Debt investor presentation p Cape Town, 20 October 2010 2 - - PowerPoint PPT Presentation

Debt investor presentation

Cape Town, 20 October 2010

p

2

Overview of FirstRand

Johan Burger

3

St t i i Strategic overview

FirstRand’s strategic intent

4

• To be the African financial services group of choice

g p

• Create long-term franchise value
• Deliver superior and sustainable economic returns within

acceptable levels of volatility p y

Growth strategies

5

• Dominant South African player focussing on existing and

d t d k t under represented markets

• Grow African franchise targeting:
• Grow African franchise, targeting:
• Above average domestic growth markets
• Markets strongly positioned to benefit from trade and investment

g y p flows between Africa and Asia, particularly China and India

SA growth in perspective

China 9.81

6

China 9.81 Ghana 8.35 India 8.28 Mozambique 7.46 Tanzania 7.07 Nigeria 6 74

High growth

Nigeria 6.74 Angola 6.72 Uganda 6.72 EM Average 6.55 Indonesia 6.48 Zambia 6.15 Kenya 5.85 Sub-Saharan Africa 5.43 Botswana 5.40 Brazil 4.72 Mexico 4.64 World 4 43

Medium growth

World 4.43 Russia 4.13 South Africa 3.83 Australia 3.30 Canada 2.85 USA 2 59

Folder: Y:\C - Macro\BSM macro outlook\201009\Data File: Growth blocks & forecasts

USA 2.59 Namibia 2.50 UK 2.46 Japan 1.90 Germany 1.68 Italy 1.26

Low growth

File: Growth blocks & forecasts Sheet: GDP forecast (3)

y Spain 1.09 Greece

• 0.30

Note: Figures represent average GDP growth forecasts for 2010-14

Source: IMF

High growth Medium growth Low growth

FirstRand targeting growth of nominal GDP + 3% to 5%

Growth areas in South Africa

7

• Retail
• Mass market
• Wealth segment
• Corporate

Corporate

• CIB initiative
• RMB FICC
• Risk appetite for corporate lending

Domestic retail growth opportunities

8

Mass segment strategies

• Cellphone banking
• More than doubled customer base in FY10 (from 950k to 1.95 million)
• FNB EasyPlan

FNB EasyPlan

• 15 branches at 30 June 2010
• Target 100 branches in 2011
• eWallet
• eWallet
• Launched in October 2009
• 222 539 Wallets at September 2010

Wealth segment

• Acquisition of BJM private clients business

Acquisition of BJM private clients business

Innovative platforms

• PayPal, FNB Connect, ADTs

Domestic corporate growth opportunities

9

• Corporate and Investment Banking
• CIB and Coverage units formed

RMB FICC t t

• RMB FICC strategy
• Focus on flow and client drive
• Wholesale credit focus
• Adjusted prudential limits
• Increased appetite for investment-grade defensive counters

Africa is core to the Group’s international strategy

10

international strategy

London branch China China India

Existing countries:

Namibia

Corridors

Namibia Botswana Lesotho Mozambique Swaziland Zambia

Flows and distribution

Priority countries: Nigeria Tanzania Angola

Representative office FirstRand Bank branch

Angola Ghana

International strategy

11

• Regional integrated financial services group
• Roll-out FirstRand’s businesses in targeted countries across sub-

Saharan Africa Saharan Africa

• Co-ordinate activities across FirstRand’s brands
• Preserve and grow current franchises and create sustainable profits
• Universal banking
• Universal banking
• Provide a comprehensive range of banking products appropriate to

the jurisdiction

• Implement best practices and governance principles

p p g p p

Entry strategy – international

12

• Our entry into new countries will be a combination of acquiring

existing banks or Greenfields as appropriate

• We will do Greenfields if:

We will do Greenfields if:

• New banking licenses are available
• Environment is conducive to Greenfields
• Environment is conducive to Greenfields
• No suitable acquisitions are available

Growth opportunities in Africa

13

• Nigeria
• Representative office staffed

Representative office staffed

• Still assessing acquisition of small, healthy local bank
• Entry into investment banking being investigated

Tanzania

• Tanzania
• Core team identified
• Systems, premises and infrastructure in place
• Awaiting final regulatory approval
• Angola
• Received approval for representative office in July 2009

pp p y

• Greenfields business case being developed
• Pursuing opportunities from SA-Angola bilateral trade agreements
• Zambia
• Zambia
• FNB Zambia launched in April 2009
• 14 000 accounts opened to date

E t d t b k i D b 2011

• Expected to breakeven in December 2011

Coordinated focus on Africa and corridors

14

• Growth in FICC business in existing African subsidiaries
• Namibia

number 1 in the market

• Namibia – number 1 in the market
• Zambia – breakeven in year 1
• Mozambique – ahead of budget
• Corridor strategies in India and China gaining traction
• India branch
• Profitable from May 2010
• Strong brand building achieved in the Indian market with major corporates and

Strong brand building achieved in the Indian market with major corporates and government institutions

• Traction in FICC and Investment Banking space
• Trade Finance revenues from Indian counters as doubled since establishing a
• Trade Finance revenues from Indian counters as doubled since establishing a

presence on the ground in India

• Advisory partnership signed with one of India’s leading Advisory firms

(JM Financial) (JM Financial)

• Work to be done in DCM, infrastructure, distribution and equities spaces

FirstRand rebalancing its portfolio

15

• Retail vs corporate

p

• CIB initiative, increase appetite for investment-grade defensive counters
• Better balance between mass consumer and wealth revenue streams in the
• Better balance between mass, consumer and wealth revenue streams in the

retail portfolio Cli t fl d k t ithi t d i t t

• Client flows vs secondary markets within corporate and investment

banking portfolio f

• Building the savings franchise
• South Africa and the rest of Africa

Maintain sound financial position Maintain sound financial position

Strategy and risk profile aligned

16

Aligning strategy and risk

17

• Risk management deeply embedded in tactical and strategic decision-making
• Apply the basic disciplines
• Apply the basic disciplines
• Hold appropriate levels of core capital
• Manage liquidity prudently
• Manage diversified portfolio on a holistic basis, utilising natural hedges and business

mix to ensure sufficient loss absorption capacity

• Manage asset profile in line with risk appetite ranges
• Drive operational efficiencies across the portfolio
• Rebalance the portfolio for different macro scenarios
• Macro shifts

highways

• Macro shifts – highways
• Single house view – informs credit origination, funding and tail risk strategies, stress

testing K d i “hi h ” (l t d )

• Key macro drivers – “highways” (long-run trends)
• Counter-cyclical approach
• Refinements to business models

Refinements to business models

• Align risk appetite, financial/operating leverage and business mix

18

Financial performance & risk profile

Banking Group key financial ratios

19

Jun ’10 Jun ’09 Change Normalised earnings1 (R million) 8 535 6 056  41% N li d t it 2 (%) 18 13  Normalised return on equity2 (%) 18 13  Return on assets (%) 1.24 0.80  Credit loss ratio (%) 1.30 1.81  Cost to income ratio – normalised (%) 57.1 58.1  Tier 1 capital ratio3 (%) 13.5 12.3  Interest margin normalised (%) 4 56 4 96  Interest margin – normalised (%) 4.56 4.96  Advances4 (R billion) 444 430  3%

1 B f d d ti f h di id d 1 Before deducting preference share dividends 2 After deducting preference share dividends 3 Ratios shown are for FRBH 4 Gross advances after deducting ISP

Drivers of FY10 earnings

20

Macro

• Low asset growth and

Legacy g reduced margin

• Endowment
• Bad debts
• Reduced losses
• NIR

Strategy Strategy

• Cost containment
• Improving quality of earnings
• Improving quality of earnings
• Geographical diversification
• Capture white space in SA

Bad debts reduction adds R2.3bn of PBT

21

3 0 Impairment charge (%) 2.66 2.5 3.0 Retail 1 84 2.66 2.0 Total 1 28 1.81 1.30 1.84 1.79 1.5 0.83 1.28 0.73 1.13 1.0 Corporate 0.32 0.51 0.42 0 19 0.05 0.17 0.34 0.62 0.44 0 0 0.5 0.19 0.0 2005 2006 2007 2008 2009 2010

Retail unwind faster than corporate

22

p

Bad debts

Percentage of average advances

6 months to Jun ’10 6 months to Dec ’09 6 months to Jun ’09 Retail 1.41 2.08 2.97

• Residential mortgages

0.73 1.17 1.76 g g

• Credit card

5.73 8.14 12.51

• Vehicle and asset finance

1.45 2.20 2.70 Wholesale* 0.81 0.71 0.90 Total bad debt ratio 1.13 1.51 1.99

* Includes WesBank Business and Corporate

NPLs remain sticky

23

6 6 5.6 5.0 5 4.2 3.4 3 4 2.8 2.6 2.3 2.9 2 3 0.8 0.8 1.5 1.2 1.1 1.5 1 0.8 0.8 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total NPLs (%) Debt counselling (%)

Number of debt counselling accounts t bili i

24

stabilising

W B k d H L d bt lli t

53%

20 000 25 000

WesBank and HomeLoans debt counselling accounts

47% 26% 74%

15 000 20 000 5 000 10 000 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

• Inflows into debt review are stabilising
• The underlying risk profile of the debt review book is better than expected

Positive trend, but absolute level remains high

25

NPL J ’10 D ’09 J ’09 NPL

Percentage of advances

Jun ’10 Dec ’09 Jun ’09 Retail 6.94 7.43 8.15

• Residential mortgages

8.24 8.71 9.21

• Credit card

6.28 8.50 12.31

• Vehicle and asset finance

5.17 5.03 5.52 Wholesale* 2.52 2.72 2.29 Total NPL ratio 5.00 5.42 5.64

* Includes WesBank Business and Corporate

Lower NPL inflows reflect better macro and origination actions

26

and origination actions

FNB HomeLoans - New NPLs (value)

'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '10 '10 '10 '10 '10 '10

WesBank – Motor division (number of accounts)

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Aug '08 Sep '08 Oct '08 Nov '08 Dec '08 Jan '09 Feb '09 Mar '09 Apr '09 May '09 Jun '09 Jul '09 Aug '09 Sep '09 Oct '09 Nov '09 Dec '09 Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10

Effective credit and pricing strategies – FNB HomeLoans

27

FNB HomeLoans

• New business weighted heavily towards lower risk customers

R i i i iti ti f l th h l i k t lif f

100%

• Repricing initiative successful even though low risk customers qualify for

relatively higher discounts

Higher discount 70% 80% 90% 100%

d deals

discount 40% 50% 60%

% of registered

0% 10% 20% 30%

%

0% Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

A B C D E F G H I WAD New Reg Business Average discount new business

Lower discount

Low risk High risk

Corporate portfolio resilient

28 35%

Rating distribution: FRB Corporate book

20% 25% 30% June 2009 June 2010 10% 15% 20% 0% 5% A / AAA (zaf) BBB / A (zaf) BB+ / BBB- (zaf) BB- / BB (zaf) B+ / BB- (zaf) B B+ (zaf) B- / B (zaf) CCC / CCC+ (zaf) International / local rating

• Majority of negative credit migrations were experienced in specific sub-sectors, such as

property development and transportation whilst most of exposures in other industries showed property development and transportation, whilst most of exposures in other industries showed resilience

• In line with the Group’s strategy to rebalance its portfolio, FRB is increasing its exposure to

large high-quality corporate credit

• The in-force book (originated by the investment bank) has performed well, but due to natural

run-off profile of these exposures, capacity is available to write more high-quality business

Growth in client revenue improves lit f i

29

quality of earnings

2007 2010

2% 8% 7% 7%

Client activities Investment activities

85%

Trading activities

91% 85% 91%

Based on gross revenue

Quality improvement driven by RMB t t

30

RMB strategy

2007 2010

9% 29% 54% 37% 39%

Client activities Investment activities

32%

Trading activities

32%

Based on gross revenue

Geographic diversification – mix changing

31

4%

2007 2010

7% 4% 5% 10%

South Africa Rest of Africa

89% 85%

International

Based on gross revenue

Earnings mix provides risk capacity

32

Normalised NIR breakdown

38% 62%

N i t t

Transactional income Annuity fair value income Operational associated income Insurance

Non interest revenue Net interest income

Client activity

87%

Other primary income Fair value risk income Private Equity Other investment income C vestment nd trading

13%

Other investment income In an

Risk profile summary

33

• Continued improvement in asset quality (in-force and new business)
• De-risking has reduced the potential impact of legacy portfolios
• Remaining portfolio size
• Interest rate risk in the banking book – hedged

Interest rate risk in the banking book hedged

• Endowment impact: R543 million per 100 bps
• Capital position remains robust
• Strong capital generation
• Improving funding profile

Lengthened the funding profile and increased buffers

• Lengthened the funding profile and increased buffers
• Market risk (trading)
• Trading activities produced 2% of the Group’s gross revenue (2007: 7%)
• 3% of capital allocated to market risk (2007: 5%)

S fi i l i i Strong financial position

34

Prospects: Modest economic recovery

South Africa’s GDP growth

35

10 0

Y/y %

7.5 10.0 2 5 5.0

F ld Y \C M \M i k\201009

0.0 2.5

Folder: Y:\C - Macro\Macroeconomic pack\201009 File: Key variables for ppt.xlsx Sheet: 1

• 5 0
• 2.5

5.0 61 66 71 76 81 86 91 96 01 06 11

SA growth is expected to remain on the highway

Source: I-Net and FirstRand Research

Cyclical vs structural forces

36

Cyclical Cyclical

• Wide output gap
• Low food prices

p

• Strong rand

Structural

• Wage increases

Wage increases

• Administered prices
• Inflation expectations

Downward pull from cyclical forces will be temporary Downward pull from cyclical forces will be temporary, structural pressures will eventually drive CPI towards the top of band

SA inflation back in the target band

37

20

% y/y

15

Folder: Y:\C - Macro\macroeconomic pack\201009 File: Key variables for ppt

10

Sheet: 2

5 61 66 71 76 81 86 91 96 01 06 11

Expect inflation to stay in the 3-6% band

Source: I-Net and FirstRand Research

Repo rate below the highway

38

24

6 5 9 5%

18

6.5-9.5%

12

Folder: Y:\C – Macro\Macroeconomic pack File: Key variables for ppt

6

Sheet:

Repo rate below the highway – but temporary

79 83 87 91 95 99 03 07 11

(short-term range 5.5-7.5%)

Source: I-Net and FirstRand Research

Asset growth is about affordability

39

17 18 19 Debt servicing cost FRB historical impairment (bps x 10) 12 13 14 15 16 17 Debt servicing cost threshold 120bps impairment tolerance DSC threshold 6 7 8 9 10 11 DSC threshold 2 3 4 5 6

Max debt- servicing cost Prime rate (highway) Debt/income (implied max)

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

11%* 10-13% 85% 11% 9-11% 100% 5yr horizon 2yr horizon

* Given the Group’s tolerance for through-the-cycle bad debts

85% looks realistic (up from 78%)

Source: FirstRand Research

Income growth

40

45

% y/y

30 15 15

• 15

67 72 77 82 87 92 97 02 07 12

Income growth expected to be in line with nominal GDP

Source: I-Net and FirstRand Research

Wage increases at the expense of jobs

41

11.6%

12%

Income growth Employment growth Wage growth

Yoy

7 0% 7.1%

8% 10%

4.5% 7.0%

4% 6%

tion

0% 2%

Inflat Inflation

Folder: Y:\C – Macro\Analysis File: Employment & wages Sheet: 3

• 2.6%
• 4%
• 2%

%

• 4.7%
• 6%

4%

Jun'09 Jun'10

Income up due to rising wages (despite unemployment)

Source: StatsSA, I-Net , SARB Quarterly Bulletin, FirstRand Research

Excess capacity in the corporate sector

42

260

Real private investment, R'bn

210 260

Folder: Y:\C - Senior exec\AFS & budgets\201006 File: Extra trend requested for key themes.xlsx Sheet: RpiData

160 210 110 160 60 110 60 80 83 86 89 92 95 98 01 04 07 10

Source: SARB Quarterly Bulletin and FirstRand Research

Slow credit growth

43 Folder: Y:\C - Senior exec\AFS & budgets\201006 File: Extra trend requested for key themes Sheet: Credit data

40

% y/y

30

Corporate

20 10

Retail Total

10

• 10

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Credit to grow slower than nominal GDP Credit to grow slower than nominal GDP Retail credit to outpace corporate

Source: I-Net, SARB and FirstRand Research

44

Conclusion Conclusion

In conclusion…

45

• Risk profile continues to improve
• Expect revenue growth in the medium term to remain challenging
• Subdued growth in retail and corporate advances

Subdued growth in retail and corporate advances

• Manage costs and optimise operational leverage
• Significant room for improvement
• “Grow muscle, cut fat”
• Will continue to grow infrastructure in growth segments in South Africa and

invest in African footprint

Leveraging off a platform of diverse revenue streams and strong operating franchises streams and strong operating franchises

46

Capital management p g

Samantha Balsdon

Providing resources to back the Group’s strategy

47

strategy

FirstRand Group Setting the portfolio strategy Current portfolio

Business and Identifying trends Growth, Ensure resources are Business and action plans Identifying trends,

• pportunities and threats

demographic, technological, regulatory, etc. resources are available to provide for the strategy Target performance characteristics Target portfolio mix Align with growth, return, leverage and volatility targets Optimise portfolio to provide these characteristics

Target portfolio

Contextualising capital strategy

48

Earnings Residual risks to earnings Solvency / Tail risk - Capital g Capital

Expected scenario Good scenario Cost base Severe scenario Cost base Catastrophic scenario Very severe scenario Outstanding year

Earnings Residual Risks Capital

• Operating businesses seek to maximise returns within acceptable earnings
• Capital as buffer against

Expected earnings Zero profit Zero revenue Loss at 99.9% Loss Revenue

p g p g volatility constraints p g catastrophic outcomes

• Earnings act as the first buffer

against losses and financial underperformance

• Group functions manage and mitigate

these where economically feasible

• “Tail risk to earnings

resilience/sustainability”

Capital levels exceed targets and quality is good

49

is good

Capital adequacy June 2010 (%) Minimum capital adequacy % ary Max 50% f Primary Sec Ter

0 9 2.1 12.0 -13.5 15.6

p q y ( ) Lower Tier 2

11.5 -13.0 2 3 14.0

Max 100%

• f Prima

M

• f

condary and rtiary 2.5% Pilla

0.9 3.5 9 5*

Upper Tier 2

3.5 2.3 1.0

Hybrid debt instruments ax 15% Primary 25% mary ar 1 and Pilla

12 6 1.75 2.5 9.5 1.75

Non-cumulative non-redeemable preference shares Ma

• f

Max 2

• f Prim

Primary m ar 2 @ 9.5%*

5.25 8.25 12.6 1.75 10.7 7.75 FRBH FRBH

Ordinary shares and defined reserve funds (core equity) min 7% Min 75%

• f Primary

FRB FRB SARB minimum FRBH target FRBH actual

* Excludes the bank specific (Pillar 2b) add-on and capital floor

FRB target FRB actual

Strengthening capital position over time

50

9 816 7 344 12.8% 13.6% 13.8% 14.6% 15.6%

10 222 9 816 7 410

36 754 41 566 40 612 46 116 10 373

• 10.0%
• 5.0%

24 129

• 20.0%
• 15.0%
• 5,000

Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Tier 1 capital (R million) Tier 2 capital (R million) Capital adequacy %

The Group backs economic capital with Tier 1

51

41 566 40 612 46 116 35 491 35 947 35 024 36 754 41 566 40 612 19 885 25 154 24 129

Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Economic capital required (Rmillion) Tier 1 capital (Rmillion) Economic capital required (Rmillion) Tier 1 capital (Rmillion)

Economic profit returned to positive territory

52

territory

14 6

15.0 7,000 %

5 639 14.6 14.1 14.3

14.0 14.5 5,000 6,000

3 971 2 719 13.2

13.0 13.5 3,000 4,000

1 662 12.4

11 5 12.0 12.5

• 1,000

2,000

• 474

11.0 11.5

• 1,000
• Jun 06

Jun 07 Jun 08 June 09 June 10 NIACC (R illi ) A t f it (%) NIACC (R million) Average cost of equity (%)

Unprecedented number of regulatory changes

53

changes

Proposed changes to Proposed changes to Proposed changes to SA Bank Regulations Basel ll framework Basel ll framework SA Bank Regulations

1 January 2012

Minorities

Credit risk scalar

Minorities Deferred tax assets Securitisations

Liquidity ratios Market risk

Credit valuation adjustment Asset value correlation D d ti

Leverage ratio Re-securitisations

Deductions Conservation and countercyclical buffer

Impact on risk weighted assets and qualifying capital Impact on risk weighted assets and qualifying capital

What’s the “new normal” for core?

54

• Calibration of capital levels in three categories
• Domestic banks
• Systemically important domestic banks
• Systemically important international banks
• The “new normal” for core: 8-10%
• Basel = 7%
• Emerging market banks will be higher
• Systemically important banks will be higher
• FSA will be higher

10%

• FSA will be higher – 10%
• Swiss banks will be higher – 10%
• Additional buffers over minimum
• Additional buffers over minimum
• Conservation buffer included
• Countercyclical buffer – still much uncertainty

Significant competitive pressures to implement early

FSA Core Tier 1 mooted level of 10%, Source: FT

The regulatory outlook for capital instruments

55

instruments

• Considerable uncertainty
• Ambitious global liquidation and resolution mechanisms under

consideration – likely to affect the conditions of instruments

• Grandfathering period equal to the shorter of 10 years or the step up
• Grandfathering period equal to the shorter of 10 years or the step-up

date (begins Jan 2013)

• No grandfathering for new issues

g g

• Deductions against Tier 2 phased out by 2018
• Subdued investor appetite for certain instruments proposed
• Concerns on Hybrid Tier 1 and Contingent capital
• Inclusion in indices

P t it d

• Permanent write-down
• Conversion into equity
• No rating
• Investors waiting for certainty

Tier 2 call dates

56

2 500 R million 1 740 2 110 2 000 1 500 1 000 1 000 300 628 440 500 100 100

• 5 Nov 2012

6 Dec 2012 15 Sept 2014 10 June 2016 10 June 2017 21 Dec 2018 21 Dec 2018 22 Dec 2018

Upper Tier 2 Lower Tier 2

FirstRand Bank’s Tier 2

57

E t t d b di t d d bt ll d t

• Expect to redeem subordinated debt on call dates
• Likely to continue to take impairments against Tier 2 until the
• Likely to continue to take impairments against Tier 2 until the

regulations are changed

• Little appetite to raise Tier 2 until the regulatory uncertainty is

resolved

Conclusion on capital

58

• Capital management strategy remains unchanged
• Manage the business on the principle that economic risk is backed by Tier 1
• Manage the business on the principle that economic risk is backed by Tier 1
• Principle remains that excess capital will be returned
• Point in time capital levels are strong
• Capital planning is done on a three year horizon

Capital planning is done on a three year horizon

• Expect to be within current targeted capital levels after taking into account:
• Domestic recovery and growth requirements
• Current expansion initiatives
• Banks act changes

Basel III changes as currently proposed

• Basel III changes as currently proposed
• Presently little appetite for Tier 2

59

Funding & liquidity g q y

Andries du Toit

Agenda

60

• Funding and liquidity management philosophy
• Funding & liquidity risk management
• Regulatory impact

Regulatory impact

• FirstRand’s risk profile
• Liquidity premium
• International developments
• FirstRand’s response to the challenges of funding and liquidity
• FirstRand s response to the challenges of funding and liquidity

61

Funding & liquidity management philosophy management philosophy

Liquidity risk management philosophy

62

• Continuous funding and liquidity cycle

Forward looking

Funds transfer pricing Target risk profile

• Forward looking
• Integrated across
• Macro economic environment
• All business units
• All financial risk disciplines

Financial markets outlook

Risk framework Funding profile

• Financial markets outlook
• Ensure compliance with
• Internal risk appetite

Stress testing Liquidity buffer

• Regulatory requirements
• Rating agencies requirements
• Output

testing buffer

• Output
• Efficient, diversified, flexible funding
• Built on strong relationships

63

Funding & liquidity management: Regulatory impact Regulatory impact

External influences on funding strategy

64

• Bank for International Settlement (BIS)

P i i l f S d Li idit Ri k M t d S i i

• Principles for Sound Liquidity Risk Management and Supervision,

August 2008

• International framework for liquidity risk measurement, standards and

monitoring, December 2009

• Financial Services Authority (FSA)

y ( )

• PS 09/16: Strengthening Liquidity Standards, October 2009
• IMF
• Report on SA Banking System, September 2009
• South African Reserve Bank
• Taylor Rafferty research
• Taylor Rafferty research
• Exchange control prudential limit approach

Basel III – new liquidity rules

65

• Liquidity Coverage Ratio (LCR)
• Addresses short-term liquidity risk and cash management

Addresses short term liquidity risk and cash management

• Banks must hold high-quality liquid assets sufficient to cover
• All net cash outflows
• Over a 30-day period
• Under an acute liquidity stress scenario (combined idiosyncratic and

systemic shock)

• Enhancement of statutory liquid asset and cash reserve requirement as risk

specific (where statutory liquid assets and cash reserve are based on balance sheet size)

• Net Stable Funding Ratio (NSFR)
• Long-term focus addressing the structural liquidity risk of the balance sheet
• Ratio requires that assets maturing after 1 year be funded with “stable” funding
• “Stable” funding takes into account the stability of funding over a year during an

extended firm-specific stress scenario (decline in profitability or solvency extended firm-specific stress scenario (decline in profitability or solvency, potential downgrade, event affecting reputation/credit quality)

‘Basel III’ – initial amendments (26 July 2010)

66

• Liquidity Coverage Ratios (LCR)
• 2015 implementation

2015 implementation

• Reduced the severity of the outflow factors
• Opened the door for national discretion in some areas
• Widened the previously very narrow definition of liquid assets
• Widened the previously very narrow definition of liquid assets
• Allowed for two tiers of liquid assets
• Min 60% tier 1 liquids – government
• Max 40% tier 2 liquids
• ther traded securities such as ABS or MBS paper
• Max 40% tier 2 liquids – other traded securities such as ABS or MBS paper
• etc. ‘repo-able’
• Net Stable Funding Ratio (NSFR)
• 2018 implementation
• 2018 implementation
• The want to retain the ratio and the underlying principal
• Recognise that you cannot change the structure of supply side of funding market

that quickly that quickly

• They recognised the ratio in its current calibration was too severe
• They have extended implementation period to 8 years

Complemented by parallel reporting

• Complemented by parallel reporting
• Further work on an impact assessment

Structural funding and liquidity task team

67

• Motto: Better life for all

M b ASISA 5 b k B ki A i ti N ti l T SARB

• Members: ASISA; 5 banks; Banking Association; National Treasury; SARB;

FSB; Asset management

• Document: Recommendation to Finance Minister, early 2011

, y

• Workstreams:
• 1. Understand features and constraints of SA financial markets and their impact on

resilience of the financial sector resilience of the financial sector

• 2. Understanding the distribution of savings between different products
• 3. Regulatory reform: removal of unwanted regulatory asymmetries where they

exist exist

• 4. Identifying unintended consequences of tax structure in giving rise to distortions

in the structural funding profile of SA FIs 5 Understand the business model of FIs as it pertains to structural funding and

• 5. Understand the business model of FIs as it pertains to structural funding and

liquidity risk management

• 6. Review international standards and best practice, and their impact on SA

Macro-prudential limit approach to exchange control

68

exchange control

4.7% 4.8% 5.5% 4.7% 4.8% Feb '10 Mar '10 Apr '10 Ma '10 J n '10

• Macro prudential limit of 25% of bank’s total liabilities

Feb '10 Mar '10 Apr '10 May '10 Jun '10 Average foreign exposure Limit = 25%

• Macro-prudential limit of 25% of bank s total liabilities
• (Excluding shareholders equity)
• Applies to SA Authorised Dealers (banks),

N SA h

• Not SA corporates or other sectors
• Banks may acquire foreign assets directly from their SA balance sheet, or

indirectly through foreign subsidiaries / branches

• Excludes foreign direct investment and intra-group bank exposure

Taylor Rafferty debt investor perception study

69

• Every two years independent research on FirstRand regarding:

1 Debt strategy 1. Debt strategy 2. Product offering 3. People 4. Service 5. Pricing of debt instruments

• This forms an input into strategy formulation, customer and

client execution

70

Funding & liquidity management: FirstRand’s risk profile FirstRand’s risk profile

Debt profile summary

71

• Strong financial position

C ti d ti l d l t i t

• Conservative prudential and regulatory requirements
• Robust capital
• Excess liquidity buffer, although liquidity gap is a SA banking

q y , g q y g p g industry issue

• Conservative exchange control utilisation

Impro ed asset q alit

• Improved asset quality
• Investment-grade credit counterparty ratings
• Off-balance sheet vehicles

Off balance sheet vehicles

• Excess funded
• Small percentage of on-balance sheet funding
• Good diversification across term, product and segment
• Strong available funding sources

FirstRand Bank Ltd’s diversified asset profile

72

asset profile

21 49 60 39

100%

Other 13 95 132 115 132 49 60 39

80% 90%

Other Derivatives 41 44 38 29 42 47 45 47 13 15 17 19

60% 70%

Investments 42 47 45 46 38

40% 50%

Africa Cash, fixed assets and other 233

30% 40%

Corporate 233 257 250 254

10% 20%

Wholesale Retail

0% 2007 2008 2009 2010

Rating distribution of advances

73

%

Rating distribution FirstRand Bank June 2010

20% 22% 20% 25% 18% 14% 15% 20% % 12% 9% 10% 3% 5% 2% 0%

A / AAA (zaf) BBB / A (zaf) BB+ / BBB (zaf) BB- / BB (zaf) B+ / BB (zaf) B B+ (zaf) B- / B (zaf) CCC / CCC+ (zaf) AAA (zaf) A (zaf) BBB- (zaf) BB (zaf) BB- (zaf) B+ (zaf) B (zaf) CCC+ (zaf)

Source: FirstRand Pillar III disclosures

FirstRand’s advances show an improving rating distribution

74

rating distribution

Rating distribution – FirstRand Bank’s lending book

25% 30% 20% 25%

2007-2010 Average rating for the book maps to an

10% 15%

equivalent BB- (international scale)

5% 10% 0% A / AAA (zaf) BBB / A (zaf) BB+ / BBB- (zaf) BB- / BB (zaf) B+ / BB- (zaf) B B+ (zaf) B- / B (zaf) CCC / CCC+ (zaf)

International / Local Rating International / Local Rating

2007 2008 2009 2010 Source: FirstRand annual report & FRBH Pillar III disclosures

Stable debt margin after credit impairments

75

impairments

350 600 bps

R bn

250 300 500 550

R

200 250 450 500 100 150 350 400 50 300

• 250

FY06 FY07 FY08 FY09 FY10

Investment Securities Cash & Short Term Funds Advances Interest Margin After Impairements† (RHS) Source: FirstRand shareholder circulars

Net interest margin + other annuity income + income from investment securities – impairment charge Advances + investment securities + cash and short term funds

FirstRand Bank Limited’s external ratings

76

Standard & Poor’s Moody’s Fitch Ratings FOREIGN CURRENCY Long term/Outlook BBB+/Negative A3/Stable BBB+/Stable Short term A-2 P-2 F2 LOCAL CURRENCY Long term/Outlook BBB+/Negative A2/Stable BBB+/Stable Short term A-2 P-1

• NATIONAL

Long term/Outlook

• Aa2.za/Stable

AA(zaf)/Stable Short term

• P-1.za

F1+(zaf)

Sources: Standard & Poor’s, Moody’s Investors Service, Fitch Ratings

Strong credit enhancement for senior debt investors

77

debt investors

2 2% 90% 100%

Provisions

1 1% 0.2% 1.9% 2.2% 70% 80% 90%

Provisions Profit after tax

481 280

0.6% 1.1% 50% 60% 70%

Upper Tier II Sub Debt

481 280

10% 30% 40% 50%

Preference Shares E it

10% 20%

Equity Depositors

0%

Funding Liabilities Loss absorption capacity

Equates to a 16% “first loss protection” Equates to a 16% first-loss protection (For a BBB+ rating in a CDO, rating agencies typically require 8.5% first-loss protection)

SA banking system liquidity gap

78

6%

10%

• On a contractual basis

where retail and

6%

2% 2% 1% 1% 0%

• 1%
• 4%

0% 5%

where retail and corporate balances are treated as demand there is liquidity in gap

• 10%
• 5%

there is liquidity in gap in the SA system reflecting the extent of maturity transformation

21%

• 20%
• 15%

maturity transformation

• The SA banking
• 21%
• 23%
• 26%
• 28%
• 29%

31%

• 30%
• 25%

system is however managed on a behaviorally adjusted

• 31%
• 34%
• 40%
• 35%

1D 2D-7D 8D-1M 1M-2M 2M-3M 3M-6M 6M-1YR 1Yr+

basis, taking into account the closed rand pool and behavior

Contractual Cumulative Gap BAU Cumulative Gap

• f these demand

balances

Source: SARB BA300 return, June 2010

Increased reliance on institutional funding

79

50% 40% 30% 10% 20% 0% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 FRB SBK ABSA NED

The SA banking system has increasingly been funded in the institutional market The SA banking system has increasingly been funded in the institutional market

Source: SARB BA returns, Dec 2009

Creating appropriate liquidity buffers

80 14% 12% 14% 10% 8% 4% 6% J 08 A 08 J l 08 O t 08 J 09 A 09 J l 09 O t 09 J 10 A 10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Buffer Liquidity Statutory Liquidity

Increased liquidity buffers by R15bn over FY10

Source: SARB BA returns, June 2010 Note: SARB liquid assets definition is very narrow, above consists of government securities of SA & G7

q y y

81

Funding & liquidity management: Liquidity premium Liquidity premium

FirstRand's funding curve

82

Term structure of FirstRand’s funding spreads Horizon for Basel III’s NSFR

200

170 134 145 147 168

150

98 109 121 135 78 107 112 123

100

54 78 23 37 45 57 65 68

50

12 19 22 27 31 31 36 3M 4M 5M 6M 7M 8M 9M 12M 18M 2Y 3Y 4Y 5Y 7Y 10Y 14-Oct-10 30-Jun-10 31-Dec-09 30-Jun-09 Source: FirstRand Research 30-Jun-07

FirstRand's funding curve

83

12m Funding Spread

80 90 100 60 70 80 40 50 10 20 30 10

Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 12M 60 per. Mov. Avg. (12M) Source: FirstRand Research, Oct 2010

How does SA compare to the US$ market

84

Spread between 12m deposit & swap rate

100 120 80 40 60 20

• 20

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 SA 12m US 12M Funding Spreads Source: FirstRand Research, Bloomberg Data, Oct 2010

85

Funding & liquidity management: International developments International developments

The offshore interbank funding market

86

• While there has been a

clear recovery the

120 140

clear recovery the interbank funding market as measured by the LIBOR-OIS

80 100

by the LIBOR-OIS spread, the market is still nervous

60 80

• Recent volatility is

related to Eurozone sovereign stresses

20 40

• Since USD LIBOR is a

global rate which includes Eurozone

• 20

Jan-07 Aug-07 Feb-08 Sep-08 Mar-09 Oct-09 May-10 Nov-10

banks, the stress manifests in LIBOR

3M USD OIS Spread 3M EUR OIS Spread Source: FirstRand Research, Bloomberg Data, Oct 2010

EM investment theme

87

Asset allocation to emerging markets Portfolio flows to emerging markets

15.9%

16% 18% Share of emerging market equities in total U.S. holdings

485

450 550 US$ bn

Potential flows resulting from a 1% reallocation of global funds to EM. This number was exceed before the half year to Jun-2010

12% 14% Share of emerging market equities in world market capitalization 350 450

half year to Jun 2010

8.7%

8% 10% 250 4% 6% 150

1.6% 2.4%

0% 2% 50

1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9

2004 2009

• 50

1991 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 Source: FirstRand Research, IMF Statistics, Oct 2010

Emerging market investment theme

88

Money flows to bonds, EM stocks in first half

By Sujata Rao LONDON | Fri Jul 2, 2010 3:38pm BST (Reuters) - A massive $453 billion (298 billion ( ) ( pounds) fled safe-haven money funds in the first half of 2010, heading for bonds and emerging stocks as investors fretted over the global economy but seemed more confident g y about the developing world's outlook.

Source: Bloomberg Data, JSE, Bank of England Financial Stability Report

Net global financial flows

89

1000

US$ bn

800 400 600 200

• 200
• 400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 USA & Canada Japan UK Euro area EM's USA & Canada Japan UK Euro area EM s

Source: FirstRand Research, IMF Statistics, Oct 2010

South Africa is a beneficiary of EM rotation

90

72 80

n

Net purchases/sales by foreigners 72 44 69 63 61 60 80

ZAR b

19 7 27 23 20 40

• 4
• 14
• 20
• 54
• 60
• 40
• 54
• 80

60 2005 2006 2007 2008 2009 2010 YTD Bond Equities

Source: FirstRand Research, Bloomberg Data, Oct 2010

South African sovereign spreads have contracted

91

have contracted

700

bps

600 700 400 500 300 400

Nov-09 10-yr: 190 bps Oct-10 10 yr: 141 bps

200

Jan-07 10-yr: 60 bps 5 yr: 40 bps 10 yr: 190 bps 5-yr: 170 bps 10-yr: 141 bps 5-yr: 117 bps

• 100

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

5-yr: 40 bps

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 SA Sov CDS 1Yr SA Sov CDS 5Yr SA Sov CDS 10Yr Source: FirstRand Research, Bloomberg Data, Oct 2010

International funding markets

92

1 000

5-year sovereign spreads

800 900 1,000 600 700 400 500 100 200 300

• 100

Jun-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 5-Yr Sov CDS Portugal 5-Yr Sov CDS Brazil 5-Yr Sov CDS Greece 5-Yr Sov CDS Spain 5-Yr Sov CDS SA 5-Yr Sov CDS China Source: FirstRand Research, Bloomberg Data, Oct 2010

93

FirstRand’s response FirstRand s response

Create efficient, flexible and diversified funding platforms

94

funding platforms

Regulated platforms (licenced) FirstRand Bank, (branches: London, India), African banking platform, OUTsurance RMB Morgan Stanley (licenced) OUTsurance, RMB Morgan Stanley Exchanges (LSE, JSE, BESA) Unregulated entities (un-licenced) FirstRand Investment Holdings Private equity (un licenced) Private equity Off-balance sheet Securitisations, conduits / risk transformation platform Bi l t l (C l l ) Bi-lateral (Carlyle) O f d P i t it (Eth ) Own funds Private equity (Ethos) FirstRand structured investments, e.g. RMB / Westport 3rd party platforms Traditional 3rd party platforms Traditional

• FNB Wealth & RMB Private Bank

Strong focus on building a diversified funding base

95

funding base

Sources of funding Funding instruments (30 June 2010)

11% 9% 8% 6% 5% 5% 90% 100% Other ZAR450bn ZAR481bn (CAGR 12%) Other deposits 7% Derivative 7% NCD's 6% Senior Debt 3% Conduits 3% Sub Debt 2% (3Y CAGR 9%) 17% 19% 18% 60% 70% 80% Foreign Funding Govt & Repo's 8% Trading liabilitie s 1% Securitisation 1% (3Y CAGR 10%) 28% 28% 26% 40% 50% 60% Govt & Parastatal Retail Fixed and notic d it Call & savings deposits 14% 1% Other 1% (3Y CAGR 9%) (3Y CAGR -6%) 36% 38% 42% 20% 30% Corporate e deposits 28% Current account s 19% (3Y CAGR 6%) (3Y CAGR 9%) 0% 10% Jun 08 Jun 09 Jun 10 Institutional (3Y CAGR 25%) 08 09 10 Sources: SARB BA 100 return & FirstRand Limited annual report Source: SARB BA900 returns, June 2010

Incentivise building of retail deposit franchise

Retail and corporate funding strategy key

96

14% 13% 14% 15%

100%

Retail (CAGR 9%)

12% 10% 11% 11% 14% 13% 14% 15%

80% 90%

( ) Commercial (CAGR 4%)

26% 27% 26% 26%

60% 70%

Corporate (CAGR 8%)

27% 24% 25% 29%

40% 50%

Wholesale (CAGR 10%)

2% 2% 1% 1%

4% 4% 4% 5%

27% 29%

20% 30%

Africa (CAGR 15%) Capital markets (CAGR -2%)

3% 6% 5% 5%

12% 14% 14% 9%

2% 1%

0% 10% 2007 2008 2009 2010

Capital markets (CAGR 2%) Financial markets (CAGR -1%) Off balance sheet vehicles (CAGR 26%)

2007 2008 2009 2010 Off Balance sheet Financial markets Capital markets Africa Wholesale Corporate Commercial Retail

FirstRand – leading bond issuer…

97

FirstRand Bond Sales

Bloomberg News Bloomberg News 2010-10-06 20:01:01.0 GMT

By Garth Theunissen

• Oct. 7 (Bloomberg) -- FirstRand Ltd., South Africa’s second-
• Oct. 7 (Bloomberg)

FirstRand Ltd., South Africa s second largest financial services company, is leading bond sales in Africa’s biggest economy by locking in record-low borrowing costs with longer dated debt as it expands on the continent. The Johannesburg-based company has raised 7.46 billion rand ($1.08 billion) in 18 bond sales this year, the most since Bloomberg began compiling the data in 1999.

• Banking in Africa
• Longer Maturities
• Increasing Bond Sales
• ‘Quickest to Increase’

etc…

ZAR million Nominal Cash Total bids 4 296 5 813 ZAR million Nominal Cash Total bids 4 889 4 989 August 2010 auction summary: April 2010 auction summary: Allocation 2 571 3 340 Allocation 4 199 4 309

Diversified listed debt maturity profile

98

5 000 FirstRand Bank’s listed debt 4 000 4 500 3 000 3 500 2 000 2 500 1 000 1 500 500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2022 2023 2024 2028 2033 2045

CLN Sub Senior - Inflation Linked Senior

Source: FirstRand Research, JSE-BESA Bond Data, Sep 2010

SA banking sector issuance profile

99

90% 100% 70% 80% 90% 50% 60% % 30% 40%

13% 17% 34%

10% 20%

13% 17%

0% 0-3yrs 3-7yrs 7yrs + Other Banking Institutions Investec Nedbank SBSA ABSA FirstRand g

Source: JSE-BESA Bond Data, Sep 2010

Conduits: Assets under management

100

100%

R18 bn R15 bn

52% 46% 48%

80% Indwa

62% 52% 48%

60%

31%

40% Ivuzi

25% 24% 31% 38%

20%

12% 24% 23% 14%

20% Inkhotha 0%

2007 2008 2009 2010

Securitisation notes outstanding

101

5%

7% 4% 8% 4%

7% 2% 1% 90% 100%

Nitro1

R17 bn R26 bn

8% 7% 7% 5% 5%

11% 7% 23%

80% 90%

Nitro2

6% 7% 7%

29%

60% 70%

Nitro3

76%

29%

40% 50%

Ikhaya1 Ikhaya2

61% 68% 76%

17% 11% 20% 30%

Ikhaya2 Procul

12% 17% 10% 20%

Fresco

0% 2007 2008 2009 2010

Funding strategy

102

• Deposit franchise

A i li t i iti d t ti t t i

• Aggressive client acquisition and retention strategies
• New product and channel development
• Wholesale market
• Wholesale market
• Extending the term
• Diversify new sources
• Africa
• Aggressive expansion into new markets
• Enhancing existing deposit franchises
• Capital markets

L l d i t ti l k t i t di if

• Local and international market issuance programs to diversify
• Off-balance sheet vehicles
• Continue existing funding platforms
• Continue existing funding platforms

In summary

103

• Integrated funding & liquidity framework
• Aim to be in excess of minimum requirements of SARB, FSA & Basel II Minimum Liquidity

standards (2009) standards (2009)

• Strong management in building deposit franchises in retail, commercial and corporate

segment

• Strong African deposit raising franchises
• South Africa, Namibia, Botswana, Swaziland, Lesotho, Mozambique
• Enter new African markets
• Zambia, Angola, Tanzania, Nigeria
• International platforms to secure long term multicurrency funding
• London branch
• Europe Medium Term Note program (LSE)

Middl E t d A i l tf

• Middle East and Asia platforms
• Currently the group has excess foreign currency funding to be deployed towards

markets and businesses within the FirstRand overall group strategy

• Basel III
• Support initiative to strengthen the international liquidity risk standards
• Cost of compliance may reduce economic growth
• SA would require structural reform with respect to the supply side of funds
• SA would require structural reform with respect to the supply side of funds
• A pragmatic approach should be adopted by all parties