Firstrand Limited · JSE:FSR
Firstrand — FirstRand Bank — Non-Deal Roadshow (May 2017)
48 slides from Firstrand's roadshow presentation, May 2017
Slide 1: Funding and Liquidity Conditions: Non-deal roadshow
FUNDING AND LIQUIDITY CONDITIONS Non-deal roadshow May 2017
Slide 2: Agenda
2 Agenda • Macroeconomic environment • Fiscal conditions, local currency rating implications, EM case studies • Fair value for investors to enter market – risk/return perspective • Funding and liquidity • Ratings implications • Financial stability considerations • Regulations and mandates • Funding
Slide 3: Macroeconomic environment
3 MACROECONOMIC ENVIRONMENT
Slide 4: Possible reasons for local currency (LC) downgrade
4 Possible reasons for local currency (LC) downgrade Macro regime: policy uncertainty Macro regime: policy changes introduce and reform stagnation fiscal risk 1 2 3 Fiscal deterioration Debt monetisation Marked institutional (inflation/currency) deterioration/trend growth hit • Policymakers’ ability
Slide 5: Policy uncertainty and reform stagnation: some challenges
5 Policy uncertainty and reform stagnation: some challenges Macro regime: policy uncertainty Estimated fiscal deficit based on FSR growth forecast* and reform stagnation % GDP 4.0 3.5 3.0 2.5 1 2.0 1.5 1.0 0.5 0.0 Fiscal deterioration 2016/17 2017/18 2018/19 2019/2020 FSR growth forecast: government
Slide 6: Outflow potential in response to further LC downgrades
6 Outflow potential in response to further LC downgrades Bond indices that require investment grade (IG) Rating sensitivity of LC government bond investors 600 0.5 Passive and rating insensitive 17 (e.g. JPM EM index) 0.4 500 Passive and IG-sensitive 0.4 global bond index 9 400 0.3 Active and IG-sen
Slide 7: Components of fixed income risk premiums
7 Components of fixed income risk premiums Risk premiums Liquidity premium • Liquidity risk premium • Concentration risk premium • Supply constraints Credit risk premium • Other risk premiums • Incomplete closed market Credit: EL • Uncertainty arising from resolution Term premium Term premium framew
Slide 8: Cross-country comparison of real yield and inflation uncertainty premium
8 Cross-country comparison of real yield and inflation uncertainty premium A comparison of real yield and inflation premium across local currency ratings (%) • Local currency 10-year yield = real yield + expected inflation + inflation uncertainty premium 6 Brazil • Real yield and inflation uncertain
Slide 9: Yield impacts: 10-year yield scenario analysis
9 Yield impacts: 10-year yield scenario analysis Estimates for a scenario of fiscal slippage 10-year yield model (regression equation) (assume 60% debt to GDP ratio) – yield to maturity (%) Variable Coefficient t-statistic 10.0 Constant 1.82 3.11 9.8 US real yield 0.34 3.55 9.6 Trend inflation 0.44
Slide 10: Move to sub-investment grade: Brazilian and Turkish macros
10 Move to sub-investment grade: Brazilian and Turkish macros Economic institutional strength Political institutional strength Index Index Index 0.3 0 0.4 0.2 -0.2 0.3 0.1 -0.4 0.2 0 -0.6 0.1 -0.1 -0.8 0 -0.2 -1 -0.1 -0.3 -1.2 -0.2 1996 2000 2003 2005 2007 2009 2011 2013 2015 1996 2000 2003 2005 200
Slide 11: Move to sub-investment grade: Brazilian yield experience
11 Move to sub-investment grade: Brazilian yield experience Brazilian 10-year yield through the downgrade cycle (%) 18 Inflation, fiscal and political • Brazil’s 10-year yield lifted from 13% to 16.5% uncertainty premium spike during the period where its local currency rating February 2016: BB fell
Slide 12: Move to sub-investment grade: Turkish yield experience
12 Move to sub-investment grade: Turkish yield experience Turkish 10-year yield through the downgrade cycle (%) 13 Inflation and political • Turkey’s 10-year yield lifted from a range of uncertainty premium 9 – 10% to 10 – 12% in downgrade cycle 12 • Currency weakened 25% over the downgrade 10-12% p
Slide 13: Brazil and Turkey bond yields: the sub-investment grade experience
13 Brazil and Turkey bond yields: the sub-investment grade experience A comparison of 10-year local currency bond yields (non-investment grade LC rating) – yield to maturity (%) 11.0 • Brazil (BB) and Turkish (BB+) local currency yields are now between 9.8% – 10.5% (i.e. 100 – 9.8% - 10.5% 200 bps f
Slide 14: Policy changes introduce fiscal risk: moving beyond (only) a downgrade concern
14 Policy changes introduce fiscal risk: moving beyond (only) a downgrade concern Macro regime: policy changes introduce fiscal risk • Foreigners own around 39% of the outstanding amount of SA’s LC bonds and significant portion of the equity market 2 3 • Both SA real yields and inflation risk premiu
Slide 15: Some other impacts to consider
15 Some other impacts to consider • Foreign mandate impact • Foreign FDI and fund portfolio flows • Indices • Need to proactively address implications via local regulators • Solvency Assessment and Management (SAM), life and insurance capital requirements punitive for exposure (including SA banks) •
Slide 16: Cumulative flows – excluding mark-to-market gains and losses
16 Cumulative flows – excluding mark-to-market gains and losses R billion
Slide 17: Historical monthly flow distribution
17 Historical monthly flow distribution Monthly flow Bond Equities Total Max 28.64 17.65 22.77 Min -21.44 -28.16 -47.60 R billion monthly flow size distribution (Jan 01 to Apr 17) 20% 18% 18% 16% 16% 14% 13% 12% 12% 12% 10% 9% 8% 6% 5% 4% 4% 3% 3% 3% 2% 2% 1% 1% 1% 0% 0% 0% -50 -40 -30 -20 -15 -10 -
Slide 18: National Treasury's conservative debt management will cushion impact
18 National Treasury’s conservative debt management will cushion impact should there be a stress event • SA ZAR treasury bills • Locally held, mainly by banks and MMF’s, liquidity risk and sentiment indicator, key role played in liquidity management • SA ZAR government fixed rate bonds • 40% of fixe
Slide 19: Net foreign funding exposure of SA Inc.
19 Net foreign funding exposure of SA Inc. Assets and liabilities to foreigners Net position to foreigners USD billion USD billion 60 80 51 73 50 70 36 40 60 29 51 30 50 46 43 20 40 36 9 34 10 29 30 - 20 -10 10 -20 - -30 -27 National SA Life Unit Pension -40 Treasury banks companies trusts funds Nat
Slide 20: Funding and liquidity: Rating implications for SA Inc
20 FUNDING AND LIQUIDITY Rating implications for SA Inc
Slide 21: Philosophy on foreign currency external debt
21 Philosophy on foreign currency external debt • Framework for the management of external debt should take into account sources of sovereign risk • Unsustainable debt path (solvency) crisis • Liquidity crisis • Exchange rate and macroeconomic crisis • The group considers external debt of all South
Slide 22: External financing
22 External financing Solvency Net asset value Asset quality Structural borrowing limit Liquidity risk Cash flow and earnings profile Debt level Liquidity limits Liquidity mismatch Market confidence
Slide 23: Liquidity transmission across the financial system
23 Liquidity transmission across the financial system Greater liquidity transmission is required across markets FX swap market Cash market Repo market (cross currency (funding liquidity) (financing liquidity) liquidity) Central bank operations Charles Goodhart of the BIS Advisory Committee, BOE and
Slide 24: Robust mechanisms for liquidity transmission are required
24 Robust mechanisms for liquidity transmission are required to deal with large outflows Need operational mechanisms for dealing with the liquidity transmission Liquidity transmission Sources of liquidity Cash outflow and • FX reserves settlements of Commercial Central • Offshore swap lines payment
Slide 25: FX swaps and forwards market
25 FX swaps and forwards market • Swaps don’t add debt from an ALM perspective • Structural FX risk remains • Can address cash management and short-term liquidity risks • Swap market is more liquid • Credit enhanced, cleared, collateralised and secured • Is the natural transmission mechanism • For h
Slide 26: South Africa USD ZAR daily FX turnover
26 South Africa USD ZAR daily FX turnover South Africa has very deep and liquid FX markets, but only in short tenors
Slide 27: USD ZAR forward trade – mechanism to relieve immediate liquidity pressures
27 USD ZAR forward trade – mechanism to relieve immediate liquidity pressures
Slide 28: South African sovereign credit rating update
28 South African sovereign credit rating update South African sovereign credit rating Action date FC LC Outlook S&P 3 April 2017 BB+ BBB- Negative Fitch 7 April 2017 BB+ BB+ Stable Moody’s 3 April 2017 Baa2 Baa2 Review for downgrade South Africa’s FC is rated as sub-IG status by 2 agencies. Only Fit
Slide 29: FRB's overall creditworthiness remains unchanged despite S&P rating downgrade
29 FRB’s overall creditworthiness remains unchanged despite S&P rating downgrade Anchor rating Economic risk Industry risk 5 6 7 4 bbb bbb- bb+ 5 bbb- bbb- bb+ Issuer Capital Business Risk Funding and SACP/ credit Anchor and position position liquidity GCP* rating earnings (ICR) FirstRand Average (0
Slide 30: Allocation of savings flows by platform
30 Allocation of savings flows by platform 100% 2% 3% 5% 9% 11% 13% 90% 15% 17% 17% • Non-guaranteed liabilities 80% 18% 17% 9% 18% Regulatory • Relative value pricing, targeted return 9% 70% 9% 12% 13% and hurdles, often based on LDI mandates, 60% 23% 14% economic 50% 35% 30% forces will and real r
Slide 31: Savings assets, regulations and ratings
31 Savings assets, regulations and ratings AUM Regulation Regulator Ratings in Ratings in regulations mandates trusts Unit 13% CISCA Pension funds 18% Reg 28 Not in FSB Yes regulations PIC 14% insurers LT 20% SAM Included in International Banks 34% regulations, PD Basel III SARB mapping and banks as
Slide 32: Funding spread decomposition
32 Funding spread decomposition FirstRand funding spreads (mid bps) 250 200 200 191 181 172 163 150 150 135 120 139 122 130 105 112 104 100 90 94 83 74 70 68 9 10 10 9 10 10 50 10 10 7 42 47 49 50 51 51 51 5 36 28 17 - 1 2 3 4 5 6 7 8 9 10 Risk neutral credit spread BBB- Risk neutral credit spread B
Slide 33: Funding and liquidity: Regulatory and funding update
33 FUNDING AND LIQUIDITY Regulatory and funding update
Slide 34: Funding spread pressures returns post downgrade
34 Funding spread pressures returns post downgrade FirstRand Bank funding spreads (mid bps) 200 150 100 50 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Dec-12 Jul-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 12m 24m 36m 60m 120m Source: Bloomberg <RMBP3>.
Slide 35: SOEs have not been issuing in current environment
35 SOEs have not been issuing in current environment SOE credit spreads have been increasing and are now inverted relative to banks Source: JSE, I-Net Bridge, RMB Global Markets April 2017.
Slide 36: Treasury bill and FX implied spreads
36 Treasury bill and FX implied spreads 85 125 65 45 75 25 5 25 -15 -35 -25 -55 -75 -75 01-Jan-14 01-Jan-15 01-Jan-16 01-Jan-17 24-Apr-14 24-Apr-15 24-Apr-16 24-Apr-17 3M TBS 6M TBS 9M TBS 12M TBS Poly. (12M TBS) FX 1W LP SABOR Spread 90 per. Mov. Avg. (FX 1W LP) Source: Bloomberg.
Slide 37: FRB funding strategy continues to be anchored in the deposit franchise
37 FRB funding strategy continues to be anchored in the deposit franchise DEPOSIT FRANCHISE 194 183 171 169 149 150 150 134 114 109 66 62 15 20 Retail Commercial Corporate and Group Treasury Debt securties Other deposits Subordinated debt investment bank deposits Dec 2015 Dec 2016
Slide 38: Reduced reliance on institutional funding and improved funding mix
38 …with reduced reliance on institutional funding and improved funding mix % of total funding Retail and SME as % of total funding 47.5% 27% 45.0% Retail and SME (RHS) 25% 26% 25% 42.5% Institutional funding 24% 40.0% 23% 37.5% 34% 22% 35.0% 21% 33% 32.5% 20% 30.0% 19% Corporate and public sector 2
Slide 39: Group LCR has improved by reporting alignment and execution on balance sheet strategies
39 Group LCR has improved by reporting alignment and execution on balance sheet strategies 115% (6%) 105% 24% 104% 95% 85% 2% 10% 75% 74% 65% 55% Dec 15 Reduced outflows Increased inflows Increased HQLA Other LCR movements Dec 16 FirstRand group consolidated LCR as at 31 December 2016: 95%.
Slide 40: Funding plans
40 Funding plans • Diversification across segments, source, currency, markets, instrument types and maturities • Flexibility across markets, investors, products, investor risk appetite • Given we expect to exceed the minimum NSFR, require greater optimisation • Funding levels in the SA market are ve
Slide 41: Appendix: FirstRand Bank
APPENDIX FIRSTRAND BANK 4
Slide 42: Appendix: SAM
42 Appendix: SAM Credit quality Probability Rating step of default (S&P LC, IS) 1 0.01% AA+ 2 0.02% AA Collateral LGD 3 0.03% AA- Fully cash covered with regular MTM of the 4 0.06% A+ 5.0% collateral 5 0.09% A Significantly over-collateralised 18.0% 6 0.11% A- 7 0.16% BBB+ Fully-collateralised 35.0%
Slide 43: Stylised view: risk/return transformation and pricing differentiation
43 Stylised view: risk/return transformation and pricing differentiation Providers of funds Application of funds Risk-adjusted Risk-adjusted Secured pricing pricing Cash and liquid assets Unsecured Bank intermediation Secured loans and transmission of monetary conditions Subordinated Unsecured (cove
Slide 44: South Africa national scale mapping tables
44 South Africa national scale mapping tables – local currency global scale ratings to national scale ratings Moody’s S&P Global scale National scale National scale Global scale National scale National scale long term long term short term long term long term short term Baa1 and above Aaa.za P-1.za B
Slide 45: Glossary of terms
45 Glossary of terms Term Definition ASF Available stable funding EL Expected loss FI Financial institution LCR Liquidity coverage ratio NCOF Net cash outflows NSFR Net stable funding ratio RSF Required stable funding TB Treasury bills FMLG Financial Markets Liaison Group CLF Committed liquidity fac
Slide 46: Notes
46 Notes
Slide 47: Notes
47 Notes
Slide 48: www.firstrand.co.za
Www-firstrand-co-Za FIRSTRAND BANK