FirstRand Limited · JSE:FSR
FirstRand — H1 2009 Earnings Presentation
114 slides from FirstRand's earnings presentation, February 2009
Slide 1: FirstRand Limited Results for the Six Months Ended 31 December 2008
08/09 FIRSTRAND LIMITED RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 @ FIRSTRAND
Slide 2: Macro environment remains challenging
Macro environment remains challenging International South Africa Demand for resources shrinking; impacts Consumers not spending; saving, export industries and related industries; deleveraging; fiscal stimulus takes time spreads to the rest of the economy Domestic capital shortages; risk aversion; Li
Slide 3: Taken cognisance and adapted accordingly
Taken cognisance and adapted accordingly Strategic issue FirstRand response Strong capital ratios; solvency before Meltdown; asset price implosion; capital profitability; de-risk balance sheet; liquidity flows to SA drying up buffers; stress test Consumer under pressure; high interest More stringent
Slide 4: Overview of results
Overview of results • In line with guidance in December 2008 • Half year profits: R4.58 billion (▼23%) • ROE = 17.4% (2008: 26%) • Strong performance in client franchises impacted by bad debts • Investment / proprietary activities impacted by global and local asset price collapse DIVERSIFIED PORTFOL
Slide 5: FirstRand Limited Financial Review
FIRSTRAND LIMITED FINANCIAL REVIEW
Slide 6: Key financial ratios
Key financial ratios R millions Dec ’08 Dec ’07 % change Normalised earnings – pro forma 4 576 5 953 T (23) Diluted normalised EPS – pro forma (cents) 81 106 T (23) Normalised return on equity – pro forma 17% 26% T Normalised net asset value 53 547 47 111 S 14 Dividend per share (cents) 34 44 T (23)
Slide 7: Momentum Group Financial Review
MOMENTUM GROUP FINANCIAL REVIEW
Slide 8: Key financial ratios
Key financial ratios R millions Dec ’08 Dec ’07 % change Normalised earnings 740 913 T (19) Return on equity (%) 23 31 T New business 32 810 27 236 S 20 Value of new business 331 291 S 14 Return on embedded value (%) (5.4) 14.9 T CAR cover (times) 1.4* 2.0 T * Revised CAR calculation
Slide 9: Strong operational performance but negatively impacted by investment markets
Strong operational performance but negatively impacted by investment markets • Value of new business up 14% to R331m • 65% of operating profit subject to investment markets, all share index down 29% • 11% of liabilities are smoothed bonus • Shareholder funds not exposed to equity markets
Slide 10: FirstRand Banking Group Financial Review
FIRSTRAND BANKING GROUP FINANCIAL REVIEW
Slide 11: Key financial ratios
Key financial ratios Dec ’08 Dec ’07 % change Normalised earnings* (R millions) 4 149 5 283 T (21) Return on equity 18% 27% T Return on assets 1.23% 1.81% T Credit loss ratio† 1.64% 0.97% S Cost to income ratio** 52.7% 52.6% − Tier 1 capital ratio‡ 11.1% 10.8% S Interest margin 4.23% 3.98% S Advance
Slide 12: Mixed performance from banking franchises
Mixed performance from banking franchises Profit before tax (R millions) Dec ’08 Dec ’07 % change FNB 2 875 3 436 T (16) FNB Africa 658 525 S 25 RMB 1 904 2 383 T (20) WesBank 168* 591 T (72) OUTsurance 211 182 S 16 * Excluding loss on sale of Australia MotorOne advances book of R206m
Slide 13: Income in local franchises weathered the cycle but international portfolios incurred MTM volatility
Income in local franchises weathered the cycle but international portfolios incurred MTM volatility CLIENT ACTIVITIES PRINCIPAL ACTIVITIES FNB / WesBank / RMB RMB Dec ’08 Dec ’07 % change Dec ’08 Dec ’07 % change R millions R millions Retail 8 256 8 804 (6) Private Equity 1 576 1 709 (8) Net interes
Slide 14: Client activities FNB / RMB / WesBank
CLIENT ACTIVITIES FNB / RMB / WesBank Dec ’08 Dec ’07 % change R millions Retail 8 256 8 804 (6) Net interest revenue 1 934 3 443 (44) Non interest revenue 6 322 5 361 18 Corporate & Commercial 4 805 4 287 12 Net interest revenue 2 278 2 096 9 Non interest revenue 2 527 2 191 15 IBD and FICC 3 139 2
Slide 15: Cycle impacts retail net interest income after bad debts
Cycle impacts retail net interest income after bad debts Net interest income (R millions) Dec ’08 Dec ’07 % change HomeLoans (702) 571 T (>100) Mass 458 423 S 8 Card (17) (18) S 6 Personal Banking 999 852 S 17 Wealth 312 319 T (2) FNB other and support 51 (21) S >100 FNB Africa 724 588 S 23 WesBank
Slide 16: 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 17: Bad debts currently dominated by retail
Bad debts currently dominated by retail 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 * For the 6 months ended June 2008 † Includes Dealstream impairment
Slide 18: Migration risk to corporate
Migration risk to corporate 6 months 6 months 6 months Bad debts Dec ’08 Jun ’08 Dec ’07 Percentage of average advances Retail 2.41 2.21 1.39 - Mortgages 1.48 1.21 0.42 - Credit card 9.76 8.47 9.16 - Instalment finance* 2.22 2.18 1.21 - Other retail 4.75 4.85 3.43 Corporate/wholesale 0.66 0.34 0.33
Slide 19: Client activities FNB / RMB / WesBank
CLIENT ACTIVITIES FNB / RMB / WesBank Dec ’08 Dec ’07 % change R millions Retail 8 256 8 804 (6) Net interest revenue 1 934 3 443 (44) Non interest revenue 6 322 5 361 18 Corporate & Commercial 4 805 4 287 12 Net interest revenue 2 278 2 096 9 Non interest revenue 2 527 2 191 15 IBD and FICC 3 139 2
Slide 20: Client activity continues to drive transactional income
Client activity continues to drive transactional income R millions +21% 8,000 Transactional revenue breakdown by franchise* 7,964 7,000 7% 7% 6,567 6,000 6% 5,000 4,000 120% 3,000 -10% 22% 2,000 80% 1,000 FNB FNB Africa RMB WesBank 0 Transactional Fair value Investment Other Dec '07 Dec '08 * Exclud
Slide 21: Client activities FNB / RMB / WesBank
CLIENT ACTIVITIES FNB / RMB / WesBank Dec ’08 Dec ’07 % change R millions Retail 8 256 8 804 (6) Net interest revenue 1 934 3 443 (44) Non interest revenue 6 322 5 361 18 Corporate & Commercial 4 805 4 287 12 Net interest revenue 2 278 2 096 9 Non interest revenue 2 527 2 191 15 IBD and FICC 3 139 2
Slide 22: Local investment banking activities showed solid performance
Local investment banking activities showed solid performance Gross income – December 2008 R millions Dec '07 2,500 2,000 1,500 +10% growth 1,000 500 - -500 -1,000 Trading Client Investing Capital Int. debt Client Private Advise Finance raising & Trading and execution equity investments structuring
Slide 23: Principal activities RMB
PRINCIPAL ACTIVITIES RMB Dec ’08 Dec ‘07 % change R millions Private Equity 1 576 1 709 (8) Equity Trading (410) (767) 47 Dealstream (335) - (>100) MTM loss (116) - (>100) Impairment (219) - (>100) Debt and investment portfolio MTM (555) (233) >100 Total income 276 709 (61)
Slide 24: Good balance between annuity income and realisations
Good balance between annuity income and realisations R millions Dec ’07 Dec ’08 2,000 1,800 (8%) 1,600 1,709 45% 1,576 47% 1,400 1,200 53% 55% 1,000 800 600 Profit on realisations -10% Annuity income 22% 400 200 0 Unrealised profits* at R993 million (2007: R2.2 billion) Private Equity Other Transact
Slide 25: Principal activities RMB
PRINCIPAL ACTIVITIES RMB Dec ’08 Dec ‘07 % change R millions Private Equity 1 576 1 709 (8) Equity Trading (410) (767) 47 Dealstream (335) - (>100) MTM loss (116) - (>100) Impairment (219) - (>100) Debt and investment portfolio MTM (555) (233) >100 Total income 276 709 (61)
Slide 26: Portfolios exposed to international markets incurred MTM losses
Portfolios exposed to international markets incurred MTM losses Gross income – December 2008 R millions Dec '07 2,500 2,000 1,500 1,000 500 - -500 -1,000 Trading Client Investing Capital Int. debt Client Private Advise Finance raising & Trading and execution equity investments structuring
Slide 27: Slowing top line impacts cost to income ratio
Slowing top line impacts cost to income ratio R millions 20,000 70% 4%* 18,000 60% 16,000 14,000 50% Top line CAGR 16% 12,000 4% 40% Costs CAGR 14% 10,000 30% 8,000 6,000 20% 4,000 10% 2,000 0 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dec '08 Costs Top line Cost to income ratio * Excluding los
Slide 28: Normalised cost growth in line with inflation
Normalised cost growth in line with inflation R millions Dec ’08 Dec ’07 % change As per income statement 10 401 9 957 4.5% Share based payments 50 (143) WesBank MotorOne expenses (3) (126) Fund liabilities 59 (64) Normalised costs 10 507 9 624 9.2% Cost to income ratio (%) 52.7 52.6
Slide 29: In conclusion
In conclusion • Local franchises weathered the cycle, in good shape • Activities exposed to international markets have incurred mark-to- market losses • Robust earnings base still intact after absorbing impact of bad debt cycle and offshore mark-to-market volatility • Still dealing with 2006/07 reta
Slide 30: BSM Strategies
08/09 BSM STRATEGIES Pans ¥) r FIRSTRAND Banking Group
Slide 31: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 32: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 33: How will the macro trends impact the business?
How will the macro trends impact the business? • The SA macro cycle is shifting gear • Old wave: Inflation spike • Consumer under pressure due to lower disposable income and higher rates • New wave: Impact on real economy • Export slowdown due to slower growth in trading partners • Consumer segment
Slide 34: How will the macro trends impact the business?
How will the macro trends impact the business? Blow-out Slow puncture (e.g. US / UK) (e.g. South Africa) Liquidity • Dry-up • Higher cost • Toxic asset write downs • Increased bad debts Profitability • Losses (no earnings) • Lower activity • Capital wipe-out • Capital levels robust Solvency • Over g
Slide 35: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 36: Credit strategies will provide underpin
Credit strategies will provide underpin • Targeted portfolio management strategy • Improved risk management • Reduced earnings volatility • Reduction of international lending exposures as part of broader capital and liquidity preservation strategy • Australian mezzanine property finance • WesBank Au
Slide 37: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 38: Funding and liquidity strategies key to balance sheet strength
Funding and liquidity strategies key to balance sheet strength • Increase focus on deposit franchise • Lengthening long-term funding profile to 20% (2007: 16%)* • Eliminated rollover risk on international balance sheet • Off-balance sheet activity managed as part of on-balance sheet liquidity & fund
Slide 39: Funding composition structural issue and in line with peers
Funding composition structural issue and in line with peers FirstRand Bank Limited Industry average* 37% 37% Professional Professional 32% 34% 27% 26% Corporate Corporate 30% 29% 18% 20% Retail Retail 17% 19% 12% 10% Govt & para** Govt & para 13% 11% 7% 6% Other Other 8% 7% 0% 10% 20% 30% 40% 0% 10%
Slide 40: Liability mix adds pressure to margins
Liability mix adds pressure to margins R millions Dec ’08 Dec ’07 % change Dec ’08 mix % Dec ’07 mix % Retail 104,138 90,053 16% 15% 15% Corporate 121,738 118,060 3% 18% 19% Professional 188,150 193,077 (3%) 27% 31% Govt & Parastatal 52,566 51,649 2% 8% 8% Foreign sector 29,800 31,349 (5%) 4% 5% Tra
Slide 41: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 42: Capital position remains robust
Capital position remains robust FRBH capital adequacy (%) FRBH Tier 1% Total % 15 13.75 Capital adequacy ratio 11.08 12.97 12.97 2.63 1.89 Regulatory minimum 7.00 9.50* 0.82 0.86 10 Target 10.00 12.00 – 13.50 FRB Tier 1% Total % 5 10.30 10.22 Capital adequacy ratio 9.89 11.91 Regulatory minimum 7.00
Slide 43: Operating at the higher end of the Core Tier band
Operating at the higher end of the Core Tier 1 band Core Tier 1 ratio Current targeted band 9.0% 8.5% ment ve i mpro e d 8.0% rk Ma 7.5% Internal target 7.0% 6.5% Basel I 6.0% 5.5% Basel II Regulatory minimum 5.0% Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Given market uncertainty, we believe
Slide 44: Economic risk backed with Tier 1 capital
Economic risk backed with Tier 1 capital R millions 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jun '05 Jun '06 Jun '07 Jun '08 Dec '08 Tier 1 Economic capital risk Data shown for FirstRand Bank Holdings Limited
Slide 45: Limited rollover risk in capital structure
Limited rollover risk in capital structure R millions 2,500 2,000 1,500 1,000 500 0 2010 2012 2014 2016 2017 2018 Subordinated debt Upper Tier 2 Data shown for FirstRand Bank Limited
Slide 46: Managing the business through the cycle
Managing the business through the cycle Asset quality & Funding & liquidity risk taking BSM Strategies Macro Capital environment Earnings volatility
Slide 47: Enhanced risk appetite should reduce volatility
Enhanced risk appetite should reduce volatility • Statement of intent • Do not pierce minimum regulatory and internal capital levels under conditions of severe stress • Limit earnings volatility within acceptable levels • Desired credit rating and counterparty status
Slide 48: Enhanced risk appetite should reduce volatility
Enhanced risk appetite should reduce volatility • Principles applied • Balance sheet not excessively geared • Limit off-balance sheet exposure relative to own capital and funding base • Risk transfer about true risk transfer and not accounting/regulatory arbitrage • Diversify sources of income • Pot
Slide 49: Risk appetite framework
Risk appetite framework Stakeholder requirements & expectations Activities, assets, diversification, funding (depositors, regulators, investors) Strategy strategy, growth targets, incentives Acceptable level of What risks introduced to balance earnings volatility? sheet and income statement? Annuity
Slide 50: Return on equity versus cost of equity: a trade off
Return on equity versus cost of equity: a trade off Earnings Capital buffer Negative earnings Capital erode capital Core capital Lower volatility might reduce ROE, but will create more long-term shareholder value This graph is for illustrative purposes only
Slide 51: FirstRand Banking Group Review
FIRSTRAND BANKING GROUP REVIEW
Slide 52: Franchise diversification
Franchise diversification WesBank 4% [Dec 07: 8%] RMB 35% [Dec 07: 36%] FNB 53% [Dec 07: 51%] FNB Africa 8% [Dec 07: 5%] Based on normalised earnings, excluding Group Support, FirstRand & NCNR preference shares
Slide 53: Segment diversification – corporate compensating for retail strain
Segment diversification – corporate compensating for retail strain Retail 24% [Dec 07: 35%] Investment banking 35% [Dec 07: 36%] Corporate & commercial 41% [Dec 07: 29%] Based on normalised earnings, excluding Group Support, FirstRand & NCNR preference shares
Slide 54: Performance drivers: Advances growth slowing
Performance drivers: Advances growth slowing • Advances flat* since June ’08 as a result of deliberate strategy to reposition lending portfolios • Retail – reduced exposure in high-risk areas • Affordability criteria • Security values • Corporate • RMB/FNB • Increased risk management on existing por
Slide 55: Performance drivers: Bad debts driven by retail
Performance drivers: Bad debts driven by retail Wholesale 14% 27% Retail: residential mortgages Retail: other 16% 16% Retail: credit card 27% Vehicle & asset finance >80% of bad debt charge relates to retail product lines Excluding Group Support
Slide 56: Performance drivers: Bad debts concentrated in asset-backed portfolios
Performance drivers: Bad debts concentrated in asset-backed portfolios R millions 1,200 1,000 Dealstream (R219m) 800 600 400 200 0 Residential Credit card Vehicle & asset Other retail Wholesale mortgages finance Dec '07 Jun '08 Dec '08 Too early to call retail cycle peak, wholesale bad debts will pi
Slide 57: Performance drivers: Non interest revenue – mixed performance
Performance drivers: Non interest revenue – mixed performance • RMB T15% • Losses in international equity trading and debt & investment portfolios • Positive contributions from Investment Banking, FICC and Private Equity • FNB NIR S15% • Customer base and transactional activity still growing • SA cu
Slide 58: Performance drivers: Costs remain a key focus
Performance drivers: Costs remain a key focus • Cost growth at 4% • Includes reversal of IFRS 2 costs and other staff related costs • Normalised cost increase would be 9%, which is below inflation • Maintained overall cost growth below inflation • Reduction in variable costs in investment bank – in
Slide 59: First National Bank Overview
FIRST NATIONAL BANK OVERVIEW
Slide 60: Mixed performance across segments
Mixed performance across segments Profit before tax* (R millions) 2008 2007 % change Mass 705 540 S 31 Consumer (21) 1 048 T (>100) HomeLoans (975) 256 T (>100) Card Issuing 38 33 S 15 Other Consumer 916 759 S 21 Wealth 170 218 T (22) FNB Other and Support 74 (24) S >100 Retail 928 1 782 T (48) Comm
Slide 61: Unpacking performance of HomeLoans
Unpacking performance of HomeLoans • Dec ’07 HomeLoans profit* = R256m • Dec ’08 HomeLoans loss* = (R975m) • Year-on-year decline of R1 231m – mainly attributed to: • R600m increase in funding & liquidity costs and interest in suspense (ISP) charge • R780m increase in bad debt provisions • Endowment
Slide 62: Retail dominated by losses in residential mortgages
Retail dominated by losses in residential mortgages Market share – residential mortgage advances* 34% ABSA 32% 30% 28% 26% 24% Standard Bank 22% Nedbank 20% 18% 16% FNB 14% Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 • Residential mortgage advances growth 8% y/y • Market share reduced from 16.5
Slide 63: Cost: income impacted by top line slowing
Cost: income impacted by top line slowing R billions 12,000 65% 64.7% 63% 10,000 61% 60.0% 57.1% 59% 8,000 56.5% 57% 6,000 55% 53% 4,000 51% 49% 2,000 47% - 45% 2005 2006 2007 2008 Revenue Cost CIR • Headcount reduction largely via natural attrition • Single digit growth targeted for full year • Sti
Slide 64: FNB Africa continues to deliver
FNB Africa continues to deliver Dec ’08 Profit before tax 25% Costs 34% Advances 18% Deposits 17% C:I 48.7% ROE 30% • Deterioration in C:I by 1.8 percentage points – expansion costs
Slide 65: RMB Overview
RMB OVERVIEW
Slide 66: Earnings remain under pressure
Earnings remain under pressure Profit before tax R millions 3,500 1st half 2nd half 3,000 2,500 -20% 2,000 +5% ROE 20% 1,500 1,000 500 0 2004 2005 2006 2007 2008 2009
Slide 67: Portfolio provided some earnings protection
Portfolio provided some earnings protection Profit before tax R millions 1,500 1,000 500 0 -500 -1,000 Investment FICC Private Equity Equity Trading Other* Banking Dec '07 Jun '08 Dec '08 * Includes mark-to-market losses on international debt and investment portfolios
Slide 68: Investment banking continues to perform
Investment banking continues to perform PBT (Rm) 1,500 +21% 1,000 500 0 -500 -1,000 Investment FICC Private Equity Equity Trading Other* Banking Dec '07 Dec '08 • Lending business • Good annuity income • Corporate credit – prudently provided • Some slowdown in activity • Deal pipeline remains robust
Slide 69: FICC: good performance in volatile markets
FICC: good performance in volatile markets PBT (Rm) 1,500 • Good client flows 1,000 +30% • Good margins 500 0 • Book not directionally positioned -500 -1,000 FICC Investment Private Equity Equity Trading Other* banking Dec '07 Dec '08
Slide 70: Private Equity coming off high base
Private Equity coming off high base PBT (Rm) 1,500 • Large realisations in 1st half (7%) • Stocks, Alstom, Idwala 1,000 • Associate earnings reflect difficult operating 500 environment • Sector mix 0 • Decrease in unrealised profits -500 • Realisations • Inclusion of Dealstream portfolio -1,000 Priv
Slide 71: Equity Trading sustains further losses from ongoing de-risking
Equity Trading sustains further losses from ongoing de-risking PBT (Rm) 1,500 • International • Portfolio = $18m – unable to reduce position 1,000 further due to illiquidity • Closed offshore equity trading business 500 0 • Local -500 • Agency and local businesses performed well (5%) • Dealstream -1
Slide 72: International debt & investment portfolio losses
International debt & investment portfolio losses • Special Projects International (SPJi) business PBT (Rm) was closed in early 2008 1,500 • Portfolios were moved to Investment Banking 1,000 and FICC to be wound down • R555 million of mark-to-market losses 500 • Current portfolio = $257 million 0 • I
Slide 73: WesBank Overview
08 WESBANK OVERVIE WwW WesBank
Slide 74: Operating profit under pressure…
Operating profit under pressure… 6 months 6 months 6 months % change to Dec ’08 to June ’08 to Dec ’07 Local 153 283 635 T (76) International 15 (140) (44) T (>100) WesBank 168 143 591 T (72) Disposal of MotorOne Finance (206) - - - WesBank – after disposal (38) 143 591 T (>100)
Slide 75: … driven by bad debts in local business
… driven by bad debts in local business Dec ’08 June ‘08 Dec ’07 % change NII after impairments 562 558 1 073 T (48) Net interest income 1 793 1 792 1 785 - 0 Credit impairment charge (1 231) (1 234) (712) S (73) Non interest revenue 1 024 1 133 959 S 7 Operating expenses (1 379) (1 347) (1 334) S (
Slide 76: Negative gearing continues to impact profitability
Negative gearing continues to impact profitability • Advances growth showing negative trend • Advances declined 7% year on year • Retail new business production down 24% • Corporate new business production down 18% • Higher bad debts • Peak experienced in retail arrear levels and repossessions • Wea
Slide 77: WesBank's off-shore activities
WesBank’s off-shore activities • Developed markets • UK – Carlyle • Good operational performance • Pressure on arrears/funding • Australia • Residual personal loan book (R170m) running down • WorldMark business profitable – retained as portfolio investment (not opportune time to exit) • Developing m
Slide 78: International
08/09 INTERNATIONAL Pans ¥) r FIRSTRAND Banking Group
Slide 79: Reviewed international strategy from investment activities to building client franchises
Reviewed international strategy from investment activities to building client franchises • FNB – looking for more opportunities in Africa • FNB Zambia will open doors on 2 April 2009 • New branches and ATMs in Mozambique and Lesotho • RMB – focus on building client franchises in Africa • India strat
Slide 80: Prospects
08/09 PROSPECTS Pans ¥) r FIRSTRAND Banking Group
Slide 81: FNB faces further pressures from negative cycle
FNB faces further pressures from negative cycle • Declining interest rates • Negative endowment effect will compress margin • Bad debts have not yet peaked – reductions will lag interest rate declines • Potential ‘second wave’ of bad debts triggered by job losses • NIR and cost growth will slow in l
Slide 82: RMB – client businesses should partly offset further pressure in principal activities
RMB – client businesses should partly offset further pressure in principal activities • Client businesses • Slowdown in activity but pipeline intact • Good annuity earnings from in-force book • Stress in the wholesale credit portfolios to continue • FICC: pricing power, continued market volatility B
Slide 83: WesBank continues to face tough operating environment
WesBank continues to face tough operating environment • Retail operations • Arrears/repossessions stabilised • Impact of job losses (unknown) • Further efficiency opportunities • Gradual recovery in security realisations • New business still under pressure • Repricing exercise completed but remains
Slide 84: Momentum Group Financial and Operational Review
MOMENTUM GROUP FINANCIAL AND OPERATIONAL REVIEW
Slide 85: Operating environment – market volatility
Operating environment – market volatility 35,000 70 JSE all share index SA volatility index 33,000 60 31,000 +5% 29,000 +2% 50 27,000 25,000 40 -29% 23,000 30 21,000 19,000 20 17,000 15,000 10 Jun ’07 Jun-07 Dec ’07 Dec-07 Jun ’08 Jun-08 Dec ’08 Dec-08
Slide 86: Investment-related business dominates
Investment-related business dominates Operating profit 65% 1% 34% Administration Investment Risk
Slide 87: Salient features of results
Salient features of results Negative impact of markets − Market impact on asset-based fees − Increased liability for minimum maturity guarantees − Negative lapse experience − Negative market impact on embedded value Resilience in core operations + Solid new business volumes + Growth in value of new
Slide 88: Financial performance
Financial performance Dec ’08 Dec ’07 % change Normalised earnings (R millions) 740 913 T (19) Return on equity (%) 23 31 T New business (R millions) 32 810 27 236 S 20 Value of new business (R millions) 331 291 S 14
Slide 89: Market turmoil puts pressure on operational performance
Market turmoil puts pressure on operational performance R millions Dec ’08 Dec ’07 % change Momentum 444 690 T (36) FNB Insurance 144 110 S 31 Group operating profit 588 800 T (27) Investment income 152 113 S 35 Normalised earnings 740 913 T (19)
Slide 90: Unpacking the decline in operating profit
Unpacking the decline in operating profit R millions Market impact -32% 840 -2% 800 -7% 740 -14% -27% 640 +5% -4% -11% 588 540 +6% 440 340 240 Dec '07 New business 10% A sset-based M inimum M argins and FNB System Dec '08 strain participatio n fees maturity experience insurance integratio n fee guar
Slide 91: Investment income benefits from capital investment policy
Investment income benefits from capital investment policy R millions +35% 160 • Rates higher on average than prior 150 period 152 +14% 140 • Higher cash levels than prior period 130 +14% 120 +7% 110 113 100 90 Dec '07 Bond hedge Interest rates Increased cash Dec '08 MTM balance
Slide 92: New business volumes remain solid
New business volumes remain solid APE (R millions) 2,000 +11% 1,800 18% overall APE increase 1,600 1,400 +30% 1,200 1,000 800 +4% 600 400 +96% +3% 200 -4% -14% 0 Retail Retail Institutional Group FNB Short-term Health investments investments collaboration Dec '07 Dec '08
Slide 93: Channel diversification enhances growth
Channel diversification enhances growth Contribution to Momentum sales APE 100% 6% 9% 15% 16% 18% 90% 23% 80% 70% 60% 68% 64% 60% 61% 50% 61% 56% 40% 30% 20% 8% 12% 12% 14% 14% 14% 10% 18% 15% 13% 9% 7% 7% 0% Jun '04 Jun '05 Jun '06 Jun '07 Jun '08 Dec '08 Other bank brokers FNB Independent brokers
Slide 94: Favourable retail recurring new business mix
Favourable retail recurring new business mix R millions (API) 700 +4% • Pressure on disposable income impacting endowments 600 -15% 500 • Strong risk and retirement annuity sales 400 +21% • New commission dispensation 300 from 1 January 2009 200 +14% 100 0 Dec '07 Dec '08 Risk Retirement annuities E
Slide 95: Retail recurring lapse rates are increasing
Retail recurring lapse rates are increasing First year lapses: 30% • Lapse rates for 25% brokers lower than 20% agents Channel 15% 10% 5% • Pressure on 0% disposable income Brokers Agents impacting on Dec '07 Dec '08 persistency of savings business 30% 25% 20% • Lapses on risk Product products and 1
Slide 96: Retail lump sum investment growth remains strong
Retail lump sum investment growth remains strong R millions (APE) 20,000 • Unit trust sales strong in a 18,000 +11% competitive environment 16,000 • Endowments impacted by 14,000 pressure on disposable income 12,000 +37% 10,000 • Shift to guaranteed annuities 8,000 6,000 4,000 -4% 2,000 -69% +29% 0
Slide 97: Institutional inflows
Institutional inflows R millions 14,000 • Inflows boosted by +30% additional contributions 12,000 from existing clients -23% 10,000 • Overall net institutional +6% outflow of funds of 8,000 R10.8 billion 6,000 +>100% 4,000 2,000 +6% 0 Dec '07 Dec '08 Advantage on balance sheet Advantage off balance
Slide 98: RMBAM investment performance ranking
RMBAM investment performance ranking Alexander Forbes Global Large Manager Watch – 12 month periods Jun ’04 Jun-04 Dec ’04 Dec-04 Jun ’05 Jun-05 Dec ’05 Dec-05 Jun ’06 Jun-06 Dec ’06 Dec-06 Jun ’07 Jun-07 Dec ’07 Dec-07 Jun ’08 Jun-08 Dec ’08 Dec-08 0 2 4 6 8 10 Turnaround in performance 12 • Improv
Slide 99: Strong recovery in group recurring new business
Strong recovery in group recurring new business R millions (API) 250 • Umbrella funds • Growth in broker footprint +65% • Up and cross-sell initiatives 200 • Competitive group risk market 150 +49% 100 50 >+100% 0 Dec '07 Dec '08 Group risk Umbrella funds
Slide 100: FNB collaboration new business
FNB collaboration new business R millions (API) 250 • Good new business volumes in mass market +3% 200 • Pressure on disposable income impacted negatively on volumes 150 in middle market 100 • Good claims experience in mass market 50 • Increased lapses 0 Dec '07 Dec '08 Middle market Mass market
Slide 101: Progress in healthcare administration
Progress in healthcare administration Total lives 700,000 • Take-on of new restricted scheme from 1 January 2009 600,000 588,000 +23% 500,000 477,000 122,000 • System integration completed 400,000 • Efficiency improvements 301,500 287,400 300,000 200,000 100,000 175,500 178,600 0 Jun '08 1 Jan '09 M
Slide 102: Short-term insurance profitable
Short-term insurance profitable Gross premium earned R millions 50,000 Claims ratio 100% • Maiden profit achieved 45,000 50% 40,000 • Claims ratio satisfactory Operating profit (% of premium income) 0% 35,000 -50% • Pressure on new business 30,000 -100% volumes 25,000 -150% 20,000 -200% 15,000 -250%
Slide 103: Margins sustained
Margins sustained Value of new business as % of PV of future premiums 3.0% • Favourable retail new business mix 2.5% 2.6% • Reduced retail lump sum margins 2.0% 2.2% 2.2% 2.1% 2.1% • Higher margins in 1.5% group business • Reduction in risk 1.0% discount rate 0.5% • Higher cost of capital 0.0% Jun '
Slide 104: Sustained growth in value of new business
Sustained growth in value of new business R millions 700 +15% p.a. 662 600 590 500 518 400 434 300 200 100 0 Jun '06 Jun '07 Jun '08 Dec '08* * Annualised
Slide 105: Change in embedded value
Change in embedded value R millions 17,500 EV profit 17,000 1,163 (1,605) 16,500 16,000 16,039 15,500 (476) 15,000 15,121 14,500 14,000 Jun '08 Operations Market conditions Dividends Dec '08
Slide 106: Return on embedded value
Return on embedded value Return on EV 35% 31% 30% 28% 28% 25% 20% 17% 15% 15% 7% 10% (5%) 5% 0% -5% -10% -15% Jun '03 Jun '04 Jun '05 Jun '06 Jun '07 Jun '08 Dec '08 Value of new business Operating experience Investment income Capital appreciation Investment experience on VIF
Slide 107: Increase in statutory net asset value
Increase in statutory net asset value Statutory net asset value R millions 7,000 6,379 +14% 543 6,000 5,613 757 5,000 4,000 3,000 5,836 4,856 2,000 1,000 0 Jun '08 pro forma (post dividend) Dec '08 Discretionary surplus assets NAV of subsidiaries
Slide 108: CAR cover within reformulated range
CAR cover within reformulated range Statutory net asset value R millions 7,000 1.4 x CAR 6,000 1.6 x CAR 5,000 4,000 3,000 2,000 1,000 0 Jun '08 pro forma (post dividend) Dec '08 CAR Excess
Slide 109: Improvement in liability mix
Improvement in liability mix % of total liabilities 100% 12% 90% 18% 80% 11% 70% 32% 60% 50% 40% 71% 30% 56% 20% 10% 0% Jun '98 Dec '08 Linked and market related Smoothed bonus Other
Slide 110: Capital efficient liability mix
Capital efficient liability mix CAR as % of liabilities 8% 7% 7.3% 6% 5% 4% 3% 3.0%* 2% 1% 0% Jun '98 Dec '08 * New guidelines
Slide 111: Capital efficiency impacted by volatile markets
Capital efficiency impacted by volatile markets CAR as % of liabilities 8% 7.3% 7% 5.7% 6% 5.0% 5% 4.0% New 4% guidelines 3.3% 2.6% 3.0% 3% 2.4% 2.1% 1.7% 1.9% 2% 1.6% 2.4% 1% 0% 98 99 00 01 02 03 04 05 06 07 08 Dec '08 Large companies Momentum Line 3
Slide 112: Prospects
Prospects • Uncertain global economic outlook • Local market conditions expected to remain challenging • Slower new business growth and higher lapses • Markets will continue to impact investment-related businesses • Lower interest rates expected to reduce investment income on capital • Continued pro
Slide 113: Conclusion
08/09 CONCLUSION @ FIRSTRAND
Slide 114: Robust strategy and strong franchises
Robust strategy and strong franchises • We are not in denial of the risks • Increased pressure on consumer e.g. job losses • “Second wave” impact on real economy • Corporate sector will be challenged • But we have a robust strategy • Capital preservation before earnings • Closed or reduced loss maki