Firstrand Limited · JSE:FSR
Firstrand — UBS Financial Services Conference 2010
38 slides from Firstrand's conference presentation, Oct 21, 2010
Slide 1: Optimising return on capital in a challenging new landscape
Optimising p g return on capital p in a challenging new landscape UBS C Conference, f 21 O October t b 2010 Johan Burger, COO & CFO
Slide 2: Agenda
Agenda • Comparing international and local ROEs • The capital p landscape p is changing g g • Management a age e t actions act o s • Conclusion
Slide 3: SA and international banks – ROEs appear similar
SA and international banks – ROEs appear similar ROE 30% SA – Big 4 banks 25% FirstRand 20% International – Sample banks 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 Sources: UBS Research, ECB , Bloomberg
Slide 4: However, vastly different ROAs and leverage
However, vastly different ROAs and leverage ROA Financial leverage 2.0% 30 1.8% SA – Big 4 banks International – Sample banks 25 1.6% 1.4% 20 1 2% 1.2% SA – Big 4 banks 1.0% 15 0.8% 10 0.6% International – Sample banks 0.4% 5 0.2% 0.0% 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 20
Slide 5: Understanding the relationship between ROA and ROE
Understanding the relationship between ROA and ROE ROA 0.5% 1.0% 1.5% 10:1 (equity multipliier) 5.0% 10.0% 15.0% everage e 15:1 7.5% 15.0% 22.5% ROE 20:1 10.0% 20.0% 30.0% Le 30:1 15.0% 30.0% 45.0% • ROE should h ld nott be b viewed i d iin iisolation l ti • Function of both ROA and leverage • Does
Slide 6: Understand the relationship between leverage and risk
Understand the relationship between l leverage and d risk i k Low risk Fundamental High financial capacity capacity, understating of leverage thus low risk risk/reward appetite relationship Protect sustainable ROA
Slide 7: Agenda
Agenda • Comparing international and local ROEs • The capital p landscape p is changing g g • Management a age e t actions act o s • Conclusion
Slide 8: Comprehensive regulatory response
Comprehensive regulatory response • Strengthened risk coverage - enforce a more stringent calculation of risk i k weighted i ht d assets t • Credit risk • Market risk • Improve p the q quality y and level of capital p - additional buffers to be held • Increase core capital • Reduce the inclusion of
Slide 9: FSR remains adequately capitalised…
FSR remains adequately capitalised… 100 – 200 bps 50 – 100 bps FirstRand target June 2010 SARB Amendments Basel 3 Proposals Fi tR d would FirstRand ld re-visit i it ttargett levels l l given i more stringent ti t capital it l d definitions fi iti
Slide 10: …and complies with finalised Basel III proposals
…and complies with finalised Basel III proposals FRBH FirstRand % Basel III* SARB current 30 Jun ’10 targets actual Core Tier 1 7.0 5.25 9.0 12.6 Tier 1 85 8.5 70 7.0 10 5 10.5 13 5 13.5 Total CAR 10.5 9.75 12.0 – 13.5 15.6 * Includes capital preservation buffer • No indication from SARB whether req
Slide 11: Excess capital – dispelling the myth
Excess capital – dispelling the myth Low asset growth and Not to scale earnings recovery Core Tier 1 Banks Act changes Basel III changes • FirstRand takes a 3-year view on capital • Uncertainties remain • Pace of expansion • Recovery of SA • Regulation
Slide 12: Sustainable ROE a function of recovery and specific management actions
Sustainable ROE a function of recovery and specific management actions Capital p invested in business remains the same However, CAR will be 150-300bps lower under Basel III Basel II Basel III
Slide 13: ROEs already showing recovery
ROEs already showing recovery 35% 30% 25% 20% 15% 10% Jun '04 Jun '05 Jun '06 Jun '07 Jun '08 Jun '09 Jun '10 Return on equity (actual) Return on equity (adjusted for the cycle) Average cost of equity Average ROE through the cycle
Slide 14: Agenda
Agenda • Comparing international and local ROEs • The capital p landscape p is changing g g • Management a age e t actions act o s • Conclusion
Slide 15: No fundamental change to FirstRand’s capital strategy
No fundamental change to FirstRand’s capital it l strategy t t • All entities continue to be appropriately capitalised on a standalone basis • Manage businesses on the principle that economic risk is backed with Tier 1 • p y capital Continue to deploy p to businesses that meet the required q return
Slide 16: Deployment of capital to Africa less than 1% impact on ROE
Deployment of capital to Africa less than 1% impact i on ROE Impact of expansion FNB Africa FirstRand excl FNB Africa Cost of equity June 2003 June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010 Future expansion initiatives will have marginal drag on short-term ROE, but will provid
Slide 17: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing
Slide 18: HomeLoans reduced discount to Prime and decreased risk rating
HomeLoans reduced discount to Prime and decreased risk rating Higher Higher risk discount 60 Average discount new business 50 40 Average FR rating at registration 30 20 10 Lower Lower risk discount 0
Slide 19: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels
Slide 20: Grow risk income but remain within refined risk appetite
Grow risk income but remain within refined risk appetite RMB revenue 2007 2010 9% 29% 39% Client activities Investment activities 37% 54% Trading activities 32% Based on gross revenue
Slide 21: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels • Manage costs and improve efficiencies
Slide 22: Still room for improvement in operational leverage
Still room for improvement in operational leverage Jaws remain positive 45 000 10% 40 000 60% 35 000 50% 30 000 Top line CAGR 15% 40% 25 000 7% C t CAGR 14% Costs 20 000 30% 15 000 20% 10 000 10% 5 000 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Costs Top line Cost to income ratio Note: T
Slide 23: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels • Manage costs and improve efficiencies • Target growth in activities where currently under represented
Slide 24: FirstRand under-represented in many SA retail segments
FirstRand under-represented in many SA retail t il segments t • Mass segment strategies • Cellphone banking • More than doubled customer base in FY10 (from 950k to 1 1.95 95 million) • FNB EasyPlan • 15 branches at 30 June 2010 • Target 100 branches in 2011 • W lth segmentt Wealth • Acquisition of B
Slide 25: FirstRand under-represented in many SA corporate segments
FirstRand under-represented in many SA corporate t segmentst • Corporate and Investment Banking • CIB and coverage units formed • FICC strategy • Focus on client flows • Wholesale credit focus • Adjusted prudential limits • I Increased d appetite i ffor investment-grade i d ddefensive f i counters
Slide 26: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels • Manage costs and improve efficiencies • Target growth in activities where currently under represented • Optimise funding strategy (deposit franchise and liquidity)
Slide 27: Focus on growing deposit franchise
Focus on growing deposit franchise FirstRand Bank Peer comparison 179 186 Professional 187 Professional 190 202 207 120 114 Corporate 122 Corporate 114 123 116 83 94 Retail 83 Retail 95 85 97 37 30 Public sector 32 Public sector 28 37 36 28 26 Other 32 Other 30 34 26 Jun '09 Dec '09 Jun '10 Jun '09
Slide 28: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels • Manage costs and improve efficiencies • Target growth in activities where currently under represented • Optimise funding strategy (deposit franchise and liquidity) • Align g business models ((for example
Slide 29: CIB will drive growth in corporate segments
CIB will drive growth in corporate segments Corporate and Investment Banking Group (CIB) RMB Manbo FNB CBG EXCO Proprietary Board Business Development CIB Unit Client Coverage Relationship Mgmt Wholesale Credit Corporate Private P i Equities E ii IInvestment FICC Transactional Equity Trading Banking
Slide 30: Specific actions to optimise portfolio
Specific actions to optimise portfolio • Adjust pricing • Grow risk income from current levels • Manage costs and improve efficiencies • Target growth in activities where currently under represented • Optimise funding strategy (deposit franchise and liquidity) • Align g business models ((for example
Slide 31: Geographical diversification is not impacting ROE
Geographical diversification is not i impacting i ROE FirstRand portfolio ROE Earnings contribution South Africa 18% 89% FNB Africa 23% 7% International 4% Total 18% 100%
Slide 32: “Original thinking” can provide additional uplift
“Original thinking” can provide additional uplift • Innovation • eWallet • Launched in October 2009 • 222 539 Wallets at September 2010 • PayPal • FNB Connect C t • ADTs • Banks need to re-think distribution platforms • Understand ROEs of different businesses/products
Slide 33: SA Inc – no material mismatch
SA Inc – no material mismatch Financial assets Supply side 96M+ 96M+ 60M-96M 60M-96M 36-60M 36-60M 12-36M 12-36M 6-12M 6-12M 3 6M 3-6M 3 6M 3-6M 1-3M 1-3M 0M 0M - 500 1,000 1,500 2,000 2,000 1,500 1,000 500 - Interbank Bank: Tbills Retail Depos Non FI Depo's UT - Money Market Bank: Gov Securities Ba
Slide 34: Banks need to re-think distribution platforms
Banks need to re-think distribution platforms Financial assets Supply side 96M+ 96M 96M+ 96M 60M-96M SA Inc has 60M-96M long-term savings 36-60M 36-60M 12-36M 12-36M 6-12M 6-12M 3 6M 3-6M 3 6M 3-6M 1-3M 1-3M 0M 0M - 500 1,000 1,500 2,000 2,000 1,500 1,000 500 - Interbank Bank: Tbills Bank: Gov Secur
Slide 35: What is the appropriate portfolio combination?
What is the appropriate portfolio combination? ROA 8% 7% 6% 5% 4% 3% 2% 1% 0% 0 5 10 15 20 25 30 35 40 45 Leverage Note: The chart is for illustrative purposes only
Slide 36: FirstRand’s portfolio – the current ROA and leverage ratio
FirstRand’s portfolio – the current ROA and leverage ratio ROA FirstRand products 9.0% 8.0% FRBG 7.0% RMB 6.0% 5.0% 4.0% 3.0% 2.0% FSR FSR 1.0% 0.0% 0 5 10 15 20 25 30 35 40 -1.0% Leverage
Slide 37: Agenda
Agenda • Comparing international and local ROEs • The capital p landscape p is changing g g • Management a age e t actions act o s • Conclusion
Slide 38: Conclusion
Conclusion • SA banks’ ROE: an ROA story, not a leverage story • FirstRand already y appropriately pp p y capitalised p for Basel III • Management a age e t taking ta g app appropriate op ate act actions o s • 18-22% 18 22% a sustainable ROE range Retain balance between ROE and earnings growth