FirstRand Limited · JSE:FSR
FirstRand — H1 2004 Earnings Presentation
55 slides from FirstRand's earnings presentation, March 2004
Slide 1: FirstRand's interim results for the six months to 31 December 2003
FirstRand’s interim results for the six months to 31 December 2003
Slide 2: Agenda
Agenda • Environment • Highlights • The numbers • Issues resolved • Key drivers Corporate banking Retail banking Momentum Greenfields • Strategy and prospects
Slide 3: Big changes in our environment
Big changes in our environment • Declining interest rates and falling inflation • Upturn in equity markets • Buoyant retail banking market • Strengthening rand • More favourable trading environment
Slide 4: How did this impact the Banking Group?
How did this impact the Banking Group? + − • Strong new business • Margin squeeze growth (mitigated by hedging) • Low bad debts and NPLs • Reduced endowment • Increased transactional effect on capital and trading income • Increased income from merchant banking fees
Slide 5: How did this impact the Momentum Group?
How did this impact the Momentum Group? + − • Improved investment • Reduction in single performance premium new business • Improved bonus stabilisation reserves • Strong growth in unit trust and linked product sales
Slide 6: Good operational performance
Good operational performance • Good performance by retail banking • Excellent performance by FNB Corporate and RMB • Satisfactory performance by Momentum in a tough environment • Strong performance by retail insurance (OUTsurance and FNB Life) • Outstanding performance by Discovery
Slide 7: Anomalies
Anomalies • Volatility introduced by AC133 • Capital Funding cost of new capital raised – R70m • Costs Two sets of salary increases included in both FNB Retail and Corporate to align to new increase dates • Profits from work out division of FNB Corporate
Slide 8: Resulting in….
Resulting in…. • Headline earnings +26% • Core headline earnings +17% • ROE (based on core) 26% • Dividend per share +17% • NAV +19%
Slide 9: The numbers
The numbers
Slide 10: Environment favoured the banking group
Environment favoured the banking group Headline earnings Momentum Discovery Group Group 2% 16% Banking Group 82%
Slide 11: As predicted, AC133 introduced earnings volatility
As predicted, AC133 introduced earnings volatility Pre-tax hedging mark-to-market loss of R45m vs profit of R151m in comparable period
Slide 12: Understanding operating performance
Understanding operating performance Dec 03 Dec 02 % Banking Group 2,308) 1,722 ) +34) Momentum Group 502) 460) +9) Discovery Group 85) 51) +67) FirstRand (108) (18) (>100) Headline earnings 2,787) 2,215) +26) Foreign currency translation loss 216) 362) (40) Earnings excl. translation losses 3,003) 2
Slide 13: Creating shareholder value
Creating shareholder value • FirstRand Banking Group ROE (excluding translation losses) 26% NAV growth +21% • Discovery Group Return on embedded value +74% Embedded value growth per share +24% • Momentum Group (6 months annualised) Return on embedded value +21% Profit margin on new business +19%
Slide 14: Superior value creation by the bank
Superior value creation by the bank CAGR in NAV +22% NAV (Rm) 22,500 20,000 27% 17,500 NAV 15,000 25% 12,500 10,000 ROE 23% 7,500 5,000 21% 2,500 0 19% Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 NAV ROE (based on core)
Slide 15: Momentum continues to create value
Momentum continues to create value Annualised return of 21% before dividends Rbn 10 8 6 +11% 4 2 0 June 2003 Dec 2003 In-force Business Shareholders' net assets • Headline earnings contribution to EV 12% • Value of in-force and shareholders’ assets 9%
Slide 16: Superior value creation by Discovery
Superior value creation by Discovery Rm 7,000 Embedded value 6 months annualised 6,000 +74% 5,000 +58% Destiny 4,000 Life 3,000 Health/Vitality 2,000 Shareholder’s funds 1,000 0 Jun-02 Dec-02 Jun-03 Dec-03 • Embedded value growth +58% • Embedded value growth per share flat
Slide 17: FirstRand Banking Group
FirstRand Banking Group
Slide 18: Unpacking the YTD core headline profit
Unpacking the YTD core headline profit Contribution to 21% growth 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Net interest Bad debts Non-interest Operating Income from Indirect tax Direct tax income revenue expenditure associates YoY growth: +6% –28% +27% +22% +45% –26% +9% Favourable Unfavourab
Slide 19: Strong advances growth
Strong advances growth Rbn Banking Group 205 200 +11.6% 195 190 185 180 175 170 Dec-02 Jun-03 Dec-03 • Satisfactory growth in corporate domestic advances +13% • Non-rand advances +5% (–20% in rand terms) • Strong retail advances growth +15%
Slide 20: Record levels of new business (WesBank)
Record levels of new business WesBank Total advances +23% R000s New business growth +24% 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Jul Aug Sep Oct Nov Dec Prior Year Current year Driven by a strong demand for new and used cars
Slide 21: Record levels of new business (FNB HomeLoans)
Record levels of new business FNB HomeLoans Total advances +6% R000s New business growth +37% 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Jul Aug Sep Oct Nov Dec Prior Year Current year • Driven by a buoyant property market • Overall advances growth limited due to natural run-off on the Sa
Slide 22: FNB Namibia merger benefits still to come
FNB Namibia merger benefits still to come N$ million Advances growth 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 Jul Aug Sep Oct Nov Dec Organic growth Acquisition growth • +56% growth including SWABOU acquisition • +10% organic growth
Slide 23: Solid growth in deposits
Solid growth in deposits Banking Group Rbn 250 +8.7% 200 150 100 50 0 Dec-02 Jun-03 Dec-03 • Satisfactory growth in retail deposits +13% • Good growth in medium corporate +25% • Large corporate deposits flat
Slide 24: Protecting the margin
Protecting the margin 4.93 % 0% –0.16% –0.21% 0.22% –0.08 % 4.70 % Volume effect 507 Deposits Hedges –156 215 Other 12% –72 3% Capital 1% 4,668 –213 Interest income 5% 4% 4,387 Dec 2002 Dec 2003 • Volume growth more than compensates for margin squeeze • Hedging provides satisfactory protection
Slide 25: Bad debts and NPLs at all time lows
Bad debts and NPLs at all time lows 6 1.5 1.6 1.4 5.6 1.3 5 1.1 1.2 4 4.3 0.9 1.0 0.8 3.6 3.5 3 0.8 0.5 0.6 2.5 2 1.9 0.4 1 0.2 0 0.0 1999 2000 2001 2002 2003 Dec-03 NPLs Bad Debts
Slide 26: Improved credit profile
Improved credit profile Total FRB exposure distribution 60% Distribution of national scale deal ratings across the entire bank 50% 40% Dec-02 Dec-03 30% 20% 10% 0% AAA/AA+ AA A/BBB BB and B CCC/D • Corporate loans average deal rating remained static at FR22 (A+) • Retail loans average deal rating im
Slide 27: Excellent growth in NIR
Excellent growth in NIR +27% 4,000 3,600 –5% Other income (5%) 3,200 2,800 2,400 Investment income >+100% 2,000 1,600 Trading income +57% 1,200 800 Transactional income +16% 400 * Excluding translation gains/(losses) 0 2002 2003 • Transactional income driven by strong client acquisition and volume g
Slide 28: Operating expenditure
Operating expenditure Rbn 6,000 Forecast 5,000 4,000 3,000 2,000 1,000 0 98/99 99/00 00/01 01/02 02/03 03/04 December June • Two sets of salary increases included to align to new increase dates • Second half expenses not expected to show similar increase
Slide 29: Maintaining efficiency ratio
Maintaining efficiency ratio 65 60.9 60 57.6 55.3 55.5 55 50 45 40 35 2001 2002 2003 Dec-03 • Expenses not comparable with previous period • Effect of low bad debts excluded from efficiency ratio *Excludes the effect of translation profits and losses
Slide 30: Momentum Group
Momentum Group
Slide 31: New risk products begin to deliver
New risk products begin to deliver Rm Retail new business – recurring premiums 400 350 300 250 200 150 100 50 0 June 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Investment Risk • Recurring risk premiums +57% • Recurring investment premiums –9%
Slide 32: Low demand for investment products
Low demand for investment products Retail new business – lump sum inflows Rm 3,500 +11% 3,000 2,500 2,000 1,500 1,000 500 0 June 2001 Dec 2001 June 2002 Dec 2002 June 2003 Dec 2003 Single Linked products • Single premiums –35% • Increase in lump sum inflows driven by increase in linked products +57%
Slide 33: Discovery Group
Discovery Group
Slide 34: Discovery Group
Discovery Group Highlights: • 57% increase in earnings attributable to shareholders • 22% increase in HEPS following 36% increase in the number of shares in issue • Robust performance from Discovery Health, but a reduction in new business • Growth of 35% in Discovery Life new business
Slide 35: Capital management
Capital management
Slide 36: Continued focus on capital management
Continued focus on capital management • Momentum CAR is 2.7x based on realistic directors’ valuation for FRAM • If investments are valued based on new FSB requirements, Momentum’s CAR decreases to 2.0x (in line with target) • Appropriate gearing of bank’s capital structure • Post year-end bond issue
Slide 37: Issues resolved
Issues resolved
Slide 38: We resolved one issue…
We resolved one issue… • Irish tax matter Reached settlement of €7.5m (±R60m) Cost significantly lower than anticipated legal fees Maintain the view that there was no liability – pragmatic decision to • Avoid expensive and protracted litigation • Avoid reputational damage • Bring certainty to
Slide 39: …progressing well on another
…progressing well on another • Ansbacher disposal Group has received numerous expressions of interest • Entire business • Parts of business Progressing discussion with parties interested in entire business Confident that process will be completed by year end
Slide 40: Achieved turnaround of RMBAM
Achieved turnaround of RMBAM • Disappointed with outflows • Positive growth in unit trust sales • Excellent investment performance Jointly rated number 1 in the Alexander Forbes Large Manager Watch (global and local), for the one year period ended December 2003 Convert into new business inflows
Slide 41: Key drivers
Key drivers
Slide 42: More to come from FNB Corporate
More to come from FNB Corporate • Excellent performance from FNB Corporate Retail exposures worked out: • One-off profit – McCarthy to come • Holding cost no longer a drag on earnings Positive growth in transactional flows due to new customer acquisition Strong growth in liabilities and focus
Slide 43: RMB benefits from diverse portfolio
RMB benefits from diverse portfolio • Strong performance from RMB Corporate Finance • BEE activity and fee income, • Good profits from equity-related transactions Treasury trading performed well off a low base Local and international divisions benefited from the improved credit environment • F
Slide 44: Retail well positioned for second half
Retail well positioned for second half • Strong new business growth FNB HomeLoans FNB Card WesBank • NPLs and bad debt at all time low, due to improved credit quality • Strong growth in non-interest income • Turnaround in micro-loan book • Protection provided by hedging • Margin squeeze • High
Slide 45: Tough environment for Momentum
Tough environment for Momentum • Subdued new business volumes • Strong improvement in margin on new business attributed to: Improved profitability of new generation risk products Increased proportion of Retirement Annuity business Good performance by group risk • Lower health distribution fee
Slide 46: Greenfield operations continue to provide a "sweetener"
Greenfield operations continue to provide a “sweetener” • Headline earnings Discovery +57% OUTsurance +70% FNB Life >+100%
Slide 47: Unpacking the growth
Unpacking the growth Growth in core earnings for the half year = R426m = +17% Retail 10% Corporate 12% Greenfields 2% Capital centre 1% 25% Capital raising costs (3%) 22% AC133 (5%) Total Growth 17%
Slide 48: Reserves of top 10 medical schemes
Reserves of top 1,800 10 medical schemes 1,600 1,400 1,200 1,000 800 600 400 200 0 d y ne e r th bi v lth ld p s y en m sc o a e ta el P al er ie vi ea zw NM g ih ni he sh o ov c o -Di xy dh Si ed Pr Bo ni ed sc O n Fe SP M m No Di M O M Source: 2002/3 CMS report, current Discovery
Slide 49: Growth in Discovery Health reserves
Growth in Discovery Health reserves Rm 25% 2,700 2,400 2,100 1,800 15% 1,500 1,200 900 600 7% 300 4% 2% 0 2000 2001 2002 2003 2004
Slide 50: Discovery Health
Discovery Health Name of medical scheme Principal members* 2002 1 Discovery Health Medical Scheme 497,779 2 Bonitas Medical Aid Fund 250,232 3 Medihelp 110,955 4 Net growth in Discovery for 2003 97,035 5 Medshield Medical Scheme 89,499 6 Fedhealth 71,510 7 MSP Sizwe Medical Scheme 65,585 8 National
Slide 51: Destiny Health
Destiny Health Annual 2003 2002 change New business $31.3m $19.7m 59% Members (1 Jan) 28,449 17,037 67% Operating loss* (R) (R47.6m) (R89.9m) 47% ($) ($6.7m) ($9.6m) 30% * Excluding non-recurring items valued at $4.4m in 2003 • Destiny Health expected to break-even in Illinois this month
Slide 52: Strategy and prospects
Strategy and prospects
Slide 53: Our unique structure and value proposition
Our unique structure and value proposition • Owner-manager culture • Separate profit centres • Portfolio of brands • Supported at the centre Capital Strategic alignment Business philosophy Lots of little growth stories
Slide 54: Growth strategy remains the same
Growth strategy remains the same • Combination of Continuous improvement Acquisitions Collaboration Promoting and nurturing “greenfields”
Slide 55: Well positioned for growth
Well positioned for growth • Favourable economic environment • Low interest rates expected to continue leading to Good demand for credit Hedging strategy continue to provide protection • Release of Ansbacher underperforming capital