Chairman’s statement

Garth Griffin

Group Chairman

Introduction and overview

This is my first statement to you as Absa Group's Chairman. I look forward to serving the Group and all its stakeholders in this capacity.

Absa demonstrated resilience in a challenging operating environment of slow economic recovery and muted credit demand during 2010. Despite modest revenue growth, the Group increased its headline earnings by 6% to R8 billion, as impairments improved from unusually high levels. It was also gratifying that Absa kept its return on equity above its cost of equity, while maintaining capital comfortably above board targets and regulatory requirements.

As satisfying as these financial results were, so too was the progress made to enhance the Group's capacity and capabilities in many important areas to enable future growth. Examples include the robust Absa Capital business, implementing a common platform for our African operations and developing a world-class foreign exchange capability for our clients. We have made good progress on several other initiatives underpinning our One Absa strategy. These efforts are examples of balancing the Group's short-term results with its longer-term prospects. Thus, Absa has navigated the recession commendably and is well positioned to take full advantage of gradually improving conditions.

The annual report, including the Group Chief Executive and the Group Financial Director's reviews, the annual financial statements and the business operational review provides a comprehensive overview of Absa's activities in 2010. Without repeating any of the detail, I highlight below a few key areas.

Commitment to sustainability

The recent global financial crisis underscored the importance of sustainability, particularly in the banking sector where some respected groups failed and significant long-term damage was done to global financial and economic systems. Absa's board considers sustainability an important obligation, with long-term viability weighing more heavily than short-term financial gain. Thus, we remain committed to growing our business in a sustainable and responsible manner and, in line with the King III recommendations, recognise the need to embed sustainability into our business operations and report on our progress as we proceed.

Management has identified 12 material topics that we believe to be critical to us and our stakeholders because, taken together and over time, they determine the Group's long-term relevance and sustainability. The topics are covered, each in some detail, on our website. At its most basic level, however, sustainability depends on a company's ability to behave ethically in its interactions with all its stakeholders. This is only possible if a company embraces a set of values that demands of its people respect for others - both internal and external - and an attitude of accountability. These attributes are core elements of the Absa values and the board fully intends to ensure that the Group remains above reproach on this score.

As just one of several highlights last year, investing in the communities in which we operate remained a focus for Absa, despite the difficult operating environment. The Group exceeded the BBBEE Codes of Good Practice targets in socio-economic development for the third successive year. Of note, Absa achieved its target of providing financial literacy training to a million consumers, improving their understanding of basic financial concepts. Other highlights included opening our environmentally friendly Absa Towers West building, within the existing Johannesburg CBD complex, targeting a four-star Green Star rating; procuring R1,5 billion of goods and services from exempt and qualifying small enterprises; and micro-enterprise finance supporting 5 421 (2009: 2 984) informal, self-employed individuals in their income-generating activities that sustain their families and communities.

From these comments, I trust you will appreciate that, beginning with the board, Absa is committed to ensuring the sustainability of its operations. This calls for an appropriate corporate footprint that is sensitive to its environment and constituencies and has a positive impact and legacy. Put simply, we seek to be a respected corporate citizen that makes a valued contribution to developing the markets and communities we serve.

Regulatory developments

The banking industry is, for good reason, subject to stringent regulatory oversight and much has changed following the 2008 banking crisis centred in the United States and Europe. Fortunately, the local banking industry weathered the storm relatively well, due in part to more demanding regulatory requirements. Following the international crisis, substantial changes have been or are expected to be made to regulatory requirements that will affect the level and nature of capital banks are required to hold. Changes will also enable banks to better withstand unexpected liquidity demands.

Ultimately, these changes will impact both pricing and the nature of products that banks offer to their various markets. Higher capital levels will need to be maintained and serviced, while some product lines will become less attractive. Access to higher levels of liquid assets will also come at a cost and it will be difficult to meet the proposed Basel liquidity requirements within the current construct of the South African financial services sector. While we remain supportive of the need for improved regulatory requirements, care needs to be taken that changes are tailored to local conditions.

Regulatory change, however, is not limited to prudential or solvency issues; the Group is faced with regular and significant legislative and regulatory changes in other areas, covering matters such as anti-money laundering activities, the implications of the new Companies Act and the new Consumer Protection Act in South Africa. Complying with all legislative and regulatory requirements is a core requirement for the Group.

Remuneration

Remuneration in the banking sector is an important and widely debated issue. Indiscriminate remuneration policies that incentivised short-term gains at the expense of longer-term sustainability have been identified as a contributor to the excesses preceding the financial crisis. We cover the Group's remuneration policies in some detail in the remuneration report, but I will comment on some key features.

Banking covers a wide spectrum of activities, from the more routine to highly complex and fast moving transactions. All, to a greater or lesser extent, rely on specialist skills to ultimately provide customers with appropriate solutions and to manage the supporting processes. Banking has therefore come to depend on developing and retaining deep pools of necessary expertise. Increasingly, these come at a cost. Incentives designed to reward behaviour that is aligned with the interests of other stakeholders are an important component of our reward structure.

Within Absa, therefore, we try to maintain an appropriate balance between short- and longer-term incentives on the one hand, and cash and share-based payments on the other. This is targeted at employees whose skills make a material and measurable difference to the Group's performance over time. The size and mix of these incentives will depend on the area of activity and the performance levels of the individual and the business, after taking risk into account.

While poorly designed incentives may encourage inappropriate risk-taking at the expense of other parties, both internal and external to the business, we are of the view that such activity should be constrained in the first instance by the inherent risk controls established by the business. Put differently, the core business risk management controls should detect and prevent inappropriate risk taking, leaving the incentive structure to reward appropriate performance.

Hence, there are two foundational elements to an effective incentive framework, designed to attract and retain the talent necessary to drive a large banking group. Firstly, an effective performance management process and, secondly, a comprehensive risk management process. Add to this an agreement on what determines the quantum of the available incentive pool, an appropriate mix of short- and long-term awards and a proper governance process, and we have the ingredients of an effective incentive programme.

These, essentially, are the elements we have in place at Absa, and we continually seek to improve the overall system, taking note of international developments in this regard. The Basel committee has made recommendations on certain remuneration disclosures. We will monitor these and local regulatory developments closely, with a view to adopting them as required.

At the heart of our approach is the recognition that Absa is accountable to a range of stakeholders and that incentives should reflect the effort required and the value that is being added within this context. Sometimes this results in individual incentives that appear high, but we remain comfortable that such incentives have been subject to due process within an effective system.

Relationship with Barclays

Absa benefits meaningfully from a strong, committed majority shareholder. Our constructive relationship with Barclays continues to deepen, as evidenced by closer collaboration across the rest of Africa and our much improved foreign exchange offering, for instance. We also benefit significantly by being able to benchmark our activities against those of a major international banking group, while our people's skills and insight grow as a result of challenge from and exposure to their Barclays counterparts. The Group will continue to draw on Barclays expertise and insight in developing its own skills and capacity wherever we operate. On behalf of the board, I would like to thank our colleagues at Barclays for the support they have provided. I look forward to working with them to further enhance Absa's enterprise value.

Board changes

Dave Brink retired from the board as from the end of September. His contribution at board level to Absa since 1992 was immense. During this period he served as Chairman from 1993 to 1997 and later as Deputy Chairman under both Danie Cronje and Gill Marcus. From July 2009 until his retirement, he once again served as Chairman of the board, and we all benefited from his experience and insights.

It was therefore a great honour and privilege to succeed Dave and I look forward to working with my board colleagues as well as Maria Ramos and her executive team.

Des Arnold will be retiring at the annual general meeting. Des joined the board in 2003 and has made a significant contribution, particularly as Chairman of the Group Audit and Compliance Committee. Colin Beggs was appointed to the board in June 2010, and, subject to ratification at the annual general meeting, will succeed Des as Chairman of the Group Audit and Compliance Committee. Monhla Hlahla is retiring by rotation and has decided not to make herself available for re-election. On behalf of the board, I thank Des and Monhla for their contribution to the Group and wish them well.

Acknowledgements

Under Maria Ramos' able leadership, Absa benefits from a skilled and committed management team whose dedication is reflected in both the financial results and the ongoing capacity and capability development underpinning the Group's One Absa strategy. Maria and her team lead the way in every respect.

I would like to thank our staff for their enormous dedication and hard work in a difficult environment. It is through their efforts that we have made the progress we have.

Thank you also to my colleagues on the board for your support and guidance. The demands on and responsibilities of a non-executive bank director are significant, and I am grateful for the dedication of my colleagues in ensuring effective governance processes for the Group. On average, non-executive directors were each expected at more than 24 meetings in 2010, including training meetings and interactions with the regulator.

We again thank our banking regulator for his wise supervision and constructive method of engagement. Much of the credit for the quality of the local banking sector has to do with the nature and style of this interaction.

Importantly, I thank our customers, suppliers and shareholders for their continued support. Without this our business could not thrive.

Conclusion

In spite of a relatively subdued economic environment, the Group delivered satisfactory results over the past year, while making good progress in preparing for the future. We continued to invest, both internally and into the communities we serve, and to play an important role in improving the quality of life for many by way of community outreach and product innovation. We see these as solid foundations for the sustainability of the Group and will continue to build capacity and capability to support our franchise in the markets we currently serve.

At the same time, Africa offers an exciting future for financial services, particularly banking. I am optimistic that Absa, in conjunction with Barclays, is well positioned to take advantage of these opportunities.