Credit environment
Private sector credit extension
30 25 20 15 10 5 0 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jul-06 Jan-07

Private sector credit extension growing at a slower rate, from 27% end06 to 24% and expected to drop to 21% by end-07 Asset based finance growth slowing down Nominal house price growth stable at 15% over past quarter Higher interest rates, inflation, fuel prices and debt to income ratios likely to cool credit extension Short-term risk of interest rates rising as well

Mortgage advances vs. house price growth

40 30 20 10 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Mortgage advances yoy growth Nominal house prices yoy growth

Credit environment - debt and servicing costs rising

75 23

21 70 19 65 17 60

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55

13

11 50

Debt servicing leads debt levels

45 7

40 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Household debt as % of household disposable income (LH) Prime rate (RH) Debt servicing costs as % of HDI (RH)

Credit environment

2004 Private sector credit % CPIX Real GDE Real GDP 19.2 4.3 7.9 4.8

2005 20.5 3.9 5.9 5.1

2006 26.3 4.6 8.7 5.0

2007F 21.5 5.6 5.5 4.8

2008F 21.6 5.5 5.0 4.4

Advances - retail banking

Home loans still contributing nearly 60% to total advances Highest growth areas - Absa Card and Retail Banking Services Policy of cross selling into the existing customer base maintained in Absa Card, with the mono-line approach restricted to Virgin and Barclaycard

Impairment trends
South African banking sector at the end of a long downturn trend in impairments Clear evidence of a rise in delinquencies, owing to higher interest rates and household indebtedness in line with our 2006 expectations Absas internal data indicates a rise in arrears in line with our expectations Based on what weve seen to date, we expect the impairment ratio to be at the lower end of 60-70bps for 2007 The impact of the NCA remains uncertain, but will be clearer in the second half of 2007

Actions to mitigate trends

Implement new scorecards for improved risk assessment and tighten certain scorecard cut-offs Reduce manual intervention on current account risk assessments Implement further risk based pricing Apply strict credit line decreases to high risk card accounts Develop models to optimise credit card limit assignment Implement advanced fraud detection models in card Collections - be on top of our game

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Credit environment - corporate and investment banking

Credit environment remains benign Infrastructure investment will result in positive conditions remaining Absa intends to grow the earnings contributions from these areas Credit risk management is a source of competitive advantage (processes, people and systems)

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Absa Corporate and Business Bank - progress made

Structure: Revised industry focused structure implemented Policy: Credit policy updated and target market criteria and sub policies finalised for key segments including Commercial Property Finance (CPF), Leverage and Acquisition Finance and Public Sector Risk appetite: Mandate and scale limits defined and implemented for CPF and Agri Measurement: Credit grading rolling-out across the portfolio, with PD, EAD and LGD data now available at customer level Risk/reward decisioning now available at customer/sub portfolio level as part of VAPM rollout Detailed statistical information on key risk (e.g. expected loss and economic capital concentrations) and performance indicators (e.g. turnaround times, application quality) now available Process: Streamlined applications formats for specialist sectors e.g. CPF ICA (electronic application/sanctioning system) roll out almost complete New credit mandates/discretions implemented and have significantly improved turnaround times. Average turnaround now <1 day Credit committees significantly rationalised and streamlined Higher risk cases: Business support structure used in Barclays implemented to ensure all high risk names managed within dedicated and highly experienced single unit. Impairment processes upgraded to achieve Sarbanes-Oxley compliance

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Absa Capital - progress made

Systems and data: Barclays Global limit monitoring system (GCIS) fully rolled out and populated providing portfolio management information and total Group large exposure monitoring and tracking Processes: Dedicated Absa Capital credit team created with revised roles, responsibilities and industry focused teams Credit sanctioning processes, policies and procedures significantly enhanced Streamlined and enhanced application formats Credit committees significantly rationalised and streamlined, multi-layers reduced to one layer in Absa Measurement: Portfolio fully risk graded using Basel 2 compliant models and in line with Barclays Group policies Management of traded product exposure: Marginal models for equity, forex and interest rate derivatives introduced and managed by a newly created front office credit team. Barcap Global and Absa Capital credit partnership: Good working relationship established with frequent attachments, in both directions, and support/training provided Risk appetite: Established and set clear mandate and scale limits for certain higher risk sectors and where concentrations exist

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Strategies and priorities

Maximise value by upgrading and developing scorecards and models Reduce costs by streamlining and automating underwriting functions across all retail products Limit impairments by improving collection capabilities and investing in best-of-breed systems Win new business by responding quickly Use the best of Barclays methodologies to gain advantage

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Conclusion
The market is as we expected it to be Macro economic conditions remain attractive Retail delinquencies have risen, but are within our expectations/appetite We are working hard to mitigate these trends and to maintain income growth Significant progress in enhancing risk management in Absa Capital and Absa Corporate and Business Bank

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