Slide 1: UBS Banking Conference – October 2008
UBS Banking Conference – October 2008 Navigating the down cycle
Slide 2: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 3: RMB in context
RMB in context FirstRand • WesBank • Corporate Banking • Investment Banking Corporate Division Division • Public Sector Banking • Fixed Income, Currencies • WesBank & Commodities Trading • Commercial & Retail (FICC) Business Banking • etc • Equities Trading • High Net Worth – RMB Private Bank & FNB
Slide 4: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 5: Our base case
25 our base case prime 20 overdraft rate 10 15 8 10 6 4 2 GDP growth 0 -2 22 -4 20 18 16 14 12 CPIX inflation 10 8 6 4 2 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 08/09/08
Slide 6: FRB impairment charge
25 prime RMB/BER 20 overdraft rate business confidence index 15 100 90 10 80 70 60 net optimists 50 40 net pessimists 30 20 % 10 1.4 1.28 0 1.2 1.19 1.0 0.8 0.6 0.4 FRB impairment charge 0.2 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 23/07/08
Slide 7: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 8: Consequences of Credit Crunch for Global banks
Consequences of “Credit Crunch” for Global banks …. Risk aversion Market Volatility conditions TRADING DCM ECM Structuring Proprietary Economic Trading cycle Liquidity CLIENT PRINCIPAL Lending Advisory Investments Corporate Credit activity Political / Regulatory interventions 8
Slide 9: Direct Consequences for RMB to deal with
Direct Consequences for RMB to deal with …. • Flight to quality in equity markets • Closure of Subprime caused dislocations between small positions (R10m) caps and hedges = Equity losses • Reviewed conduit (SIV) structures Risk aversion • Sell-down of offshore Market equities (now <5% of Volatility
Slide 10: Indirect consequences for SA and banks
Indirect consequences …. for SA and banks • Changing risk appetite (particularly • DCM slowdown banks) • Too complex – need for • Low tolerance for volatility of earnings transparency in DCM Risk aversion • Market VIX (“fear index”) higher than Market Volatility 911 for some time conditions • Volati
Slide 11: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 12: Investment Banking Cycle
Investment Banking Cycle What drives Investment Banking Business …………… TRADING DCM ECM Structuring Proprietary & Hedging Trading Lending Investments Advisory SA Africa CLIENT PRINCIPAL Corporate Activity Other LBOs M&A Resources Infrastructure Asset Backed Property 12
Slide 13: M&A activity has slowed YTD
…. but M & A activity has slowed YTD Total M & A deal value 2004 - 2008 R bn BEE 600 Non-BEE 500 400 300 200 100 - 2004 2005 2006 2007 2008YTD 13 Sources: DealMakers magazine / internal analysis
Slide 14: Private equity activity has slowed
Private equity activity has slowed 2007 2008 ¾ “Big ticket” ¾ >R6bn ¾ Smaller deals ¾ Foreign buyers ¾ <R5bn ¾ Local funding House of Busby ¾ Construction Equity Markets Ð & Infrastructure Realisations slower High cost of credit, lower demand for HY 14
Slide 15: Opportunities in the infrastructure sector
….. opportunities in the infrastructure sector Rm Infrastructure Spend (Rm) - MTEF Investment Banking 100,000 Origination & structuring Arranging & underwriting Ports 80,000 Rail 60,000 Infrastructure Roads Spend Electricity 40,000 FiCC Housing FNB Commodity, 20,000 Transactional Health currency, in
Slide 16: Opportunities in Africa
…… opportunities in Africa Resources, Commodities Trade Finance, Infrastructure, M & A 16
Slide 17: Investment Banking Cycle
Investment Banking Cycle What drives Investment Banking Business …………… Turnover TRADING Investor Market Sentiment Activity Pricing & DCM ECM volatility Structuring Proprietary & Hedging Trading Lending Investments Advisory CLIENT PRINCIPAL 17
Slide 18: Decline in ECM and DCM issuance
Decline in ECM and DCM issuance Rbn 140 120 100 80 60 40 20 - 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD Acquisition of Assets Rights Issue Scrip Dividend Share Incentive Via Prospectus Issues for Cash Other Rbn Bonds 25 Structured finance Total 20 15 10 5 - 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07
Slide 19: Volatile markets create client and trading opportunities
Volatile markets create client and trading opportunities % p.a. SA Interest Rates & Inflation SA SAequity Equitymarkets (ALSI) Markets (ALSI) 18 CPIX y/y ALSI 16 31,000 Prime Top 40 14 Repo 26,000 Findi 21,000 12 16,000 10 11,000 8 6,000 6 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jan-04 Jan-05 Jan-06 Jan-
Slide 20: Volatile markets create client and trading opportunities
Volatile markets create client and trading opportunities Hedging Structuring & Turnover Volatility & Flow Advisory Trading opportunities 20
Slide 21: Investment Banking Cycle
Investment Banking Cycle What drives Investment Banking Business …………… TRADING DCM ECM Risk appetite Liquidity Structuring Proprietary & Hedging Trading Lending Capital Private Advisory Equity CLIENT PRINCIPAL 21
Slide 22: Focus on capital preservation
Focus on capital preservation Pricing Market risk Liquidity & Capital management Concentration Credit risk management 22
Slide 23: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 24: Corporate NPLs and provisioning
Corporate NPLs and provisioning Wholesale Credit Expected Loss 100 90 Current 80 Stress Loss Levels of 70 Provision 60 50 40 Average Loss 30 20 Benign Loss 10 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 • Wholesale lags Retail which seem
Slide 25: Profile of our book
Profile of our book • Repricing Wholesale Credit Portfolio* across portfolio Investment Grade = BB Rating Grade = B Rating Grade = • Low appetite 55% of Total EAD 32% of Total EAD 12% of Total EAD for 14% -underwrites (prefer club 12% deals) -Term in risky 10% industries • Reduce 8% concentrations 6
Slide 26: RMB in context
RMB in context Economic backdrop Impact of global credit crunch Corporate & Investment Banking cycle Credit markets & our response Strategic positioning
Slide 27: Strategic philosophy
Strategic philosophy Risk aversion The Challenge Market • Different Volatility conditions • Complex TRADING • Rapid rate of change DCM ECM Structuring Proprietary Economic Trading cycle Liquidity CLIENT PRINCIPAL Very unpredictable Lending Advisory Corporate Credit activity Political / Regulatory Ab
Slide 28: Profitable despite changing markets
Profitable …. despite changing markets Credit & liquidity crunch “dotcom” crash 9/11 Myburgh Asian Commission Crisis LTCM High Yield Market Russian Crisis Rand Debt collapse Crisis 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 28
Slide 29: Strategic philosophy
Strategic philosophy Ability to react ct P la e l l e tfor Int m • People • Risk • Culture management • Balance sheet • Brand & reputation • Relationships • Infrastructure & systems Overall well positioned 29
Slide 30: Prospects in current business environment
Prospects in current business environment Strong strategic framework and base Diverse portfolio of businesses Private Investment FICC Equities Equity Banking 30
Slide 31: Prospects in current business environment
Prospects in current business environment Strong strategic framework and base Diverse portfolio of businesses Client franchise & access to flows Private Investment FICC Equities Equity Banking 31
Slide 32: Client franchise – across all sectors
Client franchise – across all sectors Transport & Property & Resources Telcos BEE LBOs Logistics Infrastructure 32
Slide 33: Prospects in current business environment
Prospects in current business environment Strong strategic framework and base Diverse portfolio of businesses Client franchise & access to flows Annuity Book Private Investment FICC Equities Equity Banking 33
Slide 34: Annuity income
Annuity income % of revenue 100% 80% 60% 40% 20% 0% 2004 2005 2006 2007 2008 34
Slide 35: Prospects in current business environment
Prospects in current business environment Strong strategic framework and base Diverse portfolio of businesses Client franchise & access to flows Annuity Book Leading SA & African player Private Investment FICC Equities Equity Banking Trading 35
Slide 36: Leading SA and African player
Leading SA and African player >25 Countries Resources, Commodities, Energy, Infrastructure, Telecomms, Road, Rail & Ports, Transport & Logistics, Senegal Burkina Niger Gambia Guinea Faso Sudan >20 yrs experience Bissau Nigeria Guinea C.A.R Cameroon Liberia Benin Ghana Congo Kenya DRC Tanzania Angola
Slide 37: Prospects in current business environment
Prospects in current business environment Strong strategic framework and base Diverse portfolio of businesses Client franchise & access to flows Leading SA & African player Annuity Book Private Investment FICC Equities Equity Banking Trading Ð Realisations Ð M & A activity Ð DCM Ð International Î As
Slide 38: Rebalancing the business
Rebalancing the business ……… Brand value Re-inforce Leverage Rainmakers Annuity More emphasis Less volatility Risk Based Client relationships A cornerstone Leverage Product Leader Local Keep focussed Africa key International Strategic Capital Distribution capability preservation Balance sheet Fund I
Slide 39: # RAND
# RAND ay MERCHANT BANK CO. of FirstRand Bank Limited Traditional values. Innovative ideas.