FirstRand Limited · JSE:FSR
FirstRand — UBS Warburg conference 2004
56 slides from FirstRand's conference presentation, 2004
Slide 1: Capital management enhances shareholder value
Capital management enhances shareholder value
Slide 2: Our unique value proposition
Our unique value proposition • Integrated The building blocks for collaboration • Segment focus “Chunking” • Business philosophy Innovation Entrepreneurial • Federal structure Run by owner-managers Lots of little growth stories
Slide 3: Integrated
Integrated • Provides building blocks • Leverages intellectual capital, client base, brand, infrastructure, and balance sheet • Facilitates collaboration • Capital Mobility of capital Leverage benefit Skills – actuarial & banking
Slide 4: Consistent growth strategy
Consistent growth strategy Organic Collaboration Acquisitions Greenfields Capital management
Slide 5: FirstRand Capital Management Framework
FirstRand Capital Management Framework Level & Investment Allocation structure of capital of capital of capital
Slide 6: What is the optimal level of capital in the Bank?
What is the optimal level of capital in the Bank?
Slide 7: Balancing perspectives
Balancing perspectives Maximise return on capital for shareholder Balanced against Debt holder Regulatory requirement requirement (rating agency) Strong capital & credit rating to attract investors & clients
Slide 8: Sound principles
Sound principles • Maintain highest level of regulatory or economic capital • Maintain target counterparty credit rating • Building blocks for buffer Expected profit Economic capital Economic cycles Risk concentration
Slide 9: Expected profit
Expected profit Expected profit Variability R0 R 4,7bn Funds organic growth and expected losses
Slide 10: Economic capital
Economic capital Establish economic capital • 99,9 Confidence Interval Capital = unexpected losses Expected profit • Reference to credit rating Variability R0 R0 R 6 bn R 12 bn R 18 bn R 20 bn R 4,7bn
Slide 11: Building protection
Building protection Establish buffer over regulatory capital • Protect against business disruptions Capital = unexpected losses Expected profit • Volatility of earnings • AC 133 Variability • Internal capital generation for growth • Economic downturns • Interest rate shocks • Exchange rate volatilit
Slide 12: Optimal target
Optimal target AC 133 Buffer 14.0% 12.0% Buffer Regulatory Capital Adequacy Requirement 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Regulatory capital Economic Capital FRB Capital
Slide 13: Surplus capital ?
Surplus capital ? Capital adequacy as disclosed: 13,7% FirstRand Banking Group Issue of preference shares 1,6% Capital adequacy after preference shares 15,3%
Slide 14: Surplus capital ?
Surplus capital ? Capital adequacy after preference shares 15,3% Less: •Dividend 1,2% •AC 133 1,1% Excess capital 13,0% Adjust for 1,6% •Perpetual preference shares 0,4% •Ansbacher Capital Optimal capital level 11,0% Apply true excess capital
Slide 15: What is the optimal capital structure for the Bank?
What is the optimal capital structure for the Bank?
Slide 16: Improving cost trough ∆ mix
Improving cost trough ∆ mix Cost Quality 10% Low Low 2.5% 3.3% 8% 1.5% 6% 4% 6.7% 6.0% 2% High High 0% Current Regulations Ratings Requirement Core Perpetual Preference shares Tier 2
Slide 17: Improving cost through ∆ mix
Improving cost through ∆ mix • Rank capital instruments in order of cost i.e. equity vs. subordinated term paper • Issue capital instruments in order • Capacity for the lowest cost FirstRand raises these instruments on a regular basis
Slide 18: Improving cost through ∆ mix
Improving cost through ∆ mix 22,000 R ‘m 20,000 11.90% 11.50% 18,000 11.10% 16,000 14,000 12,000 10,000 Capital Tier 2 Issue Preference Share issue FirstRand raises these instruments on a regular basis
Slide 19: What is the optimal level of capital for Momentum?
What is the optimal level of capital for Momentum?
Slide 20: Balancing perspectives
Balancing perspectives Maximise return on capital for shareholder Balanced against Regulatory Policy holder requirement requirement
Slide 21: Regulatory capital
Regulatory capital 2.50 Regulatory capital (1x) • Do not cover credit risk 2.00 Times 1.50 1.00 0.50 Regulatory capital
Slide 22: Informal regulatory capital
Informal regulatory capital 2.50 Informal regulatory capital (1,5x) • Only 95% Confidence Interval 2.00 Times 1.50 1.00 0.50 Regulatory capital
Slide 23: Optimal capital level
Optimal capital level 2.50 Internal Model • Credit risk 2.0x CAR 2.00 • 99,9% Confidence Interval Times 1.50 1.00 0.50 Regulatory capital Internal model Application of the same principles as the bank
Slide 24: Built on three pillars
Built on three pillars FirstRand Capital Management Framework Level Investment Allocation of capital of capital of capital
Slide 25: Recovery of cost of capital
Recovery of cost of capital Cost of capital Risk Free Rate Risk premium × Responsibility Responsibility Capital Business Centre Units Measure what business units manage
Slide 26: How do we invest the capital in the bank?
How do we invest the capital in the bank?
Slide 27: Recovery of risk free rate
Recovery of risk free rate • Managed by Banking Group Treasury • Invest in underlying currency • No interest rate risk on issue of capital debt instruments • Cost is credit spread • Invest along the yield curve to: • Maximise and optimise the return • Reduce volatility in the income statement
Slide 28: Recovery of risk free rate
Recovery of risk free rate • Determine economic capital utilisation • Monitor and change risk premium to business units • Measure profitability above risk premium
Slide 29: Measured in two components
Measured in two components Risk free rate Yr 1 Yr 2 Yr 3 Yr 4 Risk Stable Premium RoE measured in two components
Slide 30: Reduce volatility
Reduce volatility Risk free rate Yr 1 Yr 2 Yr 3 Yr 4 Risk Stable Premium Sustainable RoE
Slide 31: Strategy at work
Strategy at work 5.02% 0% (0.43%) (0.28%) 0.31 % (0.15%) Margin Volume 4.47 % effect 9% Endowment capital -8% Interest Endowment Hedges Income deposits -6% 7% Other -3% 2003 9104 8907 2003 2004
Slide 32: How does investment strategy affect level of capital in Momentum?
How does investment strategy affect level of capital in Momentum?
Slide 33: Optimise capital investment strategy
Optimise capital investment strategy 143% 150% 125% 120% 100% 90% 60% 30% 0% Cash Bonds Equities
Slide 34: Maximising RoE
Maximising RoE 23.0% 22.0% 21.0% 20.0% 19.0% 18.0% % % % % % % % % % 0% 0% 10 30 50 70 20 40 60 80 90 10 Within optimal capital level
Slide 35: Integrated investment approach
Integrated investment approach • Cash & near cash Managed by FirstRand Bank (Banking Group Treasury) • Actively managed equities RMB Asset Management
Slide 36: Built on three pillars
Built on three pillars FirstRand Capital Management Framework Level Investment Allocation of capital of capital of capital
Slide 37: Recovery of cost of capital
Recovery of cost of capital Cost of capital Risk Free Rate Risk premium × Responsibility Responsibility Capital Business Centre Units Measure what business units manage
Slide 38: Objectives
Objectives • Understanding the risk assumed by business units • Measure profitability above risk premium • Ensuring appropriate pricing for risk • Strategic decisions measured against requirement and returns • Aligning shareholders’ interests with performance measurement of management
Slide 39: Understanding economic risk
Understanding economic risk Credit risk 70% Market risk 11% Investment risk 8% Operational risk 6% Insurance risks 5% 0% 20% 40% 60% 80% Align business strategies to capital utilisation
Slide 40: Profitability above risk premium
Profitability above risk premium Capital Charge to business units Economic capital × Risk premium •Bottom up calculation •All risk types •Per business unit •Per product/ client •Per portfolio Measure Business units above risk premium
Slide 41: Ensuring appropriate pricing
Ensuring appropriate pricing Interest & Liquidity risk (ALCO) MMTP Regulatory costs Statutory costs FR Internal Rating Assessment Expected Loss (Credit) Infrastructure costs & salaries Operational costs Economic Capital Unexpected loss (capital) Ensure price for risk and pricing is dynamic
Slide 42: Strategic decision making
Strategic decision making Prerequisite • Maintain credit rating • Establish economic capital and risk/ reward • Capital at risk Probability of loss Severity of loss • Fund the capital required
Slide 43: Strategic decision making
Strategic decision making 70,000 60,000 Corporate Retail 50,000 40,000 30,000 20,000 10,000 0 AAA,AA,A BBB BB B CCC /D Align with existing portfolio credit rating
Slide 44: Limit the severity of loss
Limit the severity of loss Target: 10% Real growth Variability Loss acceptance align to expected growth
Slide 45: Contribution above RoE
Contribution above RoE ROE 60% 40% 20% Cost of capital 0% B k a nk t nk r e nk us he an r ic RM at ba ba tli Tr or ac B Af -20% es rs il rp sb te B B ta Fi W FN Co FN a An Re iv d an Pr B FN B e RM nc ra su ut O Return on equity per product/ market segment
Slide 46: Aligning management with shareholders
Aligning management with shareholders Capital Charge to business units Level of capital × Risk premium Performance measurement Remuneration program
Slide 47: What does it all mean?
What does it all mean? (2) FIRSTRAND
Slide 48: Thinking like shareholders
Thinking like shareholders R ‘m Value Added through capital management 200 25% 180 Cost of equity 160 20% 140 120 15% 100 80 10% 60 40 5% 20 0 0% 1999 2000 2001 2002 2003 2004 2004Pref
Slide 49: Simple sum
Simple sum • Optimal capital level Dividend strategy is important True excess should be returned to shareholders • Cost efficient capital structure • Maximise return over cost of capital • Ensure capital requirement is embedded in business unit strategy • Alignment with remuneration strategy Bus
Slide 50: What are the future challenges?
What are the future challenges?
Slide 51: Basel II implications
Basel II implications • Capital requirements more volatile Basel II But FRBG capital planning process robust Capital buffers are sufficient • Retail v Corporate shift of capital requirements Collateralised businesses benefit • Higher complexity of compliance But closely aligned to business m
Slide 52: FRBG External Targets
FRBG External Targets Market Credit Risk Operational risk Risk Standardised Basic Basic indicator Foundation IRB Building Block Standardised Advanced IRB* Internal model AMA** Targets commensurate with internal risk practices •*Retail only •**Initially will operated under standardised approach
Slide 53: Five years of prep
Five years of prep Implemente Start of credit d internal Implemented re-engineering credit rating new risk-based Basel II common project models Credit systems capital allocation implementation enhancement methodology date projects start. Started Basel II operational risk loss data collection. Ongoin
Slide 54: Positioning the book for Basel II
Positioning the book for Basel II 100% 80% 60% 40% 20% 0% Basel II Basel I Basel II Basel I June 2003 June 2004 Investment Banking Equity investment Corporate business Mortgages Retail Instalment Finance Africa Insurance Operation Risk Understand the impact on business
Slide 55: Insurance industry
Insurance industry • Alignment between statutory & economic capital • Exploring the use of debt capital instruments
Slide 56: FirstRand
) FIRSTRAND