Firstrand Limited · JSE:FSR
Firstrand — FirstRand Banking Group — Investor Day (March 2008)
96 slides from Firstrand's investor day presentation, Mar 31, 2008
Slide 1: FirstRand Banking Group: Inaugural debt investor day
FirstRand Banking Group: Inaugural debt investor day London, 31 March 2008 FIRSTRAND Banking Group
Slide 2: Important notice
Important notice • 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 i
Slide 3: Agenda
Agenda • South African macroeconomic environment • South African banking industry • Overview of the FirstRand Banking Group • Financial review: FirstRand Limited • Key focus areas for balance sheet management 3
Slide 4: South African macroeconomic environment
South African macroeconomic environment Jaco van der Walt FIRSTRAND Banking Group
Slide 5: Structural achievements
Structural achievements Fiscal reform exceeds expectations Commitment to inflation targeting 2 60 20 '94 elections IT regime 0 48 15 -2 36 Avg 15% Avg 10% 10 Avg 6% -4 24 -6 12 5 -8 0 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 1981 1986 1991 1996 2001 2006 Fiscal balance (% GDP) Government
Slide 6: Structural challenges
Structural challenges Physical infrastructure falling behind Policy uncertainty–expect noise, not change 15 Net capital formation (% GDP) • Change in political leadership creating uncertainty 12 • Expect more debate from the left wing, but new 9 leadership is committed to the current policy 6 framew
Slide 7: Cyclical challenges
Cyclical challenges Inflation pressure beyond food & oil External vulnerability 12 15 10 10 5 8 0 6 -5 -10 4 un d ep a Th esi a ge d Po li c do le n e i na a a o Ta l a Af y M il So Tu ry a R n a H l an Ar il an si R di az u t rke si ic in In Chi a ric e ub ga 2 ay ch In iw Ve h us ex zu nt Br n C a
Slide 8: SA in context
SA in context Slower growth not unique to SA Inflation pressure not unique to SA 10 10 8 8 6 6 4 4 2 2 0 0 Developed w orld Developing w orld SA Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Grow th 2007 (% y/y) Estimated grow th 2008 (% y/y) SA China Poland Czech Chile SA not alone
Slide 9: South African banking industry
south African banking industry Sizwe Nxasana FIRSTRAND Banking Group
Slide 10: Structure of the SA banking industry
Structure of the SA banking industry • Robust banking system • Regulated by the South African Reserve Bank (SARB) • 20 registered banks, 14 registered branches, 2 registered mutual banks and 46 representative offices of foreign banks • Retail lending represents approximately 70% of bank loans – roug
Slide 11: SA banking sector – sophisticated, competitive, expanding
SA banking sector – sophisticated, competitive, expanding • Total assets at 31 December 2007 = EUR255bn (18.2% CAGR over past 5 years in local currency terms) • Total deposits at 31 December 2007 = EUR186bn (18% CAGR over past 5 years in local currency terms) • Trends • Strong barriers to entry give
Slide 12: Competitive map
Competitive map FirstRand Banking Group is a market leader Total assets (EURbn) Total deposits (EURbn) 71 97 48 62 64 37 38 49 FirstRand ABSA Standard Nedbank FirstRand ABSA Standard Nedbank Bank Bank Bank Bank Return on Equity Net asset value (EURbn) 27% 27% 5.5 25% 21% 3.9 3.8 3.0 FirstRand ABSA S
Slide 13: Overview of FirstRand Banking Group
Overview of FirstRand Banking Group FIRSTRAND Banking Group
Slide 14: Our structure
Our structure Listed entity (FirstRand Ltd, JSE:FSR) 100% 100% 100% FirstRand FirstRand Bank Momentum Investment Holdings Holdings Ltd Group Ltd Banking Insurance & asset management 100% 100% FirstRand FNB Africa International Ltd 100% 100% 100% Investment banking division Commercial banking divisio
Slide 15: Our business model
Our business model • Decentralised, federal operating model • Portfolio of leading franchises • Strategies are owned at franchise level • Autonomous management • Entrepreneurial culture • Centralised functions • Performance management • Risk management • Balance sheet management 15
Slide 16: Performance management
Performance management • The approach to performance management is to • Maximise the spread between return on equity and cost of capital • Measure the performance of each division on its ability to maintain and grow that spread over time • Long-term financial targets • 10% real growth in earnings •
Slide 17: Franchise diversification
Franchise diversification Assets* Normalised earnings* 31 December 2007 31 December 2007 9% Return on Equity 5% 18% RMB 33% 4% 43% 36% FNB 34% FNB Africa 32% WesBank 17% 34% 51% * FirstRand Banking Group, excluding Group Support, NCNR preference shares. 17
Slide 18: Segment diversification
Segment diversification Normalised earnings* 31 December 2007 36% Investment banking 36% Corporate & commercial Retail 28% * FirstRand Banking Group, excluding Group Support, NCNR preference shares. 18
Slide 19: Continued rotation to corporate and investment banking
Continued rotation to corporate and investment banking ZAR million 10% 6,000 Normalised earnings after tax 5,000 4,000 3,000 8% 33% 14% 2,000 (100%) 1,000 0 Retail Corporate & Investment Other Total Commercial banking -1,000 Dec '06 Jun '07 Dec '07 FirstRand Banking Group, excluding Group Support, N
Slide 20: Overview of banking franchises
Overview of banking franchises 100% FirstRand Bank Holdings Ltd Banking 100% 100% 100% 100% Investment banking division Commercial banking division Instalment finance division 20 Multi-branding strategy in banking
Slide 21: A quality portfolio
A quality portfolio Fixed income, Private Investment Equity currencies & Other equity banking trading commodities • RMB is a leading advisor and financier in South Africa in many sectors such as mining and resources, construction, black economic empowerment (BEE), transport, and retail • RMB was rat
Slide 22: Consistent leaders
Consistent leaders M & A Deal of the year Mergers Survey & BEE Listings Structured 2007 Year Deals Finance Acquistions M & A Dealmaker of the year 2006 2007 1st 1st 3rd 1st M & A Dealmaker of the year 2005 2005 1st * 1st 1st 1st M & A Dealmaker of the year 2004 2003 1st * n/a 7th 1st Magazine by tra
Slide 23: Overview of banking franchises
Overview of banking franchises 100% FirstRand Bank Holdings Ltd Banking 100% 100% 100% 100% Investment banking division Commercial banking division Instalment finance division 23 Multi-branding strategy in banking
Slide 24: Successful segment strategy
Successful segment strategy Mass Consumer Wealth Commercial Public sector Corporate • Overall strategy to optimise ROE through gaining profitable market share • Increasing access to the low income markets and small and medium enterprises • FNB currently operates 709 branches and 4,642 ATMs across So
Slide 25: FNB segment strategy and structure
FNB segment strategy and structure Income / Turnover Customer numbers Profit before tax – Dec ’07 Corporate Support >ZAR400m 0.7k -2% Public Sector Corporate N/A 12.5k 9% Mass 17% <ZAR400m Commercial 430k >ZAR750k Wealth 47k Commercial Consumer 39% 31% ZAR81 – 750k Consumer 2.0m Wealth <ZAR81k Mass
Slide 26: African footprint
African footprint Pre-tax profit up 23%* to ZAR525m (EUR 53.7m); CIR 46.5% FNB Mozambique FNB Botswana • Acquired in July ’07 • Profit +13% to ZAR239m (EUR24.4m) • PBT of ZAR11m (EUR1.1m) (+18% local currency) • Infrastructure investment • Assets up 29% • Deposits up 34% • Strong brand in market FNB
Slide 27: Overview of banking franchises
Overview of banking franchises 100% FirstRand Bank Holdings Ltd Banking 100% 100% 100% 100% Investment banking division Commercial banking division Instalment finance division 27 Multi-branding strategy in banking
Slide 28: Market leader in instalment finance
Market leader in instalment finance Personal International Collection Motor Corporate Fleet Loans Operations Solutions • WesBank is a market leader in both asset-based finance and fleet management solutions (market share 36% as at 31 December 2007) • WesBank’s strategy of partnering with motor manuf
Slide 29: Strategy of the FirstRand Banking Group
Strategy of the FirstRand Banking Group FIRSTRAND Banking Group
Slide 30: Challenges and opportunities
Challenges and opportunities + – Corporate sector remains strong Capital, funding & liquidity Current account deficit Infrastructure expansion Inflationary pressures Commodity prices up e.g. gold and platinum Increased interest rates put pressure on consumer Major sell-off of SA equities by foreigne
Slide 31: Strategy
Strategy • FRBG strategy is to build a diverse portfolio of leading banking franchises in South Africa • Increasing focus on selected niche international opportunities, particularly in large emerging markets • RMB – building investment banking, private equity capacity in India & Nigeria • FNB – acce
Slide 32: Financial review: FirstRand Limited
Financial review: FirstRand Limited Johan Burger FIRSTRAND
Slide 33: Performance to financial targets
Performance to financial targets ROE 35% 10% real growth 15% Momentum Group (ROE 31%) 30% 85% Banking Group (ROE 27%) 25% 10% plus FirstRand WACC 20% 15% 10% 0% 10% 20% 30% 40% Normalised earnings growth * Based on normalised earnings, excluding Discovery, FirstRand centre and NCNR preference shares
Slide 34: Insurance outperforms banking
Insurance outperforms banking ZAR millions Normalised earnings Dec ’07 Dec ’06 % Change Banking Group 5 283 4 783 10 Momentum Group 913 768 19 FirstRand* (49) (69) 29 Preference Dividend (194) (163) (19) FirstRand proforma 5 953 5 319 12 Discovery 185 220 (16) 6 138 11 FirstRand actual 5 539 * Inclu
Slide 35: Slower earnings growth but targeted returns maintained
Slower earnings growth but targeted returns maintained Dec ’07 Dec ’06 Proforma Dec ’07 Dec ’06 ZAR millions Proforma Proforma Change % Actual Actual Normalised earnings 5 953 5 319 12 6 138 5 539 Normalised earnings per share - Basic 105.6 94.4 12 108.9 98.3 - Diluted 105.6 94.3 12 108.9 98.2 Headl
Slide 36: Premium returns over cost of equity
Premium returns over cost of equity ZAR billions 50 28% 27% 28% 25% 25% 25% 25% 26% 40 23% 23% 30 17% 16% 15% 14% 13% 13% 13% 12% 13% 14% 20 10 0 Jun '01 Jun '02 Jun '03 Jun '04 Jun '05 Dec '05 Jun '06 Dec '06 Jun '07 Dec '07 NAV (excluding dividends) NAV (including dividends) Return on equity Avera
Slide 37: Banking Group remains well capitalised
Banking Group remains well capitalised • Raised EUR150m in dated Tier 2 – Nov/Dec 2007 • Launched Fresco II, a corporate synthetic securitisation programme of EUR2bn (August ’07) • Concluded the 2nd home loans securitisation programme, iKhaya 2, of EUR280m (July ’07) • Plan to issue Hybrid Tier 1 an
Slide 38: Insurance group well capitalised
Insurance group well capitalised ZAR millions 6,000 2.0 x CAR Target: 1.7 - 1.9 times 5,000 1.9 x CAR 4,000 0.9 x CAR 0.9 x CAR 3,000 2,000 1,000 1 x CAR 1 x CAR 0 Jun '07 Dec '07 Termination Mortality and morbidity Expense Investment Credit Other risks Available for distribution 38
Slide 39: Lower growth from the bank
Lower growth from the bank Dec ’07 Dec ’06 % change Normalised earnings* (ZAR millions) 5 283 4 783 10 Return on equity** (%) 27 32 Return on assets (%) 1.82 1.98 Credit loss ratio*** (%) 1.00 0.69 Cost to income ratio (%) 52.6 53.0 * Before deducting preference share dividends ** After deducting pr
Slide 40: Mixed performance from franchises
Mixed performance from franchises Profit before tax % growth FNB ZAR3.4 billion 22 FNB Africa ZAR0.5 billion 23 RMB ZAR2.4 billion 8 WesBank ZAR0.6 billion (17) Other ZAR0.2 billion (63) Total profit before tax ZAR7.1 billion 7 40
Slide 41: Results in context
Results in context ZAR millions Dec ’07 Dec ’06 change • Net interest income 8 134 7 130 14% • Credit impairment charge (1 625) (1 151) 41% • Net interest income after impairments 6 509 5 979 9% • Non interest revenue* 10 802 9 983 8% Transactional 6 567 5 230 26% Fair value and risk 1 419 2 419 (41
Slide 42: Financial highlights
Financial highlights Dec ’07 Dec ’06 • Net interest income 8 134 7 130 14% • Credit impairment charge (1 625) (1 151) 41% • Non interest revenue 10 802 9 983 8% • Operating expenses (9 957) (9 076) 10% • Taxation expense (1 434) (1 572) (9%) 42
Slide 43: Advances growth levels off
Advances growth levels off 21% ZAR420bn 9% 2% ZAR388 bn 400 12% 1% ZAR347bn 24% 350 2% 24% 300 22% 5% 5% 5% 11% 250 13% 11% 200 150 60% 57% 58% 100 50 0 Dec '06 Jun '07 Dec '07 Retail Corporate Commercial Investment banking Other Advances are shown net of interest in suspense (ISP) 43
Slide 44: Liability mix adds pressure to margins
Liability mix adds pressure to margins Change Dec ’07 Dec ’06 ZAR millions Dec ’07 Dec ’06 % mix % mix% Retail 107 733 90 507 19 17 18 Corporate 201 000 166 000 21 32 33 Professional funding 172 439 115 710 49 28 23 Trading liabilities 61 652 65 605 (6) 10 13 Other liabilities 22 869 21 376 7 4 4 Me
Slide 45: Customer deposits & endowment support margin
Customer deposits & endowment support margin 0.32% 5% 0.22% 4.33% -0.26% 4.10% -0.16% 4% -0.16% -0.19% 3% 2% 1% 0% Dec '06 Deposits Capital Advances Funding / Mix Other Dec '07 volume and margins liquidity endowment 45
Slide 46: Financial highlights
Financial highlights Dec ’07 Dec ’06 • Net interest income 8 134 7 130 14% • Credit impairment charge (1 625) (1 151) 41% • Non interest revenue 10 802 9 983 8% • Operating expenses (9 957) (9 076) 10% • Taxation expense (1 434) (1 572) (9%) 46
Slide 47: NPLs and bad debts continue upward trend
NPL’s and bad debts continue upward trend 5.6 1.5 1.3 4.3 0.9 1.1 3.5 * 1.0 0.8 Long run expected loss: 0.8 3.0 0.9* 2.4 0.7 0.4 0.5 2.0 0.3 0.5 1.6 1.7 1.4 1.4 1.3 1.3 Jun '99 Jun '00 Jun '01 Jun '02 Jun '03 Jun '04 Jun '05 Dec '05 Jun '06 Dec '06 Jun '07 Dec '07 NPLs (%) Impairment charge (%) *Cre
Slide 48: Retail worse, Wholesale steady
Retail worse, Wholesale steady NPL Ratio Impairment Ratio 3.50 1.80 3.09 1.60 3.00 1.53 1.40 2.50 2.30 1.22 1.20 2.0 2.00 1.0 1.76 1.00 0.97 1.50 0.80 0.94 0.60 1.00 0.82 0.74 0.40 0.50 0.29 0.28 0.20 0.25 0.00 0.00 Dec Retail NPL% '06 Jun '07 Dec '07 Dec '07 Total Total impairment charge Total Impa
Slide 49: Sensitivity of bad debts
Sensitivity of bad debts 2.2% 2.0% 1.8% 1.6% Base case 1.4% Bad debts 1.2% 1.0% Long run expected loss: 0.8 0.8% 0.6% 0.4% 0.2% 0.0% Base '+50 '+100 '+150 Change in rates Prime rate scenarios: 14.5% 15% 15.5% 16% Lower Expected Upper Revised estimate 1.2% – 1.3% for year end (up from 1% – 1.2%) 49
Slide 50: Retail main contributor to bad debts and negative trend continues
Retail main contributor to bad debts and negative trend continues Percentage of average advances Dec ’07 Dec ’06 Non performing loans - Retail mortgages 2.4% 1.0% - Retail non-mortgages 3.7% 2.2% - Commercial 1.3% 1.4% - Wholesale 0.6% 0.8% Total 2.0% 1.4% Bad debts - Retail mortgages 0.44% 0.36% -
Slide 51: Financial highlights
Financial highlights Dec ’07 Dec ’06 • Net interest income 8 134 7 130 14% • Credit impairment charge (1 625) (1 151) 41% • Non interest revenue 10 802 9 983 8% • Operating expenses (9 957) (9 076) 10% • Taxation expense (1 434) (1 572) (9%) 51
Slide 52: Diversification in non interest revenue
Diversification in non interest revenue Resources Other investment 2% 0% Fair value Private equity 13% 13% 8% Other Transactional income 3% 61% WesBank and OUTsurance * Associate income split into appropriate non interest revenue categories 52
Slide 53: Diversification in non interest revenue
Diversification in non interest revenue Transactional income 61% 53
Slide 54: Economic activity drives transactional income
Economic activity drives transactional income ZAR millions 26% 7,000 9% 6,000 11% 5,000 4% 4,000 120% 3,000 76% 2,000 -10% 22% 1,000 FNB FNB Africa RMB WesBank 0 Transactional Fair value Investment Other Dec '06 Jun '07 Dec '07 54
Slide 55: Diversification in non interest revenue
Diversification in non interest revenue 13% Private equity 55
Slide 56: Good balance between annuity income and realisations
Good balance between annuity income and realisations Dec ’06 Dec ’07 ZAR millions 14,000 12,000 Profit on 10,000 Profit on realisations Annuity realisations Annuity 44% income 48% income 8,000 52% 56% 6,000 4,000 -10% 22% 45% 2,000 0 Private equity Other Transactional Fair value Dec '06 June '07 Dec
Slide 57: Unrealised profits maintained
Unrealised profits maintained Assets, unrealised value and profit before tax ZAR millions 3,500 3,000 2,500 2,000 1,500 1,000 Associate Earnings 500 0 2002 2003 2004 2005 2006 2007 H1 08 Profit before tax Unrealised profits Assets (excl debt) 57
Slide 58: Diversification in non interest revenue
Diversification in non interest revenue 13% Fair value 58
Slide 59: Annuity showed strong growth but risk income volatile
Annuity showed strong growth but risk income volatile ZAR millions Dec ’07 Dec ’06 % change • Annuity 1 518 1 140 33 Lending 875 646 35 Client flows 643 494 Risk 30 • Risk (325) 1 212 (>100) Equities (774) 667 (>100) Commodities 30 30 - Interest rates 452 189 >100 Credit (49) 45 (>100) Forex 52 13 >
Slide 60: Financial highlights
Financial highlights Dec ’07 Dec ’06 • Net interest income 8 134 7 130 14% • Credit impairment charge (1 625) (1 151) 41% • Non interest revenue 10 802 9 983 8% • Operating expenses (9 957) (9 076) 10% • Taxation expense (1 434) (1 572) (9%) 60
Slide 61: Positive jaws maintained
Positive jaws maintained ZAR millions Income growth +11% 20,000 58.2% 18,000 16,000 56.8% 55.5% Jaws =1% 14,000 55.6% 12,000 53.8% 53.0% 10,000 8,000 51.9% 52.6% Cost growth +10% 6,000 4,000 2,000 0 Dec '00 Dec '01 Dec '02 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 Total income Total costs Cost to inco
Slide 62: Improving efficiencies remains a focus
Improving efficiencies remains a focus Dec ’07 Dec ’06 Top line Cost Cost to Cost to growth growth income ratio income ratio % % % % FNB 22.2 15.0 56.5 60.0 - Retail 23.3 17.3 57.8 60.8 - Corporate & Commercial 20.2 10.9 54.1 58.6 FNB Africa 19.7 20.0 46.5 46.4 WesBank 18.1 20.6 53.4 52.3 RMB 12.9 1
Slide 63: Key focus areas for balance sheet management
Key focus areas for balance sheet management FIRSTRAND Banking Group
Slide 64: Balance sheet management focus areas
Balance sheet management focus areas Capital Funding & liquidity Asset quality 64
Slide 65: Capital
Capital • Conservative gearing levels • Robust core equity • Buffer for off-balance sheet activity • Prudential limits for off-balance sheet vehicles • Core equity backs economic risk and buffers • Targeted credit rating • Limited exposure to refinancing risk • Own originated assets for off-balance
Slide 66: Asset quality
Asset quality • Underwrite to keep on balance sheet • Limited exposure to highly leveraged deals • Credit hedging strategies • No exposure to sub-prime • Prudential limit for equity exposure • Origination strategy in line with macroeconomic outlook • Marginal pricing for assets • Collection capacity
Slide 67: Funding & liquidity
Funding & liquidity • Appropriate liquidity buffers (local & offshore) • Actively lengthening funding profile • Matched maturity marginal funds transfer pricing • De-risking offshore balance sheets • Assuming no roll-over in next 12 months, still liquidity surplus internationally • All off-balance s
Slide 68: Q&A session
Q@ @ A session FIRSTRAND Banking Group
Slide 69: Panel discussion: Balance sheet management
Panel discussion: Balance sheet management London, March 2008 FIRSTRAND Banking Group
Slide 70: Introduction
Introduction Johan Burger FIRSTRAND Banking Group
Slide 71: Rationale for creation of Balance Sheet Management
Rationale for creation of Balance Sheet Management • Business model of decentralised owner-manager culture operating off one balance sheet • Had to create a framework for the use of the balance sheet • Balance Sheet Management is the custodian of • Capital management • Asset quality • Funding & liqu
Slide 72: Structure & activities
Structure & activities Balance sheet management Macro portfolio Credit portfolio Strategic funding Equity & management management & capital investment & advisory management analysis • Capital investment • Portfolio and credit • Capital and senior • External view on loss analysis debt raising corpora
Slide 73: Macro Portfolio Management
Macro Portfolio Management Jaco van der Walt FIRSTRAND Banking Group
Slide 74: Macro portfolio management
Macro portfolio management Macro impacts Financial markets Balance sheet MPM uses financial markets to protect & enhance the return on capital Portfolios linked within BSM (common macro view) Capital Banking book Credit • Investment of capital • Management of interest • Macro hedges for (domestic &
Slide 75: Market reaction to macro events
Market reaction to macro events ZAR has weakened 20% CDS pricing probability of a downgrade 0 125 300 250 3 100 200 6 75 150 9 50 100 50 12 25 0 15 0 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 2000 2001 2002 2003 2005 2006 2007 Mexico (BBB+) Russia (BBB+) South Africa (BBB+) USD/ZAR (in
Slide 76: Capital and NMDs (endowment)
Capital and NMDs (endowment) Level remains under pressure Longer end offering little value 10 12.2 9 11.4 10.6 8 9.8 7 9.0 6 45 51 57 15 21 27 33 39 3 9 0X 6X X X X X X X X X 2005 2006 2007 2008 42 48 54 12 18 24 30 36 4-year government bond yield (%) Market implied 3-month Jibar (%) MPM forecast (%
Slide 77: Banking book mismatch
Banking book mismatch SA curve to remain inverted Inflation breakeven at fair value 300 900 200 800 100 700 0 600 -100 -200 500 -300 400 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Curve steepness: 2s10s government spread (bp) R157/R189 spread (bp)
Slide 78: Tail risk & macro hedges for credit
Tail risk & macro hedges for credit Distribution of monthly rand changes ZAR to be escape valve if no hikes Number of monthly changes 40 12 Estimated fair value: value 32 10 ZAR7.75 8 24 6 16 4 8 2 0 0 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1980 1984 1988 1992 1996 2000 2004 2008 ZAR strength Si
Slide 79: SA housing market
SA housing market SA housing market slowing Fall in real disposable income a concern… 40 10.0 30 7.5 20 5.0 10 0 2.5 -10 0.0 -20 -2.5 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 2001 2002 2003 2004 2005 2006 2007 SA house price grow th (% y/y) US house price grow th (% y/y) Real disposable inco
Slide 80: Credit Portfolio Management & Advisory
Credit Portfolio Management @ Advisory Gert Kruger FIRSTRAND Banking Group
Slide 81: CPMA functions overview
CPMA functions overview New business In force business CPM Influence Portfolio origination management strategy Macro economic outlook on credit risk Risk Hedges – cycle appetite smooth Measurement & Optimisation Measurement & Expected losses, stress / volatility Event risk pricing advisory capital m
Slide 82: Strategic responses to current market conditions
Strategic responses to current market conditions 82
Slide 83: Response 1: Assess external environment for new vulnerabilities
Response 1: Assess external environment for new vulnerabilities Tools Corporate lead indicators Net cash flow lower but still high • Segment specific lead indicators 27 25 • Credit risk indices 23 21 • Market based lead indicators 19 • Scenario and stress testing 17 1996Q 3 1997Q 3 1998Q 3 1999Q 3 2
Slide 84: Response 2: Hedge or de-risk positions
Response 2: Hedge or de-risk positions with higher cyclical or event risk potential Example: Bad debt cycle smoothed with credit hedge 5.6 1.5 1.3 4.3 0.9 1.1 3.5 1.0 0.8 3.0 0.9 Insurance Long run expected benefit loss: 0.8 0.8 2.4 0.7 0.69 0.81 0.4 0.5 2.0 0.3 0.5 1.6 1.7 1.4 1.4 1.3 1.3 Jun '99 J
Slide 85: Response 3: Focus on quality of new business origination
Response 3: Focus on quality of new business origination Example: Impact Risk drivers Appetite levels Ratings Expected loss Target market 1.00% Volatility Approval rates Capital levels 0.40% Affordability IFRS provisions 0.20% Collateral levels Portfolio ROE Calm Speculative Turbulent Levers that in
Slide 86: Response 4: Ensure appropriate re-pricing of new transactions
Response 4: Ensure appropriate re-pricing of new transactions 5-year Industrial Spreads above 5-year swaps 550 500 450 400 Spread in bps 350 300 250 200 150 100 50 0 A BBB BB B Median Pricing Wizard 90th Percentile Spread example 86
Slide 87: Response 5: Improved communication on credit delinquency and trends
Response 5: Improved communication to internal and external stakeholders on credit delinquency and trends Aggregate portfolio bad debt sensitivity 2.2% 2.0% 1.8% 1.6% Example: 1.4% Portfolio loss Forecast (% of Performing) 1.2% 1.10% 1.0% 1.00% 0.8% 0.6% 0.90% 0.81% 0.4% 0.80% 0.70% 0.2% 0.70% 0.0%
Slide 88: Strategic Funding & Capital Management
strategic Funding & Capital Management Andries du Toit FIRSTRAND Banking Group
Slide 89: Strategic funding & capital management
Strategic funding & capital management Contingent funding Funding activities (senior unsecured) • Debt holders’ requirements Diversification (rating agencies, targeted rating) Efficiency • Deposit holders and key funders Funding Flexibility • Minimise regulatory intervention (to prevent business dis
Slide 90: Importance of core equity
Importance of core equity • Core equity • Three year forecast (dividend is seen as annuity) • All buffers kept in this category • Back internal economic capital • Accumulating buffers for acquisition/ expansion / pro-cyclicality • Buffer sufficient for downturn (exceed internal targets) and severe d
Slide 91: Funding the growth
Funding the growth Growth in South Africa Corporate capacity building/ infrastructure expansion + Recent developments in global financial markets (bank lending to stay on balance sheet) = Need to create capacity to fund anticipated advances growth on balance sheet (give investment bank flexibility)
Slide 92: Understanding the flow of funds in SA
Understanding the flow of funds in SA • Structural liquidity position in South Africa • Contractual vs discretionary savings • Banks disintermediated due to large portion of individuals’ savings flows that are recycled through money market funds • = contractual liquidity risk • Exchange control prud
Slide 93: Reliance on wholesale funding
Reliance on wholesale funding 100% 7% 9% 8% 8% 90% 16% 15% 13% 13% 80% 70% 19% 17% 22% 20% 60% 50% 30% 30% 40% 28% 28% 30% 20% 28% 30% 32% 27% 10% 0% Jun '05 Jun '06 Jun '07 Dec '07 Wholesale Corporate Retail Gov¶statal Other 93 Extend term profile & diversify funding sources
Slide 94: Response to funding challenges
Response to funding challenges Action plan • Internal prudential limit for money & capital markets (wholesale) • Review of regulatory platforms • Instruments to be issued • Money market • Capital markets • Bi-lateral 94
Slide 95: Active liquidity risk management
Active liquidity risk management • Started accumulating liquidity buffers in 1Q 2007 • International • Assess current liquidity status, market conditions and risk appetite • Monitor market events, assess similar events and consider impact • Limited funding pool and marginally priced for all assets •
Slide 96: Panel discussion: Balance sheet management
Panel discussion: Balance sheet management FIRSTRAND Banking Group