South African Banks’ Integrated Reports difficult to compare

The Basel Committee on Banking Supervision (BCBS) has recognised the importance of market discipline and the need for reform within regulatory reporting in the financial services sector. Pillar 3 of the Basel Framework aims to promote market discipline through regulatory disclosure requirements as these conditions enable market participants to access information relating to a bank’s regulatory capital and risk exposures.

With the BCBS 239 reporting target set by the South African Reserve Bank (for January 2017) for all SA banks fast approaching, banks are in the process of establishing roadmaps to ensure compliance.

The risk framework within financial services during the last decade has demonstrated fundamental risks in the market and consequently in investor choices. As a result, financial institutions are required to provide much-needed clarity, consistency and comparability through a consolidated approach to external reporting.

Deloitte performed a benchmark assessment of SA listed banks’ Integrated Reports with the end target of determining how consistent and comparable these extensive reports are as this is one of the fundamental guiding principles established by the International Integrated Reporting Council (IIRC).

The IIRC has established that an Integrated Report should be concise, reliable and complete, identify all stakeholder relationships within the business, and incorporate strategic focus and future orientation.

The need for market discipline through standardised reports enables investors to make decisions based on a sound understanding of financial disclosures and core fundamentals of the underlying industry as well as the investment opportunities identified.

The BCBS has identified guiding principles for financial organisations when approaching Pillar 3 reporting, which include: clarity within disclosures; comprehensive disclosures; disclosures which are meaningful to users; consistency within disclosures; and comparability of disclosures with other financial organisations.

The Integrated Report should include the following content in terms of the IIRC:

-          Organisational and external environment overview;

-          Governance;

-          Business model;

-          Risks and opportunities;

-          Strategy and resource allocation;

-          Performance;

-          Outlook; and

-          Basis of preparation and presentation.

The IIRC outlines certain basic guiding principles for organisations when compiling an Integrated Report and we have noticed that not all SA banks meet the basis for preparation standard principle.

The IIRC requires organisations to clearly state how they determine what matters and that they include in the Integrated Reports how the matters are quantified or evaluated as the basis of presentation of the Integrated Report.

In order to provide a meaningful comparison of the Integrated Reports of SA banks, we first need to understand the approach followed by each bank in terms of what they included in their reports. We identified a trend whereby SA banks’ reports are concise and adhere to the IIRC minimum content requirement. Additional disclosures such as consolidated financial statements, sustainability reporting, and risk and capital management reporting can be found in separate reports on the banks’ websites.

The challenge facing organisations is establishing a picture for investors which captures the business environment in which it operates, its risks and compliance which are unique to the organisation.

During this exercise, Deloitte observed that banks tend to segment their impairments in different ways and the revised disclosures being introduced by the South African Reserve Bank will create comparability going forward.

Banks will need to ensure they are capable of calculating both Advanced Internal Ratings-Based approach numbers and standardised approach numbers to the granularity required in the revised Pillar 3 disclosures.

Banks will also need to ensure their collateral data is robust and accurate enough to meet the revised Pillar 3 requirements, which means being able to identify segregated versus unsegregated data.

In the short-term, some financial institutions should approach BCBS 239 and Pillar 3 reporting by identifying the core requirements needed to achieve minimum adherence; adapt current systems to achieve compliance; and use a balanced approach to obtain an efficient trade-off between cost and resource allocation.

In the long-term, these institutions should identify skills shortages to improve data aggregation; invest in IT systems which currently are not adequately set up for the future state of risk reporting; review and implement BCBS 239 regulations in conjunction with Pillar 3 reporting; and reduce duplicating the extraction of data and data calculations which is a regulatory and reporting requirement.

For the report go to: https://www2.deloitte.com/za/en/pages/financial-services/articles/a-reporting-comparison-for-the-informed-investor-in-south-africa.html?id=za:2em:3cc:awa_FSIBS:fsibs_cl_email