Firstrand Limited · JSE:FSR
Firstrand — Debt Investor Presentation (October 2011)
76 slides from Firstrand's debt investor presentation, Oct 28, 2011
Slide 1: Debt investor day
@ debt investor day
Slide 2: Group Treasury
group treasury Andries du Toit
Slide 3: Agenda
Agenda • Liquidity risk management philosophy • Basel III update • FirstRand’s response • Liquidity buffer • Funds Transfer pricing • Funding strategy
Slide 4: The FirstRand response
The FirstRand response • Funds Transfer pricing • Behaviour pricing for liquidity and deposits • Match funding for illiquid long dated assets • Minimum client pricing on both side of the balance sheet • Funding strategy • New measurement on deposit franchise • New product offering and development •
Slide 5: Group Treasury
Group Treasury Set frameworks, risk appetite and strategy Centralised Treasury Functions Intra-day liquidity Finance Global Funding & Liquidity Capital & Cross Border Flows management Management exchange control Strategic Treasury ALM Relationship Management Portfolio Management Multi Currency Funds
Slide 6: Liquidity management
liquidity management Andries du Toit
Slide 7: Liquidity risk management philosophy
Liquidity risk management philosophy • Consequential risk • Continuous funding and liquidity cycle Funds Liquidity • Liquidity is a consequential risk transfer risk pricing appetite • Forward looking • Integrated across: Contingency Risk strategy • Macro economic outlook funding plan LIQUIDITY RISK
Slide 8: Basel III update
basel III update Bhulesh Singh
Slide 9: G20 leaders endorse the Basel framework
G20 leaders endorse the Basel framework “We endorsed the landmark agreement reached by the Basel Committee on the new bank capital and liquidity framework, which increases the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital and l
Slide 10: Basel III – liquidity ratios
Basel III – liquidity ratios Proposed changes to Basel III framework Basel III framework SA Bank Regulations 1 January 2012 1 January 2013 1 January 2015 Minorities Credit Risk Scalar Deferred Tax Assets Liquidity Ratios Securitisations Market Risk Credit Valuation Adjustments Leverage Ratio Asset V
Slide 11: Basel III – new liquidity rules recap
Basel III – new liquidity rules recap • Liquidity Coverage Ratios (LCR) • Addresses short-term liquidity risk and cash management • Banks must hold high-quality liquid assets sufficient to cover • all net cash outflows • over a 30-day period • under an acute liquidity stress scenario (combined idios
Slide 12: Implementation timeline
Implementation timeline Dec-09 BCBS Liquidity Apr-12 Framework Proposed Expected Dec-10 Draft regulations BCBS Released from SARB Liquidity Framework Dec-10 - Jan-15 Dec-10 - Jan-18 LCR implementation NSFR Implementation Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-11 Dec-09 Jan-18 Ju
Slide 13: Basel III QIS – liquidity ratios
Basel III QIS – liquidity ratios SA Banks *, 68% 91% SA Banks * NSFR 103% 93% CEBS EU Banks Study SA Banks *, 57% Group 2 67% LCR 98% Group 1 83% 0% 20% 40% 60% 80% 100% 120% • QIS results above incorporate extraordinary central bank intervention in-force at the time • The SA banks do not comply • W
Slide 14: Basel III QIS – liquidity standards
Basel III QIS – liquidity standards Composition of stock of liquid assets of submitting banks • South Africa has limited qualifying liquid assets Central Bank Reserves, • One of the constraints is the international PSE-I, 7% 19% scale rating of AA- or better as an eligibility Central PSE-II, 6% Bank
Slide 15: Basel III QIS – liquidity criteria & SOE securities
Basel III QIS – liquidity criteria & SOE securities Characteristics Status • In addition to rating criteria the Basel SOE securities committee set out the characteristics of Fundamental characteristics high quality liquid assets Low credit and market risk • We have made the case for public sector
Slide 16: Level 1 asset shortfall
Level 1 asset shortfall • Countries that have sufficient Level 1 assets have high levels of Comparing public debt to GDP and the banking sector government debt 90% • We would not suggest higher 83% 82% 82% 80% 77% government debt levels to meet the LCR 70% 63% 61% 62% 60% 60% • There is a conflictin
Slide 17: LCR liability outflows
LCR liability outflows – surplus cash of FI’s and corporates reflect poorly -500 0 500 1 000 With Operational Less than 301 30 days Retail -30 SME 112 -11 Non FI 175 Relationships -44 FI's 77 -19 Gov & PSE 71 -18 Non FI 254 Relationships Operational -190 Without FI's 355 Composition (R'bn) -355 Outf
Slide 18: Bringing the LCR liquid asset and outflows together
Bringing the LCR liquid asset and outflows together Main LCR components Liquid Assets • R16bn physical cash Liquid Asset • R61bn central bank reserves Buffer 364 • R280bn net sovereign securities LCR = 57% R840bn Outflows • R30bn retail • R80bn operational deposit • R600bn non-operational • R190bn c
Slide 19: NSFR re-weighting effect on liabilities
NSFR re-weighting effect on liabilities 1 022 624 439 439 393 312 314 231 231 128 102 24 24 0 0 0 Banks & FI's Corporate SME Retail Requires deposit LT Borrowing LT Borrowing Capital insurance Other (FI's) Instruments coverage <1year Not Stable <1year Less Stable <1year Stable >1 year Amount (R'bn)
Slide 20: Basel III – it's the balance sheet structure
Basel III – it’s the balance sheet structure 100% 1% 5% 5% 7% 12% 90% 1% Other Assets 5% 18% 4% 13% 80% 24% 13% 8% Net Fixed Assets 70% 42% 60% Long-Term Investments 51% 28% 44% 45% 50% Cash & Near Cash 40% 67% 30% Interbank 20% 43% 43% 30% 33% 30% Marketable securities 10% 0% Net Loans FirstRand US
Slide 21: Basel III & the SA structure
Basel III & the SA structure eececeeeceeeee ese ese eee eee eee eee sees ese eee eeseeeseseeeeeeeeeseooeeeeerEeoeeeoeeseeeeoeeeeoe
Slide 22: Structural funding and liquidity task team
Structural funding and liquidity task team • SA banking sector does not comply given structural features • Under the guidance of National Treasury a structural funding and liquidity task team has been established • To make recommendations to the Finance Ministry • It is not the intention of National
Slide 23: National Treasury view
National Treasury view Savings are channeled into investment through numerous channels, directly and through financial institutions of which banks are one of them Decision Decision Investments Investors Institutions levers I Levers II (AUM) Cash and near cash Pension funds Individuals Economic Econo
Slide 24: Lim's development s-curve hypothesis
Lim’s development s-curve hypothesis • Lims’s development s-curve hypothesis provides a theoretical framework albeit empirical evidence is sometimes inconsistent Stage 1 Stage 2 Stage 3 (Turtle) (Horse) (Elephant) Japan • Economies in different development phases have different features and differen
Slide 25: SA's household flows – contractual savings scheme
SA’s household flows – reflects a contractual savings scheme (i.e. low discretionary savings) 100% 2% 1% 4% 10 10% 6% 8% 11% 15% 15% 15% 7% 12% 18% 80% 16% 25% 28% 28% 5 30% 27% 17% 29% 33% 46% 42% 36% 60% 20% 49% 32% 21% - 10% 40% 62% 59% 61% 53% (5) 68% 55% 56% 56% 42% 46% 20% 53% 39% (10) 0% -4%
Slide 26: Liquidity reserves and private credit
Liquidity reserves and private credit + As maturity transformation increases (liquidity mismatch) 14 000 Theoretical maximum money supply Credit growth constrained 12 000 + Increase liquidity reserves 10 000 - Constrains private credit extension 8 000 Purchase of government securities leeds 6 000 to
Slide 27: FirstRand's response
firstrand’s response Andries du Toit
Slide 28: The FirstRand response
The FirstRand response • Funds Transfer pricing • Behaviour pricing for liquidity and deposits • Match funding for illiquid long dated assets • Minimum client pricing on both side of the balance sheet • Funding strategy • New measurement on deposit franchise • New product offering and development •
Slide 29: Funds transfer pricing (FTP)
funds transfer pricing (ftp) Andries du Toit
Slide 30: Numerous approaches to FTP
Numerous approaches to FTP • No right or wrong • If the FTP does not reflect economic reality, then • The resultant behaviour can have incorrect impact and results It is not just about the price, but also about the availability
Slide 31: Components of FTP
Components of FTP 10.0 Rate "%" Risk costs & margin 9.5 in client rate 9.0 8.5 Liquidity premium & 8.0 statutory costs 7.5 7.0 6.5 Interest base rate 6.0 5.5 5.0 0 10 20 30 40 50 60 months Base interest rate Trasnfer rate including liquidity premium Client rate • The funding curve represents the ban
Slide 32: Why we do not like average-incurred-cost approaches
Why we do not like average-incurred-cost approaches Illustration of FTP and market rates Lag effect • In each time period the costs actually incurred Spread (bps) 250 Market rate by outstanding funding are allocated to outstanding assets 200 Averaging effect 150 • These are deficits from this approa
Slide 33: Addressing the economic value of deposits
Addressing the economic value of deposits for a sustainable funding base Economic Models to determine the risk for pricing and measurement Assets Liabilities • Credit • Capital • Market Risk • Liquidity on deposits Outstanding • Liquidity • Funding • Investment Risk • Operational Risk • Operational
Slide 34: The significance of the liquidity component
50 - 100 150 200 250 Dec-05 Feb-06 10 Apr-06 Jun-06 Aug-06 Oct-06 12 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 12M FY Avg Oct-07 Dec-07 32 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 64 Feb-09 Apr-09 12m Jun-09 Aug-09 Oct-09 83 Dec-09 Feb-10 Apr-10 Jun-10 Liquidity premium re-prices every 9m while assets onl
Slide 35: Components of FTP – fixed rate loans
Components of funds transfer pricing – fixed rate loans ITP = 6.50% LTP + Stats = 0.55% FTP = 7.05% 8.00% 7.00% 0.50% 0.15% 0.90% 0.55% 6.00% 1.0% 5.00% FTP Objective Interest rate risk is removed from the 4.00% business and centralised via the ITP process. 6.50 3.00% 5.5% 2.00% 1.00% 0.00% 3 month
Slide 36: Components of FTP – demand deposit
Components of funds transfer pricing – demand deposit ITP = 5.5% LTP = 0.50% FTP = 6.00% 8.00% 7.00% 6.00% 0.50% 0.50% 5.00% 4.00% FTP Objective Stable deposits are incentivised 3.00% 5.5% 5.50 2.00% 1.00% 0.00% 3 month ITP Hedges Term Funding Mismatch Cost of Liquid Behavioural Total FTP JIBAR (Jib
Slide 37: Evaluating core deposits and their value
Evaluating cored core deposits and their value 150 140 130 120 Deposit balance 110 100 97.5% 90 80 70 60 Deposit run off 50 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00
Slide 38: Estimation of mortgage funding costs
Estimation of mortgage funding costs 10.5% On a portfolio-basis, rates 9.5% 9.48% Prime 0.50% of below prime were only 0.42% 8.5% possible from sustaining a 1.15% liquidity mismatch 7.5% 1.60% 6.5% The benefit of this 5.56% 5.5% 0.25% mismatch was given to borrowers 4.5% 3M JIBAR Statutory costs Ter
Slide 39: Can you outperform the mortgage costs
Can you outperform the mortgage costs Efficiency and channel costs 10.5% Credit appetite Origination strategy 9.48% 9.5% 0.50% 0.42% 8.5% 1.15% 7.5% Volatile, cause Carry costs 1.60% 6.5% Targeted ROE 5.56% 0.25% 5.5% 4.5% 3M JIBAR Statutory costs Term funding Throught the cycle Cost of capital Expe
Slide 40: FTP conclusions
FTP conclusions • There is no perfect approach • The approach should create the correct incentives • Align economic risks and incentives • Support target balance sheet
Slide 41: Funding strategy
funding strategy Andries du Toit
Slide 42: The pillars of our funding strategy
The pillars of our funding strategy Diversification Efficiency Flexibility Counterparty relationships Segments Fund efficiently and with Ensure flexibility in The Group places great Country and currency consideration of liquidity accessing funding value on its strong risk management opportunities es
Slide 43: Strong focus on building a diversified funding base
Strong focus on building a diversified funding base Sources of funding Funding instruments Senior debt Conduit R 343bn R 516bn (CAGR 11%) Securitisation 3% 100% 6% issuance Other 5% 6% 5% 5% 5% Other 4% 2% 90% 9% 8% (4Y CAGR 15%) 13% 11% 9% Repo Sub debt 7% 1% 80% Other 19% 18% Foreign funding 17% 1
Slide 44: Franchises gaining traction with deposit growth
Franchises gaining traction with deposit growth Funding by segment Year on year growth FNB Consumer & Mass 68 +5 74 FNB Wealth 16 +4 20 64 FNB Commercial 67 +4 47 GTS & Other 52 +5 119 RMB 132 + 13 172 Group Treasury 180 +8 Jun-10 Jun-11 Source: FirstRand, results, segmental reporting Jun 2011
Slide 45: South African banking sector – funding composition by counterparty
20% 40% 60% 80% 100% 0% Jan-01 27% 29% 24% 9% 11% Jan-02 27% 29% 21% 10% 13% Source: SARB BA900, June-2011, FirstRand Jan-03 27% 31% 22% 10% 11% Jan-04 29% 29% 21% 12% 9% Jan-05 32% 26% 20% 14% 8% Jan-06 31% 29% 19% 13% 8% Jan-07 33% 28% 17% 14% 9% Jan-08 40% 26% 17% 8% 8% composition by counterpart
Slide 46: Industry liquidity profile has been improving
Industry liquidity profile has been improving – however definitions do not align Aggregate funding mix 100% 20% 12% 13% 13% 14% 15% 15% 18% 21% 22% 24% 24% 26% 21% 21% 80% 22% LT relative to Total 20% 21% 17% 15% 20% 18% 20% 17% 60% MT relative to Total 40% 68% 67% 66% 65% 65% 65% 64% 64% 58% 58% 57
Slide 47: Industry funding and term profile by segment
Industry funding and term profile by segment 1 200 Other Repo, 91 1 000 Government, 103 Institutional 3rd party 161 800 Institutional direct 123 Other 15 Government, 600 Corporate, 321 Other Institutional 3rd party 400 Government, 35 438 Institutional 3rd party Government, 27 Institutional 3rd party
Slide 48: Term yield pick-up is an insufficient incentive
Term yield pick-up is an insufficient incentive 6.5 6.0 0.2500 0.1250 0.1750 5.5 0.0750 0.2600 5.0 6.125 5.240 5.240 4.5 4.0 Overnight rate 1m 3M 6m 12m 24m Total incld spread pick up
Slide 49: Corporate
Corporate • To the extent we provide operational and cash management services this Other 2.9% Foreign funding strengthens the funding relationship 5% Public sector 9% • Banks are going to have to be innovative in order to attract and retain deposits Retail 18% Corporate 80 24% 70 60 Savings & other
Slide 50: Retail
Retail • The market for “deposits” is getting more competitive as banks price for their Other 2.9% Foreign funding embedded value and try to re-intermediate to enhance their liquidity profile 5% Public sector 9% • Banks are going to have to be innovative in order to attract and retain deposits Retai
Slide 51: Institutional funding
Institutional funding Other 2.9% • FirstRand has historically been under represented in the capital markets. Foreign funding 5% Public sector • We are increasingly seeking long term fixed income investment appetite in the capital market 9% and looking at alternative funding strategies including Reta
Slide 52: Industry liquidity profile has been improving
10% 20% 30% 40% 50% 60% 70% 80% 0% Jan-01 14% 23% 16% 66% Jan-02 15% 23% 14% 67% Jan-03 14% 25% 15% 64% Jan-04 17% 24% 14% 68% Jan-05 16% 21% 14% 65% Jan-06 16% 23% 13% 65% Jan-07 16% 23% 13% 65% Jan-08 17% 22% 13% 64% Mix within short term funding (<"1m") Jan-09 15% 20% 13% 58% Source: SARB BA900,
Slide 53: Actively lengthening the term profile and holding liquidity reserves
Actively lengthening the term profile and holding appropriate liquidity reserves 25.0 Liquidity reserves “%” of total liabilities 41 Securitisation 500 42 209 & Conduit 16% 45 202 20.0 14% 400 165 17 20 12% Institutional 15.0 10% 300 12 8% 10.0 6% 200 Deposit Franchise 4% 307 269 280 5.0 2% 100 0% I
Slide 54: Diversified listed debt maturity profile
Diversified listed debt maturity profile 9 000 ZAR mil 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 2011 2012 2013 2014 2015 2016 2017 2018 2020 2022 2023 2024 2028 2031 2033 2045 EMTN Issuance Credit Linked Notes Sub Debt Senior - Inflation Linked Senior April 2010 auction summary: Aug 2010 au
Slide 55: Share of financial institutions debt issuance
Share of financial institutions debt issuance 100% 11% 7% 11% 12% Other Financial Institutions 90% 4% 7% 8% 80% 11% Investec 20% 31% 17% 70% 18% 60% Nedbank 50% 21% 25% 27% 40% 33% SBSA 30% 20% 21% 17% ABSA 20% 10% 21% 24% 15% 19% FirstRand 0% 0-3yrs 3-7yrs 7yrs + Total Source: FirstRand Research, J
Slide 56: FirstRand bonds – market making support
FirstRand bonds – market making support 185 • All pricing on Bloomberg Spread to benchmark (bps) 165 • Bonds, NCD’s, FRN’s 145 125 • <FRBP>, <RMBP> 105 • Provide market making support 85 65 45 25 • Facilitate secondary market trade Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FRJ13 FRJ14 FRX14 FRX15 FR
Slide 57: Foreign currency balance sheet
foreign currency balance sheet 57
Slide 58: FirstRand philosophy on foreign currency external debt
FirstRand philosophy on foreign currency external debt • Framework for the management of external debt takes into account sources of sovereign risks†: • Unsustainable debt path (solvency) crisis • Liquidity crisis • Exchange rate and macroeconomic crisis • We consider the external debt of all South
Slide 59: Fixed capital formation funded by foreigners
Fixed capital formation funded by foreigners Gross saving and gross capital formation (% of GDP) 45% 40% 35% 30% 25% 20% 15% 10% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Gross saving as a % of GDP Gross fixed capital as a % of GDP Sourc
Slide 60: Application of RMS framework to SA
Application of RMS framework to SA South Africa is in pretty good shape from a debt stock perspective SA’s risk is a liquidity risk arising from external financing requirement RMS empirical thresholds 1995 2000 2005 2008 2009 RMS threshold Total external debt/ GDP 16% 19% 13% 15% 15% < 50% Short ter
Slide 61: Obligations to foreigners – relative to GDP
10% 15% 20% 25% 30% 0% 5% 6% 6% 6% 19% 6% 6% 6% 19% 6% 5% 7% 19% 6% 5% 7% 17% 6% 6% 8% 20% 6% 6% 8% 20% 6% 6% 8% 19% Source: SARB Quarterly Bulletin, National Accounts 5% 6% 8% 19% 5% 6% 10% 21% Public debt in "ZAR" to foreigners 6% 7% 10% 24% 6% 8% 9% 24% 6% 8% 9% 22% 6% 7% 8% 22% 7% 8% 9% 24% 7% 8
Slide 62: Obligations to foreigners – relative to exports
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 25% 25% 24% 74% 24% 22% 24% 70% 24% 21% 26% 71% 21% 19% 25% 65% 23% 24% 30% 77% 20% 22% 28% 71% 20% 20% 29% 68% 19% 20% 29% 68% Source: SARB Quarterly Bulletin, National Accounts 20% 21% 36% 78% 22% 25% 35% 81% Public debt in "ZAR" to foreigners 21% 27% 30
Slide 63: Foreign currency balance sheet
Foreign currency balance sheet – Approx. $4bn Asset Short term trading assets FX working capital Liquid trading assets facilities Illiquid trading Long term loans Interbank placing assets Trading assets FX liquidity buffers Short term loans Term loans 0‐3M 3‐12M 12‐36M 36M+ Tenor Syndicated Loans Cr
Slide 64: Funding platforms to support international strategy
Funding platforms to support international strategy United Kingdom - Greece London Cyprus Iraq China Iran Middle East Qatar Taiwan United Arab Emirates India - Dschibuti Nigeria Ghana Kenya Indo‐Africa trade - Tanzania Angola Africa‐China trade Zambia Malawi Mozambique Namibia Zimbabwe Botswana Aust
Slide 65: International funding activities
International funding activities • EMTN program • Syndicated loans • Reg S only (investigating 144A) • Lloyds TSB arranged $150m maturing 3 Dec 2012 • €500m 5-year bond due 2012 • CCB arranged $150m maturing 25 March 2013 • Conducted a public offer and bought back €267.5m • US $350m 5-year bond due
Slide 66: Conclusion
@ conclusion
Slide 67: Conclusions
Conclusions • Building and growing our deposit franchise • Bank our clients end-to-end • Value operational relationships • Selective capital market issuance • Originate in security format
Slide 68: Questions
@ questions
Slide 69: Appendix
@ appendix
Slide 70: Industry liquidity profile has been improving
Industry liquidity profile has been improving – however definitions do not align Aggregate funding mix 100% 12% 13% 13% 14% 15% 15% 18% 21% 22% 24% 24% 26% 80% Long term > 6m 60% 88% 87% 87% 86% 85% 85% 82% 79% 78% 76% 76% 40% 74% Short & 20% medium term <6m 0% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan
Slide 71: Household flows
Household flows 225 120 100 175 80 125 60 40 75 20 25 0 -25 -20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Direct Investment Deposits with Other FI's Direct Investment Deposits with Other FI's Household bank deposits Househ
Slide 72: Increasing dependence on foreign funding of fixed capital formation
Increasing dependence on foreign funding of fixed capital formation and corporate savings Net Capital Formation (current prices) 350 300 250 200 150 100 50 - (50) (100) (150) (200) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Savings by hou
Slide 73: Private credit growth year on year lags GDP change
Private credit growth year on year lags GDP change Source: SARB Quarterly Bulletin, National Accounts
Slide 74: The significance of the liquidity component
Spread over 3M JIBAR bps - 50 100 150 200 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Spread implied by FRB NCD’s & FRN’s Jun-07 Sep-07 Dec-07 Mar-08 12m Jun-08 Sep-08 Dec-08 Mar-09 60m Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 The significance of the liquidity component Sep-11
Slide 75: Building appropriate liquidity buffers
Building appropriate liquidity buffers Liquid assets (R‘bn) 80 70 60 50 40 30 20 10 - Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Statutory liquidity Liquidity buffer Excess liquidity
Slide 76: End
end
FirstRand — Debt Investor Presentation (October 2011) on 6ix