Nedbank Group Limited (NED) Earnings Call Transcript & Summary

Right. Good afternoon, everybody. I'm Mike Brown. And on behalf of the Nedbank Group, I'd like to welcome you and thank you for taking time to be with us this evening for this COVID-19 update. I'm sure many of you are watching safely from your homes, and I trust, but first and foremost, that you and your loved ones are safe and well. It's in times like these that we all know that regular communication is important. We've just completed more than 70 investor meetings since our 2019 results. So many of you would have heard us speak on our initial actions on the COVID-19 pandemic that was breaking in South Africa. We've also just released our 2019 integrated report, where we incorporated more information on our responses, and we hope that you found it a good read. So as I was saying, looking forward from here, our Chairman and lead independent will conduct an annual governance roadshows with shareholders in mid-May, and we'll provide our usual update on our first quarter trading. We're going to make arrangements to do both of those via remote access. So given all of that, what is the purpose of today's call? Firstly, we're going to update the investment community on the progress that the industry regulators and Nedbank has made in responding to the COVID-19 pandemic. Secondly, I'm joined by Raisibe Morathi, our CFO, who will cover some of the key risk factors and regulatory developments that are emerging and how we, as Nedbank, are responding to them. Thirdly, Gary Garrett, our Managing Executive for our commercial real estate business, will provide more insights into what we are seeing in the market generally and in respect of Nedbank's commercial property exposures. Lastly, there will be time to take some questions that you can submit electronically via the webcast page. This is not a trading update, as we noted in our SENS of the 28th of April that notified our investors of this webcast, and therefore, we will not be speaking in detail to our performance in the year-to-date or answering any questions related to this. As I said earlier, as in prior years, we'll give our shareholders an update on our Q1 trading performance at a high level at our AGM on the 22nd of May. So by now, it's common knowledge that the combination of a rapid escalation of the COVID-19 pandemic and the Fitch and Moody's downgrades of the South African sovereign combined to place unprecedented challenges on all aspects of the South African economy that was at that stage already under pressure. Given the uncertainties and the progression around the duration of the virus and the related levels of economic lockdown globally or here in South Africa and in the countries where we operate, it's simply not possible at this stage for anyone, and certainly, there are lots of forecasters trying, but it's not possible for anyone to accurately predict the outcomes and impact that these will have on the economy and, as a result, the banking and financial services industry. As one would expect in these circumstances, governments and regulators, wherever we operate, are responding with ongoing actions to offset the impact of the virus and the associated lockdowns on economies and banking systems. And it's likely that these government and regulatory interventions will continue to be enhanced, calibrated and adjusted over time as the impact to the virus becomes more apparent. We welcome the actions taken by governments in the markets in which we operate, and we support them. Through our industry body, the Banking Association of South Africa, which I currently chair, we are actively engaged with the South African Reserve bank and the National Treasury with weekly meetings taking place. And the banking industry understands the role we have in supporting our clients and the economy in this challenging period, while at the same time, ensuring we preserve the safety and soundness of the financial system, which is globally recognized as being one of the strengths of our country. The BASA Board is meeting weekly to view both the operational delivery of banking in South Africa as an essential service as well as to provide input into the evolving macro prudential legislation and other industry and economic matters. Competition exemptions have been enacted to enable this to take place. Last week, you may have read that the National Treasury and the SARB, partnering with the banks as a delivery mechanism, announced a ZAR 200 billion loan guarantee scheme to help qualifying SME businesses with a turnover of less than ZAR 300 million with operational cash flows such as salaries, rent and supplier payments for 3 months, and, as a result, help the economy and save jobs. Like elsewhere in the world, the most efficient way to implement this is through the banking system, with the government providing suitable risk-adjusted support and access to funding for banks to facilitate it. This scheme will provide new loans to existing clients, who have been impacted by the shutdown for an initial amount of up to ZAR 100 billion with the ability for this to be expanded to ZAR 200 billion based on demand. Details of the scheme are shown on the right-hand side of the slide in front of you now. I think it's important for investors to understand that eligible businesses need to be in good standing, and the funds borrowed can only be used for operational expenses such as salaries, rent and lease payments as well as contracts with suppliers. Each individual bank will use their normal risk evaluation and credit application processes to assess these loans for their clients, looking at the ability of clients to continue to operate in a post COVID-19 environment with the help of these loans. Clients will be offered a single agreed lending rate by all banks participating in the scheme, which we expect to be the prime rate of interest in South Africa, and this rate will track the repo rate from time to time. Full funding for the duration of these loans will be provided to the participating banks by the SARB through a special repo window. Profits and losses are ultimately shared between government and the respective banks with first losses and costs, that's the bank's own costs and our cost of capital, being offset against the lending margin; second losses offset against a guarantee fee; and any losses thereafter capped at 6% of the size of their own COVID-19 loan scheme by bank; and anything beyond that 6% will be guaranteed by the fiscus. Banks are not expecting to profit from this scheme, but there will be indirect benefits into the wider economy. Legal documentation is in the process of being agreed and signed on a bilateral basis between each of the participating banks and the SARB, and we expect this scheme will be rolled out in the next few weeks. We enter this environment as Nedbank and the South African banking system much stronger than when we entered the global financial crisis with levels of capital and surplus liquidity much higher than in 2008 and 2009, largely as a result of Basel III, and asset growth in the more recent period having been much slower than 2006 and 2007. Our banking system in South Africa proved to be one of the most resilient globally in the 2008 and '09 crisis and is stronger today to cushion banks through the challenges of the current environment. It's sometimes interesting to reflect that our CET1 ratio in 2008 was around 8%, and that was sufficient for us and all South African banks to manage through the global financial crisis. Today, our capital ratios are 40% higher than they were in 2008. In addition, it's always worth highlighting, in particular to foreign investors, that the exchange control regime in South Africa plays a role in keeping the rand liquidity pool stable in the banking system, something we've seen in all previous banking crises and has once again been the case in the last few weeks. We commend the SARB on the proactive steps they've already taken in amending certain prudential regulations and guidelines to enable banks to increase their support for clients and the economy in these difficult times. We have built up buffers over the last few years, and the purpose of these is to enable us to support our clients and the economy in the challenges ahead. A few observations on these from my side. Firstly, on liquidity. The SARB has implemented various actions to assist with the orderly transmission of liquidity through the financial system. I think what's important here is that this is not about the stock of rand liquidity in the banking system, which I referred to earlier as being stable, but this is to increase support for the flow of this liquidity into the economy. And the SARB has further supported this with its announcement of buying government securities in the secondary market albeit at low volumes to date. To prevent banks investing all their excess liquidity only in high-quality liquid assets and not in the real economy, the SARB temporarily reduced the minimum LCR requirements to 80% effective from the 1st of April. We welcome these actions, and we continue to see a stable rand liquidity pool. With regards to credit, through Directive 3 of 2020, the SARB amended the requirements specified in Directive 7 of 2015 to provide temporary relief for banks for qualifying clients whose loans were up to date at the 29th of February when dealing with any distressed restructures, such as payment holidays, for these clients as a result of COVID-19. This directive ensures that these temporary relief measures offered by banks do not result in overly pro-cyclical consequences in risk-weighted assets, capital or impairments for clients who were in good standing and who are offered repayment holidays and restructures as a result of COVID. Raisibe will go through this in a little bit more detail later. Importantly, the final D3 of 2020 Directive was expanded from the first published draft to include COVID-19 related restructures on wholesale borrowers. As in South Africa, corporates are large employers and, in turn, large purchases from small and medium enterprises. Importantly, this directive now includes the specialized lending classes that incorporate commercial real estate in addition to corporate, SMEs and retail. The SARB directive on capital is intended to provide relief to banks in order to enable the industry to continue to provide credit to the real economy during this period of stress. These measures temporarily reduce specific minimum capital requirements. Specific relief measures include temporary removal of the systemic risk buffer or Pillar 2A capital requirement that has been reduced from 1% in total CAR to 0. In addition, banks will be allowed to use their capital conservation buffers outside of periods of stress -- built up outside of periods of stress, precisely to enable the use of these buffers in periods of stress. As a reminder, the regulatory minimum CET1 capital ratio in South Africa has been reduced from 7.5% to 7% before any bank-specific D-SIB and bank-specific idiosyncratic requirements. Lastly, on Guidance Note 4 with regard to the expectations of the SARB regarding future dividends and cash bonuses to certain executives during this period of uncertainty, these recommendations will be applied in respect to future dividends and bonuses for so long as the recommendations remain applicable. The Nedbank Board takes regulatory guidance notes very seriously and will suitably apply its mind in the context of each future dividend cycle and each future remuneration round, and the outcome of these decisions will be communicated to all our stakeholders. It's also important to note that preference share dividends and 81 coupons were not included in the guidance note as it only refers to ordinary shares. In other jurisdictions where we operate, we have seen similar guidance given by regulators. So what has Nedbank done to date? For Nedbank, our primary focus at the moment is on the health and safety of our staff as we continue to serve and provide support to clients as they manage their finances through this difficult period. As a reminder, banking in South Africa and in the countries where we operate is a designated essential service. So during the lockdown, we have continued to operate and provide all our services to our clients, albeit with reduced infrastructure and the majority of our staff working remotely. I'll go into more detail on this shortly. We've also pivoted our strategy to increase our focus on resilience so we can continue to support our clients through these challenges. This means we've increased our focus on managing liquidity, capital, market and credit risk, alongside ongoing scenario modeling and stress testing with an increased focus on costs. Work is currently underway to determine how we will reintegrate staff and business functions in a phased manner as the lockdown moves through the different levels as outlined by government. We've also kicked off a strategy review to reimagine how banking in the economy will be different as we emerge from the crisis with the progress that we have made on our technology journey that investors will know as our managed evolution, being more important and timely than ever. At Nedbank, we're very fortunate to have experienced management teams in place, many of whom have experienced the dot-com crisis, the 2001-2002 Tier 2 banking crisis in South Africa, the 2008 and '09 global financial crisis and the Abil event in 2014. Our teams have been absolutely remarkable in what has been achieved over the last few weeks to adjust to the new environment across multiple fronts, to roll out our business continuity plans and to manage emerging risks. With regards to governance and oversight, we've established a group executive steering committee to oversee our actions on staff, clients and business continuity and to manage the unfolding COVID-19 related risks. This committee is supported by 3 subcommittees, namely a COVID-19 Pandemic Steer Co focusing on the operational matters including the safety of our staff and managing our business continuity programs; a Liquidity Steering Committee focusing on maintaining our strong liquidity profile; and a Credit Steering Committee overseeing credit risks as they emerge in our clusters and supporting our efforts to help clients in these challenging times. In addition, our clusters all have their own various specific work groups in place to manage these issues. These supporting committees are meeting on a very regular basis and in addition to ongoing communication on key matters. Our Ex Co team is meeting several times a week to oversee our responses. We've convened Board calls every 2 weeks, and management is in regular contact with the Chairman of the Board and the chairpersons of our subcommittees to keep them suitably informed and consult them for input on key decisions. From a staff and operational perspective, as I said, the health and safety of our staff remains paramount, and we have increased focus on social distancing, sanitation and health practices, including the provision of personal protective equipment, employee emotional well-being and increased levels of communication. We have had 8 staff test positive for COVID-19, of which currently 5 have fully recovered. There are 91 staff in some form of self-quarantine, down from over 200 in late March. A dedicated Nedbank COVID-19 portal was established to regularly provide information on our policies, health precautions, support staff and provide them with updates. We've activated our business continuity plans tailored for the COVID-19 pandemic, running for the 35-day level 5 lockdown until the 30th of April and beyond. All staff who are able to work from home have been enabled to do so. And right now, we have more than 80% of our South African campus sites working from home. Various critical functions that cannot function remotely continue to operate from our Nedbank premises. And we split up teams between offices, floors and resumption sites to achieve appropriate social distancing. 63% or just over 300 of our branches remained open, and 95 of our temporarily closed branches have been designated as call centers and client retention, client business continuity sites. On the technology front, our systems availability and stability continues to be excellent as we ensure that both our staff and clients receive uninterrupted connectivity. We have increased capacity to enable our staff and clients to work and bank remotely, and we currently have enough capacity headroom to accommodate increased demand. Our innovation or technology rollout program is being actively managed to minimize impact on the innovation cadence and delivery, and we continue to deliver in accordance with our planned innovation cycle. As far as cybersecurity is concerned, we remain vigilant and have heightened our focus and client and staff awareness communications in these uncertain times. From a client point of view, we strive to provide excellent service to all of our clients and maintain our essential business operations and services at the highest levels possible. We committed to assist our clients in good standing who encounter repayment difficulties as a result of COVID-19. And in this regard, the new Directive 3 2020 is helpful as we can provide solutions such as payment holidays. Supporting our clients in good standing to manage through these COVID-19-related challenges is a top priority for all Nedbankers and a vital contribution that we are making to the economy. Notwithstanding the reduced level of physical presence, we continue to enable and educate our clients around banking through our mobile and web capabilities with COVID-19 likely to be a key accelerator of digital adoption. Clients are encouraged to use our digital and other self-service channels so that they stay safe and can do their banking from home with all of the security that they require. The implementation of our digital onboarding sales and servicing capabilities that we showcased in our year-end results presentation as part of our managed evolution journey have proven to be beneficial in this time, and we continue to focus on further rollouts during the year. We are committed to supporting clients during this time of uncertainty and have several solutions available to assist the clients in good standing who are impacted by the pandemic and the lockdown. Raisibe will expand on these later. But some examples include payment holidays to RBB clients on a case-by-case basis; card monthly minimum repayments being reduced from 5% to 2.5%; clients with Nedbank personal loans who lose their income or part thereof can opt-in for debt relief and claim against credit life protection, which covers up to 12 months of their debt repayments; insurance cover for clients includes death, disability, retrenchment and inability to earn an income; and partial -- and paying partial benefits for loss of income and waiving the waiting period for any COVID-19-related claims are some of the key benefits we've instituted for clients during this time. In home loans, clients can access equity in their property by applying for readvances. We've also provided temporary increases in overdraft facilities for segments such as franchise and hospitality in our business banking environment. We've digitized our debt relief forms, and these can be accessed on the app Internet banking or on our website. And in the past week, we've partnered with the Department of Small Business Development to assist spaza shops and general dealers to access support. In CIB, we've similarly provided relief and support to clients through interest and capital payment deferrals or part thereof for a suitable period and extending additional credit to certain clients to manage short-term cash flow shortfalls. In our businesses in Africa regions, we are similarly promoting the use of digital channels to support social distancing. We are restructuring facilities and providing payment moratoriums for clients in good standing as well as working capital solutions and working with our regulators. In the middle of the picture on the right, you can see an advertising campaign for our payment platform called Avo that was launched in April this year. In our results presentation in March, we spoke about the imminent launch of such a platform. But in the last few weeks, we've repurposed this to enable clients to buy essential products online and have them delivered to their homes. Other essential services, such as plumbing, electrical work and many more can be accessed once government allows the provision of these services during the various levels of lockdown. So at Nedbank, we will continue to use our financial expertise in this difficult time to do good to help the people in the countries where we operate and to help our clients. All Nedbankers have been called upon to embrace our Nedbank pledge. That is to be mindful in the time of the COVID-19 outbreak and to set an example not only for other Nedbankers but for our families, clients, communities in the preventing of the spread of the virus. For the duration of the current lockdown, we've waived certain ATM and Saswitch fees for SASSA grant beneficiaries. We're also one of the 4 banks that administers the ZAR 1 billion SA Future Trust Fund, that's the Oppenheimer contribution, whereby our qualifying clients can access these funds via our channels. We've also enabled our staff and clients to contribute to the Solidarity Fund by making this easy through the Nedbank app, their Internet banking site or the Nedbank website. We'll also be donating ZAR 12 million towards the COVID-19 relief efforts, including ZAR 5 million specifically to the Red Cross. And then finally, through the banking association, Business Leadership South Africa and Business Unity South Africa, including the business for South Africa platform, we are very actively engaged in numerous health and economic interventions. Thank you, and I'm going to hand over to Raisibe to provide more details on our latest economic forecasts and how we are responding to key risks that are emerging.

Thank you, Mike, and good afternoon to our webcast participants. As noted in our SENS announcement on the 14th of April, given the uncertain environment, we have withdrawn our 2020 financial guidance and, at the same time, noted that our medium- to long-term targets are under review. Our 2020 guidance was based on our economic forecast of January 2020. And at that stage, we expected GDP growth for this year to be 0.7% and interest rates to be flat. Economic forecasts today are materially different from January 2020. While forecasting in the current environment is complex and subject to much higher degree of forecast risk than usual, our economic unit recently revised our forecast for South African GDP growth for this year to minus 7%. After the recent 100 basis points interest rate cut in April 2020, we currently expect a further 25 basis points cut in May with possibility of more cuts to come. Our full year interest rate forecast is currently 250 basis points, of which 225 has already occurred in January, March and April, respectively. Given the challenges in forecasting accurately in the current environment, we also use a number of scenarios to inform our decision making. Our high disinflation stress scenario forecast GDP growth at minus 11%; and risk of further interest rate cuts, over and above what we expect. You can read more about this in our integrated report, which we published last week. The withdrawal of our 2020 guidance is in line with many companies globally and in South Africa. We will update investors of our revised guidance and prospects once we have more clarity. It is still too soon to understand the full impact of the pandemic on our South African business, on our Africa region as well as on our investment in ETI. I will now focus on how we are responding to and managing the key risk factors highlighted by Mike, being liquidity, markets, credit as well as capital risks. Starting with liquidity. As at 31 December, 2019, Nedbank reported strong liquidity metrics with our LCR and our NSFR ratios at 125% and 113%, respectively. And at the end of March, both of these remained well above 100%. At year-end, we had an estimated ZAR 225 billion in total sources of quick liquidity. Our deposit base remains stable and continues to grow. In this environment, we expect to see an industry-wide shortening in bank funding profiles as term maturity deposits roll down with depositors having a lower propensity to term out new deposits into future maturity dates. This is due to uncertainty around the trajectory of the virus and its impact on our clients. However, depositors remain confident in the domestic banking system, and the deposits in total are growing. But until the outlook is more certain, deposit tenors will likely shorten as deposits naturally -- as depositors naturally want to be prepared and have cash more readily available should a need arise. Nedbank is domiciled in South Africa and raises more of its deposits and funding in the close rand system with very little mismatch between foreign-denominated funding and foreign-denominated assets. Our dollar funding is small in relative terms at 3% of total liabilities with matched dollar asset at a similar 3% of total assets with very little maturity mismatch. Global U.S. dollar liquidity pressures are, therefore, not material for our group. In the second half of 2019, we raised over $1.1 billion in term funding. This has had a positive impact on our U.S. dollar funding profile, thus negating the need to raise any long-term U.S. dollar funding in 2020. Regarding trading, in our markets business, we remain profitable and have benefited from increased volatility and hedging activity into the lockdown. Looking forward, we expect volatility to remain, which is positive, but we also expect a drop-off in client volumes as a result of lockdown and resultant slowdown in economic activity. Turning to credit. As Mike mentioned earlier, we are pleased that in line with our foreign jurisdiction -- with other foreign jurisdictions, the South African Reserve Bank issued a directive on how to treat restructures of both consumer and corporate loans, where a client who has been in good standing as at the end of February 2020 is adversely impacted by COVID-19 pandemic. The South African Reserve Bank's directives also seek to prevent pro-cyclical RWA migration of COVID restructures across retail and corporate loans. An important consideration that we are working through is that current ECL standards introduce pro-cyclicality and the deteriorating credit conditions. The regulators and accounting setting bodies have issued guidance to help avoid excessive pro-cyclicality throughout the current crisis, and we are currently investigating how best to accommodate this guidance in both our capital and impairment models. Our external auditors, working with South African Institute of Chartered Accountants, the banking association as well as the Prudential authority, are reviewing how IFRS 9 will be applied in line with the SARB directives and the guidance notes. It is also worth highlighting the IFRS release of the 27th of March titled Application of IFRS 9 in the light of coronavirus uncertainty. And in this guidance, IFRS indicated that companies are encouraged to consider guidance provided by their prudential and security regulators in estimating ECL in the current circumstances. In the context of South Africa, the SARB's Directive 3 2020 is instructive. We are supporting clients in good standing with suitable individual solutions, as Mike mentioned earlier. This support includes deferring payments or part thereof for a suitable period, extending existing loan payrolls or extending additional credit to certain clients to manage short-term cash flow shortfalls. We have reviewed key risk portfolios and continue to manage emerging risks, and this slide gives out some indication of our actions to date. On oil and gas, which is less than 2% of our total advances as at 31 December, 2019, we reviewed our portfolio, and our exposures highlight no immediate risks as Brent crude price -- at Brent crude price of between USD 20 and USD 30 per barrel. Almost all clients have suitable hedges in place for the next 6 to 18 months, and some of them are at low-cost of production, which ensures some profitability as oil -- low oil prices persist. Aviation, which is around 1% of our total advances, is under pressure, and as a result, risks in aircraft finance remain a key focus. This being one of the early and most impacted sectors, pressure is inevitable, and we aim to continue to support our clients where possible through this difficult period. Our exposure to South African Airways, which is the largest proportion of our total aviation exposure, is government-guaranteed and further underpinned by appropriations made in the national budget. We, therefore, do not have to first -- to have a first claim or call up our guarantees against South African Airways in order for our exposures to be repaid. On single stock features or contracts for differences and share-based lending deals, including BEE transactions, which comprise around 1% of total advances, we have experienced no material risks on unmet margin costs or cover triggers, and therefore, this remains fairly volatile but limited risks. Other key sectors being monitored include hospitality and hotels at around 1% of our advances. SMEs, mostly in our retail relationship banking, which is part of our RBB business, is also a key focus, and this book comprises 5.5% of our total advances, and we remain vigilant monitoring this book. The CPI book, including retail shopping centers, has been a key focus, and more details will be provided by my colleague, Gary Garrett. Consumers are likely to be under pressure, and the unemployed population is likely to increase above the current levels of 29% in South Africa, but those that remain employed with their cash flows similar to the pre-COVID levels will benefit from lower inflation and reduced interest rates. The last few weeks, our bankers across the group have been busy assisting clients in good standing who have been impacted by the lockdown, and the following trends have been observed. In our retail and business banking, based on the data as at the 21st of April, more than 135,000 clients have received relief either after a direct approach to us or as a result of Nedbank reaching out to them. This number represents approximately 5.5% of our credit active client base of around 2.5 million across home loans, vehicle finance, unsecured lending, card, relationship banking and business banking. The highest level of requests for restructures were in unsecured lending followed by vehicle finance, card and then home loans. In CIB, clients are dealt with individually in terms of requests for short-term deferrals of interest and, in some cases, capital repayments that were due. Increases in general banking facilities have been approved for clients where we are comfortable with the risk. All requests for drawdowns of committed facilities are rooted through a credit process to review individual client circumstances, legal documentation and to ensure appropriate pricing. Most of such drawdowns have been placed back on deposit with ourselves at Nedbank. Coming to capital, the SARB Directive 1 capital is intended to provide relief to banks in response to the COVID-19 pandemic, thereby enabling banks to use buffers and continue providing credit to the real economy during this period of financial stress. Our latest stress testing results based on various economic scenarios indicate that our capital adequacy ratios remain robust and well above regulatory minimum requirements. ETI, and in particular its operations in Nigeria, are likely to be impacted by lower oil prices, and there is an increased risk of a further impairment on Nedbank's ETI investment. However, ETI was a small component of Nedbank's net asset value as at December 31, 2019, which was roughly [ 3%. ]And during our results call in March, we noted that should we write off our whole investment in ETI, which we certainly do not expect to, the impact would be only 28 basis points on regulatory capital as at December 2019. Last week, ETI released its quarter 1 2020 results, showing a quarter 1 profit after tax of $67 million, down 20% year-on-year in U.S. dollars but 6% up on the constant currency basis. Nedbank Group's 2019 final dividend was paid on the 20th of April given our obligation under the Companies Act to proceed to pay once declared. Going forward, for all future ordinary dividends, our Board will consider in the context of the SARB guidance note [ as our client by Mike earlier ]. Before I hand over to Gary to share with you some of the thoughts and insights on developments in our commercial property portfolio, I would like to contextualize this portfolio for the Nedbank group. Nedbank's overall combined mortgage-related exposures across residential and commercial property as a percentage of our total loan book is approximately 43%, and our total mortgage market share is around 22%, both within the peer group ranges for these metrics. Nedbank has a smaller share of residential mortgages and a higher proportion of the commercial property than peers. In the South African economy, corporates are both large employers and large payers of rent. The health of corporate South Africa is, therefore, very important to both the ability of their staff to continue to repay their respective residential mortgages and for the corporate itself to pay rent to service commercial mortgages. In previous cycles, where the credit loss ratios -- the stress in the credit loss ratios indicated that commercial mortgages have outperformed credit loss ratios in residential mortgages. I thank you, and now I hand over to Gary Garrett to take you through the CPF book. Thank you.

Thank you, Raisibe, and good afternoon to everyone on the webcast. As I noted in our commercial property investor call in the second half of 2019, Nedbank has a well-diversified commercial property finance book managed by an experienced team and has a strong client base. The portfolio contains good quality assets underpinned by strong property collateral with low average loan-to-value ratios. At 31 December 2019, this ratio was 48%, and by 31 March 2020, had increased marginally to 50%. The underlying cash flows are well diversified across all sectors of corporate South Africa, and the low average gearing levels and strong interest cover ratios that most clients have -- mean that most clients have sufficient capacity to deal with temporary cash flow shortfalls. In our view, the impact of the SA lockdown in response to the COVID-19 pandemic is having the highest impact initially on the hospitality and retail segments. While our experience is that the immediate impact on offices is not as severe, we believe that there could be a longer-term impact on that segment as new ways of working developed during this period could become more permanent. Our view on the impact on residential, being low to date, relates to our experience in the commercial property finance portfolio, where our exposures relate largely to rental stock portfolios and is not a view on the consumer residential mortgage market as a whole. Over the past few months, the share prices of the listed property sector have been under significant pressure as a result of COVID-19 and the lockdown, with some companies responding by holding back distributions to shore up balance sheets and to improve liquidity buffers. Although, the SA listed property index has reduced by 49% for the year-to-date, this, in our view, is not reflective of the underlying property fundamentals in the majority of these entities and is not an indication of the ability of these entities to meet their servicing obligations as they fall due. Shareholder distributions are, however, clearly under pressure. Nedbank CIB's commercial property analysts recently noted that the average interest cover ratio across the sector pre-COVID was 3.5x, which we consider to be strong and well above the typical interest cover ratio covenant set by lenders of around 2x. The definition of an interest covenant ratio would be transaction and finance year-specific. But broadly, it is a measure of how many times the net operating income of an entity adjusted to include dividends received and to exclude all noncash flow items can cover the interest payment obligations that need to be met on borrowings. At a level of 3.5x, it implies that net operating income, a large component of which is rental income, can drop by approximately 70% before interest payments can't be met. Our current analysis and ongoing discussion with all of our clients across the listed sector indicate that the majority have access to sufficient existing liquidity to manage through 3 to 6 months of a highly stressed environment before requiring any form of additional cash flow relief. We are actively working with any of our clients who are experiencing short-term liquidity pressures as a direct result of COVID-19 and who are in good standing as at 29 February 2020. All solutions are considered on a case-by-case basis and include capital repayment holidays, full or partial; short-term interest roll-ups; short-term liquidity facilities; extensions of tenor; and condonements of covenant breaches if debt servicing obligations are being met. To date, we have not been approached for specific COVID-19-related relief by any of our clients in the listed sector. This may, however, change depending on the extent of the lockdown and the mix and behavior of their tenants as well as the outcome of the current property industry discussions to enable REITs to retain income without adverse tax consequences. It is important to note that COVID-19-related relief for clients in good standing does not necessarily translate into increased impairments or risk-weighted asset requirements due to relief provided by the regulator as per directive 3. In considering property values, we believe that it is extremely difficult to reliably establish value in the current environment. And as a result, we will not be looking to materially update property valuations in the short term. We will, however, be working with our clients to understand the more permanent impact on values created by COVID-19 once we begin to emerge from the current environment. We do, however, anticipate that valuations in general are likely to be negatively impacted and that this will result in an increase in existing loan-to-value ratios off their current levels. In 2019, commercial property finance reported a credit loss ratio of minus 2 basis points or 10 basis points excluding recoveries and impairment reversals related to prior year provisions raised and -- the prior year provisions raised and no longer required. At year-end, in our investor engagements, we indicated that we expected the credit loss ratio in 2020 to increase to at least the bottom of our through-the-cycle guidance of 15 to 35 basis points. And since then, risks have clearly increased. Our scenario analysis shows that a credit loss ratio of 50 basis points and 100 basis points in 2019 would have resulted in impairments pretax of ZAR 772 million and ZAR 1.5 billion, respectively. This represents around 4.5% and 9% of the group's reported 2019 headline earnings of ZAR 12.5 billion. These scenarios should be seen in the context of the peak credit loss ratio for commercial property finance of 56 basis points, which occurred during the global financial crisis. Estimation in this environment is extremely difficult, and the impact and duration of the current crisis is not yet fully understood. Currently, we do not expect peak credit losses for CPF to differ materially from previous cycles. Just as a matter of interest and to create some additional context to Raisibe's earlier comment regarding our combined mortgage exposure, being both residential and commercial. The peak credit loss ratio experienced in the residential mortgage business also during the global financial crisis was 257 basis points compared to the 56 basis points experienced by commercial property finance. We anticipate that post-COVID-19 that demand for space across all property segments will continue to exist across a broad base of tenants operating in the South African economy. We do, however, anticipate increased pressure on vacancies and that the current pressure on rentals will remain, but that well-run property companies with appropriate gearing levels will be able to absorb this. Thank you, and I'll return to Mike for some closing remarks.

Great. Thanks very much, Gary, and thanks, Raisibe, and I trust that you have found those inputs informative. So before we turn to questions, I'm just going to reiterate for everybody what we said earlier, that our primary focus at this stage remains on the health and safety of our staff as well as ensuring that we maintain a resilient balance sheet to support our clients through these challenging times for individuals and businesses. As we said at the end of March, our capital and liquidity metrics remained strong. Our balance sheet was robust, and we remained in full compliance with all prudential regulatory requirements. So while these are certainly very challenging times, I believe that we, at Nedbank, are well prepared to respond to and manage the risks that will inevitably emerge. We are well prepared for a difficult few months but take comfort from the fact that we have strong and experienced management teams in place to navigate our way through this challenge and to emerge both stronger and more competitive on the other side as Nedbank, as South Africa, and as the countries where we operate. I think, lastly, to any of our staff listening in, a big thank you for all that you're doing to support our clients on the front lines. So thanks to everybody for dialing in, and we will now address some of the questions that have been submitted online.

All right. So I'll try and manage these between the 3 of us. So there's a question from Matthew Pouncett from Laurium Capital. Thank you for the update. From an operational and administrative perspective, will the large banks be able to disperse the ZAR 100 billion in SME loans within a fairly short time frame, i.e., before the SMEs face cash flow issues? So Matthew, I think that's -- it's a very good question. All of the banks have been working very hard at this for the last week or so. We're currently finalizing all of the underlying loan agreements with the Reserve Bank. So it's likely, I would imagine, in probably the next week or so, this will be announced as active. And everywhere in the world, we have seen some backlogs as these schemes have been switched on. There currently are more than 50 of them in operation around the world. And we would hope that customers do have some understanding that we're also operating in lockdown mode, but I think we'll be good to go during early May, and hopefully, that is sufficient time. There's a question from Pravarshan Murugasen, if I said that correctly, from Foord. If it's an existing client, the client is in good standing with normal risk -- normal risk evaluation has been done, why would a bank place the loan in the guarantee scheme versus keeping it on its own balance sheet? Again, it was a very good question. So I think what the scheme has tried-- is designed to try and tackle our clients that currently are facing very big shortfalls in their income. So think of a restaurant, for example, that might have no income until we get to level one. So we don't know how long that will be. Could it be three months? Could it be six months? Think of somebody who has a small hotel, a travel lodge. Somebody who has a couple of aircraft that are flying people around to mines or to tourist destinations. All of those people are likely to have a block of income that is completely lost. And it's very difficult for banks in the normal environment, even if they were good customers to lend, when you don't know how long that income is going to be lost. So I think hopefully, what this scheme will do is enable those customers to be able to at least tread water until such time as they can get back to being operational. Sorry, let me just have a look quickly here. And then there was a follow-up from Pravarshan around -- follow-up to his previous question on thinking about ROEs and the impact of RWAs and capital ratios, et cetera. So again, what has been published around the risk-sharing on the SME loan scheme is that, effectively, the first risk will be taken by the margin, effectively the difference between prime and the repo rate. That margin will be used for banks to recover their costs, and included in that cost is a cost of capital. So think about breaking even on ROE equal to your cost of capital. If there are losses, those are then first taken by a guarantee fee; and then the more material losses, the first 6%, by the banks; and the balance by National Treasury. So from an ROE point of view, you can recover a cost of capital. And from an RWA point of view, perhaps the way to think about it is the RWAs associated with a particular SME loan will be weighted as to 6% on the PD of the actual SME that you're lending to and 94% on the PD of government depending whether you are an advanced or internal ratings-based approach. So again, I think there's capital relief being applied at the same time here. Then there's a question on commercial real estate, Gary, from [ Chris Stewart ], saying, what is your central scenario for how the crisis in commercial real estate pans out? Do you have any choice but to offer your CRE clients forbearance? So Gary, would you reflect on what you said about that?

Sure. So I think our approach through this period is to offer assistance to any of our clients that approach us for short-term liquidity relief, and we set out what those various forms of help could be. I think we've seen several of our clients approach us to date. And, fortunately, we've been able to assist with all of them, largely because they -- typically, properties have -- are fairly lowly geared, and they have fairly decent interest cover ratios or ability to generate cash through the cycle. Obviously, what we're dealing with now is a short-term aberration, where tenants are not paying in some cases or only partially paying in others. And therefore, we have the ability to assist clients. If you think about the quantum of a 3-month interest roll-up in the context of the total outstanding loan, it tends to be fairly small, and the impact then on the future serviceability on the loan-to-value ratio on a permanent basis is not very material.

Okay. So there's a question here also from [ Chris Stewart ]. How do you endeavor to ensure that COVID-19 forbearance you offer clients across any category doesn't simply postpone the problem and manifest in a wave of impairments further down the line as the economic recovery disappoints? So Raisibe, would you like to talk to that?

Yes. Thanks for the question, [ Chris. ] So as we indicated that we evaluate each of the wholesale requests for restructures on the individual merit of that particular client, and it is also quite important to note that directive 3 is specifically where the client is impacted by COVID. So you have to demonstrate that it has been impacted by COVID, and therefore, you will be able to assess the temporary nature of the difficulties that the client is going through. It is also important that from a retail perspective, whilst we have had a number of restructures that have been successful, but we still do evaluate each one of the clients. And for that reason, our approach where we have not provided a blanket payment holiday but rather evaluating each client on its merit, and that is precisely to make sure that we can manage our risks more responsibly and to make sure that you don't just postpone the inevitable. So there's a lot of governance around that, and the -- one of the subcommittees that Mike mentioned, the credit subcommittee is particularly to look at all the nuances relating to all these issues as we go through what kind of issues are being -- are emerging from the clients and how do we respond to them.

Okay. And then Raisibe, another one for you because it sounds like you're on a roll. From Harry Botha at Avior Capital Markets, what proportion of Nedbank's OpEx do you believe is variable?

So Harry, the OpEx that is variable has largely been around 25%, 25%, 26%. And obviously, part of that is the incentives, but there are other things like we can structure our marketing campaigns in a manner that we consider appropriate. In terms of some of the internal spend, we also can flex different things. But most importantly, in these times, there are also costs relating to -- because there's a lock down, you can't have conferences, you can't have big gatherings. And for that reason, those costs, we are now freezing them so that we can be able to add to the savings. Of course, they have to be offset by the cost that we incur in terms of preparing our BCPs, where we have enabled more staff with the equipment and the capability to be able to work from home, investing in things like getting the right PPEs. But in the bigger scheme, what we are able to save should be larger than what we are actually paying in the context. I think the bigger issue is to focus on how we build -- rebuild our cost base going forward. Digital has come a lot quicker than -- in a bigger scale than what we would have anticipated, whilst it was part of our plan, but we have seen a higher adaptation by clients. And also internally, we are far more digital than we probably would have thought in this period. And for that reason, we will look and continue to harvest on those benefits that have come through. But definitely, still some work to do on that.

Okay. Great. So just again, looking through the list of questions here. There are 2 in respect of reinsurance on credit life and retrenchment cover, et cetera, one from [ Chris Stewart ] at Ninety One and one from Matthew Pouncett at Laurium Capital. And in short, we do not have reinsurance on our retrenchment or credit life cover that would be applicable in a pandemic environment. Just a reminder that the credit life cover that we provide, and obviously, every policy slightly different across the industry, but we provide credit life cover that would give a customer who loses income or part of their income with -- it would give them up to 12 months of repayment on the underlying personal loan, effectively giving them time to find a new job. So it's actually 12 months or when they find a new job, whichever happens sooner. Then there's a question -- if I just come back to the SME loan guarantee scheme. There was a question from Mark du Toit at OysterCatcher Investments. I thought that was a good bottle of wine. But how will the ZAR 200 billion SME loan guarantee scheme be allocated between the South African banks? Again, I think a very good question. So first of all, what you should think about is the allocation of the initial ZAR 100 billion. Because depending on the uptake of that, it may well then be scaled to ZAR 200 billion, but it's going to start at ZAR 100 billion. And the way that is likely to operate is essentially that the SARB will be, if you thought about it, a facility agent. So all of the banks will be able to look across their client base and say based on what they think their client base is likely to require over the next 3 months, they think they need X. And all of the banks will make those applications to the SARB, and the SARB will effectively look across all of those and effectively give each bank an allocation and then over time be able to manage those allocations to the extent that some banks aren't using them, passing them out to someone else, or to the extent that some needs some more, see if there are some shortfalls that they can offset. So the SARB will initially do that, and I'm sure they'll use lots of data to do that, but one of the data points will obviously be market share in that particular segment. There's a question from John Storey around what's happening in the liquidity system, SAMOS' appetite by banks for government bonds. So I think what I tried to say earlier is we're remarkably fortunate in the rand liquidity pool that, that remains stable as a consequence of exchange control. So we're seeing exactly that play out now, like we've seen in many previous environments. The only thing that you see in that liquidity pool is what Raisibe spoke to, is a natural shortening of duration. Because, firstly, for some retail customers who may have had a 6-month fixed deposit, they could come to us in a stressed environment and say they desperately need access to that money, and we'll let them break that fixed deposit to be able to put that money on call so that they can actually meet their expenses. And some corporate customers, clearly, in this environment, aren't quite sure exactly when they're going to need their cash. So even in an upward sloping yield curve, they want to keep that cash short. Appetite by the banks for South African government bonds, obviously, we have to buy bonds to meet our regulatory requirements and to meet our HQLA requirements. So that would be an ongoing feature of the way that any bank needs to run in South Africa. Then Gary, also, as part of John's question, how up to date are your LTV assumptions? And what other types of collateral does the bank carry in commercial property finance?

Our LTV assumptions, and I'm going to assume you're talking about what our valuation assumptions -- in that LTV calculation. Well, they -- different parts of the book are kind of up to date at different periods. And really, our focus tends to be on updating very frequently the high loan-to-value transactions to make sure we understand valuations there and particularly for our stage 3 exposure. So anything on our watch list or nonperforming or anything classified as a nonperforming loan, we would update at least on a 6-monthly basis and more regularly if required. Focus on very, very lowly geared. Transactions would be less frequent so that we ensure that we focused on what we consider to be the higher risk segment of the portfolio.

Okay. So just jumping around a little bit. There's a question from [ Noanle Yutumbeni ]. Can you clarify the rate charged under the guarantee scheme would be the same for each client regardless of the sector, i.e., will you be pricing for risk? So again, all the legal documentation is currently being finalized, but it is our understanding that all of these COVID-19-related loans, which effectively the risk that the banks are carrying, is 6% and 94% of that risk is National Treasury. So across that, by far, the largest risk is with National Treasury. It's our understanding that they will all have the same rate of interest and that, that will be the prime rate of interest from time to time. From Donata Sibanda, also on the same issue. What percentage of your corporate total clients qualify for the guarantee loans based on the criteria given? So again, I think, almost none of our corporate clients. Remember that this is turnover less than ZAR 300 million, so the way we think about corporate clients, they would be in our CIB business. There may well be some of our smaller property clients at the bottom end of Gary's commercial property business that would qualify. So the qualifying zone within our business is essentially business banking and retail relationship banking, not our corporate clients. From William Rudd, is the loan guarantee -- from IJG wealth. Is the loan guarantee scheme sufficient in your opinion? How long is this -- could it -- how -- any idea how long the scheme could provide relief for income shortfalls that you mentioned? So I think any scheme like this in any country is a balancing act between, on the one hand, likely demand from the scheme; and on the other hand, the fiscal space that countries have to be able to deliver the appropriate guarantees and underpins to enable these schemes to roll out. So I do think that it has based on estimation, been appropriately sized. One of the sizing criteria was all of the banks submitting data to the SARB. Now clearly, that data was submitted over a weekend, so it all came with some health warning and estimation errors, but that was taken into account. And obviously, what the SARB has done is said we're going to start at an initial ZAR 100 billion. And then I'm sure looking at the take-up and speed of take up, be able to say, should this be extended to a bigger number? And could it -- and there's many ways that it could be extended to a bigger number. The turnover level could be increased on the one hand; or on the other hand, instead of providing 3 months relief that the SARB could extend it to 6 months. All of those things are possible going forward, but that's obviously not the base construct of the scheme. And again, that hopefully also answers [ Louis Chetty's ] question around, do we have any idea of the size of our client base and the capacity to increase at a system level should it be fully utilized? Right. Peter Cromberge from Mergermarket. Good day, does Nedbank have any exposure to the ZAR 9 billion in SAA debt that matures imminently tomorrow? And what is the expectation of what will happen to this debt? So Peter, I'm not certain of exactly the maturity dates around SAA debt. We certainly do have exposure to SAA. You heard Raisibe say earlier, that is the largest piece of our aviation exposure. But what is important is that, that exposure is fully guaranteed by National Treasury. In the latest budget, you can see the appropriations that have been made in the budget to enable National Treasury to settle all of the banks, of which Nedbank is one, who has guaranteed exposure to SAA. And importantly, all of those guarantees and legal agreements are drawn in such a way that Nedbank or any of the other banks doesn't first have to sue and excuss SAA and then effectively go to National Treasury for the shortfall. Those guarantees are directly claimable on National Treasury. So what I'd expect to see play out here is a payment plan probably over a few years, where through future appropriations, those guarantees will be met, and effectively all of the bank's guaranteed debt to SAA will be settled. Raisibe, on the dividend. William Rudd has got a very tricky question. Would we have paid if the Companies Act hadn't enforced us to pay?

Thanks, William. So when the guidance note was issued, we had already declared the dividend. And the bank's requirement -- the Companies Act requirement, of course, is to pay a dividend if you can satisfy the solvency and liquidity tests, which we qualified for at the time of declaring the dividend and on the day of the expected distribution. The SARB was quite clear on the 8th of April in saying that what they issued is a guidance, not a directive. So guidance note -- guidance 4. And therefore, they expect that the banks will apply themselves in responding to that. And if you have an obligation to pay, then you should pay. So of course, we had an obligation to pay. If we had not declared the dividend, then we would have had to consider the merits of whether we can declare dividend. And are we concerned about our capital? If I look at our capital today and our stress scenarios, I do not believe that we would have been concerned about our capital liquidity and solvency. And therefore, we probably would have still paid the dividend for 2019 with the backdrop of the ZAR 12.5 billion of earnings that we produced during that time.

Okay. Thanks, Raisibe. There are some questions here, which we clearly can't answer because they are trading-related questions. So how have collections from the rest of your credit and clients been in March and April? We won't answer that. What we're actively looking to do is restructure wherever possible, but that will emerge in our credit losses over time. So that was from Khayelihle Mthembu from ABSA. James Starke, SBG Securities. Some color on the magnitude of the decline in transaction activities has been in April so far this year. So again, we can't answer that because there's quite a lot of industry data available around this that you can get from Bankserv and other places. And actually, what we saw is pretty much intuitively what you would expect, is that into March and prior to the lockdown, there was a significant increase in what we see as transaction activities that we would look at through the [ past ] devices that we have out there. In fact, some of the volumes in March were larger than the Black Friday volumes from November last year. And then consistently, what you've seen since then is a significant drop-off in transactional volumes across all of those industries or segments that you would expect to be impacted first. Big drops in aviation, restaurants, transport, all of those have dropped. Much more stability in groceries and pharma. So all of those, as you would expect, but in total, a strong drop in transactional activity going into April as the lockdown has been in place. Gary, there are a couple that are coming back in your direction. So from Megameno at MUMI Investment Managers, what are our long-term strategic plans in respect of REITS? Are we worried? Or do we see opportunities in that space?

So I mean, let me answer on the strategic plans on the SA commercial property book. I think our strategy, and we've articulated it in various presentations, is that we would continue to grow our business in line with market. We're certainly not looking to outstrip market growth, and we're certainly not looking to chase market share or maintain market share at all costs. And I think you would have seen that in some decline in our market share over the last couple of years. But certainly, we're still looking to do good transactions with our key clients and good clients across the sector. It's difficult to say are we worried, I don't think we're more or less worried about the property sector than we are about any other sector at different points in the cycle. And we certainly do see opportunities in that space, albeit I think in the current environment at a much slower pace than we would have seen in previous markets. In the context of the question being around SA Commercial property or REITs book, REITs for us is just a component of the SA commercial property market. And we've actively looked to grow our exposure to some of the listed funds where we believe we've been underweight over the last couple of years. And if we see good opportunities presenting themselves, I think we'd look to work with those clients to see if we could do anything with them.

Okay. Thanks. So just continuing to work our way through some of these on the list here. Elan Levy, Morgan Stanley, what percentage of the retail advances book is covered by credit life insurance? And to what extent is this risk reinsured? So I've answered the reinsurance question earlier. But if -- and Raisibe, jump if I've got this wrong. If I look at the credit life across the personal loans book, it's 99.99% covered. And then across the balance, I don't have the exact data. But card, there will be some that's covered, and then it's relatively low in the other portfolios. But perhaps, Alfred, we can get that information through to Elan. Then from Monika at Lazard, as you assess the client's health, are they better or worse off than in the global financial crisis era? And can you address this by sector? So Monika, maybe it's -- I can't go through it sector by sector, but if I had to try and give my assessment across perhaps retail and wholesale as 2 broad sectors, I think if we looked at our books at the end of 2018, they were probably in some of the best shape that they had been in the last 15 years from a credit point of view in terms of how well they were performing, et cetera. What we saw during 2019 was some deterioration in both retail and wholesale, but from an extremely strong base at the back end of 2018. So if I look back, I would certainly say that our retail books are in better shape than they were going into the global financial crisis. Just a reminder that 2006, '07 and '08, those sort of times, we'd seen very strong growth in home loans. I can't remember, maybe 15%, 20% per annum growth in home loans. So inevitably, credit standards would have been slipping in that environment, and we've had very low single-digit growth now. So I think the retail book is definitely in better shape. And I think the corporate book is also in better shape. It's deteriorated a little bit in '19, but in better shape than it was in 2008 and 2009. What we don't know is how comparable this crisis is to the global financial crisis, but I think our books are definitely going into it in better shape in all respects. [ Grant Dunnington ]. Nedbank's share price appears to have suffered more than the other banks, which has created attractive buying opportunity. Why do you think this is the case? Anything to do with your large property exposures? So Grant, I think if I've got it right, on a year-to-date basis, our share price is down about 10% more than ABSA and Standard Bank and about 15% more than FirstRand. So your observation is correct. As a management team, it's always quite difficult to try and understand what's underneath share prices and buyers and sellers, et cetera. That's not really what we're paid to do. We're paid to try and run the bank and do what we need to on a day-to-day basis. But broadly from our interactions with shareholders, I think there's probably 2 themes that play out, and it will be interesting to see how they actually play out over time. So firstly, South -- Nedbank is seen as more of a South African bank than some of our peers who've either got more operations in the rest of Africa or some operations now in offshore. And there was -- definitely during 28 -- '19 and '18, South Africa Inc. underperformed expectations. So as a consequence, Nedbank would be more impacted by South Africa Inc. than our peer group. However, going forward, I think it's going to be very interesting to see, from a COVID point of view. We obviously -- it's much more front and center as to what's playing out in South Africa now. But I think over time, many of these things are going to play out in the rest of Africa. And I think it's up for debate, if over time, South Africa will have a worse COVID experience than elsewhere in Africa. So I think there's that dimension. And then there is also the dimension, as you point to, around property exposure. But as we tried to point out, our property exposure is exactly the same as the peer group. It is the mix of our property exposure that is different. We have more commercial. The peer group have more residential. So again, what plays out in this crisis. Which performs better, residential or commercial? And for the people who think that residential is going to perform better, you sell Nedbank and buy another bank. For the people who think that commercial may play out better, you buy Nedbank and sell one of the other banks. But I would think those are the key things playing out underneath that. Perhaps, if we just try and get to 1 or 2 more. [ Chris Stewart ] again, under what scenario of RWA growth or losses do you anticipate actually needing to utilize the SARB concessions around Pillar 2A and capital conservation buffer? So again, Chris, I don't think we're going to talk through exactly what all of our scenarios are other than to say exactly what Raisibe said. We do extensive stress and scenario testing around scenarios that we currently think are going to play out. And our central scenario right now is a minus 7% GDP play-out in South Africa, and we have a number of more adverse scenarios than that. And currently, in our stress and scenario testing, our capital position remains robust.

And maybe just related to that. I think that this Directive 3 is particularly helpful from that perspective in terms of managing the migration of RWA. But importantly, for the long-term planning, that is exactly why we have buffers for pillars outside of the stress precisely to deal with this kind of situations. So for that reason, we are quite comfortable that in the scenarios that we run today, we do not end up with our capitals being below the regulatory buffers or the regulatory minimum. And if we do have to utilize the Pillar 2A concessions, it will be in the best interest of continuing to support the economy because that is precisely why those concessions have been provided.

Okay. So perhaps there is time just for a few more. I feel like some of the government ministers who sit and take questions endlessly on their presentations, if you watch them on TV. Oh, sorry, I have now lost the full list of questions, which is not a good thing to -- okay. No, they're back. Thank you. All right. [ Chris Stewart ], Gary, for you, saying, surely, the credit losses will exceed the previous 56 basis points peak in commercial real estate.

So [ Chris, ] it's very early on in the period that we're in, and it's very difficult to try to quantify what the longer-term impact of this will be. Right now, based on the assessments we have been running through our business and a number of stress tests across our book, this is the guidance that we can provide at this point.

Yes. So it could be wrong, but it's currently our best estimate.

Absolutely.

Like many things in these times. Just staying with you, Gary, how do we treat REIT share prices and bond yield movements when we're doing LTVs and cap rates, et cetera?

So I think for us, the REIT share prices are important indicators to us of what the market is seeing in these various companies. I think it's important to say that we don't simply adjust valuations based on share price, and that's both up and down. When the listed sector was trading at significant premiums to net asset value, we certainly weren't adjusting loan-to-value. We weren't adjusting values upwards. And at the same time, we're not making massive adjustments to values as the share prices have come off. As we said, we think that the share prices of the companies don't necessarily reflect the fundamentals of those companies and their ability to service debt at this point. In terms of bond yield movements, I mean, over time, discount rates and cap rates should broadly track bond yield movements or trend in line with them. But certainly, in periods of short-term volatility both up and down, we don't simply adjust our values. We try to take a more through the cycle approach. And certainly, at this point, we're trying to understand what the longer-term impact on value are going to be rather than making short-term panic adjustments.

Okay. So I'm just going to try and deal quickly with the remaining questions. I think we've dealt with our ability not to talk about April collections, et cetera. And then perhaps just quickly staying with you, Gary, just your thoughts around how we are likely to treat interest covenant breaches in respect of REITS.

So I think importantly, if we just talk about covenants, they are measures that allow us at different points in time to take different courses of action. As we've said a couple of times, I think the most important thing for us at this point is that our clients are able to meet their debt servicing obligations as they fall due. And to the extent that they're able to do that, I think we would look to condone any of the covenant breaches that occur over this period of time.

Yes. So provided obligations are still being met.

Absolutely.

Okay. Then I'm going to answer one question generally, and then Raisibe can deal with the last one. So I think we've also spoken about how the impairment regulations work from a stage 1, 2 and 3-point of view and how the Directive 3 helps -- how Directive 3 would play out there. There are 2 questions here that are sort of slightly similar from Matthew Pouncett and from [ Daniel Masmasveri ], if I've said that correctly, around, are there scenarios and shocks used in the SARB capital stress test in line with the GDP that we're forecasting? And then a similar sort of question around, in our GDP forecasts, are our base expectations that we reach level 1 or 2 in the lockdown? So perhaps I'll just deal with those collectively. So the SARB stress tests are done across multiple scenarios. But actually, probably what's even more instructive than that is the ICAP that we complete every year for the SARB, where we do both the stress test that the SARB asked us to do, and we also add into that a number of voluntary stress tests that we also do, where we draw on stress testing that we've seen in the U.K. and the U.S., for example, and try and translate that into South Africa. We look at areas where we have concentrations, property finance, for example, and we run specific stress tests on that. So I can't recall whether the SARB stress tests align with our current GDP forecast. But what I can tell you is that the range of stress tests that we include in our ICAP would encompass pretty much any of those GDPs across that range. And certainly, when we do -- did our GDP expectations that we now say as minus 7%, I don't think government had yet come out with the levels, 1, 2, 3, 4, 5. So I don't think those were explicitly included. Although implicitly in that forecast, there's clearly some opening up of the economy, but I can't tell you exactly what level that is. So I think the final question I'm going to leave for Raisibe, which is from Neville Chester at Coronation, and that's a question around our approach to provisioning at the interim versus the final, and will we be taking full lifetime losses on the loan book at the interim stage or is our losses -- our expected credit losses likely to be more smoothed between H1 and H2.

Yes. Thanks, Mike. And maybe just before I get to that. On the stress testing, having indicated that we have some of that included in our integrated report, which I'm sure people will read at their own time, but in each scenario, we expected that the economy opening up will be a gradual process. And what is different is really the number of days where in the base scenario, we have 35 days. And as we progress, we expected that additional days will be added given that we are still facing winter and the health professionals have indicated that our cases are likely to peak at the back end of our winter. So to Neville's question, which is around what we'll be doing at interim from a provisioning perspective versus what we'll do at final, very early days. And again, having referred to the credit committee, one of the subcommittees for the COVID-19 environment, is we are well aware that the pro-cyclicality is one of the aspects that need to be looked at in the current models. So we are looking at those, and we are not finalized as yet for us to be able to give you a directive in terms of what we'll do in H1 versus H2. But definitely, that is one of the things that we need to look into in terms of our models and also working with the full interpretation of the SARB directives, inclusive of all the different products that have come through, i.e., the SME funding, et cetera, as well as making sure that we are aligned with the audit profession. And I've indicated that the audit process is still underway, where the auditors are still communicating with the SARB and the BASA. So lots of work on credit, and we'll definitely give you a bit more color when we announce our results in June.

Okay. And we're just going to do one more. Sorry. A question from our friend Sergey Ambartsumov, I hope I said that correctly, from AB Global. And Gary, that's for you. He wants to know what particular assets in retail property may present risks, bigger shopping malls, smaller regional ones. Any granularity you can offer around that would be great. So that will be the last question because I think we've dealt with every single one.

Okay. Sergey, what I would start by saying is that vacancies across all retail, all classes of retail on average, are around about 5.2%, the last time I looked at vacancies, against a long-term average of 2.9% across all classes. Clearly, retail has showed up to be more resilient than maybe we would have expected coming into this period, but it's been at the expense of negative rental reversions and the pressures that we've seen around rentals. I think when you say big shopping malls or smaller regional ones, it's difficult to distinguish between those 2 categories. But if you look at those types of centers against neighborhood centers, neighborhood centers have typically performed better in recent times. And that's simply because fashion retailers have been under a lot of pressure in recent times, and your typical neighborhood center doesn't have much fashion. So if you talk about a big shopping mall versus a smaller regional one, it's only one category apart, and I think this is largely going to be dependent in each case on the tenant mixes and which tenants suffer more through this period than others. But in terms of risks to ourselves, I think it's largely going to be dependent on where gearing levels are on any one of those assets at a point in time and the ability for landlords to continue to meet their debt servicing obligations to us.

Okay. Great, everybody. Thanks very much for joining us, and I hope you found that interesting and informative. And as always, stay safe. Thank you.