Normalised results (unaudited)

Headline earnings have been adjusted in calculating normalised headline earnings for required accounting conventions that do not reflect the underlying economic substance of transactions. A common element in these transactions relates to shares in issue deemed by accounting convention to be treasury shares. Consequently the number of shares used for per share calculation purposes are materially lower than the economic substance, resulting in inflated per share ratios. With regard to segmental reporting, normalised adjustments have been made within central funding and Liberty Life with the results of the other business units unaffected.

Black Economic Empowerment Ownership initiative

The group concluded its Black Economic Empowerment Ownership (Tutuwa) initiative in October 2004 when it sold an effective 10% interest in its South African banking operations to a broad-based grouping of black entities.

The group subscribed for 8,5% redeemable cumulative preference shares issued by special purpose vehicles (SPVs) controlled by Standard Bank Group (SBG). The initial repurchase of SBG shares by the SPVs is treated as a reduction in the group’s equity. Subsequent to the repurchase of the SBG shares, the SPVs containing these shares were sold to the black participants. The capital and dividends on the preference shares are repayable from future ordinary dividends received on SBG shares. As a result of SBG’s right to receive its own dividends back in the form of preference dividends and capital on the preference shares, the subsequent sale of the SPVs and consequent delivery of the SBG shares to the black participants (although legally effected) is not accounted for as a sale. The preference share investment in the SPVs is also not accounted for as an asset. The preference share asset is effectively eliminated against equity as a negative empowerment reserve.

As a consequence of the above, the accounting treatment followed until full redemption, or third party financing is:

• the 8,5% redeemable, cumulative preference shares issued by the SPVs and subscribed for by SBG are not recognised as financial assets, but eliminated against equity;
  
• the preference dividends received from the SPVs are eliminated against the ordinary dividends paid on the SBG shares held by the SPVs;
  
• for purposes of the calculation of earnings per share, the weighted average number of shares in issue is reduced by the number of shares held by those SPVs that have been sold to the black participants. The shares will be restored on full redemption of the preference shares, or to the extent that the preference share capital is financed by a third party; and
• perpetual preference shares issued by the group for the purposes of facilitating the repurchase of SBG shares, are classified as equity. Dividends paid are accounted on declaration and not on an accrual basis.

The “normalised” calculation:

• reverses the elimination of preference shares against equity;
  
• adjusts headline earnings for preference dividends receivable not recognised in income;
  
• adds back the number of shares held by the Tutuwa participants to the weighted number of shares in issue, in calculating normalised headline earnings per share; and
  
• adjusts dividends declared on perpetual preference shares to an accrual basis.

Shares held for the benefit of policyholders

Group companies’ shares held by Liberty Life are invested for the risk and reward of its policyholders, not its shareholders, and consequently the group’s shareholders are exposed to an insignificant portion of the fair value changes on these shares. In terms of IAS 32, Standard Bank and Liberty Holdings shares held by Liberty Life on behalf of policyholders are deemed to be treasury shares for accounting purposes, with effect from January 2005, and eliminated. The corresponding movement in policyholders’ liabilities is however not eliminated resulting in a mismatch in the overall equity and income statement of the group.

The accounting consequences in the consolidated financial statements are:

• the investment in group shares is set off against equity in the group financial statements;
  
• within equity, the cost price of the group shares is eliminated against ordinary shareholders’ funds and minority interests;
  
• the fair value movements are eliminated from the income statement, reserves and minority interests;
  
• dividends received on group shares are eliminated against dividends paid; and
  
• no adjustment is, however, made for policyholder liabilities. Increases in the fair value of group shares and dividends declared on these shares increases the liability to policyholders. The increase in the liability to policyholders is accounted for in the income statement. The increase in assets held to match the liability position is however eliminated against equity. This results in a mismatch in the income statement.
  

The equity and profit impact is attributable to Standard Bank ordinary shareholders to the extent of the effective holding in Liberty Life (30%).

The weighted average number of shares in issue for earnings per share is calculated by deducting the full number of group shares held (100%) and not the effective 30% owned by the group, as the accounting standard IAS 33 – Earnings per share does not contemplate minority portions of treasury shares. This further exaggerates the reduction in the number of shares for purposes of calculating per share ratios.

For purposes of calculating the normalised results, the adjustments described above are reversed and the group shares held on behalf of policyholders are treated as issued to parties external to the group.

Adjustments to normalised number of shares

		2005			2004
			Weighted				Weighted
	Issued		average		Issued		average
	number		number		number		number
	of shares		of shares		of shares		of shares
	Million		Million		Million		Million
IFRS	1 207		1 205		1 253		1 322
Add back: SBG shares held by Tutuwa SPVs	99		99		99		24
Add back: SBG shares held in policyholder funds	46		49
Normalised	1 352		1 353		1 352		1 346

Adjustments to normalised results

			Headline earnings			Ordinary shareholders’ equity
	Standard Bank
	operations		Liberty Life		Group		Group
	Rm		Rm		Rm		Rm
IFRS values – 2004	7 187		351		7 538		29 064
Preference dividend accrual	(114)				(114)		(114)
8,5% cumulative redeemable preference dividend and
shares recognised	83		4		87		4 360
Normalised values – 2004	7 156		355		7 511		33 310
IFRS values – 2005	8 145		319		8 464		32 931
Preference dividend accrual	3				3		(111)
8,5% cumulative redeemable preference dividend
and shares recognised	342		25		367		4 378
Fair value movements and dividends received on deemed
treasury shares			179		179		1 072
Normalised values – 2005	8 490		523		9 013		38 270

Capital adequacy and allocation

The group manages its capital base to achieve a balance between maintaining prudent capital ratios to support business growth and depositor confidence, and the objective to provide competitive returns to shareholders.

Regulatory capital

The group is subject to regulation and supervision by a number of South African and international regulators.

The 25 banks in the group are required to meet minimum capital requirements of regulators in those countries in which they operate. Banking regulations are generally based on the guidelines developed by the Basel Committee under the auspices of the Bank for International Settlements. In addition to the requirements of host country regulators, all banking operations are also expected to comply with the capital adequacy requirements in terms of South African banking regulations. As a consequence, the group’s individual banking operations are capitalised at the higher capital adequacy levels in terms of either host country or South African requirements.

The capital adequacy ratio, which reflects the capital strength of an entity compared to the minimum regulatory requirement, is calculated by dividing capital by risk-weighted assets.

Capital is split into three tiers. Tier I (primary capital) represents the permanent forms of capital such as share capital, share premium and retained earnings. Perpetual, non-cumulative preference shares also qualify as tier I capital. Tier II (secondary capital) includes medium- to long-term subordinated debt, revaluation reserves and general debt provisions. Tier III (tertiary capital) represents short-dated subordinated debt instruments to support a bank’s trading activities.

Risk-weighted assets are determined by applying prescribed risk weightings to on- and off-balance sheet exposures according to the relative credit risk of the counterparty. Included in overall risk-weighted assets is a notional risk weighting for market risks, counterparty risks and large exposure risks relating to trading activity.

The use of non-equity forms of regulatory capital plays an important part in the group’s capital management process:

• Domestically, Standard Bank of South Africa (SBSA) redeemed R2,7 billion of tier II capital bonds that were eligible for redemption during June and December 2005. As part of a refinancing programme and also to strengthen the bank’s capital base in view of strong risk-weighted assets growth, SBSA issued R3 billion 10 year tier II bonds at a spread of 10 basis points over the R157 bond in May 2005 following an earlier issue of R2 billion tier II capital during November 2004.
  
• International operations raised USD250 million of tier II bonds in October 2005 at a spread of 115 basis points over LIBOR. This issue was part of a strategy to improve the gearing of the regulatory capital base of the group’s London based operations and to refinance the redemption of USD100 million of tier II bonds that were eligible for redemption in November 2005. The proceeds of the above issue were also used to repay, to the pool of strategic capital, USD53 million of capital invested by the group in its international operations.
  
• Within Rest of Africa, Standard Bank Swaziland issued E35 million tier II bonds, the first bank tier II issue in Swaziland. The optimisation of capitalisation levels and structuring in the African operations will receive greater focus during 2006.

The group’s life insurance operations based in South Africa are regulated by the Financial Services Board. The capital requirements are calculated by a statutory actuary in terms of the guidance notes issued by the Actuarial Society of South Africa. Consistent with the group focus on optimising capital utilisation and shareholder value, Liberty Life similarly has an ongoing process to review its capital structure, which led to a R2 billion tier II bond issue during July 2005.

Capital adequacy ratios

The group's capital adequacy ratio reduced to 14,2% from 15,0% at December 2004, still well above the weighted average regulatory requirement of 10,3% for the 25 banks across the group. Tier I capital adequacy reduced from 11,0% to 10,5% due to strong growth in risk-weighted assets marginally exceeding retention of capital following the reduction in dividend cover. In addition, the group utilised R677 million to buy back 10,2 million shares thus counteracting the impact on earnings per share of shares issued in relation to the group’s equity compensation plans.

The group’s target level of capitalisation (excluding strategic pools of surplus capital that might be held from time to time) approximates 9% for tier I and 13% for total capital adequacy. A broad mix is targeted of 60% ordinary shareholders‘ funds, 10% other forms of tier I capital such as preference shares and 30% tier II and tier III capital instruments. Capital management activities take place against the backdrop of these guidelines and the demands on capital arising from the group’s operating requirements.

Liberty Group is well capitalised with a capital adequacy cover of 2,0 times (2004: 2,5 times) the minimum regulatory capital requirement (CAR). Liberty Life’s long-term CAR ratio target is 1,7 times.

Regulatory capital and risk-weighted assets

	2005		2004
	Rm		Rm
Regulatory capital
Ordinary shareholders’ equity	32 931		29 064
Minority interest	281		318
Perpetual preference shares	2 983		2 983
Elimination of insurance operations1	(2 122)		(2 872)
Impairments and other	(520)		(382)
Tier I capital	33 553		29 111
Preference share capital	8		8
Tier II bonds	9 467		8 042
Credit impairments for performing loans	1 236		1 036
Revaluation reserve	210		243
Tier II capital	10 921		9 329
Tier III capital	854		1 282
Total capital	45 328		39 722
Risk-weighted assets (closing balances)
On-balance sheet	257 424		212 218
Off-balance sheet	20 834		15 742
Trading activity notional assets	40 021		37 188
Standard Bank operations	318 279		265 148

1

In accordance with Basel II principles relating to the treatment of insurance entities, insurance operations are excluded from the capital base of the banking group and its related risk-weighted assets. Capital in insurance operations in excess of statutory minimum requirements is accordingly not recognised in group capital. Comparatives have been restated accordingly.

Capital adequacy ratios and targets

	Effective
	group
	constraint		SARB
	(including		regulatory
	buffers)		constraint		Target		2005		2004
	%		%		%		%		%
Standard Bank Group
Total capital adequacy ratio	13,4		10,0		13,0		14,2		15,0
Tier I capital adequacy ratio	9,4		6,0		9,0		10,5		11,0
Preference shares as % of Tier I			20,0				8,9		10,2
Tier II and Tier III as % of Tier I			100,0				35,1		36,5
Lower Tier II as % of Tier I			50,0				28,2		27,6
Ordinary equity as % of capital					60,0		67,4		65,8
Preference shares as % of capital					10,0		6,6		7,5
Tier II and Tier III as % of capital					30,0		26,0		26,7

Capital adequacy of banking subsidiaries

					2005						2004						2005
																	Host
	Tier I		Tier II		Tier III		Total		Tier I		Tier II		Tier III		Total		regulatory
	capital		capital		capital		capital		capital		capital		capital		capital		requirement
	%		%		%		%		%		%		%		%		%
Standard Bank Group	10,5		3,4		0,3		14,2		11,0		3,5		0,5		15,0		–
The Standard Bank of
South Africa	8,6		3,6		0,3		12,5		9,1		3,8		0,5		13,4		10
Rest of Africa
Stanbic Bank Botswana	12,1		3,7		–		15,8		11,9		4,1		–		16,0		15
Stanbic Bank Congo	11,0		–		–		11,0		10,8		–		–		10,8		10
Stanbic Bank Ghana	18,0		0,3		–		18,3		16,8		–		–		16,8		10
Stanbic Bank Kenya	14,7		0,7		–		15,4		19,8		–		–		19,8		12
Stanbic Bank Malawi	15,0		4,2		–		19,2		14,8		4,9		–		19,7		10
Standard Bank Mauritius	24,0		0,7		–		24,7		17,6		0,6		–		18,2		10
Standard Bank Mozambique	13,5		–		–		13,5		18,4		–		–		18,4		10
Stanbic Bank Nigeria1	307,0		–		–		307,0		26,8		0,3		–		27,1		10
Stanbic Bank Tanzania	9,2		0,9		–		10,1		8,8		0,8		–		9,6		10
Stanbic Bank Uganda	14,6		1,1		–		15,7		17,3		0,5		–		17,8		12
Stanbic Bank Zambia	21,5		0,1		–		21,6		18,6		0,1		–		18,7		10
Stanbic Bank Zimbabwe	22,4		3,8		–		26,2		15,3		3,7		–		19,0		10
Standard Bank Lesotho	17,2		0,4		–		17,6		10,0		0,5		–		10,5		8
Lesotho Bank (1999)	16,1		0,7		–		16,8		21,9		0,7		–		22,6		8
Standard Bank Namibia	9,7		3,5		–		13,2		9,0		3,8		–		12,8		10
Standard Bank Swaziland	6,1		3,2		–		9,3		7,7		0,8		–		8,5		8
SIH, incorporating	8,1		5,7		0,5		14,3		8,2		6,1		0,8		15,1		10-12
– Standard Bank London
– Standard Bank Asia Limited
– Standard Merchant Bank
Asia
– Banco Standard de
Investimentos Anonima
– ZAO Standard Bank
Standard Bank Jersey	9,1		2,3		–		11,4		9,5		2,5		–		12,0		10
Standard Bank Isle of Man	5,9		5,2		–		11,1		7,1		4,4		–		11,5		10
Aggregate regulatory capital
requirement							10,3								10,5
Liberty Life (calculated in terms
of the Long-term Insurance Act)
– CAR – times covered							2,0								2,5

1	High levels of capital in Nigeria relative to risk-weighted assets were due to a further capitalisation of the bank to meet new local minimum capital requirements.

Analysis of risk-weighted assets

	2005		2005		2004		2004
	Unweighted		Risk-weighted		Unweighted		Risk-weighted
	assets		assets		assets		assets
	Rm		Rm		Rm		Rm
On-balance sheet assets
Domestic Banking	452 038		215 219		391 668		179 845
Rest of Africa	30 043		17 075		25 348		14 641
Corporate & Investment Banking International	122 660		23 861		107 128		15 207
Stanlib and central funding (including
group eliminations)	(11 013)		1 269		(18 124)		2 525
	593 728		257 424		506 020		212 218
Off-balance sheet assets
Domestic Banking			16 861				12 462
Rest of Africa			1 685				1 831
Corporate & Investment Banking International			2 288				1 449
			20 834				15 742
Trading notional assets
Domestic Banking			11 623				14 264
Corporate & Investment Banking International			28 398				22 924
			40 021				37 188
Standard Bank operations	593 728		318 279		506 020		265 148

Economic capital

The group’s approach to the measurement and management of economic risk capital is being aligned to be consistent with Basel II requirements in relation to the internal capital adequacy assessment process (ICAAP).

The allocation of economic capital to business units considers both risk capital as well as regulatory capital requirements in order to ensure that the business units focus on generating adequate returns for actual capital that needs to be held. Economic capital is therefore set at the higher of risk or regulatory capital requirements.

Return on equity based on economic capital allocations forms part of a balanced set of business unit financial performance indicators, which are monitored regularly. Cost of equity and weighted average cost of capital estimates are calculated for each market in which the group operates to serve as objective performance benchmarks and investment criteria.

Currency profile of group capital

A significant proportion of the group's activities are based outside South Africa. The group’s plans for acquisitions also lie predominantly outside South Africa. As a consequence, 39% (2004: 35%) of the group's shareholders’ funds are foreign currency denominated; 12% (2004: 8%) is deployed in African operations and 27% (2004: 27%) supports international operations or is held as surplus capital for future expansion. The increase in capital deployed in African operations results from the further capitalisation of the group’s Nigerian subsidiary to be in compliance with new minimum capital levels of Naira 25 billion (approximately R1,2 billion).

Appropriate hedging strategies are implemented to create a more balanced currency profile given an overweight position of the US dollar in the group's foreign capital base in favour of a more balanced spread of exposures to US dollar, sterling and euro. Before accounting for currency hedging initiatives, 16% (2004: 16%) of the group’s shareholder funds was exposed to US dollar, 3% (2004: 5%) to sterling and 7% (2004: 6%) to euro. After hedging, the main non-rand currency exposures of shareholder funds are 11% (2004: 8%) US dollar, 10% (2004: 13%) sterling and 5% (2004: 6%) euro.

The group remains averse to an overconcentration of its net asset value in US dollars and has hedges in place to support this strategy. The strengthening of the USD relative to GBP and euro has accordingly given rise to losses on currency hedges on USD invested in Corporate & Investment Banking International.

Given the group’s presence in many countries, its shareholder funds will always be exposed to currency movements. Current South African Reserve Bank exchange controls do not allow for hedging of foreign currency risks on external capital into rand. Accordingly, the group’s currency hedging is limited to movements within the basket of external currencies.

Economic returns generated by Standard Bank Group

	Change		2005		2004
	%		Rm		Rm
Average ordinary equity (normalised)	15		35 743		31 073
Headline earnings (normalised)	20		9 013		7 511
Cost of equity charge	3		(4 289)		(4 164)
Economic profits on normalised headline earnings	41		4 724		3 347
Other changes in net asset value			514		(1 237)
Translation gains/(reversals)			397		(1 272)
Other reserve movements			117		35
Total economic return	>100		5 238		2 110

Closing shareholders’ funds exposure to currencies

		Total		Rand		Dollar		Sterling		Euro			Other
												ZAR
												linked		Various
		Rm		Rm		Rm		Rm		Rm		Rm		Rm
Closing currency exposure
December 2005 underlying
exposures		32 931		20 188		5 162		1 194		2 317		854		3 216
Currency profile changes
due to hedging strategies						(1 601)		2 191		(526)				(64)
December 2005 actual exposures		32 931		20 188		3 561		3 385		1 791		854		3 152
December 2004 exposures
excluding hedging activities		29 064		18 889		4 738		1 414		1 819		768		1 436
Currency profile changes
due to hedging strategies						(2 402)		2 402
December 2004 actual exposures		29 064		18 889		2 336		3 816		1 819		768		1 436
		%		%		%		%		%		%		%
Closing currency profile of shareholders’ funds
2005 before hedging		100		61		16		3		7		3		10
2005 after hedging		100		61		11		10		5		3		10
2004 before hedging		100		65		16		5		6		3		5
2004 after hedging		100		65		8		13		6		3		5