Firstrand Limited · JSE:FSR
Firstrand — UBS Annual Financial Services Conference 2011
43 slides from Firstrand's conference presentation, Oct 27, 2011
Slide 1: FirstRand's investment case: strength and quality of franchise will drive sustainable growth and returns
FirstRand’s investment case: strength and quality of franchise will drive sustainable growth and returns Johan Burger g (COO & CFO)
Slide 2: Agenda
2 Agenda • Headwinds • Macro – “new normal” • Regulation – capital and liquidity • FirstRand investment case • What is required to outperform, given headwinds
Slide 3: Agenda
3 Agenda • Headwinds • Macro – “new normal” • Regulation – capital and liquidity • FirstRand investment case • What is required to outperform, given headwinds
Slide 4: Cumulative build-up of leverage
4 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 5: Growth in bank earnings outpaced nominal GDP growth
5 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 05 0.5 05 0.5 90 92 94 96 98 00 02 04 06 08 10 12 Source: I-Net Bridge
Slide 6: Characteristics of "new normal" environment
6 Characteristics of “new normal” environment • Sluggish GDP growth • Rising inflation • Ri i unemployment Rising l t • Flat or declining property values • Disposable income under pressure • Low levels of business confidence and activity • Interest rates to remain low L Lower growth th and d more vo
Slide 7: Macros impact banks
7 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 q y • Increased cost of liquidity • Bad debts • Further benefit of monetary policy intervention limited • But asset quality muc
Slide 8: Agenda
8 Agenda • Headwinds • Macro – “new normal” • Regulation – capital and liquidity • FirstRand investment case • What is required to outperform given headwinds
Slide 9: Regulation and the role of banks in the economy
9 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 10: The FirstRand investment case
10 The FirstRand investment case • 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 11: The FirstRand investment case
11 The FirstRand investment case • 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 12: Financial strength...
12 Financial strength... • Capital position and management • Asset quality • Funding strategies ... but be competitive
Slide 13: Financial strength
13 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 14: Strong capital position
14 Strong capital position Core Tier 1 ratio 14% 13 8% 13.8% Special dividend 13% 12.6% 12% Expansion Expansion, regulatory 11% changes, etc.* Target range: 10% 9.5 – 11.0% 9% 8% 7% 6% 5% 4% Jun '10 Jun '11 * Illustrative
Slide 15: We understand the implications of regulatory changes
15 We understand the implications of regulatory l t changes h • Assessed impact of Basel 2 2.5 5 and Basel 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) • Comf
Slide 16: Consistent capital management strategy
16 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 17: FirstRand's portfolio – ROA and leverage ratio
17 FirstRand’s portfolio – ROA and leverage ratio ROA FirstRand products 9.0% 8.0% 7.0% 6.0% 5 0% 5.0% 4.0% 3 0% 3.0% HomeLoans greatest 2.0% drag on ROA and ROE FSR FSR 1 0% 1.0% 0.0% -1.0% 0 5 10 15 20 25 30 35 40 Leverage (times)
Slide 18: Focus on improving ROA to deliver superior ROE
18 Focus on improving ROA to deliver superior ROE 1.64 1.28 1.28 1 14 1.14 0.85 2007 2008 2009 2010 2011 ROA
Slide 19: Change in mix will drive NII growth despite low new business volumes
19 Change in mix will drive NII growth despite low new business volumes • Higher growth in unsecured in retail portfolios results in better risk-adjusted margins Projected portfolio Advances growth margin ranges projected trend Secured FNB HomeLoans 1.5% 0% VAF (WesBank Motor) 5.5% 10% Unsecured Mas
Slide 20: Dealing with possible excesses
20 Dealing with possible excesses • Don’t look at capital point-in-time – we take a 3-year view • Given expected low growth in RWAs, current expansion requirements and ongoing strong capital generation we expect to generate excess capital • Whilst philosophy is not to hold “war chest” for acquisitio
Slide 21: Financial strength
21 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 22: Balance sheet reflects financial soundness
22 Balance sheet reflects financial soundness Nominal* gearing 12 times RWA/Total assets* = 55% 6% Other assets 7% 5% C h & near cash Cash h 10% Tradable securities 19% & other investments 5% O Other net advances Oth liliabilities Other biliti es = 70% of assets Perpetual Corporate preference shares
Slide 23: We took the pain earlier and faster
23 We took the pain earlier and faster • First loss is best loss • No restructuring g of NPLs to p performing g • 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 • Secur
Slide 24: FNB HomeLoans vintage analysis shows quality of new business
24 FNB HomeLoans vintage analysis shows quality lit off new business b i 15% 10% 5% 0% Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Jun '06 Jun '07 Jun '08 Jun '09 Jun '10 Jun '11 3 months 6 months 12 months
Slide 25: How to achieve good returns in residential mortgages
25 How to achieve good returns in residential mortgages • Client risk • Repayment-to-income (RTI) • Expected losses (bad debts) • Pricing • Asset risk • Loan-to-value (LTV) • ROE • Area • Liquidity mismatch • Market share • Short vs long • Earnings volatility • Non-interest revenue • Cost-to-assets
Slide 26: We are improving risk profile and pricing
26 We are improving risk profile and pricing FNB HomeLoans 100% 1.60% Higher discount 90% 1.40% 80% 1.20% stered dealss 70% 1.00% 60% 50% 0.80% % of regis 40% 0.60% 30% 0.40% 20% ROE on new business 0.20% 10% In-force ROE below cost of equity above hurdle rates Lower 0% discount 0.00% Jan Apr Jul Oc
Slide 27: Financial strength
27 Financial strength • Capital position and management • Asset quality • Funding strategies
Slide 28: We need to understand who will pay for the increased cost of liquidity?
28 We need to understand who will pay for the increased cost of liquidity? 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 Cos
Slide 29: SA banking system liquidity gap
29 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% 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-
Slide 30: Increased cost of structural liquidity mismatch
30 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 31: FirstRand's response
31 FirstRand’s response • Funds transfer pricing • Behavioural pricing for liquidity and deposits • Match-funding for illiquid long dated assets • Minimum client pricing on both sides of the balance sheet • Repricing business for current and potential future costs • Funding strategy • New measuremen
Slide 32: The FirstRand investment case
32 The FirstRand investment case • 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 33: What underpins earnings resilience
33 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 • Sou
Slide 34: Diversity of earnings
34 Diversity of earnings Geography* Activity* 5% 8% 4% SA 2% Client Africa & corridors Investing International Trading 88% 93% FirstRand Segment† Franchise† 8% 16% Retail FNB 43% Commercial 45% FNB Africa 34% Corporate RMB 31% FNB Africa WesBank 15% 8% * Based on gross revenue † Based on PBT, exclud
Slide 35: Balance between NII and NIR
35 Balance between NII and NIR Normalised gross revenue breakdown 43% NII before impairments Non-interest revenue 57%
Slide 36: Quality of NIR underpinned by client franchises
36 Quality of NIR underpinned by client franchises Normalised NIR breakdown 64% Transactional income 8% RMB client flows Client activity 10% Insurance 88% 1% WesBank associates 5% Other client 4% Private equity 2% Resources Investment & trading 3% Other investment 12% 3% Trading
Slide 37: RMB rebalanced its portfolio
37 RMB rebalanced its portfolio Proportion of gross revenue 100% 8% 90% 29% 80% 24% 70% 60% 32% 50% 40% 68% 30% 20% 39% 10% 0% 2007 2011 Client Investing Trading
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, Africa grow in existing markets and those where currently underrepre
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 off relentless l l ffocus on iinnovation i iis now contributing ib i to b bottom liline • Supported by entrepreneurial, owner-manager culture • Current strategy • Focus o
Slide 40: RMB – excellent franchise will weather tough macros
40 RMB – excellent franchise will weather t tough h macros • Strengthening client franchise • Scale trading and investment activities appropriately • Better service large corporates through creation of CIB CIB, but protect integrity of investment banking franchise • Coverage g pprovides integrated g
Slide 41: WesBank – unique model underpins market leadership
41 WesBank – unique model underpins market k t leadership l d hi • Core strategy gy to p protect and g grow current local franchise – dominate p point of sale through industry partnerships • Target segments where under under-represented represented • Mid corporate • Identified over 1 000 potential c
Slide 42: The Group is making progress on cost management
42 The Group is making progress on costt managementt • No cost-to-income target, but managing core costs has received significant focus • WesBank reduced headcount by 32% since 2009 • Not a one-size-fits-all strategy – facilitated by business model • Down-sizing in low-growth businesses, i.e. HomeLo
Slide 43: To sum up
43 To sum up • Can we deliver? • Short-term Sh t t – earnings i growth th should h ld outperform t f macros • Medium to long-term – deliver superior, sustainable ROEs • We believe we can: • Balance sheet strength • Improved ROA • Diversityy and quality q y of earnings g pprofile • Franchise strength
FirstRand — UBS Annual Financial Services Conference 2011 on 6ix