Firstrand Limited · JSE:FSR
Firstrand — Investec seminar - Cape Town (March 2009)
30 slides from Firstrand's conference presentation, Mar 18, 2009
Slide 1: Bank credit risk: Making sense of the current credit cycle and outlook
Bank credit risk: Making sense of the current credit cycle and outlook Investec seminar – Cape Town 18 March 2009 Gert Kruger, FirstRand Banking Group
Slide 2: Contents
Contents • Features of the current credit cycle: Three analogies • FRBG credit experience to date • Credit outlook: Clouds and silver linings
Slide 3: Features of the SA retail credit cycle: Three analogies
Features of the SA retail credit cycle: Three analogies
Slide 4: Example 1: Strip sets training
Example 1: Strip sets training Each successive set increases heart rate at a quicker rate of change Average heart rate (AHR) bpm 180 160 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 AHR during warm-up and cool down AHR sprinting up hill AHR jogging down hill slowly
Slide 5: Example 2: Descent at the end of a race
Example 2: Descent at the end of a race The timing of the descent matters – the longer out it is the less immediate is the benefit in terms of decreased heart rate Example: Knysna half marathon 176 170 166 164 160 164 Heart Rates 160 152 164 164 166 166
Slide 6: Example 3: Tandem bicycle going up a hill
Example 3: Tandem bicycle going up a hill Partner turning from help to dead weight
Slide 7: FRBG credit experience in the cycle: Reaction of different parts of the portfolio
FRBG credit experience in the cycle: Reaction of different parts of the portfolio
Slide 8: NPLs and bad debts continue upward trend
NPLs and bad debts continue upward trend 1.40 1.64 4.2 4.2 1.31 1.28 3.4 1.11 1.19 0.98 0.97 2.9 0.79 0.83 2.8 2.6 0.79 0.78 Long run expected loss: 0.8 2.3 0.41 0.51 1.8 1.5 0.32 1.5 1.2 1.1 Jun '99 Jun '00 Jun '01 Jun '02 Jun '03 Jun '04 Jun '05 Jun '06 Jun '07 Dec '07 Jun '08 Dec '08 NPLs (%) Imp
Slide 9: Observation on the product line impact of successive rate increases
Observation on the product line impact of successive rate increases Credit card cycle behaviour 400 18% 350 16% 300 14% Prime rate 250 Impact off 12% write-offs and 10% 200 deeper cycle Peak early in the cycle Q2/3 2007 8% 150 6% 100 New impairments 4% 50 2% 0 0% Jul06 Sep06 Nov06 Jan07 Mar07 May07
Slide 10: Observation on the product line impact of successive rate increases
Observation on the product line impact of successive rate increases Wesbank impairments 400 18% 350 16% 14% 300 Prime rate 12% 250 10% 1st Peak early in the cycle 200 Q2/3 2007 Impact of deeper 8% 150 credit cycle 6% New impairments 100 4% 50 2% 0 0%
Slide 11: Observation on the product line impact of successive rate increases
Observation on the product line impact of successive rate increases Homeloans cycle behaviour 1400 18.0% 16.0% 1200 14.0% 1000 Prime rate 12.0% 800 10.0% 600 8.0% Property price slowdown impact 6.0% 400 New impairments 4.0% 200 Turning point late in the cycle 2.0% Q1 2008 0 0.0% Jul06 Sep06 Nov06 Ja
Slide 12: Outlook: Key clouds and silver linings to consider
Outlook: Key clouds and silver linings to consider
Slide 13: Outlook: Key clouds and silver linings to consider
Outlook: Key clouds and silver linings to consider • Job losses • House price developments • Corporate credit
Slide 14: The macro economic backdrop for the credit cycle
The macro economic backdrop for the credit cycle • First impacts • High inflation and interest hikes resulting in • Lower disposable income • Increased consumer defaults • Next impacts expected • Impact of the credit crunch on the real economy • Lower GDP • Job losses • But with some relief • Impact
Slide 15: Job losses – the macro data
Job losses – the macro data Unemployment Trends (QLFS )1 2005 2006 2007 2008 Services 2,560 2,661 2,192 2,319 Financial 1,482 1,636 1,296 1,309 Transport & Communications 696 774 616 611 Retail 2,935 3,164 3,024 3,055 Construction 1,054 1,191 935 1,024 Elec, Gas & Water 98 86 100 119 Manufacturing 1
Slide 16: How job losses manifest in a portfolio
How job losses manifest in a portfolio (assume 3% job losses and 0% latent job losses) • Example: High default portfolio • Example: Low default portfolio (e.g. card with 10% margin) (e.g. homeloan with 2% margin) • Assume annual NPL of 12% in • Assume annual NPL of 7% in distressed market and 70% di
Slide 17: Assumptions to make to determine impact
Assumptions to make to determine impact • Consensus forecasts vary • But 2-3% often quoted as a possibility (250k – 350k) • Job losses vs banked population • Probably reasonable to assume close to a 1:1 relationship • Job loss demographics • Data to date suggest higher incidence of job losses in low
Slide 18: Outlook: Key clouds and silver linings to consider
Outlook: Key clouds and silver linings to consider • Job losses • House price developments • Corporate credit
Slide 19: How house price movements manifest in bad debts
How house price movements manifest in bad debts • Key parameters • Example • Volume of NPL’s • R1bn NPL • NPL coverage • Coverage elements • Loan to value • LTV of 100% [R1bn] • Distress price haircut • Haircut of 35% [R0.65bn] • Time to recovery • 12 months disc. factor • Level of curing • 60% curi
Slide 20: Impact of a 10% drop in house prices on the provision
Impact of a 10% drop in house prices on the provision • Example (excluding fall): • Example (including fall): • R1bn NPL • R1bn NPL • Coverage elements • Coverage elements • LTV of 100% • LTV of 111% [R1bn of collateral] [R0.9bn value of collateral] • Haircut of 35% [R0.65bn] • Haircut of 35% [R0.72
Slide 21: House price development – the simple view
House price development – the simple view 400 350 +/-15% 300 250 200 +/-15% 150 100 50 0 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Real House price index Nominal House price index Source: INet & BSM CPM
Slide 22: Nominal and real growth vs global experience
Nominal and real growth vs global experience Nominal growth in house prices Real growth in house prices Index Index 350 2.5 SA SA 300 2.0 UK 250 1.5 US 200 UK 1.0 US Australia 150 0.5 100 Mar Mar Mar Mar Mar Mar Mar 0.0 02 03 04 05 06 07 08 Jan‐02 Dec‐02 Nov‐03 Oct‐04 Sep‐05 Aug‐06 Jul‐07 Jun‐08
Slide 23: House price : disposable income
House price : disposable income House prices to disposable income SA house price to disposable income Index Ratio 120 SA 1.7 100 House Price / Income UK 1.5 US 80 1.3 Period Average 60 1.1 0.9 40 Jan Jan Jan Jan Jan Jan Jan Jan Jan Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 00 01 02 03 04 05 06
Slide 24: Outlook
Outlook • Residential property prices likely to remain under pressure • Will put pressure on impairments through lower recoveries • Rate cuts will provide some cash flow relief and reduce cash flow defaulters
Slide 25: Outlook: Key clouds and silver linings to consider
Outlook: Key clouds and silver linings to consider • Job losses • House price developments • Corporate credit
Slide 26: Migration risk to corporate
Migration risk to corporate Impairment ratio (%) 3.5 3.0 2.5 2.41 2.0 2.21 1.5 1.64 1.39 1.0 0.5 0.66 0.33 0.34 0.0 Dec '07 Jun '08* Dec '08 Total impairments Dec '08 Impairment % Retail Impairment % Wholesale * June 2008 for the 6 months ended Source: FRBG results presentation
Slide 27: How will it unfold – Corporate ?
27 199501 199506 199511 199604 199609 199702 199707 199712 199805 Defaults 199810 199903 199908 200001 200006 200011 200104 200109 200202 200207 200212 200305 200310 RMB Wholesale Credit Cycle Indicator 200403 Wholesale Credit Cycle Indicator 200408 How will it unfold – Corporate ? 200501 200506 200
Slide 28: Corporates however in better health than previous cycles
Corporates however in better health than previous cycles Key financial ratios of JSE industrial companies Source: Inet & BSM CPM
Slide 29: Outlook
Outlook • Corporate spill-over has already started • Key area of pressure is smaller businesses • Corporate balance sheets in reasonably good health pre-crisis • Impact of global spill-overs is the main unknown
Slide 30: Conclusion
Conclusion • Expect retail pressure to remain in the short run • Especially for asset backed retail areas e.g. mortgages due to house prices falling • Rate cuts will provide some cash flow relief • But job loss uncertainties likely to mitigate benefits • Corporate spill-over has started • But may be
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