FirstRand Limited · JSE:FSR
FirstRand — FY2006 Earnings Presentation
65 slides from FirstRand's earnings presentation, Sep 23, 2006
Slide 1: Banking financial review
Banking financial review FIRSTRAND —— Banking Group ——
Slide 2: Bank delivers on key measures
Bank delivers on key measures Target June ’06 June ’05 R ’mil Normalised Normalised Headline earnings 7 268 6 062 Headline earnings growth (%) 20 21 Return on equity (%) 28 27 Return on assets 1.89 1.84 Credit loss ratio (%) 0.50 0.32 Cost to income ratio (%) 53 56 * NHE are post IFRS adjustments, a
Slide 3: All brands deliver
All brands deliver R ’mil June ’06 June ’05 Growth % FNB 5 060 4 147 22 RMB 2 608 1 890 38 WesBank 1 755 1 404 25 FNB Africa 768 653 18 OUTsurance 251 204 23 Capital centre and group support 1 184 1 328 -11 Profit before direct tax 11 626 9 626 21
Slide 4: Superior returns from diversified portfolio
Superior returns from diversified portfolio FNB 12% RMB WesBank 7% Africa 44% Capital & support 15% Return on equity % 22% FNB 32 RMB 36 WesBank 29 Africa 29
Slide 5: Financial highlights
Financial highlights • Net interest income 15% • Credit impairment charge 86% • Non interest revenue 30% • Associate earnings 39% • Operating expenses 17%
Slide 6: Benefit of advances growth muted by margin pressure
Benefit of advances growth muted by margin pressure % contribution Strong advances growth 30 Asset margins pressure (7) Asset mix (13) Funding growth volume 27 Funding mix (23) Africa 2 IFRS and the centre (1) Net interest income 15
Slide 7: FNB and WesBank deliver 71% of advances growth
FNB and WesBank deliver 71% of advances growth R ’mil 300 290 280 Advances growth +30% 270 260 250 240 230 220 210 200 June '05 Africa RMB BGT and WesBank FNB June '06 group support
Slide 8: HomeLoans dominates FNB advances growth story
HomeLoans dominates FNB advances growth story R ’mil 140 130 Advances growth +31% 120 110 100 Home loans % 90 Asset growth 40 80 Card 70 Asset growth 36 60 50 June '05 Consumer Homeloans Card Wealth Commercial Other Corporate June '06
Slide 9: Motor drives WesBank's growth
Motor drives WesBank’s growth R ’mil 85 80 75 Advances growth +24% 70 65 60 Motor % 55 Asset growth 27 50 45 Corporate Asset growth 25 40 35 June '05 Motor Corporate Fleet Personal June '06
Slide 10: Retail continues to dominate advances mix
Retail continues to dominate advances mix R ’mil 300 32% 250 24% 200 33% 6% 25% 150 6% 62% 100 33% 61% 50 0 2005 2006 Retail Commercial Corporate
Slide 11: Asset backed = 77% of retail
Asset backed = 77% of retail 42% 44% HomeLoans 34% Instalment finance 33% 5% Card 5% 8% Africa 7% 11% Other 11% 2005 2006
Slide 12: Further lending margin pressure
Further lending margin pressure Weighting June ’06 June ’05 % Asset backed mortgages 46 2.27 2.53 Instalment sales and lease debtors 32 3.53 3.60 Card debtors 4 7.52 7.44 Overdraft and other loans 6 5.10 4.83 Personal loans 4 7.12 6.08 Other advances 8 5.10 5.79 Total 100 3.47* 3.72* Lending margin
Slide 13: Funding mix remains a challenge
Funding mix remains a challenge • High consumer asset growth • South African funding base has not changed significantly – low savings rate • Professional market funding is more expensive • Increased pressure on margins
Slide 14: More dependence on professional funding
More dependence on professional funding 60% of incremental growth from professional market 42% 48% 7% 7% 6% 6% 34% 32% 10% 8% Dec '04 Jun '05 Dec '05 Jun '06 Call Deposits Current and Savings Accounts Fixed Deposits Notice Deposits Banking Group Treasury
Slide 15: Liability margins reducing
Liability margins reducing Weighting June ’06 June ’05 % Current and savings 25 3.56 3.68 Call accounts 7 1.70 1.55 Notice deposits 5 1.24 1.29 Fixed deposits 6 0.65 0.69 Other 57 0.21 0.36 Total 100 2.30 2.32 Funding margin down 2 bps * Based on the twelve month rolling average balance
Slide 16: Responses to funding challenges
Responses to funding challenges • Liquefy the balance sheet • Securitise assets below the target returns
Slide 17: Lending yields impact overall margin
Lending yields impact overall margin June ’06 Bps Margin on interest earning assets 433 (13) Lending (25) Funding (2) Capital 13 Hedges (10) Other (includes IFRS) 11 Margin on interest earning assets 420
Slide 18: Financial highlights
Financial highlights • Net interest income 15% • Credit impairment charge 86% • Non interest revenue 30% • Associate earnings 39% • Operating expenses 17%
Slide 19: Normalisation of credit cycle drives bad debt charge
Normalisation of credit cycle drives bad debt charge R ’mil 1400 45% 1311 1200 22% 1000 19% 800 706 600 86% 400 200 0 June '05 Recovery offset in Volume impact Normalisation of June '06 prior year arrears & NPL's
Slide 20: Credit themes
Credit themes • Credit quality remains robust • Change in the credit cycle • Arrears, non performing loans and bad debts will normalise • Credit management strategies
Slide 21: Banking group portfolio quality remains robust
Banking group portfolio quality remains robust Post IFRS Pre IFRS Pre IFRS R ’mil June ’06 June ’06 June ’05 Advances 297 162 297 227 228 946 NPL 4 211 4 211 3 241 I/s charge 1 411 1 311 706 *Bad debt % 0.54 0.50 0.32 * Calculated as a percentage of average advances FR rating moved from FR 40 to FR
Slide 22: Credit themes
Credit themes • Credit quality remains robust • Change in the credit cycle • Arrears, non performing loans and bad debts will normalise • Credit management strategies
Slide 23: Predictive indices drive credit strategies
Predictive indices drive credit strategies FRBG retail credit risk index FRBG commercial credit risk index 103 Higher 102 risk 102 Upward Higher trend risk 101 Turning 101 100 point ? 100 99 Lower 99 98 risk Lower 97 98 risk 1995Q1 1995Q3 1996Q1 1996Q3 1997Q1 1997Q3 1998Q1 1998Q3 1999Q1 1999Q3 2000Q
Slide 24: Credit themes
Credit themes • Credit quality remains robust • Change in credit cycle • Arrears, non performing loans and bad debts will normalise • Credit management strategies
Slide 25: Non performing loans and bad debts
Non performing loans and bad debts 1.5 Turbulent:1.60 5.6 1.3 1.1 0.9 4.3 0.8 3.5 3.6 Long run expected loss: 0.7 2.6 2.4 0.50 2.1 2.0 0.4 0.32 Calm:0.40 1.7 1.7 1.6 1.4 1.4 1.2 1.4 1.1 1999 2000 2001 2002 2003 2004 June '05 June '06 NPLs (%) Provisions (%) Bad debts (%)
Slide 26: WesBank arrears and non performing loans will normalise
WesBank arrears and non performing loans will normalise Total arrears 8% 7% NPL's 6% Arrears 5% 4% 3% 2% NPL five year average 1% 1% 0% Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06
Slide 27: Credit themes
Credit themes • Credit quality remains robust • Change in the credit cycle • Arrears, non performing loans and bad debts will normalise • Credit management strategies
Slide 28: Three pronged credit strategy
Three pronged credit strategy 1. Re-assess credit provisioning
Slide 29: Conservative coverage
Conservative coverage 6 monthly contribution as a % of advances 1st 6 months 2nd 6 months Pre-IFRS (6 month average) (6 month average) Total NPL as % of advances 1.33 1.42 1.42 Provisions as % of average advances* 0.24 0.28 0.50 - Specific (%) 0.19 0.28 0.45 - Portfolio (%) 0.05 0.00 0.05 Coverage r
Slide 30: Three pronged credit strategy
Three pronged credit strategy 1. Re-assess credit provisioning 2. Reconsider credit origination strategies dynamically and manage the risk
Slide 31: Pro-active credit risk management
Pro-active credit risk management • Identify high risk segments/clients • Tighten score cards for higher risk lending categories • Price for risk • Monitor limits dynamically – Do not honour customer settlements over limit – Reduce limits for high risk customers • Tighten up on arrear recognition po
Slide 32: Three pronged credit strategy
Three pronged credit strategy 1. Re-assess credit provisioning 2. Reconsider credit origination strategies dynamically and manage the risk 3. I/S and B/S protection and enhancement strategies through different cycles
Slide 33: Natural hedges and looking for protection
Natural hedges and looking for protection 1.2% How do we protect against this risk ? 1.0% Natural hedges 0.8% Long run expected loss: 0.7 Bad debts 0.6% 0.4% 0.2% 0.0% 30 June '06 '+50 (Aug) '+100 '+200 '+300 bps Lower Expected Upper Interest rates
Slide 34: Financial highlights
Financial highlights • Net interest income 15% • Credit impairment charge 86% • Non interest revenue 30% • Associate earnings 39% • Operating expenses 17%
Slide 35: Non interest revenue themes
Non interest revenue themes • Growth in customer numbers and transactional volumes • Low market volatility in interest rates and forex • Strong performance from the RMB debt businesses • Strong performance from the RMB equity businesses – Private equity, trading & agency
Slide 36: Transactional income drives NIR
Transactional income drives NIR R ’mil 12000 22% 10000 8000 6000 4000 35% 2000 106% 35% 0 Transactional Fair value Investment Other income 2005 2006
Slide 37: Volumes driving fee income
Volumes driving fee income R ’mil Assets under management +57% 12000 Other 22% Africa ATM transactions +19% 2% 10000 5% WesBank FNB customers +17% 8000 12% 6000 Card turnover +33% 4000 94% 2000 0 Transactional Fair value InvestmentFNB Other income 81% 2005 2006
Slide 38: RMB's performance behind fair value growth
RMB’s performance behind fair value growth R ’mil 12000 Interest Rates and Forex 10% 10000 Commodities 8000 Equities 26% 6000 13% Equity agency Secondary markets 9% 4000 35% 94% Structured 2000 40% 27% Finance 35 (43%) % 0 Fair value Investment 2006 Other Bank fees & commissions 2004 2005
Slide 39: RMB Private Equity core contributor
RMB Private Equity core contributor R ’mil 3017 12000 2492 10000 2164 8000 1070 1098 6000 826 867 556 4000 320 106% 2000 'Jun 04 Jun '05 Jun '06 0 Private equity contribution Unrealised profit Private equity assets Investment Other Bank fees & Fair value commissions 2005 2006
Slide 40: Financial highlights
Financial highlights • Net interest income 15% • Credit impairment charge 86% • Non interest revenue 30% • Associate earnings 39% • Operating expenses 17%
Slide 41: RMB businesses dominate associate earnings
RMB businesses dominate associate earnings 2006 2005 Other 1% Relyant RMB Private OUTsurance 13% Equity 20% 38% Other 4% WesBank 6% OUTsurance 21% RMB Offshore RMB Private Resources Equity WesBank 15% 58% 6% RMB Offshore Resources 18% 73%
Slide 42: Financial highlights
Financial highlights • Net interest income 15% • Credit impairment charge 86% • Non interest revenue 30% • Associate earnings 39% • Operating expenses 17%
Slide 43: Top line growth drives operational leverage
Top line growth drives operational leverage R ’mil 16000 58% 17% 14000 56% 56% 12000 55% 10000 8000 6000 53% 4000 2000 0 June '02 June '03 June '04 June '05 June '06 Total costs Cost to income
Slide 44: All brands more efficient
All brands more efficient Top line Cost Cost to growth growth income ratio R’m % % % FNB 20 16 64.2 WesBank 29 18 43.0 RMB 37 36 37.7 Africa 11 7 45.3 FirstRand Banking Group 26 17 52.7
Slide 45: Investment and variable drive costs
Investment and variable drive costs Investment Variable Base +3% +4% + 9% +16% Investment Variable Base +11% +12% + 13% +36% Investment Variable Base +5% +6% + 7% +18%
Slide 46: Capital management strategy
Capital management strategy • Capital adequacy – Target – Actual • Consumption by business units • Gearing vs ROA • Increased focus on asset returns and gearing
Slide 47: Capital structure remains efficient
Capital structure remains efficient Target Actual R ’mil % % Target capital adequacy 12 - 13 12.8 Tier I 8.8 - 10 9.0 - Core Tier I 7–8 7.8 - Non-cumulative, non-redeemable preference shares 1.8 – 2 1.1 Tier II 2.2 – 3 3.8 - Other qualifying instruments and tertiary capital 1.1 – 1.5 0.9 - Subordina
Slide 48: ROE maintained
ROE maintained Actual Actual 2006 2005 Return on equity (%) 28 27 Return on assets 1.89 1.84 X X Gearing multiple 14.8 14.5
Slide 49: More focus on asset returns vs gearing
More focus on asset returns vs gearing Assess products Increase focus on Economic vs against ROA efficiency regulatory capital targets
Slide 50: Excellent growth from Momentum
Excellent growth from Momentum June ’06 June ’05 Normalised Normalised Headline earnings 1 564 1 270 Headline earnings growth (%) 23 19 Return on equity (%) 24 25 Return on embedded value (%) 31 28
Slide 51: Major contributors
Major contributors R’ mil June ’06 June ’05 % Insurance operations 940 685 37 Asset management operations 347 247 40 Investment income 280 355 (21) Momentum group earnings – Pre IFRS 1 567 1 287 22 - IFRS adjustments (3) (17) Momentum group normalised earnings 1 564 1 270 23
Slide 52: Insurance operations performed
Insurance operations performed Existing business R’ mil 1000 13% 15% 940 900 8% 6% 16% -4% 800 685 -17% 700 600 500 + 37% 400 300 200 100 0 June '05 In-force International Sage and Agents New FNB Markets June '06 other business collaboration acquisitions strain
Slide 53: Helped by acquisitions
Helped by acquisitions R’ mil 1000 13% 15% 940 900 8% 6% 16% -4% 800 685 -17% 700 Acquisitions 600 500 + 37% 400 300 200 100 0 June '05 In-force International Sage and Agents New FNB Markets June '06 other business collaboration acquisitions strain
Slide 54: Strong new business inflows
Strong new business inflows R’ mil 1000 13% 15% 940 900 8% 6% 16% -4% 800 685 -17% 700 600 500 + 37% 400 300 200 100 New business 0 June '05 In-force International Sage and Agents New FNB Markets June '06 other business collaboration acquisitions strain
Slide 55: Insurance operations
Insurance operations Markets R’ mil 1000 13% 15% 940 900 8% 6% 16% -4% 800 685 -17% 700 600 500 + 37% 400 300 200 100 0 June '05 In-force International Sage and Agents New FNB Markets June '06 other business collaboration acquisitions strain
Slide 56: Re-deploying funds for growth
Re-deploying funds for growth R’ mil 400 -21% 355 350 300 -8% 9% 280 -11% 250 200 -11% 150 100 Disposals and acquisitions 50 0 June '05 Aflife disposals Sage & Capital Returns June '06 acquisitions restructuring
Slide 57: Re-deploying funds for growth
Re-deploying funds for growth R’ mil 400 -21% 355 350 300 -8% 9% 280 -11% 250 200 -11% 150 Capital restructure 100 50 0 June '05 Aflife disposals Sage & Capital Returns June '06 acquisitions restructuring
Slide 58: Re-deploying funds for growth
Re-deploying funds for growth R’ mil 400 -21% 355 350 300 -8% 9% 280 -11% 250 200 -11% 150 Markets 100 50 0 June '05 Aflife disposals Sage & Capital Returns June '06 acquistions restructuring
Slide 59: Market and retail inflows drive earnings
Market and retail inflows drive earnings Earnings • Markets drive earnings in R 'mil +40% asset management 350 300 250 • Unit trusts inflows are strong 200 150 100 50 0 2005 2006
Slide 60: Very strong growth in EV
Very strong growth in EV R’ mil 16000 11% 15 554 15000 14 438 21% 14000 -9% 13000 11 856 12000 31% 11000 10000 9000 8000 June '05 Growth in Value of in- Sub-total Dividends paid June '06 shareholders force net worth
Slide 61: Very strong growth in EV
Very strong growth in EV R’ mil 16000 11% 15 554 15000 14 438 21% 14000 -9% • Strong earnings from the existing book 13000 • Revaluation of strategic investments 11 856 12000 • Investment income on free assets 11000 • Strong asset management performance 10000 9000 8000 June '05 Growth in Value of in
Slide 62: Very strong growth in EV
Very strong growth in EV R’ mil 16000 11% 15 554 15000 14 438 21% 14000 -9% 13000 • Strong new business growth 11 856 12000 • Positive investment markets 11000 10000 9000 8000 June '05 Growth in Value of in- Sub-total Dividends paid June '06 shareholders force net worth
Slide 63: Very strong growth in EV
Very strong growth in EV R’ mil 16000 11% 15 554 15000 14 438 21% 14000 -9% 13000 11 856 12000 31% 11000 10000 9000 8000 June '05 Growth in Value of in- Sub-total Dividends paid June '06 shareholders force net worth
Slide 64: Very strong growth in EV
Very strong growth in EV R’ mil 22% 16000 11% 15 554 15000 14 438 21% 14000 -9% 13000 11 856 12000 31% 11000 10000 9000 8000 June '05 Growth in Value of in- Sub-total Dividends paid June '06 shareholders force net worth
Slide 65: Very strong growth in EV
Very strong growth in EV R’ mil 16000 11% 15 554 15000 14 438 21% 14000 -9% 13000 11 856 12000 31% 11000 10000 9000 8000 June '05 Growth in Value of in- Sub-total Dividends paid June '06 shareholders force net worth