Securitisation/principal finance activities and exposures

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Developments within the international economy have impacted on securitisation/principal finance activities and have limited our strategic initiatives in this space. The information below sets out the initiatives we have focused on over the past few years, albeit that some of these business lines have been significantly curtailed given the current economic climate.

UK and Europe

The UK has developed a Principal Finance business over the last four years. The business focuses on securitisation of our assets, predominantly residential and commercial mortgages. We also undertake trading and investment in structured credit investments where we have invested in rated and unrated debt instruments largely within the UK and Europe and to a lesser extent in the US.

We retain residual net exposures amounting to £516 million to the assets originated, warehoused and securitised by Kensington. View further information.

South Africa

In South Africa, our securitisation business, which forms part of our Structured Finance unit, was established approximately eight years ago when the debt capital markets commenced development. Over this time, we have arranged a number of corporate bond and commercial paper programmes and third party securitisations.

We have also assisted in the development of select securitisation platforms with external third party originating intermediaries. At present we have provided limited warehouse funding lines to these intermediaries.

Furthermore, we provide standby liquidity facilities to two conduits, namely the Grayston Conduit 1 (Pty) Ltd Series 1 and Series 2, and to the securitisation structure of the Growthpoint Note Issuer Company (Series 1 Tranche 1; Series 1 Tranche 2; Series 2; and Series 3). These facilities, which totalled R3.9 billion as at 31 March 2009, have not been drawn on and are thus reflected as off-balance sheet contingent exposures in terms of our credit analysis (refer to Risk management). The liquidity risk associated with these facilities is included in the stress testing for the group and is managed in accordance with our overall liquidity position.

In addition we have, securitised assets we have originated in our Private Banking business in South Africa. The primary motivations for the securitisation of assets within our Private Banking division are to:

•	Provide an alternative source of funding
•	Provide a source of revenue
•	Act as a mechanism to transfer risk
•	Leverage returns through the retention of equity tranches in low default rate portfolios.

Total assets that have been originated and securitised by the Private Bank amount to R9.3 billion (2008: R9.2 billion) and include auto loans (R0.9 billion), residential mortgages (R6.9 billion) and commercial mortgages (R1.5 billion).These securitisation structures have all been rated by Moody’s.

Australia

Investec Bank (Australia) Limited acquired Experien in 2007. As is the case in the South African Private Banking division assets originated by the business have been securitised. These amount to AUD914 million (2008: AUD756 million) and include leases and instalment debtors (AUD474 million), residential mortgages (AUD31 million), commercial mortgages (AUD246 million) and other loans, for example overdrafts (AUD163 million).These securitisation structures have all been rated by Standard and Poor’s.

Accounting treatment

Audited

Refer to Note 23

Credit analysis

In terms of our analysis of our credit and counterparty risk, exposures arising from securitisation/principal finance activities reflect only those exposures to which we consider ourselves to be at risk notwithstanding accounting conventions. In addition, assets that have been securitised by our Private Banking division are reflected as part of our core lending exposures and not our securitisation/principal finance exposures as we believe this reflects the true nature and intent of these exposures and activities.

Nature of exposure/activity	Exposure as at 31 March 2009 - £’mn	Exposure as at 31 March 2008 - £’mn	Credit analysis internal risk classification	Asset quality - relevant comments	Capital treatment
Structured credit investments	376	231	On-balance sheet securitisation/principal finance exposure	During the year we wrote off approximately £25 million against these exposures	Risk-weighted or supervisory deductions against primary and secondary capital
Rated	243	121
Unrated	76	91
Other	57	19
Kensington - mortgage assets
Net exposures (after impairments) to the securitised book (i.e. those assets that have been securitised)	103	101	On-balance sheet securitisation/principal finance exposure. Classified as ‘unrated’. We are required to fully consolidate all assets acquired from Kensington. However, only those assets to which we are at risk are reflected in this analysis with the balance reflected under “no credit exposures”	Refer to Capital Markets	Risk-weighted or supervisory deductions against primary and secondary capital
Net exposures (after impairments) to the warehouse book (i.e. those assets that have been orginated and placed in special purpose vehicles awaiting securitisation)	413	128	On-balance sheet securitisation/principal finance exposure. Classified as ‘other’. We are required to fully consolidate all assets acquired from Kensington. However, only those assets to which we are at risk are reflected in this analysis with the balance reflected under “no credit exposures”	Refer to Capital Markets	Risk-weighted
Direct funding warehouse facility (i.e. where we are the funding provider to the assets)	-	238			Risk-weighted
UK - residual investments in other assets which have been securitised by us (unrated)	29	29	On-balance sheet securitisation/principal finance exposure.We are required to fully consolidate these assets. However, only those assets to which we are at risk are reflected in this analysis with the balance reflected under “no credit exposures”		Risk-weighted or supervisory deductions against primary and secondary capital
South Africa - warehouse lines provided to, and investment in third party intermediary originating platforms (mortgage and auto loans)	78	28	On-balance sheet securitisation/principal finance exposure	During the year we created a specific impairment of £2.5 million largely against the net investments within these platforms	Risk-weighted depending on rating of counterparty
Private Banking division assets	1 128	914	On-balance sheet exposure - reclassified from “accounting securitsed assets” to core loans and advances for credit analysis purposes	Analysed as part of the group’s overall asset quality on core loans and advances as reflected in Risk management	We apply securitisation rules: either risk- weighted or supervisory deductions against primary and secondary capital
South Africa - liquidity facilities provided to third party corporate securitisation vehicles	292	299	Off-balance sheet credit exposure as these facilities have remained undrawn and reflect a contingent liability of the bank		Unutilised facility that is risk-weighted