FirstRand Limited · JSE:FSR

FirstRand — H1 2005 Earnings Presentation

80 slides from FirstRand's earnings presentation, February 2005

  1. Slide 1: Interim results for the six months ended 31 December 2004

    integrated | financial services Interim results for the six months ended 31 December 2004 a) FiIRSTRAND

  2. Slide 2: Agenda

    Agenda ƒ Strategic issues and operating review ƒ The numbers ƒ Prospects

  3. Slide 3: Strategic issues and operating review

    Strategic issues and operating review

  4. Slide 4: Ansbacher goes at premium to NAV

    Ansbacher goes at premium to NAV ƒ Sold to QNB at premium to NAV ƒ Transaction effective November 2004 ƒ Net proceeds £91.1m ƒ Investment return from acquisition to disposal approx. 12% per annum compound ( 1992-2004 )

  5. Slide 5: Largest BEE transaction in SA

    Largest BEE transaction in SA ƒ 4 broad based partners (6.5%) ƒ Significant staff participation (3.5%) ƒ Represents 12.2% of Group’s local operations ƒ Third party funded R2 936m limits capital sterilisation ƒ Total cost to shareholders is 3.15% ƒ Economic cost of dilution is 2.1% ƒ Implemented by M

  6. Slide 6: A more focused FNB

    A more focused FNB ƒ October 2004 dismantled the clusters ƒ Merged FNB Retail and FNB Corporate ƒ Alignment strengthens Group segment focus ƒ Maximise growth opportunities in mid- corporate and business segments ƒ More effective utilisation of branch network

  7. Slide 7: Simplified structure

    Simplified structure WesBank FNB RMB Banking Bank Group Africa Support Treasury Function

  8. Slide 8: Consistent growth strategy

    v | _* v7 Consistent growth strategy New Age Capital Organic growth Collaboration Acquisitions Businesses | Management

  9. Slide 9: The story of organic growth continues…

    The story of organic growth continues… ƒ Natural market growth ƒ Innovation ƒ Collaboration

  10. Slide 10: Buoyant trading conditions

    Buoyant trading conditions ƒ Accelerated growth of the South African economy ƒ Further strengthening of the Rand ƒ Continued reduction in inflation ƒ Stable low interest rates ƒ Strong world economy and commodity cycle ƒ Improved equity markets

  11. Slide 11: Natural market growth

    Natural market growth ƒ Strong growth in domestic household expenditure particularly motor and property • Higher levels of disposable income • Consumers willing to take on more debt • Wealth effect ƒ High levels of BEE activity ƒ Consumer and business confidence at all time highs

  12. Slide 12: Innovation creates new pockets of growth

    Innovation creates new pockets of growth ƒ Discovery card - 60 000 new accounts • Monthly roll-out already bigger than FNB card distribution ƒ One account • R100 million per month ƒ Million-a-month-account • New clients for FNB and banking system

  13. Slide 13: Innovation creates new pockets of growth

    Innovation creates new pockets of growth ƒ Momentum RealSaver ƒ Pru Health ƒ OUTsurance Essential product

  14. Slide 14: Discovery Card hits the ground running

    Discovery Card hits the ground running 60,000 50,000 Distribution delays, marketing curtailed 40,000 30,000 20,000 . 10,000 - 14 v 21 v 28 v 05 ov 09 n 16 n 23 n an 06 n eb 12 c 19 c 26 c 02 c 07 t o o o c e e e e a a a a -O -N -N -N -N -D -D -D -D -J -J -J -J -J -F 30 31

  15. Slide 15: Bancassurance continues to be meaningful

    Bancassurance continues to be meaningful Retail NPBT from insurance operations up 40% year-on-year Dec 04 Dec 03 % change (Rm) (Rm) YOY OUTsurance 101 67 49% FirstLink 37 25 48% WesBank 122 107 14% HomeLoans 32 27 18% Subtotal 292 226 30% FNB Life 4 - >100% FNB Consultants 23 18 28% Total 319 244 40

  16. Slide 16: Quantifying organic growth

    Quantifying organic growth WesBank new business 29% FNB HomeLoans new business 90% FNB Card advances 24% Consumer cheque sales 64% Consumer transmission accounts 52% RMB Private Bank advances 41% Knowledge based fees 46% Momentum risk products new business 38% Discovery new business premium income 3

  17. Slide 17: Investing in the future

    Investing in the future ƒ Destiny’s performance exceeded expectation • Annualised new business +84% • Losses to date R51m • Maiden operating profit of R1.6m in January 2005 ƒ Pru Health • Start up costs of R80m as budgeted over the period ƒ Pulz • 108 500 beneficiaries in the fund • R10.8m start up

  18. Slide 18: Diverse portfolio of businesses

    Diverse portfolio of businesses Profit before taxation R’m % growth RMB 813 36% FNB 2 193 22% WesBank 636 33% Momentum 425 28% OUTsurance 101 49% Discovery 228 36%

  19. Slide 19: RMB firing on all cylinders

    RMB firing on all cylinders ƒ Excellent environment • BEE activity • Lower interest rates • High equity values ƒ Good performance across all business units ƒ Private equity realisation >R200 million • Unrealised profits grew from R984m to R1.01bn • Strong deal pipeline ƒ RMBAM performed well • Incre

  20. Slide 20: WesBank still in a sweet spot

    WesBank still in a sweet spot ƒ New vehicle sales at 20 year high ƒ New business up 29% to R18.7 billion (R3.1bn per month) • Continues to be driven by partnership strategy ƒ NIR increased by 43% • Volume kicker • Penetration of insurance products ƒ Average market share up to 31% WesBank finances 4.

  21. Slide 21: FNB continues to benefit

    FNB continues to benefit ƒ HomeLoans • New business up 90% • Profits impacted by new business strain • Increase in market share ƒ Credit card • Loans up 24% • Balance Transfer Product ƒ Branch banking sales up strongly • HomeLoans +90% • Consumer cheques +64% • Business investment products +45%

  22. Slide 22: FNB continues to benefit

    FNB continues to benefit ƒ Corporate • Negatively impacted by disintermediation and margin pressure ƒ Commercial • NIR up 25% due to new customers and increased transactional volumes • Commercial expected to be future growth engine Disintermediation positive for RMB

  23. Slide 23: Areas of focus

    Areas of focus ƒ Commercial property division ƒ Micro finance ƒ Sales culture ƒ Credit • Have we adjusted the pricing for our current default experience?

  24. Slide 24: OUTsurance, always a bonus

    OUTsurance, always a bonus ƒ Organic growth drives up gross premium income by 31.5% ƒ Headline earnings up by 44.3% ƒ Effective cost containment ƒ Total assets > R1.5bn ƒ Collaboration within FirstRand contributes 27% of premium income • WesBank, FNB HomeLoans, RMB Private Bank • Volume kicker

  25. Slide 25: Gaining Momentum

    Gaining Momentum ƒ New business in the local market increased by 18% • Risk recurring premium income +38% • Retail recurring premium income +26% • Single premium income +17% ƒ Good domestic cost containment ƒ Launch of Myriad 5 risk product in October 2004 ƒ Merger with Pulz and NMP = Momentum Healt

  26. Slide 26: Discovery very healthy

    Discovery very healthy ƒ Discovery produced excellent performance • 35% increase in HEPS ƒ Combination of strong organic growth and increased efficiencies across all businesses ƒ Discovery Health strong new business growth (members up 9% to 1.6m lives) ƒ Life operating profits up 82% ƒ Destiny turne

  27. Slide 27: An entrepreneurial view

    An entrepreneurial view Break- Organic Start-up through growth

  28. Slide 28: Africa – a solid performance in local currencies

    Africa – a solid performance in local currencies ƒ Strong Rand impacts overall performance ƒ Profit up only 6.1% (13% in local currencies) ƒ Namibia • Unlocking synergies of Swabou merger • Strong growth in insurance through cross selling • Empowerment transaction ƒ Botswana • Solid results driven b

  29. Slide 29: Pipeline of growth opportunities

    Pipeline of growth opportunities ƒ Implementation of FNB best practice in subsidiaries • Cross selling FNB Life into Swabou customer base • Business units now have dedicated Africa specialists ƒ Alternative entry strategy • Currently closing 2 new deals

  30. Slide 30: The numbers

    ey) FIRSTRAND

  31. Slide 31: Another excellent performance

    Another excellent performance Headline earnings +23% Diluted headline earnings per share +21% Dividend per share +38%

  32. Slide 32: All business units grew strongly

    All business units grew strongly Headline earnings growth Banking Group +23% Momentum Group +18% Discovery +43%

  33. Slide 33: Bank dominates Group earnings

    Bank dominates Group earnings 2003 2004 4% 3% 17% 16% 80% 80% Banking Group Momentum Group Discovery Relative headline earnings contributions

  34. Slide 34: Superior shareholder value creation

    Superior shareholder value creation ƒ FirstRand Banking Group • ROE 28% ƒ Momentum Group • EV growth +21% ƒ Discovery • EV growth +27%

  35. Slide 35: Banking Group

    Banking Group

  36. Slide 36: Superior ROE and EVA

    Superior ROE and EVA Dec-04 Jun-04 Return on assets 1.84 1.58 x x Gearing multiple 15.3 16.5 Return on equity 28.2 26.1 - - Cost of equity 12.5 13.0 Economic value added 15.7 13.1

  37. Slide 37: All businesses showing strong growth

    All businesses showing R’m strong growth 2500 +22% 2000 1500 1000 +36% +33% 500 +6% 0 FNB RMB WesBank Africa 2003 2004 PBT

  38. Slide 38: Key income drivers

    Key income drivers % Change Interest income (1.5) Bad debts (10.1) Non interest income +34.7 Operating expenditure +14.9 Income from associates +79.9 Taxation +32.9

  39. Slide 39: Key income drivers

    Key income drivers % Change Interest income (1.5) Bad debts (10.1) Non interest income +34.7 Operating expenditure +14.9 Income from associates +79.9 Taxation +32.9

  40. Slide 40: Protecting the margin

    Protecting the margin 4.47% 0% 0.08% Margin (0.19%) (0.38%) 0.41 % 4.38 % Volume Interest effect 5% income Endowment Hedges Other 2% 2003 capital -4% 10% Endowment deposits -9% 4454 Jun 04 Dec 04

  41. Slide 41: Margin squeeze levelling off

    Margin squeeze levelling off % 4.8 4.7 2004 Average: 4.47 4.4 4.4 4.1 4 3.6 'Dec-03 'Jun-04 'Dec-04

  42. Slide 42: Strong growth in banking advances

    Strong growth in banking advances + 2% 2 7 13 8 +14% 4 9 211.2 207 5 -10% 'Dec 03 Trading Ansbacher Corporate WesBank HomeLoans RMB Other 'Dec 04

  43. Slide 43: Strong customer deposit growth

    Strong customer deposit growth + 1.2% 2 6 7 1 237 234 2 1 Professional Customer deposits Funding –3% + 4% Dec-03 Ansbacher Professional Non Recourse Corporate Retail Africa Dec-04 funding

  44. Slide 44: Key income drivers

    Key income drivers % Change Interest income (1.5) Bad debts (10.1) Non interest income +34.7 Operating expenditure +14.9 Income from associates +79.9 Taxation +32.9

  45. Slide 45: Bad debts and NPLs bottom out

    Bad debts and NPLs bottom out 1.5 5.6 1.3 1.1 4.3 0.9 3.5 3.6 0.8 2.6 2.4 2.1 2.0 0.4 1.7 1.7 0.4 1.6 1.6 1.4 1.4 1999 2000 2001 2002 2003 2004 2004HY NPLs (%) Provisions (%) Bad debts (%)

  46. Slide 46: Key income drivers

    Key income drivers % Change Interest income (1.5) Bad debts (10.1) Non interest income +34.7 Operating expenditure +14.9 Income from associates +79.9 Taxation +32.9

  47. Slide 47: NIR grows across all business units

    NIR grows across all business units +35% Africa Africa 5% 5% RMB RMB 20% 18% WesBank 7% WesBank 9% FNB FNB 66% 70% Dec 2003 Dec 2004

  48. Slide 48: First National Bank

    First National Bank Africa 5% RMB 20% W esBank 9% FNB 66% FNB +18% Dec 2004 Fees & commission income +24% Service fee volumes +15% Electronic banking +36%

  49. Slide 49: Rand Merchant Bank

    Rand Merchant Bank Africa RMB 5% 20% WesBank 9% FNB 66% RMB + 32% Dec 2004 Trading income +48% Investment income +>100% Knowledge base income +16%

  50. Slide 50: WesBank

    WesBank Africa 5% RMB 20% WesBank FNB 9% 66% Dec 2004 WesBank + 43% Fees & commission +50% Insurance penetration +29% WesBank Auto + 21%

  51. Slide 51: Key income drivers

    Key income drivers % Change Interest income (1.5) Bad debts (10.1) Non interest income +34.7 Operating expenditure +14.9 Income from associates +79.9 Taxation +32.9

  52. Slide 52: Operating expenditure

    Operating expenditure +15% Africa Africa 6% RMB 6% RMB 5% 5% WesBank 12% WesBank 13% FNB 77% FNB 76% Dec 2003 Dec 2004

  53. Slide 53: FNB – operating expenditure

    FNB – operating expenditure Africa RMB 5% 5% WesBank 13% FNB 77% Dec 2004 FNB +15% Infrastructure – business volumes Discovery Card Acquisition costs by HomeLoans +74%

  54. Slide 54: WesBank – operating expenditure

    WesBank – operating expenditure Africa RMB 5% 5% WesBank 13% FNB 77% Dec 2004 WesBank +23% Business volumes Improved efficiencies Cost : assets improvements

  55. Slide 55: RMB – operating expenditure

    RMB – operating expenditure RMB 5% Africa 5% WesBank 13% FNB 77% Dec 2004 RMB +25% Infrastructure costs Technology investments Reduced cost : income

  56. Slide 56: Maintaining efficiency ratio

    Maintaining efficiency ratio R’bn % 12 58.5 60 10 55.5 54.5 8 55 52.5 6 4 50 2 0 45 Dec-01 Dec-02 Dec-03 Dec-04 Cost to income Operating expenditure Total income

  57. Slide 57: Operational leverage still improving

    Operational leverage still R’bn improving 64 62 62 60 61 61 58 58 56 57 57 54 55 52 50 1999 2000 2001 2002 2003 2004 2004HY Cost to income

  58. Slide 58: Momentum Group

    Momentum Group

  59. Slide 59: Momentum - key drivers

    Momentum - key drivers % Change Insurance operations +15% Asset management operations +19% Investment income +23% Headline earnings growth +18%

  60. Slide 60: Strong embedded value growth

    Strong embedded value growth R’m 12,000 10,000 +21% 8,000 6,000 +14% 4,000 2,000 0 'Jun-03 'Dec-03 'Jun-04 'Dec-04 Shareholder funds In-force business Dec ’04: 42% Annualised return on EV

  61. Slide 61: Strong new business growth

    Strong new business growth ƒ New business in the retail market grew by 18% • Recurring premium income +26% • Recurring risk product sales +38% • Recurring investment sales +14% • Lump sum inflows +17% • Linked product inflows +36% • Living annuities +78% • Immediate annuities -35%

  62. Slide 62: Focus on efficiencies delivering real results

    Focus on efficiencies delivering real results 1,000 R’m Marketing & admin expenses Total 8% 54% 500 1% 0 'Dec-03 'Dec-04 Local Offshore On track for a 15% real reduction

  63. Slide 63: Strong performance from Asset Management

    Strong performance from Asset Management Headline earnings R‘m 120 +19% 100 107 90 +36% 80 75 60 55 (9)% 40 35 32 20 0 Total Local International

  64. Slide 64: Strong increase in assets under management

    Strong increase in assets under management Asset management operations R‘bn 200 +21% 182 150 150 +28% 100 99 +14% 77 50 65 57 +14% 16 18 0 Total Group Retail Institutional R5,3bn outflows has been turned into R2,3bn inflow

  65. Slide 65: Discovery

    ey) FIRSTRAND

  66. Slide 66: Strong new business growth

    Strong new business growth * API +34% Vitality Vitality 3% 8% Health Health Life 40% 52% Life 50% 47% Dec 2003 Dec 2004

  67. Slide 67: Excellent operating performance

    Excellent operating performance Dec-04 Dec-03 % Change Discovery Health 249 216 15 Discovery Life 191 105 82 Vitality 9 20 -55 Destiny Health (39) (79) 51 Pru Health (80) - Operating Profit 330 262 26

  68. Slide 68: Embedded value continues to grow

    Embedded value continues to grow R’m 9000 Total 27% 8000 7000 +16% 6000 5000 4000 3000 +48% 2000 1000 0 'Jun-03 'Dec-03 'Jun-04 'Dec-04 Health & Vitality Life Destiny Shareholder funds Embedded value per share: R14.71

  69. Slide 69: Capital Management

    Capital Management

  70. Slide 70: Capital in context

    Capital in context Split of main operating companies of capital ROE FR Banking 76% 28% Group Momentum 18% 25% Discovery 6% 32% 0% 20% 40% 60% 80% 100%

  71. Slide 71: Strong internal capital generation

    Strong internal capital R‘m generation 22 20 R3bn Perpetual Preference Share 18 Capital Generation 16 14 12 Capital Requirement (RWA growth) 10 -03 v- 0 3 -0 4 r-0 4 y-0 4 -0 4 -0 4 v-0 4 ef) Se p No J an Ma Ma Jul Se p No 4( Pr 0 0 2/2 0 1/1 ROE exceeds real RWA growth requirement Review dividend c

  72. Slide 72: Current capital position

    Current capital position FirstRand Momentum Banking Group (times) (%) Total Capital Position 14.4 2.1 Regulatory Requirement 10.0 1.0 Excess 4.4 1.0 Less: Economic Risk Buffer 1.0 0.8 Dividend Payable 0.7 0.1 Surplus - capital 2.7 0.1

  73. Slide 73: Applying surplus capital

    Applying surplus capital FirstRand Limited (R’bn) Total Surplus capital 4,5 Applied as follows: 4,5 BEE Transaction 2,4 Reduction in gearing and/or return to shareholders 2,1

  74. Slide 74: Dividend policy

    Dividend policy

  75. Slide 75: Dividends – principles

    Dividends – principles ƒ Excess over growth requirement ƒ Sustainable dividend growth ƒ Protect shareholders from volatility Dividend cover for HY 2005 will be 2.5 times

  76. Slide 76: Dividend growth of 38%

    Dividend growth of 38% Dividend per share 30.00 Dividend cover reduction 18% 25.00 20.00 15.00 HEPS (excl translation) 20% 10.00 5.00 0.00 y Y Y Y Y Y H H H H H H 04 00 01 02 03 05 20 20 20 20 20 20

  77. Slide 77: Prospects

    I) FIRSTRAND

  78. Slide 78: There are significant challenges

    There are significant challenges ƒ Bad debt improvement “as good as it gets” ƒ Overseas competition ƒ Fee pressure/consumerism ƒ New age insurance products providing value for money ƒ Greater cost efficiency required

  79. Slide 79: A positive picture

    A positive picture ƒ Benign operating environment expected to continue ƒ Banking will benefit from continued high credit demand and consumer spending ƒ New products will drive Momentum’s new business volumes ƒ Discovery well positioned for continued strong growth Portfolio of businesses provides nat

  80. Slide 80: FirstRand

    [&) FIRSTRAND

FirstRand — H1 2005 Earnings Presentation on 6ix