Firstrand Limited · JSE:FSR
Firstrand — FirstRand Bank — Debt Investor Presentation (November 2016)
54 slides from Firstrand's debt investor presentation, November 2016
Slide 1: Debt Investor Update
DEBT INVESTOR UPDATE November 2016
Slide 2: Presentation team
2 Presentation team • Frikkie Kleinhans (Group Treasury – Head: Capital Management) • Bhulesh Singh (Group Treasury – Head: Funding and Liquidity) • Jaco van Wyk (Head: Group Finance) • Melanie Kleinhans (Investor Relations)
Slide 3: Overview of the FirstRand Group and FirstRand Bank (Issuer)
3 OVERVIEW OF THE FIRSTRAND GROUP AND FIRSTRAND BANK (ISSUER)
Slide 4: Introducing the FirstRand group – financial position and track record
4 Introducing the FirstRand group – financial position and track record FINANCIAL HIGHLIGHTS ZAR USD NORMALISED EARNINGS – YEAR ENDED 30 JUNE for the year ended 30 June 2016 million million ZAR million Total assets (normalised) 1 149 326 78 399 25 000 Normalised net asset value 99 794 6 807 22 855 N
Slide 5: FirstRand's statement of intent
5 FirstRand’s statement of intent • FirstRand’s portfolio of leading financial services franchises: • provides a universal set of transactional, lending, investment and insurance products and services • seeks to operate in markets and segments where franchises can deliver competitive and differentia
Slide 6: FirstRand's portfolio of operating franchises
6 FirstRand’s portfolio of operating franchises LISTED HOLDING COMPANY (FIRSTRAND LIMITED, JSE: FSR) Retail and commercial bank Corporate and investment bank Instalment finance Investment management Group-wide functions Customer-facing Stakeholder management
Slide 7: FirstRand Bank (FRB) is the debt issuer
7 FirstRand Bank (FRB) is the debt issuer BOND ISSUER LISTED HOLDING COMPANY (FIRSTRAND LIMITED, JSE: FSR) 100% 100% 100% 100% 100% FirstRand Investment FirstRand EMA FirstRand Investment FirstRand Insurance FirstRand Bank Limited* Management Holdings (Pty) Ltd (FREMA) Holdings (Pty) Ltd (FRIHL) Hol
Slide 8: Difference between group and bank
8 Difference between group and bank
Slide 9: FRB is one of South Africa's 'Big 4' banks
9 FRB is one of South Africa’s ‘Big 4’ banks… Assets* (ZAR billion) Gross advances* (ZAR billion) Residential mortgages* (ZAR billion) 4 843 3 708 902 1 200 937 307 227 996 183 943 761 730 834 672 129 Industry FRB Absa Nedbank SBSA Industry FRB Absa Nedbank SBSA Industry FRB Absa Nedbank SBSA Deposi
Slide 10: A significant contributor to the group's financial position
10 … and a significant contributor to the group’s financial position FIRSTRAND NORMALISED EARNINGS FIRSTRAND ASSETS 10% 24% FirstRand Bank FirstRand Bank Other legal entities* Other legal entities* 76% 90% FIRSTRAND NORMALISED NET ASSET VALUE FRB GEOGRAPHICAL ADVANCES SPLIT 2% 3% 4% 21% South Africa
Slide 11: Macroeconomic environment
11 MACROECONOMIC ENVIRONMENT
Slide 12: Macro rebalancing
12 Macro rebalancing Inflation forecast to fall back in target band next year External imbalance (trade balance) continues to improve INFLATION (% y/y) SA TRADE BALANCE (R billion , 12-month moving average) 14 8.0 12 4.0 10 8 0.0 6 -4.0 4 Target band Forecast -8.0 2 0 -12.0 Oct 00 Oct 02 Oct 04 Oct
Slide 13: Household debt falling, government debt lifting
13 Household debt falling, government debt lifting Household balance sheets improving slowly Household debt service cost remains manageable HOUSEHOLD DEBT TO DISPOSABLE INCOME % DEBT SERVICE COST-TO-DISPOSABLE INCOME RATIO (%) 90 15 14 85 13 80 12 1 std deviation above 75 11 70 10 Average 65 9 60 8
Slide 14: SA is progressing on G20 reforms and alignment
14 SA is progressing on G20 reforms and alignment Source: FSB.
Slide 15: Further strengthening the SA financial system
15 Further strengthening the SA financial system • SA is adopting the Twin Peaks model of financial sector regulation • Prudential Authority with the SARB • Financial Sector Conduct Authority • Regulation and legislative frameworks • South Africa aims to adopt G20 and FSB recommendations in line wit
Slide 16: Market developments
16 Market developments • Strate and Clearstream collateral management JV has gone live in SA, enables: • Efficient collateralisation • A secured square-off between clearing banks • Improving domestic market liquidity conditions and liquidity of National Treasury TBs • Proposals with workgroup includ
Slide 17: FirstRand Bank financial performance
17 FIRSTRAND BANK FINANCIAL PERFORMANCE
Slide 18: FRB normalised performance highlights
18 FRB normalised performance highlights 2016 2015 % change Profit before tax (ZAR million) 23 184 20 635 12% Earnings (ZAR million) 17 351 15 246 14% Return on equity (%) 23.0 22.9 Return on assets (%) 1.75 1.69 Credit loss ratio (%)* 0.84 0.73 Cost-to-income ratio (%) 54.0 55.3 Tier 1
Slide 19: Topline growth resilient
19 Topline growth resilient NORMALISED EARNINGS (R million) 22 500 +9% +9% +13% +25% 20 000 (1 262) 2 204 (2 801) +7% 14% 17 500 4 420 (456) 17 351 15 000 15 246 12 500 10 000 7 500 5 000 2 500 0 2015 NII Impairments NIR Opex Tax and other 2016
Slide 20: Retail advances reflect both macros and specific origination strategies
20 Retail advances reflect both macros and specific origination strategies R million 2016 2015 % change RETAIL ADVANCES BREAKDOWN Residential mortgages 187 806 180 208 4 Retail unsecured 17% VAF 127 243 116 682 9 4% - SA 98 377 95 759 3 7% - MotoNovo (UK)* 28 866 20 923 38 6% Card 21 968 19 488 13 P
Slide 21: Muted growth from domestic corporate book but commercial remains robust
21 Muted growth from domestic corporate book but commercial remains robust CORPORATE ADVANCES BREAKDOWN R million 2016 2015 % change 5% RMB IB core South Africa 153 262 158 177 (3) 21% HQLA corporate advances 20 297 9 494 >100 Investment banking-related corporate adv. 173 559 167 671 4 8% RMB cross-
Slide 22: Margin benefited from positive endowment
22 Margin benefited from positive endowment MARGIN (bps) 520 4 (4) 517 10 Group Treasury impacts Increased cost of funding and liquidity: 505 3 (4) 13 bps 502 (5) 19 (8) 490 475 2015 Other MTM vs accrual Impact of Higher funding Capital and Advances mix Change in Deposit pricing 2016 normalised acco
Slide 23: Topline growth resilient
23 Topline growth resilient NORMALISED EARNINGS (R million) 22 500 +9% +9% +13% +25% 20 000 (1 262) 2 204 (2 801) +7% 14% 17 500 4 420 (456) 17 351 15 000 15 246 12 500 10 000 7 500 5 000 2 500 0 2015 NII Impairments NIR Opex Tax and other 2016
Slide 24: Operational NPL trend reflects macros and cycle
24 Operational NPL trend reflects macros and cycle NPLs* (R million) NPLs* (R billion) 8 000 20 Origination Credit cycle worsening Specific action and counterparties +15% 18.0 workout 6 000 15 15.6 +29% (7%) 5 432 +18% 4 983 4 585 4 000 4 253 4 238 4 205 10 +28% 3 190 2 495 2 000 5 0 0 Residential R
Slide 25: Paying debt review customers require lower coverage
25 Paying debt review customers require lower coverage DEBT REVIEW COVERAGE NON-DEBT REVIEW TOTAL NPL COVERAGE COVERAGE RATIOS (%) 2016 2015* 2016 2015 2016 2015 FNB credit card 43.0 – 76.0 72.7 67.3 72.7 FNB retail other 43.0 – 75.6 77.6 70.4 77.4 FNB loans 66.7 – 70.1 74.3 69.3 74.3 WesBank
Slide 26: Overall coverage remains appropriate
26 Overall coverage remains appropriate COVERAGE RATIOS (%) 2016 2015 NPLs (R million) Retail – secured 26.3 26.1 20 000 1% Residential mortgages 21.9 20.1 1% 29% VAF 30.3 32.5 15 000 <1% SA 29.5 31.9 24% 27% UK (MotoNovo) 61.1 62.7 20% 10 000 15% 16% Retail – unsecured 60.7 66.9 Credit card 67.3 72
Slide 27: Total portfolio provisions increased with franchise overlays maintained
27 Total portfolio provisions increased with franchise overlays maintained PORTFOLIO IMPAIRMENTS (R million) 8 000 6% 7 000 6 000 2016 2015 5 000 Portfolio impairments 0.99 1.01 as % of performing book 4 000 3 000 Credit loss ratio (%) 0.84 0.73 2 000 Portfolio impairments (R million) 7 510 7 109 1
Slide 28: Cycle emergence now reflecting in credit performance
28 Cycle emergence now reflecting in credit performance CREDIT LOSS RATIO (%) 2016 2015 Retail – secured 0.68 0.52 Residential mortgages 0.21 0.06 VAF 1.40 1.22 5.7 SA 1.41 1.27 5.0 0.1% impact due UK 1.36 0.96 4.4 to reclassification Retail – unsecured 5.60 4.81 3.6 Credit card 2.73 1.08 Personal l
Slide 29: Topline growth resilient
29 Topline growth resilient NORMALISED EARNINGS (R million) 22 500 +9% +9% +13% +25% 20 000 (1 262) 2 204 (2 801) +7% 14% 17 500 4 420 (456) 17 351 15 000 15 246 12 500 10 000 7 500 5 000 2 500 0 2015 NII Impairments NIR Opex Tax and other 2016
Slide 30: NIR driven by strong client franchise; costs up on investment strategy
30 NIR driven by strong client franchise; costs up on the back of investment strategy • Non-interest revenue (NIR) +9%: • Fee and commission income +6% (represents 78% of NIR) • FNB grew NIR 6%, despite year-on-year reduction of c.R300 million in interchange fees and 14% increase in allocated reward
Slide 31: Funding and liquidity (incl. update to regulatory framework)
31 FUNDING AND LIQUIDITY (incl. update to regulatory framework)
Slide 32: Strong focus on building a diversified funding base
32 Strong focus on building a diversified funding base SOURCES OF FUNDING FUNDING INSTRUMENTS 2% 3% R640bn R705bn R760bn R826bn 10% 2% 2% 2% 1% 22% 6% 6% 7% 7% 5% 6% 1% 3% 5% 5% 9% 10% 10% 10% 4% 17% 17% 7% 18% 19% 19% 22% 23% 22% 20% 29% 39% 37% 36% 37% Current and savings accounts Call deposits Fi
Slide 33: FRB funding strategy anchored in the deposit franchise
33 FRB funding strategy continues to be anchored in the deposit franchise SOURCES OF FUNDING AS AT 30 JUNE 2016 INSTITUTIONAL DEPOSIT FRANCHISE +9% AND OTHER +1% 335 339 +14% +9% +5% 180 158 167 153 134 140 Retail Commercial CIB Institutional funding 2015 2016 Source: FRB analysis of financial resul
Slide 34: Update on liquidity ratios
34 Update on liquidity ratios Liquidity coverage ratio (LCR) Net stable funding ratio (NSFR) • LCR phase-in requirements continue with • Welcome the change to the ASF for FI minimum requirement deposits <6m to 35%, considering regulatory (2016: 70% and 2017: 80%) and economic barriers that prevent l
Slide 35: Sustainable, diversified funding strategy for international market access
35 FRB requires a sustainable, efficient diversified funding strategy for international market access • Group has adopted a conservative approach to external financing risk • Considering the external debt of all South African entities • Considering all claims on SA Inc’s repayment capacity • Confide
Slide 36: Proactive funding strategies
36 Proactive funding strategies EMTN programme Syndicated loans • USD 500 million 5-year bond due 2020 DFI facilities CHF programme (Six Swiss Exchange) Trade finance facilities MotoNovo Finance • USA, Europe • Turbo ABS securitisation programme • Middle East and Asia • 6 successful issues • Committ
Slide 37: Protect and enhance market access
37 Protect and enhance market access • Within our external balance sheet consider both liquidity risk and business risks • Possible rating downgrade reflected in stress testing, credit origination and balance sheet strength • FRB is now an operating CLS member • FRB is a euroclear and clearstream me
Slide 38: Capital (incl. update to regulatory framework)
38 CAPITAL (incl. update to regulatory framework)
Slide 39: Final capital framework for South Africa fully aligned to Basel III
39 Final capital framework for South Africa fully aligned to Basel III Individual capital requirement or Pillar 2B 14.0* • Bank-specific individual capital requirement 2.5 • Not disclosed externally • Met with all components of capital 2.5 D-SIB 8.5* 1.0 • Systemic importance of banks 1.0 2.0 • Refl
Slide 40: Capital position as at 30 June 2016 – targets aligned to end state
40 Capital position as at 30 June 2016 – targets aligned to end state % June 2016 Targets CET1 13.9 10.0 – 11.0 Tier 1 14.2 >12.0 Total 17.1 >14.0 Of which: Tier 2 2.9 >2.0 - Basel III 2.1 - Old style 0.8 • Target and maintain optimal level and composition of capital • Raise capital in good times, n
Slide 41: Solid CET1 ratio as at June 2016
41 Solid CET1 ratio as at 30 June 2016 CET1 RATIO 13.9% 14% 13.5% ZAR13.9bn 12% surplus CET1 target range: 10% Management 10% – 11% buffer 2.5% 8% 6% SARB end-state minimum 4% requirement 8.5% 2% 0% Target Column2 Regulatory X Economic Column1 actual actual Note: Economic capital excludes volatile r
Slide 42: Domestic market already embracing new generation instruments
42 Domestic market already embracing new generation instruments TIER 2 ISSUANCE IN SA FRB TIER 2 ISSUANCE R billion 2014 4.7 FRB: 34% 2015 4.4 2016 2.6 Remaining banks Total 11.7 = 2.1% of RWA • Issuance since 2014: language aligned to Basel III • Well understood by investor base in South Africa • F
Slide 43: SA banks well capitalised despite conservative approach to RWA
43 SA banks well capitalised despite conservative approach to RWA RWA/TOTAL ASSETS (%) Size of bubble = ROE% 65 CET1 minimum 60 55 FRB 50 45 40 35 30 25 8 9 10 11 12 13 14 15 CET1 RATIO (%) Sources: FRB analysis of financial results as at 30 June 2016; peer bank annual reports as at 31 December 2015
Slide 44: Leverage is supplementary to risk-based capital ratio
44 Leverage is supplementary to risk-based capital ratio 2013 2015 2017 2018 Final recalibrations Basel III Disclosure Migrate to Pillar 1 and adjustments to implementation requirements requirement definitions Monitoring phase Final % June 2016 Actual 7.2 SARB minimum requirement 4.0 BIS minimum req
Slide 45: Loss absorbency requirements for capital instruments
45 Loss absorbency requirements for capital instruments • Basel III framework has redefined bank capital instruments, globally • SARB requirements fully aligned Europe Statutory • Principal loss absorbency requirements applicable to Additional Tier 1 and Tier 2 Turkey, Brazil, Singapore, Contractual
Slide 46: South Africa evolving resolution regime
46 South Africa evolving resolution regime • Broadly in line with FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions • White paper jointly released in September 2015, Strengthening South Africa’s Resolution Framework for Financial Institutions • Concept of point of resol
Slide 47: Conclusion
CONCLUSION FIRSTRAND BANK
Slide 48: FirstRand Bank is well positioned for the cycle
48 In summary, FirstRand Bank is well positioned for the cycle • Strong financial position • Proactively provided for credit cycle • Strong capital position • Integrated funding and liquidity management • Earnings should remain resilient • Quality and diversification underpin earnings resilience • B
Slide 49: Important notice
49 Important notice THIS PRESENTATION IS NOT AN OFFER OR SOLICITATION OF AN OFFER TO BUY OR SELL SECURITIES. IT IS SOLELY FOR USE AT AN INVESTOR MEETING AND IS PROVIDED FOR INFORMATION ONLY. THIS PRESENTATION IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, INTO AUSTRALIA, CA
Slide 50: Important notice (continued)
50 Important notice (continued) This presentation does not constitute an offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities of FRB nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment wh
Slide 51: Annexures
ANNEXURES FIRSTRAND BANK
Slide 52: Summary features of AT1 capital under Basel III
52 Summary features of AT1 capital under Basel III FEATURES BASEL III SARB Ranking Subordinated to Tier 2 Maturity Perpetual Optional redemption Callable only after 5 years Early redemption Tax and regulatory only Incentives to redeem Step-ups not allowed Coupon reset Permitted Full di
Slide 53: Summary features of Tier 2 capital under Basel III
53 Summary features of Tier 2 capital under Basel III FEATURES BASEL III SARB Ranking Subordinated to senior unsecured obligations Maturity Dated (minimum 5 year maturity) Optional redemption Callable only after 5 years Early redemption Tax and regulatory only Incentives to redeem Step-ups n
Slide 54: Future developments under review
54 Future developments under review • Credit risk • Constraints on internal models • Revisions to standardised approach • Capital floors (based on standardised approaches) • Sovereign risk • Expected loss/IFRS 9 • Operational risk • Market risk – fundamental review of the trading book • Interest rat
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