Firstrand Limited · JSE:FSR
Firstrand — WesBank — UBS Conference 2008
36 slides from Firstrand's conference presentation, October 2008
Slide 1: Managing the Downcycle
Slide 2: Agenda: Recent history
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 3: Agenda: Recent history
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 4: Slide 4
Slide 5: Agenda: Recent history
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 6: This is what happened in the last years
THIS IS WHAT HAPPENED IN THE LAST 6 YEARS… 18% Sep-02 Sep 02 17% 3 Recovery ? 16% Jun-08 Jun-03 Apr-08 15% me rate Dec-07 14% Oct-07 2 Crunch Prim Sep-03 Aug-07 13% Growth Dec-06 Jun-07 1 12% Oct-03 Oct-06 Aug-06 Dec-03 11% Aug-04 Apr-05 Jun-06 10% 50% 55% 60% 65% 70% 75% 80% Debt-to-Household-Incom
Slide 7: The growth phase was exceptionally good
THE GROWTH PHASE WAS EXCEPTIONALLY GOOD – THE LARGEST IN SA HISTORY SINCE WWII Passenger and Commercial Vehicles sales Units per quarter More than 200,000 doubling of vehicles sales in only 3 years 150,000 100,000 Flat vehicle unit sales 50 000 50,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1
Slide 8: Growth also reflected in asset prices, creating a wealth effect
GROWTH WAS ALSO REFLECTED IN ASSET PRICES, CREATING A ‘WEALTH EFFECT’ Normalised house price Real house price, 1990 = 100% 250% Doubling of real house Similarly, JSE Similarly 200% prices in index same period quadrupled from 03 to 07 150% 100% Flat real house prices 50% 0% 1990 1991 1992 1993 1994 1
Slide 9: WesBank benefitted from the huge growth
WESBANK BENEFITTED FROM THE HUGE GROWTH … Annual WesBank New Business production Rb 60 Growth funded by increase in household 51 50 debt from 53% to 78% of income 41 40 29 30 22 20 20 17 13 10 10 0 1999 2000 2001 2002 2003 2004 2005 2006
Slide 10: Agenda: Predictability is vital
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 11: Predictability is vital
PREDICTABILITY IS VITAL … “The US and world “ We believe a economies may y super cycle is have entered a underway, driven new era of low by materials’ interest rates“ intensive economici growth th in China” Alan Heap, Heap (citigroup) 2005 Rich Miller (BusinessWeek Washington) 2005 (Unknown) “This T
Slide 12: Agenda: The shock
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 13: The shock
THE SHOCK “Oil will breach $100 a “ CPIX expected to peak b barrel” l” (Arjun (A j Murti M ti - 2007) at 12% in the third “Oil prices are likely to rise quarter of 2008 and to between $150 to $200 in only ease back within the next six to 24 months months” the target band by the (Arjun Murti – 2008)
Slide 14: Massive increase in default rates up to the peak of the crunch
RESULTING IN MASSIVE INCREASE IN DEFAULT RATES UP TO THE PEAK OF THE CRUNCH … Probability of Default per Decision Bucket 25% PD % increase from Jun2004 to Jun2008 216% 20% 213% 211% 15% 250% 170% 10% 201% 151% 181% 5% 109% 0% A1 A2 A3 A4 A5 D1 D2 D3 NS Jun2004 Jun2006 Jun2008 * Note, LGD provides fu
Slide 15: Poorer asset recoveries as demand waned
… AND POORER ASSET RECOVERIES AS DEMAND WANED Repo p asset value to accounting g balance Downturn Recoveries depressed Downturn recoveries – retail downturn with elevated due to limited vehicle Rand depreciation inflation linked vehicle inflation
Slide 16: The end result is a cyclical retail bad debt charge
THE END RESULT IS A CYCLICAL RETAIL BAD DEBT CHARGE Bad debt p.a., WesBank Motor 2 5% 2.5% 2.2% 2.0% 1.7% 1.6% 1.5% 1.5% 1.4% 1.4% 1.2% 1.2% 1 2% 0.9% 1.0% 1.0% 0.9% 1.0% 1.0% 0.6% 0 6% 0.6% 0.6% 0 6% 0.5% 0.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Growth Cr
Slide 17: Agenda: Why the current cycle is different
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 18: The current cycle is different and worse than 1998
THE CURRENT CYCLE IS DIFFERENT AND WORSE THAN 98 … 1998 2008 • Preceding period of flat or no • Largest post WWII growth growth period • Preceding period of volatile • Preceding period of extremely interest rates low interest rates (for SA) • Moderate debt-to-income • Record debt-to-income levels le
Slide 19: Agenda: Management actions
• Recent • History • Simple down cycle • Predictability is vital • The shock • Why the current cycle is different ff • Management a age e t act actions o s • Where are we going
Slide 20: Management actions started as far back as end of 2005
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005! WesBank started slowly tightening Credit policy and scorecards Credit from the end of 2005, which in retrospect showed great foresight – tightening unfortunately the depth of the crunch was not foreseen otherwise deeper
Slide 21: First management action was to proactively tighten in 2005
30 40 50 60 70 80 Jul 004 Aug 004 Sep 004 Oct 004 Nov 004 Dec 004 Jan 005 Feb 005 Mar 005 Period of being Apr 005 deeper in the market May 005 Jun 005 Jul 005 Aug 005 Sep 005 Oct 005 Nov 005 Dec 005 Jan 006 Feb 006 Mar 006 Apr 006 May 006 Jun 006 Jul 006 tightening Aug 006 Period of sustained Sep 00
Slide 22: This was done regardless of the impact on market share
THIS WAS DONE REGARDLESS OF THE IMPACT ON MARKET SHARE … 40 WesBank Standard Asset Finance Absa 35 Nedbank/MFC Other Cash 30 25 20 15 10 5 0 May-06 May-07 May-08 Jul- 05 Aug- 05 Sep- 05 Nov- 05 Jan-06 Feb-06 Mar- 06 Apr-06 Jun-06 Jul- 06 Aug- 06 Sep- 06 Nov- 06 Jan-07 Feb-07 Mar- 07 Apr-07 Jun-07 Ju
Slide 23: Management actions: credit tightening and re-pricing
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005! WesBank started slowly tightening Credit policy and scorecards Credit from the end of 2005, which in retrospect showed great foresight – tightening unfortunately the depth of the crunch was not foreseen otherwise deeper
Slide 24: Motor margin and projected profitability show impact of re-pricing
WESBANK MOTOR MARGIN AND PROJECTED PROFITABILITY SHOWS THE POSITIVE IMPACT OF SIGNIFICANT RE-PRICING Combined Interest and Non-Interest Yield for Motor Division in Month of Origination % Projected
Slide 25: Management actions: tightening, re-pricing and cost focus
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005! WesBank started slowly tightening Credit policy and scorecards Credit from the end of 2005, which in retrospect showed great foresight – tightening unfortunately the depth of the crunch was not foreseen otherwise deeper
Slide 26: WesBank Cost to Income
WesBank Cost to Income South African Inst/Fin Business Cost to Income 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2003 2004 2005 2006 2007 2008 Cost to Income Poly. (Cost to Income)
Slide 27: WesBank Cost to Assets
WesBank Cost to Assets South African Inst/Fin Business Cost to Assets 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2003 2004 2005 2006 2007 2008 Cost to Assets Poly. (Cost to Assets)
Slide 28: Various credit products under pressure in this cycle
VARIOUS CREDIT PRODUCTS AS THEY HAVE COME UNDER PRESSURE IN THIS CYCLE CYCLE… MID CREDIT LUX USED NEW HOME- CORP MARKET CARDS ITEMS CARS CARS LOANS LOANS LOANS
Slide 29: Managing the down cycle
MANAGING THE DOWN CYCLE • Sail with an experienced crew • Pull management team together and talk and act with one voice • Face realities • Repricing • Advances book • Don’t panic • Management must at least appear to be in control • Budget vs reality • Take early decisions on cost-cutting
Slide 30: Managing the down cycle
MANAGING THE DOWN CYCLE • Create a positive vision • Over O communicate i • Motivate your people • Put yyour arms around yyour best ppeople p • External / internal focus • Roadshow • Over communicate • You can’t manage what is not on your books Create the right platform for the future • Test the wat
Slide 31: Agenda: Where are we going
• Recent history • Simple down cycle model • Predictability is vital • The shock • Why the current cycle is different • Management actions • Where e eaare e we e go going g
Slide 32: Be patient for Growth, but impatient for Profit
Be patient for Growth, BUT impatient p for Profit
Slide 33: Arrear trends showing improvement across all buckets
ARREAR TRENDS SHOWING IMPROVEMENT ACROSS ALL ARREAR BUCKETS – MOTOR ARREARS DECLINING NOW FOR 6 MONTHS Total Bank Arrears (Month End) 9 8 7.7 7.6 76 7.7 7.7 7 75 7.5 76 7.6 7.4 4 7.3 6.9 7 6.5 6.6 1+ 6.3 2+ 6 5.4 53 5.3 3 3+ 5.1 5 4.5 4.5 6+ % 4.3 3.8 3.8 3.8 4 3.6 3.7 3.6 3.6 3.4 2.7 2.9 3.1 31 3 2
Slide 34: Less repossessions from more recent business
LESS REPOSSESSIONS FROM MORE RECENT BUSINESS MORE RECENT BUSINESS DECREASING AS PERCENTAGE OF REPOS Repossessions WesBank Motor (Excl TFS) % repos performed in the month % of repos coming out of more recent business is lower than historical averages of 7.25% for 0-6 months and 20.4% for 0-12 months
Slide 35: What next
WHAT NEXT … • Rate decreases of 2-3% expected during 2009 will assist with normalising volumes from currently very depressed state • However, the recovery cycle will take time as consumers de-lever to 60-70% debt-to- household income range (unlikely to ever reach 50% again) – don don’tt expect to se
Slide 36: Thank You
Thank Th k You