Firstrand Limited · JSE:FSR
Firstrand — FirstRand Bank — Debt Investor Presentation (October 2011)
46 slides from Firstrand's debt investor presentation, Oct 28, 2011
Slide 1: Debt investor day
debt investor day Johan Burger (COO & CFO)
Slide 2: Disclaimer
2 Disclaimer FirstRand Bank Limited (“FRB”) has obtained the information in this presentation from sources it believes to be reliable. Although FRB has taken all reasonable care to ensure that the information herein is accurate and correct, FRB makes no representation or warranty, express or implied
Slide 3: Agenda
3 Agenda • Overview of FirstRand Bank • Headwinds • Macroeconomic environment – “new normal” • Regulation – capital and liquidity • FirstRand’s response
Slide 4: FirstRand's strategy
4 FirstRand’s strategy • Objectives • To be the African financial services group of choice • By creating long-term franchise value • Through delivering superior and sustainable returns • Within acceptable levels of earnings volatility • Underpinned by alignment of shareholder value creation and mana
Slide 5: Portfolio of leading franchises
5 Portfolio of leading franchises Listed holding company (FirstRand Limited, JSE: FSR) Investment banking franchise Retail and commercial banking franchise Instalment finance franchise
Slide 6: Platforms / Group structure
6 Group structure Strategy set at Group-level Bank controlling company; listed holding company (FirstRand Limited, JSE: FSR) 100% 100% 100% Platforms FirstRand EMA FirstRand Investment Holdings FirstRand Bank Limited Holdings Limited (Pty) Limited (“FRIHL”) Banking Emerging Markets Other activities
Slide 7: Credit ratings – FirstRand Bank Limited
7 Credit ratings – FirstRand Bank Limited South Africa FirstRand Bank Limited credit ratings sovereign ratings FOREIGN FOREIGN CURRENCY LOCAL CURRENCY CURRENCY Long term/ Long term/ Long term/ Short term Short term Outlook Outlook Outlook Standard & Poor’s BBB+/Stable BBB+/Stable A-2 BBB+/Stable A-2
Slide 8: Key ratios – FirstRand Bank Limited
8 Key ratios – FirstRand Bank Limited Normalised Jun ’11 Jun ’10 Change Normalised earnings (R million) 6 595 5 801 18% Return on equity (%) 18.8 18.1 Return on assets (%) 1.1 1.0 Credit loss ratio (%) 0.98 1.39 Cost-to-income ratio (%) 62.7 60.9 Tier 1 ratio (%) 12.4 11.7 Core Tier 1 rat
Slide 9: Agenda
9 Agenda • Overview of FirstRand Bank • Headwinds • Macroeconomic environment – “new normal” • Regulation – capital and liquidity • FirstRand’s response
Slide 10: Cumulative build-up of leverage
10 Cumulative build-up of leverage 30% “Golden” years “New normal” 25% 20% 15% 10% 5% Nominal GDP growth y/y Private credit growth y/y 0% -5% Long on credit, short on wealth Source: I-Net Bridge
Slide 11: Growth in bank earnings outpaced nominal GDP growth
11 Growth in bank earnings outpaced nominal GDP growth Bank earnings to nominal GDP (Jan 1990 = 1.0) 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 90 92 94 96 98 00 02 04 06 08 10 12 Source: I-Net Bridge
Slide 12: Characteristics of “new normal” environment
12 Characteristics of “new normal” environment • Sluggish GDP growth • Rising inflation • Rising unemployment • Flat or declining property values • Disposable income under pressure • Low levels of business confidence and activity • Interest rates to remain low Lower growth and more volatility
Slide 13: Macros impact banks
13 Macros impact banks • Asset growth • Expected to lag nominal GDP growth • Retail expected to outpace corporate • Margins • Risk of rate cuts could reduce endowment margin • Increased cost of liquidity • Bad debts • Further benefit of monetary policy intervention limited • But asset quality much i
Slide 14: Agenda
14 Agenda • Overview of FirstRand Bank • Headwinds • Macroeconomic environment – “new normal” • Regulation – capital and liquidity • FirstRand’s response
Slide 15: Regulation and the role of banks in the economy
15 Regulation and the role of banks in the economy SA BANKING SECTOR Access to bank operating, payment & clearing Savings Borrowings flows Borrowers Capital to support risk and Savers guarantee deposits Cost of credit Cost of attracting Maturity liquidity savings mismatch Increased Cost of liquidity
Slide 16: Agenda
16 Agenda • Overview of FirstRand Bank • Headwinds • Macroeconomic environment – “new normal” • Regulatory • FirstRand’s response
Slide 17: FirstRand's response
17 FirstRand’s response • Short-term – earnings growth should outperform macros • Medium to long-term – deliver superior, sustainable ROEs What is required to deliver on these objectives? Financial strength Earnings resilience
Slide 18: FirstRand's response
18 FirstRand’s response • Short-term – earnings growth should outperform macros • Medium to long-term – deliver superior, sustainable ROEs What is required to deliver on these objectives? Financial strength Earnings resilience
Slide 19: Financial strength
19 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 20: Strong capital position
20 Strong capital position 14.2 1.8 1.0 Core Tier 1 % Tier 1% Capital adequacy ratio 11.4 12.4 Regulatory minimum 5.25 7.0 Target 9.0 – 10.5 10.5 11.4 FirstRand Bank Core Tier 1 Other Tier 1 Tier 2
Slide 21: We understand the implications of regulatory changes
21 We understand the implications of regulatory changes • Assessed impact of Basel 2.5 and III changes • 2011 returns and targets (18% – 22%) already reflect increased levels and quality of capital • Uncertainty remains regarding SARB interpretation (expect clarity in Q1 2012) • Comfortable that 18%
Slide 22: Consistent capital management strategy
22 Consistent capital management strategy • Continue to deploy capital to businesses that meet the required return • Strategic investments that breakeven within an appropriate period • Businesses required to meet minimum hurdle rates • Internal capital generation sufficient for domestic growth and A
Slide 23: Financial strength
23 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 24: Advances = 74% of assets
24 Balance sheet reflects financial soundness Nominal* gearing 16 times RWA/Total assets* = 49% 7% Other assets 8% 5% Cash & near cash 7% Tradable securities 14% & other investments Other net advances Advances = 74% of assets Other liabilities 22% Corporate Perpetual preference shares Ordinary equit
Slide 25: We took the pain earlier and faster
25 We took the pain earlier and faster • First loss is best loss • No restructuring of NPLs to performing • Focus on workout • QuickSell process in FNB HomeLoans resulted in 50% higher recoveries on asset values • Properties re-valued at default • Conservative LGDs • Write-off policies • Secured: Up
Slide 26: Market share of NPLs
26 Market share of NPLs 32% 31% 23% 20% 20% 28% 31% 16% 31% 32% 19% 23% 37% 52% 11% 27% 25% 22% 9% 11% 37% 34% 15% 14% FirstRand Nedbank Absa Standard Bank Residential mortgages Credit card VAF Other retail Wholesale Total Source: Company reports, FirstRand research
Slide 27: FNB HomeLoans vintage analysis shows quality of new business
27 FNB HomeLoans vintage analysis shows quality of new business 15% 10% 5% 0% Jun '06 Jun '07 Jun '08 Jun '09 Jun '10 Jun '11 Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 3 months 6 months 12 months
Slide 28: We are improving risk profile and pricing
28 We are improving risk profile and pricing FNB HomeLoans 100% 1.60% Higher discount 90% 1.40% 80% 1.20% % of registered deals 70% 1.00% 60% 50% 0.80% 40% 0.60% 30% 0.40% 20% 0.20% 10% Lower 0% discount 0.00% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr '07 '07 '07 '07 '0
Slide 29: Average rating distribution of advances
29 Average rating distribution of advances 40% 35% 34% 33% 30% 25% 20% 21% 20% 19% 15% 17% 15% 10% 11% 10% 10% 5% 4% 4% 0% AAA/A A-/BBB- BB+/BB- B+/B upper B/B- CCC 2010 2011
Slide 30: Financial strength
30 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 31: What are the appropriate funding and liquidity strategies?
31 What are the appropriate funding and liquidity strategies given the new normal and regulatory environment? SA BANKING SECTOR Access to bank operating, payment & clearing Savings Borrowings flows Borrowers Capital to support risk and Savers guarantee deposits Cost of credit Cost of attracting Matu
Slide 32: SA banking system liquidity gap
32 SA banking system liquidity gap Liquidity gap Institutional funding proportion 10% 7% 50% 6% 45% 0% 1% 3% 2% 2% 2% -1% 40% -3% -10% 35% -20% 30% -23% -24% 25% -30% -26% -28% -30% -32% -33% 20% -40% 1D 2D-7D 8D-1M 1M-2M 2M-3M 3M-6M 6M-1YR 1Yr+ 15% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 J
Slide 33: Increased cost of structural liquidity mismatch
33 Increased cost of structural liquidity mismatch Rate (%) Asset duration 9.0 8.5 Liquidity premium & 120 bps statutory costs 8.0 7.5 Liability duration 7.0 6.5 Interest base rate 45 bps 6.0 5.5 5.0 0 10 20 30 40 50 60 Months Base interest rate Trasnfer Transfer rate including liquidity premium A “
Slide 34: FirstRand's response
34 FirstRand’s response • Liquidity strategies • Funding strategies • Funds transfer pricing • Prepare for convergence of banks, principal investors and asset managers
Slide 35: FirstRand's response
35 FirstRand’s response • Short-term – earnings growth should outperform macros • Medium to long-term – deliver superior, sustainable ROEs What is required to deliver on these objectives? Financial strength Earnings resilience
Slide 36: What underpins earnings resilience
36 What underpins earnings resilience • In 2008/09 the Group embarked on process to rebalance earnings profile • Objectives to reduce volatility, but continue to deliver superior returns • Diversity • Income streams that provide natural hedges through the cycle • Fee income vs interest income • Sout
Slide 37: Balance between NII and NIR
37 Balance between NII and NIR Normalised gross revenue breakdown 51% NII before impairments Non-interest revenue 49% More than 90% from client franchises
Slide 38: Quality franchises...
38 Quality franchises... • FNB – most innovative, best ROE • RMB – leading investment bank in SA • WesBank – market leader in instalment finance • ... with compelling growth strategies aligned to Group objectives • In South Africa, grow in existing markets and those where currently underrepresented
Slide 39: FNB – innovation key to growth in customers and volumes
39 FNB – innovation key to growth in customers and volumes • In tougher times, innovation becomes a key differentiator • 10 years of relentless focus on innovation is now contributing to bottom line • Supported by entrepreneurial, owner-manager culture • Current strategy • Focus on building its dive
Slide 40: RMB – excellent franchise but tough macros
40 RMB – excellent franchise but tough macros • Strengthening client franchise • Scale trading and investment activities appropriately • Better service large corporates through creation of CIB, but protect integrity of investment banking franchise • Coverage provides integrated approach • Improving
Slide 41: WesBank – unique model underpins market leadership
41 WesBank – unique model underpins market leadership • Core strategy to protect and grow current local franchise – dominate point of sale through industry partnerships • Target segments where under-represented • Mid corporate • Identified over 1 000 potential customers not currently serviced in who
Slide 42: In conclusion
42 In conclusion • Balance sheet strength • Improved ROA • Diversity and quality of earnings profile • Franchise strength – real competitive advantages in many market segments • Disciplined approach to growing in Africa • Appropriate strategies to deal with the increased cost of regulation “Bearish”
Slide 43: Appendix
43 appendix
Slide 44: Normalised income statement
44 Normalised income statement Normalised (R million) Jun ’11 Jun ’10 Change Net interest income before impairment of advances 18 222 16 193 13% Impairment of advances (4 151) (5 576) (26%) Net interest income after impairment of advances 14 071 10 617 33% Non-interest revenue 19 065 17 294 10% Inco
Slide 45: Recon: normalised income statement
45 Recon: normalised income statement Funding costs Normalising IFRS on the fair value Normalised adjustments R million book Net interest income before impairment of advances 11 809 3 014 3 399 18 222 Impairment losses on loans and advances (3 637) - (514) (4 151) Net interest income after impairmen
Slide 46: Recon: normalised income statement (cont.)
46 Recon: normalised income statement (cont.) Normalised R million IFRS Normalised adjustments Equity holders of FirstRand Bank 7 785 (984) 6 801 Profit/(loss) on sale of property and equipment 47 47 Profit on sale of available for sale assets (335) (335) Other (relates mainly to profits on restruct
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