Firstrand Limited · JSE:FSR
Firstrand — Investec seminar – Cape Town (March 2009)
22 slides from Firstrand's conference presentation, Mar 18, 2009
Slide 1: Capital: The crisis and the cycle
Capital: The crisis and the cycle Investec seminar – Cape Town 18 March 2009 Samantha Balsdon, FirstRand Banking Group
Slide 2: The crisis
The crisis 09@
Slide 3: The focus on capital has increased
The focus on capital has increased • The issues • Liquidity • Investment write downs • Capital • Economic growth • Credit write downs • The stakeholders • Regulators • Rating agencies • The capital markets • The focus • Equity Tier 1 • Nominal balance sheet measures – leverage • Basel II shortcoming
Slide 4: Core is “King”
Core is “King” • Equity capital • Loss absorbing • Flexible • Tier I • Hybrids questioned • Preference shares • Tier II • Disguised leverage • Pricing prohibitive • Assumptions challenged The levels have risen globally
Slide 5: Globally capital levels are higher
Globally capital levels are higher
Slide 6: Comparability is difficult
Comparability is difficult • Capital ratios are difficult to compare • Point in time v through the cycle • Level of macroeconomic threat • Unexpected losses and expected losses • Timing and the cycle • Regulatory frameworks • Qualifying capital • Model assumptions • Provisioning • Basel II procyclic
Slide 7: The costs have also gone up
The costs have also gone up Wider spreads and steeper credit curves across bank capital structure Drop in price post non call
Slide 8: FRB maturity profile
FRB maturity profile 2,500 2,000 1,500 1,000 500 0 2010 2012 2014 2016 2017 2018 Subordinated debt Upper Tier 2
Slide 9: Additional measures need to be added to address the concerns
Additional measures need to be added to address the concerns Core equity ratio Tier I ratio Leverage ratio Equity Tier I Tier I Total Assets RWA RWA Equity Tier 1 FRBH 10.22% FRBH 11.08% FRBH 16x FRB 8.89% FRB 9.89% FRB 20x Risk weightings What are stakeholders concerned about? • Ability to absorb l
Slide 10: The cycle
The cycle 09@
Slide 11: The cycle and its impact on capital
The cycle and its impact on capital • Widely know that Basel II introduces greater cyclicality in the capital ratios • What drives cyclicality? • Risk weighted asset growth • Expected loss over provision Impairment • Responses globally • When the cycle turns
Slide 12: How is it calculated and what drives it?
How is it calculated and what drives it? • Risk weighted asset growth EAD X PD x stress factor X LGD Exposure at default Probability of default Loss given default Downturn • Expected loss over provision impairment EAD X PD X LGD Exposure at default Probability of default Loss given default Downturn
Slide 13: Risk weighted assets growing despite flat advances
Risk weighted assets growing despite flat advances 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan-08 Apr-08 Jul-08 Oct-08 -2.0% Credit RWA Cumulative Growth Advances Cumulative Growth Growth rates for FirstRand Bank
Slide 14: Significant increase in the EL > Provision impairment
Significant increase in the EL > Provision impairment R millions 2,500 2,000 1,500 1,000 500 0 June 2008 December 2008
Slide 15: Consider our provisioning in the context of Basel II
Consider our provisioning in the context of Basel II December 2008 Advances (R millions) 441,886 Balance sheet impairment (R millions) 8,543 Balance sheet impairment ratio (%) 1.9 EL> Provision impairment (R millions) 2,110 Adjusted impairment ratio (%) 2.4 EL>Provision impairment relates to FRB Ltd
Slide 16: FirstRand’s response
FirstRand’s response 09@
Slide 17: Targeted capital levels have been increased
Targeted capital levels have been increased 2008 2009 % FRB Ltd FRBH FRB Ltd FRBH Core equity 5.25 5.25 5.25 5.25 Buffer 2.00 2.00 2.50 3.00 Target core equity 7.25 7.25 7.75 8.25 Other Tier 1 1.75 2.00 1.75 1.75 Total Tier 1 9.00 9.25 9.50 10.00 Tier 2 2.50 2.75 3.50 3.50 Total 11.50 12.00 11.5 -13
Slide 18: The higher targeted ratios have been met
The higher targeted ratios have been met 2009 targets December 2008 actual % FRB Ltd FRBH FRB Ltd FRBH Core equity 5.25 5.25 8.89 10.22 Buffer 2.50 3.00 Target core equity 7.75 8.25 8.89 10.22 Other Tier 1 1.75 1.75 1.00 0.86 Total Tier 1 9.50 10.00 9.89 11.08 Tier 2 3.50 3.50 1.92 1.89 Total 11.5 -
Slide 19: 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 9.0% Targeted band 8.5% 8.0% 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
Slide 20: Economic risk is backed with Tier 1 capital
Economic risk is 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 21: Conclusion
Conclusion 09@
Slide 22: The rules of the game are still changing…
The rules of the game are still changing… Long-run capital levels for US commercial banks 1840–1993 Equity as % of assets Source: Berger, A, Herring, R and Szegö, G (1995), ‘The role of capital in financial institutions’, Journal of Banking and Finance, pages 393–430. (a) Equity as a percentage of a
FirstRand — Investec seminar – Cape Town (March 2009) on 6ix