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POSTBANK CORPORATISATION

PROGRESS REPORT TO THE SELECT COMMITTEE ON LABOUR

AND PUBLIC ENTERPRISES

May 2013

Purpose of the Document

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The purpose of the document is to brief the Select Committee on Labour and Public Enterprises on the progress made with regard to the corporatisation of Postbank.

The briefing will comprise the following:•Background

•The Corporatisation Plan

•Banking license application timelines

•Progress made to date

•Funding received

•Achievements and Challenges

•The way forward and what has to be done

•Glossary

Background

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Current:•Division within SAPO

•Exempt from Banks Act

•Limited product range

•Limited accessibility – only branches and call centre

•Non-compliant IT platform

•Organisation structure aligned with deposit taking activities

•Outdated processes

Future: •Stand-alone entity 100%owned by SAPO

•Under the Banks Act supervision

•Increased product range

•Introduce more channels

•Compliant IT platform

•Organisation structure aligned with Banks Act

•World class processes

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The corporatisation plan

POSTBANK READINESS MEANS:

•Provision of simple, accessible and affordable products and services for our communities•Efficient and reliable IT systems•Compliance with the regulatory and legislative framework (Banks Act and regulations etc)•Recruitment of appropriate individuals•Up-skilled and competent staff•World-class scalable processes•Enhanced MIS and regulatory reporting, resulting in:

The award of a banking license

WE ARE HERE

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Time period required for award of banking licence

• The Banking Licence application process is governed by legislation which Postbank cannot influence

• The process is determined by the Banks Act and supporting Regulations

• There are 3 steps to be followed in obtaining the licence:1. S12 of the Banks Act specifies that Postbank is required to submit to SARB an application

to establish a bank. It typically takes 3 to 6 months before permission to establish a bank is granted by the Registrar of Banks. The application to establish a bank has to highlight areas for improvement to enable compliance with the Banks Act. After permission to establish the Bank is received from the SARB, Postbank will need to form the company.

2. S15 of the Banks Act specifies that Postbank will need to apply to form a company that carries on the business of a bank. This application consists of the Memorandum of Incorporation, company registration forms and a mini-application form that is submitted to the CIPC. The permission to form a bank provided by the Registrar of Banks is included in the submission to the CIPC.

3. The Registrar of Banks gives the applicant up to 12 months from the date of the approval to establish a bank to demonstrate compliance. Only after that year is completed AND the applicant has complied with all conditions that SARB might impose on Postbank is the licence awarded. (The company must be incorporated in this 12 month period).

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The banking license application timelines

Completed

In Progress

Progress made to date

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• Draft Memorandum of Incorporation submitted to

DoC

• Obtained membership in the VISA card association

• Developed policies (lending, borrowing & investments) that

were submitted to DoC

• Transaction advisor on board from the 16th of January 2012

• Phases 1 and 2 (Due Diligence and Banking License application) completed

• Proposed process for the transfer of staff completed and approved by SAPO Board

• Determination of the business to be transferred completed and validated by an independent advisor

• Designated individuals to sit on the Postbank Board announced by the Minister of Communications

• Obtained full membership in the Payments Association of South Africa (PASA)

• Provided input into the proposed amendments

to the Postbank Act

• Procurement partner appointed to

assist with the sourcing of a transaction advisor

• Postbank Act promulgated

2011 2012 20132010

Funding Requirements

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• Postbank submitted requests for funding in the 2011/12 and 2012/13 MTEF and adjustment budget processes

• The 2012/13 MTEF and adjustment budget funding re-phased request was as follows:

• National Treasury requested several scenarios to reduce the funding allocation and allocated R481m with conditions:

– Restrictions on the products that may be offered i.e. Postbank may not offer lending products– Postbank must place all of its investments in Treasury Bills which reduces profitability

• This means that Postbank has to re-evaluate the products and services it plans to offer to ensure future sustainability given the restrictions imposed.

• There is also a need to optimise priorities and expenditures in light of the funding made available• The funding does allow Postbank to start appointing suitably skilled people and upgrading its

banking systems in preparation for registration as a bank. The funding deficit will have to be addressed.

R in 000s FY13 FY14 FY15 FY16 Total

Total corporatisation investment (89) (353) (608) (543) (1 593) Less amount generated by Postbank 34 147 256 297 734 Add amount contributed by SAPO - - Capital injections required - (895) - (1 544) (2 439)

Net funding requirement (55) (1 101) (352) (1 790) (3 298)

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Achievements and key challenges

Achievements• Completing the Due Diligence of the Postbank business• Completing the Banking License Application documentation• Obtaining funding from National Treasury to continue with the Corporatisation programme• Obtaining full membership in the Payments Association of South Africa and finalising bi-lateral

agreements with all the banks • Appointing key individuals that will be required in a bank : Chief Financial Officer, Chief Operating

Officer, Head of Payments, Head of Process Optimisation, Financial Controller, Manager: Customer Experience, Product Managers

Key Challenges• Compensating for the shortfall in the funding provided by National Treasury via re-prioritisation of

activities, optimal allocation of resources and actively pursuing new revenue opportunities• Postbank legislative amendments must be effected in the current calendar year

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The way forward and what has to be done

NO KEY ACTIVITY TIMELINE

1 Complete the Design Phase of the programme June 2013

2 Transfer pricing arrangements to be formulated between SAPO and Postbank June 2013

3 Finalise the Cooperation Agreement between SAPO SOC Ltd and the Postbank SOC Ltd per section 9(2)(a) of the Postbank Limited Act

August 2013

4 Banking license documentation to be submitted June 2013

5 Postbank Limited Act amendments to be introduced to Parliament June 2013

6 Commence the Construct phase that was initially due to start in July 2013 but is now fast tracked

May 2013

7 Start implementing conditions specified by National Treasury in obtaining the funding June 2013

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The way forward and what has to be done … CONT

NO KEY ACTIVITY TIMELINE

8 Phased procurement and implementation to be initiated:• Core banking system upgrade and expansion• General ledger and regulatory reporting• Anti money laundering• Risk management systems• Treasury system• Mobile banking and internet banking• Branch point of sale system etc.

May 2013

9 Recruit staff for Postbank structure (an additional 100 employees in FY 2013/14) March 2014

10 Finalise branch impact and quantify investment required August 2013

11 Finalise marketing plan aligned to the Corporatisation programme incorporating branding and product components

June 2013

12 Continue training initiatives and change management activities Ongoing

13 DOC to finalise incorporation process Subject to approval by the

Registrar of Banks

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Glossary

Due diligence: "Due diligence" is a term used for a number of concepts, involving either an investigation of a business or person prior to signing a contract,

Payments Association of South Africa (PASA): PASA performs a crucial function in the South African economy by assisting the South African Reserve Bank in managing the safety and integrity of the National Payment System, through which all payments between financial institutions must flow.

Construct phase: The development of the IT, processes and organisational capabilities required to operate as a bank.

Transfer Pricing: Transfer prices are the charges made between controlled (or related) legal entities i.e. within the same group of companies for the provision of goods and services.

Cooperation Agreement: An agreement that governs the relationship between South African Post Office and the Postbank when it becomes a subsidiary of the South African Post Office and pertains to the sharing of infrastructure (section 9(2)(a) of the South African Postbank Limited Act No.9 of 2010)