Firstrand Limited · JSE:FSR
Firstrand — Investor Presentation (November 2006)
35 slides from Firstrand's investor presentation, Nov 9, 2006
Slide 1: Presentation to the Competition Commission Banking Enquiry
Presentation to the Competition Commission Banking Enquiry 9 November 2006
Slide 2: Agenda
Agenda Introduction Is competition in banking effective? Are bank profits out of line? Does the payment system function well? Recommendations and Conclusions 2
Slide 3: 1. Introduction
1. Introduction FRB supports the Enquiry and makes a number of recommendations that it hopes will be of assistance 3
Slide 4: FirstRand Bank Competes with Multiple Brands
FirstRand Bank Competes with Multiple Brands FirstRand Bank Holdings Ltd FirstRand Bank Ltd Main operating brands Investment Banking Rand Merchant Bank (RMB) Asset-based Finance WesBank Retail, Commercial, First Corporate & Private National Banking Bank (FNB) 4
Slide 5: 2. Competition is Intense
2. Competition is Intense FNB competes against a wide range of effective rivals Market concentration is driven by cost structure Banks and other players compete vigorously as evidenced by: Switching Switching Price Price Product Product Place Place (Channel) (Channel) Promotion Promotion FNB is acti
Slide 6: FNB Competes Intensively with Many Players
FNB Competes Intensively with Many Players Credit Consumer Consumer New Entrants Credit Intermediaries Intermediaries Credit Credit Providers Providers (e.g. (e.g. mortgage mortgage (personal (personalloans, loans, ¾ Virgin Money originators) originators) asset finance) asset finance) ¾ Capitec ¾ Ol
Slide 7: Concentration is Driven by Banking Cost Structure
Concentration is Driven by Banking Cost Structure ¾ +/- 80% of banking costs are fixed ¾ Market only able to support a limited number of firms in competitive equilibrium ¾ Recovery of costs needs to cover substantial fixed costs as well as marginal costs ¾ Cost drivers include: Staff Branch and ATM
Slide 8: Concentration is Driven by Cost Structure
Concentration is Driven by Cost Structure NCA Regulatory compliance cost FNB almost R1bn in 2005/6 R700m fees impacted p.a. Legislation and compliance requirements have grown significantly 250 232 228 225 218 213 206 200 200 Doubled in # of Regulations 191 13 years 186 175 166 154 150 141 132 135 12
Slide 9: Concentration in Banking Widely Observed
Concentration in Banking Widely Observed SA not out of line in terms of number of banks holding 75% of banking assets 8 Poland Turkey Russia Number of banks holding 75% Assets 7 Nigeria Brazil 6 Thailand Canada Italy 5 South Africa Portugal Australia Mexico UK 4 Chile Indonesia Hong Kong Netherlands
Slide 10: Intensive Rivalry is Reflected by Switching
Intensive Rivalry is Reflected by Switching ¾ Switching in SA is higher FNB’s Annual Churn Rates than observed internationally ¾ FNB survey reasons why 50% customers switch banks: 2005 40% 2006 1. Dissatisfied with overall service delivery 30% 2. Personal/professional 20% recommendation 3. Product/s
Slide 11: How FNB Competes: Pricing
How FNB Competes: Pricing ¾ FNB policy of simple and transparent pricing – Banded pricing – Flat rates – Simple monthly account fee to reduce complexity ¾ Pricing hotline and calculator to help customers choose the right options ¾ First to market with pricing options: – Electronic Pricing Option (20
Slide 12: Pricing is Only One Dimension of Competition
Pricing is Only One Dimension of Competition Average Monthly Bank Charges based on FNB Customers’ Average Transactions Low Income (Smart) Middle Income Cheque SME Cheque Absa FNB Nedbank SBSA MTN Capitec PnP Go Banking R0 R 20 R 40 R0 R 50 R 100 R 150 R 450 R 500 R 550 ¾ FNB is competitively priced,
Slide 13: How FNB Competes: Product Innovation
How FNB Competes: Product Innovation Product Innovation – Individuals Product Innovation – Businesses eBucks eBucks for Business inContact (sms messaging) inContact Pro Restart fixed deposit New Business Solutions Flexi Fixed deposit account FNB leveraged finance Equity linked fixed deposit Biznetwo
Slide 14: How FNB Competes: New & Innovative Channels
How FNB Competes: New & Innovative Channels Mini ATMs Community Banks Mobile Banks Cash Back at POS Cellphone Banking ¾ Draw cash from merchants ¾ Reduces retailer cash holdings 14
Slide 15: How FNB Competes: Promotion
How FNB Competes: Promotion In order to gain customers and build its brand, FNB invests extensively in marketing Above-the-line Advertising spend* (2006/7) 6 2 15 Radio 23 71 TV Newspaper Magazines Outdoor Online Cinema 42 53 * Figures in Rm 15
Slide 16: Competing in the Low Income Market
Competing in the Low Income Market ¾ FRB concurs with Falkena* that the market works well for “high end” consumers ¾ Same competitive conditions apply to low income consumer banking ¾ High reliance on fee income as interest margins are narrow and offset by high bad debts ¾ Relatively low provision d
Slide 17: Competing in the Low Income Market
Competing in the Low Income Market Banks and other financial services firms are actively exploring ways of serving the low income market ¾ Access: – Mobile banks; 1,500 mini ATMS; 2,650 ATMs; cash back at POS; 240,000 cellphone banking users ¾ Targeted products: – Smart Account, Smart Spend, Smart H
Slide 18: Competing in the SME Market
Competing in the SME Market High costs associated with servicing the SME market ¾ High cash usage, high failure rate, reliance on physical infrastructure and face to face contact ¾ Initial failure of SME leveraged finance unit based on misjudgment of costs and risks FNB continues to innovate in the
Slide 19: Agenda
Agenda Introduction Is competition in banking effective? Are bank profits out of line? Does the payment system function well? Recommendations and Conclusions 19
Slide 20: 3. Intense Rivalry Keeps Profits in Line
3. Intense Rivalry Keeps Profits in Line Analysis of profitability is complex ¾ Correct valuation of intangible assets ¾ Allocating common costs ¾ Cost of capital ¾ e.g. “The Banker” figures differ substantially from audited ROEs Effective competition keeps profits in line ¾ Competition will result
Slide 21: Cross-Country Profit Comparisons are Problematic
Cross-Country Profit Comparisons are Problematic Country Risk Gearing and Different Capital Products & Management Demographics Regulatory Business Environment Cycle Accounting Standards 21
Slide 22: Agenda
Agenda Introduction Is competition in banking effective? Are bank profits out of line? Does the payment system function well? Recommendations and Conclusions 22
Slide 23: 4. Sophisticated Payment System
4. Sophisticated Payment System SA has a relatively sophisticated financial system 45,000 Sophistication Sophistication Below Interbank Clearing & 40,000 below United States Settlement Stats: Expectations Expectations Ireland 35,000 Denmark ¾ 1.5 bn transactions G DP per Capita at PPP (US $) Canada
Slide 24: There is Strong Participation in the NPS
There is Strong Participation in the NPS ¾ Everyone has access to the National Payments System via the participants ¾ Direct participation governed by SARB and PASA to safeguard stability and security ¾ Participants have the ability to draw funds from any South African bank account (under customer i
Slide 25: BankServ Charges Constrained by Market Forces
BankServ Charges Constrained by Market Forces ¾ BankServ has high fixed costs (likely >80%) primarily driven by technology and people ¾ Current pricing scheme – Allows smaller banks to benefit from infrastructure and scale – Incentivises large banks to remain in the system, reducing average cost to
Slide 26: On Interchange - Clarity is Needed
On Interchange - Clarity is Needed ¾Rationale for Interchange? – Cost recovery mechanism that encourages investment in infrastructure and products ¾How should Interchange be set and at what level? – Bilateral negotiations cumbersome and adversely impact smaller banks – Multilateral approach requires
Slide 27: Agenda
Agenda Introduction Is competition in banking effective? Are bank profits out of line? Does the payment system function well? Recommendations and Conclusions 27
Slide 28: 5. FRB Recommendations (1 of 4)
5. FRB Recommendations (1 of 4) Issue Recommendation ¾ Further regulation may be counter- productive; risks of intervention likely to outweigh benefits 1. Optimise Regulation ¾ Deliberations must factor in the impact of NCA ¾ Speed up Dedicated and Co-operative Banks Bills 28
Slide 29: FRB Recommendations (2 of 4)
FRB Recommendations (2 of 4) Issue Recommendation Rivalry & Customer Switching ¾ Establish a ‘switching code’ & guidelines to share non- proprietary information – e.g. KYC central hub, debit order switching services ¾ Revise rules for explicit comparative advertising Improve transparency of pricing
Slide 30: FRB Recommendations (3 of 4)
FRB Recommendations (3 of 4) Issue Recommendation Access to Banking ¾ Guidance in order to eliminate SASWITCH fees 3. Address Reduce the costs of servicing customers Industry ¾ Costs of cash and security challenges ¾ Servicing low density areas ¾ Regulatory capital requirements, liquid asset require
Slide 31: FRB Recommendations (4 of 4)
FRB Recommendations (4 of 4) Issue Recommendation Access to the National Payment System ¾ Open to further participation to the NPS as long as risks are managed 4. Participation, Control of BankServ openness and fairness of ¾ Appoint non-executive members to the board NPS, BankServ and ¾ Promote comp
Slide 32: Conclusion
Conclusion Industry is functioning well with high levels of rivalry and innovation Rivalry keeps prices and profit in line South Africa has a highly participatory and sophisticated payments system that is of great benefit to consumers Like all dynamic industries there are opportunities for further i
Slide 33: Annexure
Annexure as: eA
Slide 34: Why Debit Cards Attract Fees & Interchange?
Why Debit Cards Attract Fees & Interchange? ¾ Concern raised regarding why debit cards attract both interchange from the acquirer as well as transaction fees from the cardholder . – Current account has far greater reliance on transaction fees as less of the costs can by funded by interest turn (vs a
Slide 35: SASWITCH SLIDE
SASWITCH SLIDE 35