ANNUAL REPORTS

Financial and development investment overview continued
The net foreign exchange loss (R57,2 million) and net
revaluation loss of financial assets and liabilities held at fair
value (R398,9 million), totalling net losses of R456,1 million,
are mainly attributable to the following:
• The USD open position on equity investments
(R92,9 million foreign exchange loss, and
R204,1 million revaluation loss, totalling a
R297,0 million loss).
• A R158,7 million revaluation loss on fair valuing of
funding (R83,5 million), ZAR interest rate hedging
(R70,4 million) and capital market instruments
(R4,8 million). Normally, the revaluation of funding
would be offset approximately by the revaluation
of the corresponding hedging derivatives. However,
hedging usually protects against parallel shifts
of the bond curve relative to the swap curve.
This year, the swap curve steepened relative to
the bond curve, compared to last year. This means
that the derivatives were valued at a discount rate
that is relatively lower than the corresponding
capital market instruments.
Therefore, despite the R70,4 million loss on ZAR interest
rate hedging, the Bank would have been worse off by
another R200,5 million had the hedging not been in
place. This would have resulted in a net loss for the year of
R125,4 million. The net benefit that the hedging achieved
during the financial year is detailed in the table below.
R million
Benefit/(loss)
Foreign exchange 17,9
Revaluations: Currency hedging
derivatives (36,0)
Revaluations: ZAR hedging derivatives (70,4)
Net interest income benefit 289,0
Net benefit of derivatives 200,5
Equity portfolio impact on income statement, 2010/11
The rest of the foreign exchange and revaluation losses
(R0,4 million) are attributable to the net result of the foreign
currency hedging. The Bank does not speculate on interest
rates and foreign exchange rates but manages these risks
by aligning, as far as possible, the interest rate and foreign
currency profiles of borrowing and lending through the
application of interest rate swaps and cross-currency interest
rate swaps.
The protection that the hedging provided during the year
can be seen from the fact that the foreign exchange and
revaluation gains and losses relating to loans, funding and
hedging approximately net off:
R million
Gains/(losses)
Foreign exchange: Development loans (310,3)
Foreign exchange: Funding and hedging 345,9
Revaluations: Currency hedging
derivatives (36,0)
Remaining net loss (0,4)
Furthermore, in the current environment of low interest rates,
the hedges also provided a R289,0 million benefit on the net
interest income line. This was achieved because the declining
interest income on the floating rate lending was matched by
a decline in the interest expense, through the application of
interest rate swaps on the funding.
Foreign exchange adjustment
Dividends received
Interest received
Fair value adjustment – realised
Fair value adjustment – unrealised
Impairment
R92,9 million
R16,2 million
R2,8 million
R57,6 million
R204,2 million
R0 million
The net impairment charge of R228,7 million (2009/10: R228,4
million) to the income statement is managed in line with the
overall increase in the loan book. The non-performing book
debt ratios remain within acceptable norms (2010/11: 4,2%;
2009/10: 4,9%).
The cost-to-income ratio of 41,2% (2009/10: 40,5%) is below
the prudential limit of 45%, owing to the active management
of the income and expense components.
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DBSA DBSA | ANNUAL | ANNUAL REPORT REPORT 2010/11 2010/11